UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(x) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended November 30, 2005 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, 35,796,134 shares outstanding as of December 31,
2005.
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - November 30, 2005, August 31, 2005, and
November 30, 2004 3
Consolidated Statements of Operations - Three Months
Ended November 30, 2005 and November 30, 2004 4
Consolidated Statements of Cash Flows - Three Months
Ended November 30, 2005 and November 30, 2004 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Item 4. Controls and Procedures 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 1A. Risk Factors 20
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits 22
Signatures 22
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(Unaudited)
November 30, August 31, November 30,
2005 2005 2004
------------------ ----------------- -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 61,148 $ 93,075 $ 121,222
Receivables, net 13,596 228,800 15,332
Inventories 66,222 26,625 62,039
Prepaid expenses 1,503 1,874 1,547
Deferred income taxes 6,372 6,305 6,598
------------------ ----------------- -----------------
Total current assets 148,841 356,679 206,738
PROPERTY, PLANT AND EQUIPMENT, NET 60,409 60,158 62,299
EXCESS OF COST OVER NET ASSETS OF
BUSINESSES ACQUIRED 4,183 4,183 4,183
INTANGIBLES, NET 5,999 5,960 5,489
OTHER ASSETS 1,562 1,446 1,608
DEFERRED INCOME TAXES 10,563 10,758 7,600
------------------ ----------------- -----------------
TOTAL ASSETS $ 231,557 $ 439,184 $ 287,917
================== ================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES :
Current maturities of long-term debt $ 8,300 $ 10,078 $ 11,318
Accounts payable 25,767 18,218 22,955
Accrued expenses 39,135 221,824 29,735
Income taxes payable 3,898 12,893 2,377
------------------ ----------------- -----------------
Total current liabilities 77,100 263,013 66,385
------------------ ----------------- -----------------
LONG-TERM DEBT 3,363 7,271 11,001
------------------ ----------------- -----------------
MINORITY INTEREST IN SUBSIDIARIES 5,709 4,877 6,563
------------------ ----------------- -----------------
DEFERRED COMPENSATION 403 - -
------------------ ----------------- -----------------
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;
40,944,440, 40,928,929 and 40,247,696 shares issued;
35,900,334, 36,099,823 and 38,580,230 shares outstanding 4,094 4,093 4,025
Capital in excess of par value 82,694 81,640 66,127
Retained earnings 184,542 199,742 167,734
Accumulated other comprehensive loss (4,060) (4,305) (2,306)
Treasury stock, at cost; 5,044,106, 4,829,106 and 1,667,466 shares (122,395) (117,254) (31,719)
------------------ ----------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 144,982 164,023 203,968
------------------ ----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 231,557 $ 439,184 $ 287,917
================== ================= =================
The accompanying notes are an integral part of these financial statements.
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
(in thousands, except per share amounts)
(Unaudited)
November 30, November 30,
2005 2004
----------------- ------------------
NET SALES AND LICENSING FEES $ 9,825 $ 17,454
COST OF SALES 6,663 8,421
----------------- ------------------
GROSS PROFIT 3,162 9,033
----------------- ------------------
OPERATING EXPENSES:
Research and development 5,605 4,430
Selling 3,398 3,066
General and administrative 6,119 4,539
----------------- ------------------
Total operating expenses 15,122 12,035
----------------- ------------------
OPERATING LOSS (11,960) (3,002)
INTEREST INCOME, NET 1,028 458
OTHER EXPENSE, NET (1,203) (1,507)
EQUITY IN NET LOSS OF AFFILIATE (814) (738)
MINORITY INTEREST IN EARNINGS OF SUBSIDIARIES (832) (2,336)
----------------- ------------------
LOSS BEFORE INCOME TAXES (13,781) (7,125)
INCOME TAX BENEFIT 4,488 2,808
----------------- ------------------
LOSS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE (9,293) (4,317)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAX (358) -
----------------- ------------------
NET LOSS (9,651) (4,317)
DIVIDENDS ON PREFERRED STOCK (160) (128)
----------------- ------------------
NET LOSS APPLICABLE TO COMMON SHARES $ (9,811) $ (4,445)
================= ==================
BASIC AND DILUTED NET LOSS PER SHARE BEFORE CUMULATIVE EFFECT
OF ACCOUNTING CHANGE $ (0.26) $ (0.12)
================= ==================
CUMULATIVE EFFECT OF ACCOUNTING CHANGE $ (0.01) $ -
================= ==================
BASIC AND DILUTED NET LOSS PER SHARE $ (0.27) $ (0.12)
================= ==================
NUMBER OF SHARES USED IN BASIC AND DILUTED NET LOSS
