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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
X Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
- ----- Act of 1934 for the fiscal year ended August 31, 1998
- ----- Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 000-21788
DELTA AND PINE LAND COMPANY
(Exact name of registrant as specified in its charter)
Delaware 62-1040440
(State or other jurisdiction
of incorporation or organization) (I.R.S. Employer Identification No.)
One Cotton Row, Scott, Mississippi 38772
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (601) 742-4500
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, $0.10 par value New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the 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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of Common Stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Common Stock on October 31,
1998, as reported on the New York Stock Exchange, was approximately
$643,405,000. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
As of October 31, 1998, Registrant had outstanding 38,394,541 shares of Common
Stock.
PART I
ITEM 1. BUSINESS
On May 8, 1998, Delta and Pine Land Company and subsidiaries, a Delaware
Corporation ("D&PL" or the "Company") entered into a merger agreement with
Monsanto Company ("Monsanto"), pursuant to which the Company would be merged
with and into Monsanto. This agreement is subject to the approval of the
Company's stockholders and the expiration of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976. Under terms of the
agreement, the Company's stockholders would be entitled to receive 0.8625 shares
of Monsanto's Common Stock in exchange for each share of Delta and Pine Land
stock they hold.
On June 1, 1998, Monsanto and American Home Products Corporation ("AHP")
announced that they had entered into an agreement providing for the merger of
those two companies. On October 13, 1998, AHP and Monsanto announced publicly
that they had mutually agreed to terminate the merger pursuant to the agreement.
D&PL is primarily engaged in the breeding, production, conditioning and
marketing of proprietary varieties of cotton planting seed in the United States
and other cotton producing nations. D&PL also breeds, produces, conditions and
distributes soybean planting seed in the United States.
Since 1915, D&PL has bred, produced and/or marketed upland picker varieties of
cotton planting seed for cotton varieties that are grown primarily east of Texas
and in Arizona. The Company has used its extensive classical plant breeding
programs to develop a gene pool necessary for producing cotton varieties with
improved agronomic traits important to farmers, such as crop yield, and to
textile manufacturers, such as enhanced fiber characteristics. In 1996, D&PL
commenced commercial sales in the United States of cotton planting seed
containing Bollgard(TM) gene technology licensed from Monsanto which expresses a
protein toxic to certain lepidopteran cotton pests. Since 1997, D&PL has
marketed in the U.S. genetically modified cotton planting seed providing
tolerance to glyphosate-based herbicides ("Roundup Ready(R) Cotton").
In 1980, D&PL added soybean seed and in 1988 hybrid sorghum seed to its product
line. In 1988, D&PL also commenced distributing corn hybrids acquired from
others. In 1995, the Company sold its corn and sorghum business to Mycogen Plant
Science, Inc. ("Mycogen"). D&PL and Mycogen entered into a joint marketing
agreement whereby both companies sold D&PL's remaining corn and sorghum
varieties through 1997. D&PL will exchange a sorghum processing plant located in
Plainview, Texas for a cottonseed delinting facility in Lubbock, Texas owned by
Mycogen by December 31, 1998.
During the 1980's, as a component of its long-term growth strategy, the Company
began to market its products, primarily cottonseed, internationally. Over a
period of years, the Company has strengthened and expanded its international
staff in order to support its expanding joint venture activities. In foreign
countries, cotton acreage is often planted with farmer-saved seed which has not
been delinted or treated and is of low overall quality. Management believes that
D&PL has an attractive opportunity to penetrate foreign markets because of its
widely adaptable, superior cotton varieties, technological know-how in producing
and conditioning high-quality seed and brand name recognition. Furthermore, in
many countries the Bollgard gene technology and Roundup Ready gene technology
licensed from Monsanto would be effective and help farmers in those countries.
D&PL sells its products in foreign countries through (i) export sales from the
U.S., (ii) direct incountry operations and to a lesser degree (iii) distributors
or licensees. The method varies and evolves, depending upon the Company's
assessment of the potential size and profitability of the market, governmental
policies, currency and credit risks, sophistication of the target country's
agricultural economy, and costs (as compared to risks) of commencing physical
operations in a particular country. To date, a majority of the Company's
international sales have resulted from exports from the U.S. of the Company's
products rather than direct in-country operations.
In 1997, D&PL announced a production and cost optimization program aimed to
improve operating efficiencies. As part of this program, the Company idled three
of its delinting facilities and reduced its work force at these facilities and
at other locations by offering eligible employees a voluntary early retirement
plan. D&PL believes its reconfigured production capabilities will allow it to
continue to meet the accelerating demand for its insect resistant and herbicide
tolerant transgenic products on a cost efficient basis to the farmer.