PER SHARE CALCULATIONS 36,074 38,544
================= ==================
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 CASH FLOWS
FOR THE THREE MONTHS ENDED
(in thousands)
(Unaudited)
November 30, November 30,
2005 2004
------------------ -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (9,651) $ (4,317)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 2,155 2,226
Loss (gain) on sale of assets 28 (10)
Equity in net loss of affiliate 814 738
Foreign exchange gain (183) (106)
Accretion of debt discount 113 194
Minority interest in earnings of subsidiaries 832 2,336
Stock-based compensation expense 660 -
Change in deferred income taxes 123 3,209
Cumulative effect of accounting change 555 -
Changes in assets and liabilities:
Receivables 215,141 169,892
Inventories (39,469) (31,778)
Prepaid expenses 373 371
Intangibles and other assets (242) (254)
Accounts payable 7,410 (1,194)
Accrued expenses (182,843) (158,203)
Income taxes payable (8,990) (6,397)
------------------ -----------------
Net cash used in operating activities (13,174) (23,293)
------------------ -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,350) (1,781)
Sale of investments and property 23 12
Investment in affiliate (700) (800)
------------------ -----------------
Net cash used in investing activities (3,027) (2,569)
------------------ -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of short-term debt (5,800) -
Dividends paid (5,549) (4,757)
Minority interest in dividends paid by subsidiary - (359)
Payments to acquire treasury stock (5,141) -
Proceeds from exercise of stock options 231 1,675
------------------ -----------------
Net cash used in financing activities (16,259) (3,441)
------------------ -----------------
EFFECTS OF FOREIGN CURRENCY EXCHANGE RATES 533 938
NET DECREASE IN CASH AND CASH EQUIVALENTS (31,927) (28,365)
CASH AND CASH EQUIVALENTS, August 31 93,075 149,587
------------------ -----------------
CASH AND CASH EQUIVALENTS, November 30 $ 61,148 $ 121,222
================== =================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the three months for:
Interest, net of capitalized interest $ - $ -
Income taxes paid /(refunded) $ 3,437 $ (128)
Noncash financing activities:
Tax benefit of stock option exercises $ 12 $ 211
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 month periods ended November 30, 2005 and 2004, 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. Management
is presently evaluating the impact of this modification to determine if the
effect of this eliminates the need for liability recognition for the applicable
stock options.
For further information regarding the adoption of SFAS 123R see Note 4, "Stock
Based Compensation Plans" to these financial statements.
New Accounting Pronouncements
In May 2005, the Financial Accounting Standards Board ("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 LOSS
Total comprehensive loss for the three months ended November 30, 2005 and 2004,
was (in thousands):
Three Months Ended
-------------------------------------
November 30, November 30,
2005 2004
----------------- ------------------
Net loss $ (9,651) $ (4,317)
Other comprehensive income:
Foreign currency translation gains 449 1,545
Net realized and unrealized
losses on hedging instruments (204) (115)
Income tax expense related to other
comprehensive income (79) (508)
----------------- ------------------
Other comprehensive income, net of tax 166 922
----------------- ------------------
Total comprehensive loss $ (9,485) $ (3,395)
================= ==================
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 month periods ended November 30,
2005 and 2004, is as follows (in thousands):
Three Months Ended
------------------------------------
November 30, November 30,
2005 2004
----------------- -----------------
Net sales and licensing fees (by segment)
Domestic $ 397 $ 552
International 9,428 16,902
----------------- -----------------
$ 9,825 $ 17,454
================= =================
Net sales and licensing fees
Cottonseed $ 9,069 $ 16,650
Soybean seed (22) 13
Other 778 791
----------------- -----------------
$ 9,825 $ 17,454
================= =================
Operating (loss) income
Domestic $ (12,838) $ (9,075)
International 878 6,073
----------------- -----------------
$ (11,960) $ (3,002)
================= =================
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 $660,000 of compensation expense for stock options, Restricted Stock
and Restricted Stock Units in the first quarter of 2006, in addition to
recording the cumulative effect of $358,000, net of tax, related to the intitial
adoption of SFAS 123R, which is recorded as a separate component in the income
statement.
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 first quarter of 2006: 6 year
expected life; expected volatility of 24.6%; risk free rate of 4.45% 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 first quarter of 2006 was
$5.71.
The Company recognized compensation cost associated with all of its outstanding
stock option awards of $262,000, net of tax benefit of $93,000, in the first
quarter of 2006, versus $0 in the prior year period. At November 30, 2005, there
was approximately $2.6 million of unrecognized compensation cost related to
stock option awards, net of an anticipated tax benefit of $923,000, 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 in 2006 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 November 30, 2005.
The following table represents stock option activity for the quarter ended
November 30, 2005:
Number of Intrinsic
Shares Price Range Value
-------------- -------------------------- ------------
Outstanding at August 31, 2005 3,704,182 $ 10.69 $47.31
Granted 25,600 23.60 23.60
Exercised (15,511) 10.69 19.62
Lapsed or canceled (24,400) 17.85 35.93
-------------- ------------ ----------
Outstanding at November 30, 2005 3,689,871 $ 15.61 $47.31 $4,205,733
============== ============ ========== ============
Exercisable at November 30, 2005 3,294,387 $3,096,578
============== ============
The following table summarizes certain information about outstanding and
exercisable stock options at November 30, 2005:
Options Outstanding Options Exercisable
------------------------------------------------------ -------------------------------
Weighted Average Weighted Weighted
Remaining Average Average
Exercise Price Range Contractual Life Exercise Exercise
Number in Years Price Number Price
--------------------- ------------- ------------------- ------------- -------------- -------------
$10.69 to 19.99 1,630,364 5.0 $ 18.99 1,387,273 $ 19.04
$20.00 to 29.99 1,790,166 4.7 25.92 1,637,773 25.99
$30.00 to 39.99 267,341 5.6 31.51 267,341 31.51
$40.00 to 47.31 2,000 2.4 47.31 2,000 47.31
------------- --------------
3,689,871 4.9 23.27 3,294,387 23.53
============= ==============
Restricted Stock and Restricted Stock Units. In the first quarter of 2006, 3,600
shares of Restricted Stock were granted to employees, with total compensation
cost of approximately $78,000 determined based on the market price of the
Company's common stock at the time of award of $22.43 per share and considering
dividend restrictions and expected forfeitures. Compensation cost will be
recognized as expense ratably over the three-year vesting period.
For the three month period ended November 30, 2005, the Company recognized
compensation cost of approximately $398,000, net of tax benefit of $141,000,
related to shares of Restricted Stock and Restricted Stock Units issued in 2005
and 2006 versus $0 in the prior year period. At November 30, 2005, there was
$3.3 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 $1.2 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 November 30, 2005.
The following represents Restricted Stock and Restricted Stock Units activity
for the quarter ended November 30, 2005:
Restricted Stock Restricted Stock Units
---------------- ----------------------
Number of Weighted Avg. Grant Number of Weighted Avg. Grant
Shares Date Fair Value Shares Date Fair Value
--------------- --------------- ----------------- ---------------
Non-vested at August 31, 2005 142,448 $25.22 24,000 $26.31
Granted 3,600 $22.43 - -
--------------- -----------------
Non-vested at November 30, 2005 146,048 $25.15 24,000 $26.31
=============== =================
The following table illustrates for the first quarter of 2005 the effect on
operating results and per share information had the Company accounted for share
based compensation in accordance with SFAS 123R.