Employees
As of October 31, 1998, the Company employed a total of 581 full time employees
worldwide. Due to the nature of the business, the Company utilizes seasonal
employees in its delinting plants and its research and foundation seed programs.
The maximum number of seasonal employees approximates 300 and typically occurs
in October and November of each year. The Company considers its employee
relations to be good.
Acquisitions
In 1996, D&PL acquired Ellis Brothers Seed, Inc., Arizona Processing, Inc. and
Mississippi Seed, Inc., which own the outstanding common stock of Sure Grow
Seed, Inc., (the "Sure Grow Companies") in exchange for stock valued at
approximately $70 million on the day of closing. D&PL exchanged 2.8 million
shares of its common stock (after all stock splits) for all outstanding shares
of the three companies. The merger was accounted for as a pooling-of-interests.
The Company continues to market upland picker cottonseed varieties under the
Sure Grow brand. Additionally, the Sure Grow breeding program has full access to
Monsanto's Bollgard and Roundup Ready gene technologies.
In 1996, the Company acquired Hartz Cotton, Inc. from Monsanto, which included
inventories of cotton planting seed of Hartz upland picker varieties, germplasm,
breeding stocks, trademarks, trade names and other assets, for approximately
$6.0 million. The consideration consisted primarily of 800,000 shares (after all
stock splits) of the Company's Series M Convertible NonVoting Preferred Stock.
Additional shares may be issued to Monsanto depending on the sales and
profitability levels achieved by the product line acquired.
Since the 1940's, the Paymaster(R) and Lankart(R) upland stripper cottonseed
varieties have been developed for and marketed primarily in the High Plains of
Texas and Oklahoma (the "High Plains"). In 1994, D&PL acquired the Paymaster and
Lankart cotton planting seed business ("Paymaster"), for approximately $14.0
million. Although the Paymaster varieties are planted on approximately 80% of
the estimated 4.0 to 5.0 million cotton acres in the High Plains, only a portion
of that seed is actually sold by Paymaster. Farmer-saved seed accounts for a
significant portion of the seed needed to plant the acreage in this market area.
Through 1996 the seed needed to plant the remaining acreage was sold by
Paymaster and its 12 sales associates through a certified seed program. Under
this program, Paymaster sold parent seed to its contract growers who planted,
produced and harvested the progeny of the parent seed, which Paymaster then
purchased from the growers. The progeny of the parent seed was then sold by
Paymaster to the sales associates who in turn delinted, conditioned, bagged and
sold it to others as certified seed. The sales associates paid a royalty to
Paymaster on certified seed sales. Beginning in fiscal 1997, D&PL's operations
department, in addition to producing parent seed, commenced delinting,
conditioning and bagging finished seed. Unconditioned seed is also supplied by
D&PL to a limited number of contract processors who delint, condition and bag
seed for a fee. This finished seed is sold by Paymaster to distributors and
dealers.
The Company acquired in 1994 from the Supima Association of America ("Supima")
certain planting seed inventory, the right to use the Supima(R) trade name and
trademark and the right to distribute Pima extra-long staple (fiber-length)
cotton varieties. D&PL also entered into a research agreement with Supima's
university collaborator that allows D&PL the right of first refusal for any Pima
varieties developed under this program which D&PL partially funds. In 1998 D&PL
gave notice to its university collaborator of its intention to terminate this
agreement. Pima seed is produced, conditioned and sold by D&PL to distributors
and dealers.
Biotechnology
Collaborative biotechnology licensing agreements which were executed with
Monsanto in 1992 and subsequently revised in 1993 and 1996, provide for the
commercialization of Monsanto's Bollgard ("Bacillus thuringiensis" or "Bt") gene
technology in D&PL's varieties. The selected Bt is a bacterium found naturally
in soil and produces proteins toxic to certain lepidopteran larvae, the
principal cotton pests in many cotton growing areas. Monsanto created a
transgenic cotton plant by inserting Bt genes into cotton plant tissue. This
transgenic plant tissue is lethal to certain lepidopteran larvae that consume
it. The gene and related technology were patented or licensed from others by
Monsanto and were licensed to D&PL for use under the trade name Bollgard. In
D&PL's primary markets, the cost of insecticides is the largest single
expenditure for many cotton growers. The insect resistant capabilities of
transgenic cotton containing the Bollgard gene may reduce the amount of
insecticide required to be applied by cotton growers using planting seed
containing the Bollgard gene. In October 1995, Monsanto was notified that the
United States Environmental Protection Agency ("EPA") had completed its initial
registration of the Bollgard gene technology, thus clearing the way for
commercial sales of seed containing the Bollgard gene. In 1996, D&PL sold
commercially for the first time two Delta Pine varieties, which contained the
Bollgard gene, in accordance with the terms of the Bollgard Gene License and
Seed Services Agreement (the "Bollgard Agreement") between the Company and
Monsanto. This initial EPA registration expires on January 1, 2001, at which
time the EPA will, among other things, reevaluate the effectiveness of the
insect resistance management plan and decide whether to convert the registration
to a non-expiring (and/or unconditional) registration.