Three Months Ended
November 30,
2004
-------------------------
Net loss (in thousands):
As reported $ (4,317)
Add: Total stock-based compensation expense
included in reported net loss, 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 (731)
-------------------------
Pro forma $ (5,048)
=========================
Basic and diluted net loss per share:
As reported $ (0.12)
=========================
Pro forma $ (0.13)
=========================
5. INVENTORIES
Inventories consisted of the following as of (in thousands):
November 30, August 31, November 30,
2005 2005 2004
------------------ ----------------- -----------------
Finished goods $ 31,862 $ 19,713 $ 30,400
Raw materials 38,791 13,156 35,972
Growing crops 1,032 818 234
Supplies 1,591 1,101 1,466
------------------ ----------------- -----------------
73,276 34,788 68,072
Less reserves (7,054) (8,163) (6,033)
------------------ ----------------- -----------------
$ 66,222 $ 26,625 $ 62,039
================== ================= =================
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 three-month periods ended November 30, 2005 and 2004
was approximately $742,000 and $157,000, 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):
November 30, August 31, November 30,
2005 2005 2004
------------------ ----------------- -----------------
Land and improvements $ 6,416 $ 6,263 $ 6,228
Buildings and improvements 43,716 43,018 43,645
Machinery and equipment 64,183 63,142 59,599
Germplasm 7,500 7,500 7,500
Breeder and foundation seed 2,000 2,000 2,000
Construction in progress 2,497 2,564 3,110
------------------ ----------------- -----------------
126,312 124,487 122,082
Less accumulated
depreciation (65,903) (64,329) (59,783)
------------------ ----------------- -----------------
$ 60,409 $ 60,158 $ 62,299
================== ================= =================
Depreciation expense during the three-month periods ended November 30, 2005 and
2004 was approximately $2.0 million and $2.1 million, respectively.
7. INTANGIBLES
The components of identifiable intangible assets were as follows as of (in
thousands):
November 30, 2005 August 31, 2005 November 30, 2004
----------- --- --------------- ----------------------------------- -----------------------------
Gross Gross Gross
Carrying Accumulated Carrying Accumulated Carrying Accumulated
Amount Amortization Amount Amortization Amount Amortization
------------------------------- ----------------------------------- -----------------------------
Trademarks $ 3,182 $ (977) $ 3,182 $ (958) $ 3,182 $ (899)
Commercialization
agreements 400 (128) 400 (121) 400 (100)
Licenses 1,100 (220) 1,100 (192) 1,100 (110)
Patents 1,800 (162) 1,640 (116) 865 (101)
Other 2,105 (1,101) 2,096 (1,071) 2,036 (884)
----------- --------------- -------------- ---------------- ------------- --------------
$ 8,587 $ (2,588) $ 8,418 $ (2,458) $ 7,583 $ (2,094)
=========== =============== ============== ================ ============= ==============
Amortization expense for identifiable intangible assets during the three-month
periods ended November 30, 2005 and 2004 was approximately $120,000 and
$120,000, respectively.
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 three-month periods ended November 30, 2005 and 2004, D&PL's
equity in the net loss of DeltaMax was approximately $814,000 and $738,000,
respectively.
9. DERIVATIVE FINANCIAL INSTRUMENTS
Accumulated other comprehensive loss includes the following related to the
Company's soybean hedging program for the three-month periods ended November 30,
2005 and 2004 (in thousands):
2005 2004
------------------- -------------------
Deferred net gain (loss), as of August 31 $ 224 $ (134)
Net losses on hedging instruments arising during the three month
periods (204) (115)
------------------- -------------------
Deferred net gain (loss) on derivative instruments included in
accumulated other comprehensive loss at November 30 $ 20 $ (249)
=================== ===================
The deferred net gain of $20,000 included in accumulated other comprehensive
loss at November 30, 2005 consists of net realized gains of $109,000 and net
unrealized losses of $89,000. The deferred net gain of $20,000 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.
For the three-month periods ended November 30, 2005 and 2004, 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.
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 seeks injunction against
continued sale of seed containing Monsanto's Ingard(R) gene and recovery of an
unspecified amount of damages. Trial of this matter commenced on March 7, 2005,
and concluded on April 6, 2005. D&PL is awaiting a decision from the Court.
Consistent with its commitments, Monsanto has agreed to defend D&PL in this suit
and to indemnify D&PL against damages, if any are awarded. Monsanto is providing
separate defense counsel for D&PL. D&PL is assisting Monsanto to the extent
reasonably necessary. Due to the status of this matter, management is unable to
determine the impact, if any, of this matter on the consolidated financial
statements.
D&PL vs. Monsanto Company and Pharmacia Corporation
On December 20, 1999, Monsanto withdrew its pre-merger notification filed
pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("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. STOCKHOLDERS' EQUITY
For the quarters ended November 30, 2005 and 2004, common share equivalents were
not included in D&PL's calculation of diluted earnings per share because their
inclusion would have been antidilutive to earnings since D&PL reported a net
loss for each of the aforementioned quarters. As a result, basic and diluted
earnings per share are the same in each respective quarter ended November 30,
2005 and 2004.
For D&PL, items that are considered in the determination of common share
equivalents include the Series M Convertible Non-Voting Preferred shares, stock
options, Restricted Stock and Restricted Stock Units. At November 30, 2005 and
2004, the total of those items was approximately 3.3 million and 3.8 million,
respectively. The computation of common share equivalents is dependent on the
weighted-average market value of D&PL common stock during the period under
consideration, among other things. Therefore, only a portion of these items
would be considered common share equivalents for purposes of a diluted earnings
per share calculation.
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
--------------------------------------- ---------------------------------------
November 30, November 30, November 30, November 30,
2005 2004 2005 2004
------------------ ------------------ ------------------ ------------------
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
================== ================== ================== ==================
The amount of the minimum pension liability that is recorded as a component of
Accrued Expenses at November 30, 2005 was $7.1 million. As of November 30, 2005,
D&PL had not made any contributions to the Plan. D&PL anticipates contributing
$2 million to the Plan in 2006.
As of November 30, 2005, 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 November 30, 2005, there were no loans outstanding under the Credit
Agreement, other than the existing Letters of Credit discussed above.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW/OUTLOOK
Our commitment to research and seed development continues to pay dividends.
During 2006, we expect to introduce as many as eight new varieties containing
the second generation Monsanto insect resistant (Bollgard II(R), or "BGII") and
herbicide tolerance traits (Roundup Ready Flex(R), or "RRF") and expect to have
enough seed to plant 1.5 million acres containing these traits. Four of these
new varieties are single-gene RRF and four varieties contain both the RRF gene
technology and BGII. Additionally, we continue to dedicate resources to the
development of the traits we have licensed from Syngenta and DuPont, which are
expected to be launched later this decade.
Internationally we continue to seek expansion in the world's largest cotton
markets. In January, we announced that we acquired Vikki's Agrotech Pvt. Ltd.,
an Indian cottonseed company. Vikki's has licenses to Monsanto's Bollgard(R) and
Bollgard II technologies for India as well as rights to commercialize Bt genes
from another party. Subject to regulatory approvals being received, Vikki's may
commercialize Bollgard hybrids in India in 2006. D&PL has also established a
research program in Northern India to develop products for the Punjab region of
India. We continue to consider other acquisition opportunities in the Indian
market.
Consistent with prior years, we are reporting a loss for the first quarter of
2006, as the only sales occurring in the first quarter are from our
international operations in the Southern Hemisphere, primarily Argentina,
Australia, Brazil and South Africa. Domestic sales of our cotton and soybean
seed products will begin late in the second quarter and continue until early in
the fourth quarter. International sales will continue throughout the year. The
first quarter of 2006 loss was higher than that incurred in the first quarter of
the prior year, due primarily to lower international sales volumes, and higher
research and development expenses, marketing expenses and stock-based
compensation expense due to the adoption of SFAS No. 123R.
2006 Earnings Guidance
We increased our prices on many of our conventional and transgenic cotton
product offerings in 2006, and we expect such increases to exceed anticipated
higher costs. We expect earnings from our International business to be lower in
2006 due to increased competition in the profitable Australia market and a 25%
reduction in the cotton acreage planted in Brazil. We expect to continue to
experience challenges at our joint ventures in China, due to strong local
competitive pressures and the Chinese government's refusal (until recently) to
approve new products.
For the fiscal year 2006, we expect to report earnings per diluted share in the
range of $1.10 to $1.20, after charges of $0.10 per diluted share related to our
lawsuit against Pharmacia and Monsanto. We reported earnings of $1.08 per
diluted share in fiscal 2005, after a reduction of $0.07 per diluted share
related to Pharmacia/Monsanto litigation expenses. The 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 from Monsanto, costs related to the development of DuPont and
Syngenta technologies, expenses related to share-based compensation and sales
and marketing expenses.
Earnings are significantly affected by planted cotton acreage in the U.S.
Although, based on current market conditions (primarily commodity prices and the
cost of inputs), we expect cotton plantings in the U.S. to remain constant with
2005 or to increase over 2005 plantings of 14.2 million acres, we based our 2006
earnings guidance on cotton acreage that is flat with 2005. We also made other
assumptions regarding the maintenance of our market share and achievement of our
product/sales mix targets.