Pursuant to the terms of the Bollgard Agreement, farmers must buy a limited use
sub-license for the technology from D&M Partners, a partnership of D&PL and
Monsanto, in order to purchase seed containing the Bt gene technology. The
distributor/dealers who coordinate the farmer licensing process receive a
service payment not to exceed 20% of the technology sub-licensing fee. After the
dealers and distributors are compensated, D&M Partners pays Monsanto a royalty
equal to 71% of the net sub-license fee (technology sub-licensing fees less
distributor/dealer payments) and D&PL receives 29% for its services. The license
agreement continues until the later of the expiration of all patent rights or
October 2008.
Pursuant to the Bollgard Agreement, Monsanto must defend and indemnify D&PL
against claims of patent infringement, including all damages awarded or amounts
paid in settlements. Monsanto must also indemnify D&PL against a) costs of
inventory and b) lost profits on inventory which becomes unsaleable because of
patent infringement claims. Monsanto must defend any claims of failure of
performance of a Bollgard gene. Monsanto and D&PL share the cost of any product
performance claims in proportion to each party's share of the royalty. Indemnity
from Monsanto only covers performance claims involving failure of insect
resistance, and not claims arising from other causes.
D&PL has also developed transgenic cotton and transgenic soybean varieties that
are tolerant to Roundup, a glyphosate-based herbicide sold by Monsanto. In 1996,
such Roundup Ready plants were approved by the Food and Drug Administration, the
USDA, and the EPA. In February 1996, the Company and Monsanto executed the
Roundup Ready Gene License and Seed Services Agreement (the "Roundup Ready
Agreement") which provides for the commercialization of Roundup Ready
cottonseed. The Roundup Ready Agreement grants a license to D&PL and certain of
its affiliates the right in the United States to sell cottonseed of D&PL's
varieties that contain Monsanto's Roundup Ready gene. The Roundup Ready gene
makes cotton plants tolerant to contact with Roundup herbicide. Similar to the
Bollgard Agreement, farmers must execute limited use sub-licenses for the
technology in order to purchase seed containing the Roundup Ready Gene. Monsanto
must defend and indemnify D&PL against claims of patent infringement, including
all damages awarded or amounts paid in settlements. Monsanto will also indemnify
D&PL against the cost of inventory that becomes unsaleable because of patent
infringement claims, but Monsanto is not required to indemnify D&PL against lost
profits on such unsaleable seed. In contrast with the Bollgard Gene License
where the costs of gene performance claims will be shared in proportion to the
division of sub-license revenue, Monsanto must defend and must bear the full
cost of any claims of failure of performance of the Roundup Ready Gene. In both
agreements, generally, D&PL is responsible for varietal/seed performance issues
and Monsanto is responsible for failure of the genes. In February 1997, the
Company and Monsanto executed the Roundup Ready Soybean License Agreement (the
"Roundup Ready Soybean Agreement") which provides for the commercialization of
Roundup Ready soybean seed.
Since 1987, D&PL has conducted research using genes provided by DuPont to
develop soybean plants that are tolerant to certain DuPont ALS(R) herbicides.
Such plants enable farmers to apply these herbicides for weed control without
significantly affecting the agronomics of the soybean plants. Since soybean seed
containing the ALS herbicide-tolerant trait was not genetically engineered, sale
of this seed does not require government approval, although the herbicide to
which they express tolerance must be EPA approved.
D&PL announced in March 1998 that it was granted United States Patent No.
5,723,765, entitled CONTROL OF PLANT GENE EXPRESSION. This patent is owned
jointly by D&PL and the United States of America, as represented by the
Secretary of Agriculture. The patent broadly covers plants and seed, both
transgenic and conventional, of all species for a system designed to allow
control of progeny seed viability without harming the crop. The principal
application of the technology will be to control unauthorized planting of seed
of proprietary varieties (sometimes called "brown bagging") by making such
practice non-economic since unauthorized saved seed will not germinate, and
would be useless for planting. The patent has the prospect of opening
significant worldwide seed markets to the sale of transgenic technology in
varietal crops in which crop seed currently is saved and used in subsequent
seasons as planting seed. D&PL intends that licensing of this technology will be
made widely available to other seed companies and intends for it to be used only
in those varieties that contain transgenic traits.