We are continuing to explore alternatives for uses of our cash balance,
including the expansion into new markets, acquisitions of technology, share
repurchases and dividends, as well as other options. This process is continuing
and evolving. We continue to repurchase shares in the open market.
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
--------------------------------------
November 30, November 30,
2005 2004
------------------ -----------------
Operating results-
Net sales and licensing fees $ 9,825 $ 17,454
Gross profit 3,162 9,033
Operating expenses 15,122 12,035
Operating loss (11,960) (3,002)
Loss before income taxes (13,781) (7,125)
Net loss applicable to common shares (9,811) (4,445)
The following sets forth selected balance sheet data of D&PL at the following
dates (in thousands):
November 30, 2005 August 31, 2005 November 30, 2004
------------------ ----------------- -----------------
Balance sheet summary-
Current assets $ 148,841 $ 356,679 $ 206,738
Current liabilities 77,100 263,013 66,385
Working capital 71,741 93,666 140,353
Property, plant and equipment, net 60,409 60,158 62,299
Total assets 231,557 439,184 287,917
Outstanding borrowings 11,663 17,349 22,319
Stockholders' equity 144,982 164,023 203,968
Three months ended November 30, 2005, compared to three months ended November
30, 2004:
For the quarter ended November 30, 2005, we reported a net loss of $9.7 million,
compared to a net loss of $4.3 million reported in the comparable prior year
quarter. The increased loss was primarily due to a decrease in international net
sales and licensing fees and an increase in operating expenses.
Net sales and licensing fees decreased approximately $7.6 million to $9.8
million and gross profit decreased approximately $5.9 million to $3.2 million.
The decrease in net sales and licensing fees is attributable to international
operations, particularly in South America and Australia. Sales in South America
were lower primarily due to a reduction in the acreage planted in cotton in
Brazil. The decrease in sales in Australia relates to lower volumes as a result
of increased competition.
Operating expenses increased approximately $3.1 million to $15.1 million in the
first quarter of 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 $1.2 million for the quarter
ended November 30, 2005 compared to net other expense of $1.5 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 three months ended November
30, 2005, we incurred $1.2 million, or $0.02 per diluted share, related to the
Pharmacia/Monsanto litigation expenses, compared to $1.6 million, or $0.03 per
diluted share, in the three months ended November 30, 2004.
The effective tax rate for the quarter was 32.6%, versus 39.4% in the prior year
period, due to the timing of the recognition of income tax-related reserves. We
expect the annual effective tax rate for 2006 to approximate 35.5%.
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 the adoption of SFAS 123R. See Note 1 to Consolidated Financial
Statements for the three months ended November 30, 2005 for further discussion
of this accounting change. In addition, in the first quarter of 2006, we
expensed $660,000 related to share-based payments and expect to incur
approximately $3.0 million in the aggregate for fiscal 2006 related to
share-based awards made as of November 30, 2005.
OFF-BALANCE SHEET ARRANGEMENTS
We do not currently utilize off-balance sheet arrangements.
CONTRACTUAL OBLIGATIONS
As of November 30, 2005, we owed approximately $9.3 million for a portion of our
raw materials that had been received from the 2005 production season. This
amount represents the amount due on seed production delivered that had not yet
been paid. It does not include other amounts that may become due from
contingencies contained in seed production contracts. The amount owed of $9.3
million is included in Current Liabilities in our Consolidated Balance Sheet at
November 30, 2005.
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 early payments by customers and cash from operations to fund working
capital needs. In the past, we have borrowed on a short-term basis to meet
seasonal working capital needs. However, since 2002, we have 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 would be 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 November 30, 2005, there were no loans outstanding under the Credit
Agreement, other than the existing Letters of Credit as discussed above.
Capital expenditures were $2.4 million and $1.8 million in the three months
ended November 30, 2005 and 2004, respectively. We anticipate that capital
expenditures will approximate $8.0 million to $10.0 million in 2006.
For the three months ended November 30, 2005, aggregate dividends of $5.5
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 $22.1 million in 2006.
Cash Used for Share Repurchases:
From September 1, 2005 through December 31, 2005, we repurchased 320,000 shares
at an aggregate purchase price of approximately $7.6 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 November 30, 2005:
Approximate Dollar
Total Value of Shares that
Number of Average Total Number of Shares May Yet Be Purchased
Shares Price Paid Purchased as Part of Under the June 2005
Period Purchased per Share Publicly Announced Plan Plan
----------------------------------------- ------------ ------------ -------------------------- -----------------------
September
(September 1, 2005 to September 30, 2005) - $ - - $ 47,192,594
October
(October 1, 2005 to October 31, 2005) 30,000 $ 25.06 30,000 $ 46,440,692
November
(November 1, 2005 to November 30, 2005)
185,000 $ 23.72 185,000 $ 42,051,799
------------ --------------------------
Total 215,000 $ 23.91 215,000 $ 42,051,799
============ ==========================
Cash provided from operations, cash on hand, early payments from customers and
borrowings under the credit facility, if necessary, 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) 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 November
30, 2005, was $89,000. A 10% adverse change in the underlying commodity prices
upon which these contracts are based would result in a $249,000 loss in future
earnings (not counting the gain on the underlying commodities).
Our earnings are also affected by fluctuations in the value of the U.S. dollar
compared to foreign currencies as a result of transactions in foreign markets.
We conduct non-U.S. operations through subsidiaries and joint ventures in,
primarily, Argentina, Australia, Brazil, China, South Africa and Turkey. At
November 30, 2005, 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 earnings.
For the three months ended November 30, 2005, 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 November 30, 2005.
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 report
in that Annual Report on Form 10-K, or new items that have come to the Company's
attention since that time.
Regarding the interlocutory appeal before the Mississippi Supreme Court in the
March 14, 2002, Holmes County, Mississippi lawsuit, oral arguments have been
scheduled for February 16, 2006.
Regarding the December 2002 suit filed by D&PL against Nationwide Agribusiness
and other insurance companies in the Circuit Court of Holmes County,
Mississippi, the scheduled commencement date of November 14, 2005 for the case
was continued because of pending motions.
On November 30, 2005, D&PL joined a case originally filed by Monsanto in the
United States District Court, Western District, Austin Division. That suit was
originally filed September 6, 2005 by Monsanto, and seeks to compel arbitration
of claims against Monsanto and/or seed companies by the farmers who are
defendants in the action pending in the October 6, 2005 filing in the Eastern
District of Texas, Marshall Division, as disclosed in D&PL's Annual Report on
Form 10-K for the year ended August 31, 2005, and other parties. It is
anticipated that ultimately this case will subsume the claims filed against D&PL
and others in the October 6, 2005 filing in the Eastern District of Texas,
Marshall Division.
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
acerage. Also, in WTO discussions in Hong Kong in late December 2005, U.S.
negotiators committed to reduce cotton export subsidies (the "Step 2"
program) in 2007, and to reduce overall agricultural export subsidies by
2013. U.S. farm programs, including government subsidies, and WTO rulings
impacting such programs may materially affect the results of our business.
In addition, the U.S. Congress, in an attempt to reduce the U.S.
government's budget deficit, may also revise the farm subsidy program
and/or its agricultural policy.
Other
Overall profitability will depend on the factors noted above, as well as
worldwide commodity prices, our ability to successfully open new
international markets, the technology partners' ability to obtain timely
government approval (and maintain such approval) for existing and for
additional biotechnology products on which they and D&PL are working, the
terms of such government approvals, our technology partners' ability to
successfully defend challenges to proprietary technologies licensed to us
and our ability to produce sufficient commercial quantities of high quality
planting seed of these products. Any delay in or inability to successfully
complete these projects may affect future profitability. In addition,
earnings forecasts do not consider the impact of potential transactions,
their related accounting and other factors, that may be under consideration
by the Company, but have not yet been completed or their effect determined
at the date of a particular filing.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The disclosure required under this Part II, Item 2 of this Quarterly Report on
Form 10-Q is contained in Part I, Item 2 hereof under the heading "Cash Used for
Share Repurchases" and is incorporated herein by reference.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits.
Exhibits.
31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) Under
the Securities Exchange Act of 1934.
31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) Under
the Securities Exchange Act of 1934.
32 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: January 9, 2006 /s/ W. Thomas Jagodinski
------------------------ -
W. Thomas Jagodinski
President, Chief Executive Officer and Director
(Principal Executive Officer)
Date: January 9, 2006 /s/ Kenneth M. Avery
--------------------
Kenneth M. Avery
Vice President - Finance, Treasurer and
Assistant Secretary
(Principal Financial and Accounting Officer)