The patent was developed from a research program conducted pursuant to a
Cooperative Research and Development Agreement between D&PL and the U.S.
Department of Agriculture's Agricultural Research Service in Lubbock, Texas. The
technology resulted from basic research and will require further development,
which is already underway, in order to be used in commercial seed. The Company
estimates that it may be as many as seven years before this Technology
Protection System ("TPS") could be available commercially.
The Company has license, research and development, confidentiality and material
transfer agreements with providers of technology that the Company is evaluating
for potential commercial applications and/or introduction. The Company also
contracts with third parties to perform research on the Company's behalf for
enabling and other technologies that the Company believes have potential
commercial applications in varietal crops around the world. The Company's
aggregate research and development costs were $9.8 million, $13.7 million and
$16.7 million during 1996, 1997 and 1998 respectively.
Commercial Seed
Seed of all commercial plant species is either varietal or hybrid. D&PL's cotton
and soybean seed are varietals. Varietal plants can be reproduced from seed
produced by a parent plant, with the offspring exhibiting only minor genetic
variations. The Plant Variety Protection Act of 1970, as amended in 1994, in
essence prohibits, with limited exceptions, purchasers of varieties protected
under the amended Act from selling seed harvested from these varieties without
permission of the plant variety protection certificate owner. Some foreign
countries provide similar legal protection for breeders of crop varieties.
Although cotton is varietal and, therefore, can be grown from seed of parent
plants saved by the growers, most farmers in D&PL's primary domestic markets
purchase seed from commercial sources each season because cottonseed requires
delinting in order to be sown by modern planting equipment. Delinting and
conditioning may be done either by a seed company on its proprietary seed or by
independent delinters for farmers. Modern cotton farmers in upland picker areas
generally recognize the greater assurance of genetic purity, quality and
convenience that professionally grown and conditioned seed offers compared to
seed they might save.
In connection with its seed operations, the Company also farms approximately
2,600 acres in the U.S., primarily for production of cotton and soybean
foundation seed. The Company has annual agreements with various growers to
produce seed for cotton and soybeans. The growers plant parent seed purchased
from the Company and follow quality assurance procedures required for seed
production. If the grower adheres to established Company quality assurance
standards throughout the growing season and if the seed meets Company standards
upon harvest, the Company may be obligated to purchase specified minimum
quantities of seed, usually in its first and second fiscal quarters, at prices
equal to the commodity market price of the seed plus a grower premium. The
Company then conditions the seed for sale.
The majority of the Company's sales are made from early in the second fiscal
quarter through the beginning of the fourth fiscal quarter. Varying climatic
conditions can change the quarter in which seed is delivered, thereby shifting
sales and the Company's earnings between quarters. Thus, seed production,
distribution and sales are seasonal and interim results will not necessarily be
indicative of the Company's results for a fiscal year.
Revenues from domestic seed sales are generally recognized when seed is shipped.
Revenues from Bollgard and Roundup Ready licensing fees are recognized based on
the number of acres expected to be planted with such seed when the seed is
shipped. Prior to 1998, licensing fees were based on the estimated number of
acres that farmers represented would be planted with the seed purchased. In
1998, the licensing fee charged to farmers was based on pre-established planting
rates for seven geographic regions. Revenue is recognized based on established
technology fee per unit shipped to each geographic region. Domestically, the
Company promotes its cotton and soybean seed directly to farmers and sells its
seed through distributors and dealers. All of the Company's domestic seed
products (including Bollgard and Roundup Ready technologies) are subject to
return or credit, which vary from year to year. The annual level of returns and,
ultimately, net sales are influenced by various factors, principally commodity
prices and weather conditions occurring in the spring planting season during the
Company's third and fourth quarters. The Company provides for estimated returns
as sales occur. To the extent actual returns differ from estimates, adjustments
to the Company's operating results are recorded when such differences become
known, typically in the Company's fourth quarter. All significant returns occur
or are accounted for by fiscal year end. International export seed revenues are
recognized upon the date seed is shipped or the date letters of credit are
cleared, whichever is later. Generally, international export sales are not
subject to return.
Year 2000 Readiness Disclosure
Beginning in 1996, D&PL initiated its Global Year 2000 program to ensure that
its infrastructure and information systems comply with the systems requirements
for the year 2000. The program includes the following phases: identifying
systems that need to be replaced or fixed; assessing the extent of the work
required; prioritizing the work; and successfully completing the associated
action plans. In higher risk areas, the Company also has developed contingency
action plans. D&PL has essentially completed the first three phases of the
program and is now primarily in the implementation phase. Some additional
identification and assessment continues for recent acquisitions and in the area
of embedded systems. The majority of systems, including all business critical
systems, are expected to comply with year 2000 requirements by the first quarter
of 1999 due in large part to the installation in fiscal 1997 of a third party
software system, at a cost in excess of $3.0 million, that is year 2000
compliant. The Company continues to evaluate the estimated costs associated with
year 2000 compliance based on actual experience. While the year 2000 efforts
involve additional costs, D&PL believes, based on available information, that it
will be able to manage its year 2000 transition without any material adverse
effect on its business operations, financial position, profitability or
liquidity. Total costs incurred to date for year 2000 considerations (excluding
third party software) approximate $0.2 million and the Company estimates that it
might cost an additional $0.5 million to complete the year 2000 compliance
process.
D&PL also has contacted its major suppliers to assess their preparations for the
year 2000. Similar contacts also are planned for major customers. These actions
are taken to help mitigate the possible external impact of year 2000 issues.
Even so, presently it is not feasible to fully assess the potential consequences
if service interruptions occur from suppliers or in such infrastructure areas as
utilities, communications, transportation, banking and government. D&PL is
developing business continuity plans to minimize the impact of such external
events.
Outlook
From time to time, the Company may make forward-looking statements relating to
such matters as anticipated financial performance, existing products, technical
developments, new products, research and development activities, year 2000
issues and similar matters. The Private Securities Litigation Reform Act of 1995
provides a safe harbor for forward-looking statements. In order to comply with
the terms of the safe harbor, the Company notes that a variety of factors could
cause the Company's actual results and experience to differ materially from the
anticipated results or other expectations expressed in the Company's
forward-looking statements. The risks and uncertainties that may affect the
operations, performance, development and results of the Company's business
include those noted elsewhere in this Item and the following:
D&PL's contemplated merger with Monsanto is subject to shareholder approval
as well as approval by government agencies. The inability to complete this
merger may have a material effect on the Company. However, such effect
cannot be known at this time.
Demand for D&PL's seed will be affected by government programs and, most
importantly, by weather. Demand for seed is also influenced by commodity
prices and the demand for a crop's end-uses such as textiles, animal feed,
food and raw materials for industrial use. These factors, along with
weather, influence the cost and availability of seed for subsequent
seasons. Weather impacts crop yields, commodity prices and the planting
decisions that farmers make regarding both original planting commitments
and, when necessary, replanting levels.
The planting seed market is highly competitive and D&PL varieties face
competition from a number of seed companies, diversified chemical
companies, agricultural biotechnology companies, governmental agencies and
academic and scientific institutions. A number of chemical and
biotechnology companies have seed production and/or distribution
capabilities to ensure market access for new seed products. The Company's
seed products may encounter substantial competition from technological
advances by others or products from new market entrants. Many of the
Company's competitors are, or are affiliated with, large diversified
companies that have substantially greater resources than the Company.
The production, distribution or sale of crop seed in or to foreign markets
may be subject to special risks, including fluctuations in foreign
currency, exchange rate controls, expropriation, nationalization and other
agricultural, economic, tax and regulatory policies of foreign governments.
Particular policies which may affect the international operations of D&PL
include the testing and quarantine and other restrictions relating to the
import and export of plants and seed products and the availability (or lack
thereof) of proprietary protection for plant products. In addition, United
States government policies, particularly those affecting foreign trade and
investment, may impact the Company's international operations.
Overall profitability will depend on weather conditions, government
policies in all countries where the Company sells products and operates,
worldwide commodity prices, the Company's ability to successfully open new
international markets, the Company's ability to successfully continue the
development of the High Plains market, the technology partners' ability to
obtain timely government approval (and maintain such approval) for existing
and for additional biotechnology products on which they and the Company are
working and the Company's 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.
Due to the varying levels of agricultural and social development of the
international markets in which the Company operates and because of factors
within the particular international markets targeted by the Company,
international profitability and growth may be less stable and predictable
than domestic profitability and growth have been in the past.
See "Risks and Uncertainties" in Item 7.
ITEM 2. PROPERTIES
D&PL maintains facilities primarily used for research, delinting, conditioning,
storage and distribution. The Company's headquarters and other facilities are
located in Scott, Mississippi. This location is used for corporate offices,
quality assurance, research and greenhouse space, and storage.
The Company's other owned cottonseed delinting, conditioning and storage
facilities are in: Centre, Alabama; Chandler, Arizona (on leased land); Eloy,
Arizona; Hollandale, Mississippi; Shelby, Mississippi; Tunica, Mississippi;
Aiken, Texas and Lubbock, Texas. The Company has soybean processing plants in
Harrisburg, Arkansas and Centre, Alabama. The Company also owns cottonseed
delinting facilities in Narromine, New South Wales, Australia, Groblersdal,
South Africa, Shijiazhuang, Hebei, China (through a Chinese joint venture), and
through an Argentine joint venture, a delinting plant under construction
(scheduled completion is February 1999) in Saenz Pena, Chaco, Argentina. The
Company leases land in Catamarca, Argentina on which a delinting plant is
situated. The Company's delinting and conditioning facilities in Scott,
Mississippi, Centre, Alabama, and Tunica, Mississippi were idled in conjunction
with the production and cost optimization program in 1997. The Scott,
Mississippi facility may be used on an "as needed" basis in 1998.
The Company's plant breeders conduct research at eight facilities in the United
States, five of which are owned by the Company and three of which are leased.
The Company also leases research facilities in Australia and Paraguay. In
connection with its foundation seed program, the Company leases land in the
United States, Argentina, Costa Rica and South Africa.
All owned properties are free of encumbrances except the Centre, Alabama site,
which was mortgaged prior to being acquired in the Sure Grow transaction.
Management believes that all of D&PL's facilities, including its conditioning,
storage and research facilities, are well maintained and generally adequate to
meet its needs for the foreseeable future. (See "Liquidity and Capital
Resources" in Item 7).
PRINCIPAL COMPANY LOCATIONS, AFFILIATES AND SUBSIDIARIES:
World Headquarters Operations Facilities
Scott, Mississippi, USA Scott, Mississippi, USA
Hollandale, Mississippi, USA
Research Centers Shelby, Mississippi, USA
Scott, Mississippi, USA Tunica, Mississippi, USA
Leland, Mississippi, USA Centre, Alabama, USA
Casa Grande, Arizona, USA Chandler, Arizona, USA
Chandler, Arizona, USA Eloy, Arizona, USA
Stuttgart, Arkansas, USA Harrisburg, Arkansas, USA
Hartsville, South Carolina, USA Aiken, Texas, USA
Hale Center, Texas, USA Lubbock, Texas, USA
Lubbock, Texas, USA Catamarca, Argentina
Goondiwindi, Queensland, Australia San Jose, Costa Rica
Asuncion, Paraguay Narromine, New South Wales, Australia
Larissa, Greece Hefei, Anhui, People's Republic of China
Shijiazhuang, Hebei, People's Republic
of China
Groblersdal, South Africa
Saenz Pena, Chaco, Argentina
Uberlandia, Minas Gerais, Brazil
Foreign Offices
Narrabri, New South Wales, Australia
Beijing, People's Republic of China
Mexicali, Mexico
Mexico City, Mexico
Zoetermeer, The Netherlands
Seville, Spain
Adana, Turkey
Izmir, Turkey
Urfa, Turkey
ITEM 3. LEGAL PROCEEDINGS
Through October 26, 1998, approximately 51 farmers filed arbitration claims
against the Company and Monsanto Company ("Monsanto") with state agencies in
Mississippi and Texas. The complainants allege that Roundup Ready seed marketed
by the Company failed to perform as anticipated resulting in deformed or missing
bolls and some further assert substantial yield losses in their 1998 crops. The
Company and Monsanto are presently investigating these claims to determine the
cause or causes of the problems alleged. Pursuant to the terms of the Roundup
Ready Gene License and Seed Services Agreement (the "Roundup Ready Agreement")
between D&PL and Monsanto, Monsanto has assumed responsibility for the defense
of these claims. Pursuant to the Roundup Ready Agreement, Monsanto is
contractually obligated to defend and indemnify the Company against all claims
arising out of failure of the Roundup Ready glyphosate tolerance gene. D&PL will
not have a right to indemnification from Monsanto, however, for any claims
involving defective varietal characteristics separate from or in addition to
failure of the herbicide-tolerance gene. D&PL believes that these claims will be
resolved without any material impact on the Company's financial statements.
Through October 26, 1998, 101 farmers in Georgia and 2 in Arkansas have filed
arbitration claims against the Company and, in some cases, Monsanto. The
complainants allege that certain Roundup Ready Paymaster cotton seed marketed by
the Company in 1998 produced plants which exhibited a condition known as Bronze
Wilt and consequently sustained varying degrees of lost yield. Some complaints
also contain allegations of poor germination. D&PL and Monsanto are currently
investigating these claims to determine the cause or causes of the alleged
problems and are working cooperatively with the respective states departments of
agriculture to gather the necessary information regarding causation and damage.
Presently, the definitive causes of the alleged Bronze Wilt and poor germination
in this seed have not been established, and accordingly Monsanto's indemnity
obligation, if any, is unresolved. It is D&PL's intention to defend vigorously
claims asserting product defects in the varieties. Management believes that
these complaints will be resolved without any future material impact on the
Company's consolidated financial statements.
The Company, certain subsidiaries of Monsanto and others were named as
defendants in a lawsuit filed in the Civil District Court, Williamson County,
Texas, 277th Judicial District, in April 1997. The plaintiffs allege, among
others things, that certain cottonseed acquired from Monsanto in the Hartz
Cotton acquisition and subsequently sold by the Company, failed to perform as
represented, allegedly resulting in lost yield. The Company has filed a Summary
Judgment motion based on failure to arbitrate in accordance with Texas seed law.
Pursuant to the Hartz Cotton Acquisition Agreement, the Company is entitled to
indemnification from Monsanto for damages resulting from the sale of bagged seed
inventories acquired by D&PL in that acquisition. Some or all of the seed
involved in this case may meet this criteria and D&PL will therefore be entitled
to indemnification from Monsanto for any losses resulting from such seed.
Management believes that this case will be resolved without any material impact
on the Company's financial statements.
The Company, Monsanto and other third parties were named as defendants in a
lawsuits filed in (i) the District Court of Falls County, Texas, in August 1996
and (ii) in the District Court of Robertson County, Texas, in March 1998. The
plaintiffs allege, among other things, that D&PL's cottonseed varieties, which
contain Monsanto's Bollgard gene, did not perform as the farmers had anticipated
and, in particular, did not fully protect their cotton crops from certain
lepidopteran insects. Pursuant to the terms of the Bollgard Agreement between
D&PL and Monsanto, Monsanto has assumed responsibility for the defense of these
claims. The portion of this claim relating to failure of the Bollgard gene is
subject to a duty of defense by Monsanto and prorata indemnification under the
Bollgard Agreement. Under the applicable indemnity provisions of the Bollgard
Agreement, defense costs and liability to the plaintiffs on any failure of the
technology would be apportioned 71% to Monsanto and 29% to D&PL. Some of the
claims in this litigation concern failure of Monsanto's express warranties
relating to insect resistance and those claims may not be within the scope of
D&PL's partial indemnity obligation to Monsanto. On the other hand, some of the
claims made in the litigation concern the quality of seed and seed coat
treatments, or other varietal aspects of variety, not involving failure of
performance of the Bollgard gene or express representations with respect thereto
and, therefore, may not be within the scope of Monsanto's indemnity obligation
to D&PL. D&PL intends to cooperate with Monsanto in its anticipated vigorous
defense of these suits. D&PL believes that these suits will be resolved without
any material impact on the Company's consolidated financial statements.
In October 1996, Mycogen Plant Science, Inc. and Agrigenetics, Inc.
(collectively "Mycogen") filed a lawsuit in U.S. District Court in Delaware
naming D&PL, Monsanto and DeKalb Genetics as defendants alleging that two of
Mycogen's recently issued patents have been infringed by the defendants by
making, selling, and licensing seed that contains the Bollgard gene. The suit
which went to trial on January 1998 sought injunctions against alleged
infringement, compensatory damages, treble damages and attorney's fees and court
costs. A jury found in favor of D&PL and Monsanto on issues of infringement.
Mycogen has subsequently re-filed a motion for a new trial and for a judgment in
favor of Mycogen as a matter of law. Pursuant to the terms of the Bollgard
Agreement, Monsanto is required to defend D&PL against patent infringement
claims and indemnify D&PL against damages from any patent infringement claims
and certain other losses and costs. Due to Monsanto's obligation to indemnify
D&PL, the Company believes that the resolution of this matter will not have a
material impact on the Company or its financial statements.
In May 1998, five individual alleged shareholders brought suits against
Monsanto, the Company and its Board of Directors ("Directors") in the Chancery
Court of New Castle County, Delaware. The complaints alleged that the
consideration to be paid in the proposed merger of the Company with Monsanto, is
inadequate and that the Company's Directors breached their fiduciary duties to
the Company stockholders by voting approval of the Agreement and Plan of Merger,
and that Monsanto aided and abetted the alleged breach of fiduciary duty. The
complaints were consolidated into one action, which seeks a declaration that the
action is maintainable as a class action, that the merger be enjoined, or
alternatively, rescinded, and/or an award of unspecified compensatory damages if
the merger is consummated. Management believes that the complaints are without
merit and intend to vigorously defend the consolidated complaints. D&PL further
believes that the consolidated complaints will be resolved without any material
impact in the Company's consolidated financial statements.
A corporation owned by the son of the Company's former Guatemalan distributor
sued in 1989 asserting that the Company violated an agreement with it by
granting to another entity an exclusive license in certain areas of Central
America and southern Mexico. The suit seeks damages of 5,300,000 Guatemalan
quetzales (approximately $800,000 at current exchange rates) and an injunction
preventing the Company from distributing seed through any other licensee in that
region. The Guatemalan court, where this action is proceeding, has twice
declined to approve the injunction sought. Management believes that the
resolution of the matter will not have material impact on the Company or its
financial statements. The Company continues to offer seed for sale in Guatemala.
The Company is involved in various other claims arising in the normal course of
business. Management believes such matters will be resolved without any material
effect on the Company's financial position or its results of operations.
On July 18, 1996, the United States Department of Justice, Antitrust Division
("USDOJ"), served a Civil Investigative Demand ("CID") on D&PL seeking
information and documents in connection with its investigation of the
acquisition by D&PL of the stock of Arizona Processing, Inc., Ellis Brothers
Seed, Inc. and Mississippi Seed, Inc. (which own the outstanding common stock of
Sure Grow Seed, Inc). The CID states that the USDOJ is investigating whether
these transactions may have violated the provisions of Section 7 of the Clayton
Act, 15 USC ss. 18. D&PL has responded to the CID, employees have been examined
by the USDOJ, and D&PL is committed to full cooperation with the USDOJ. At the
present time, the ultimate outcome of the investigation cannot be predicted.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the vote of security holders during the fourth
quarter of 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
From June 1993 through December 15, 1995, the stock of the Company was traded on
the NASDAQ National Market under the trading symbol COTN. On December 18, 1995,
the Company's stock began trading on the New York Stock Exchange (the "NYSE")
under the trading symbol DLP. The range of closing prices for these shares for
the last two fiscal years, as reported by the NYSE after adjustment for all
stock splits, was as follows:
Common Stock Data* 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
- ------------------ ------- ------- ------- -------
1997
Market Price Range - Low ......... $ 15.25 $ 17.44 $ 16.31 $ 16.03
- High ........ 22.36 22.79 22.79 29.63
1998
Market Price Range - Low ......... $ 23.69 $ 24.50 $ 42.19 $ 41.25
- High ....... 32.56 39.19 53.75 49.94
* Amounts have been adjusted for all stock splits.
In February 1997, the Board of Directors authorized a 4 for 3 stock split for
common and preferred shares outstanding effected in the form of a dividend, with
no change in par value per share, distributed on April 11, 1997, to stockholders
of record on March 31, 1997. In October 1997, the Board of Directors authorized
a 4 for 3 stock split for common and preferred shares outstanding effected in
the form of a dividend, with no change in the par value per share, distributed
on November 20, 1997, to the stockholders of record on November 10, 1997. All
stock splits described above have been reflected in the accompanying financial
statements and elsewhere in this Annual Report.
Annual dividends of $0.078 per share (after effect of stock splits) were paid in
1997 and annual dividends of $0.120 per share were paid in 1998. The Board of
Directors maintained the quarterly dividend rate of $0.03 per share after each
of the above splits which in effect increased the dividend paid. It is
anticipated that quarterly dividends of $0.03 per share will continue to be paid
in the future, although the Board of Directors reviews this policy quarterly.
Aggregate dividends paid in 1998 were $4.7 million and should approximate $4.7
million again in 1999.
On October 31, 1998, there were approximately 9,000 shareholders of the
Company's 38,394,541 outstanding shares.
ITEM 6. SELECTED FINANCIAL DATA
FINANCIAL HIGHLIGHTS (In thousands, except percentages and per share amounts)
YEAR ENDED AUGUST 31, 1994 1995 1996 1997 1998
------ ------ ------ ------ ------
Operating Results :
Net sales and licensing fees $ 80,602 $ 98,950 $153,271 $183,249 $192,339
Special charges and unusual charges
related to acquisitions(1) -- -- 1,418 20,700 22,662
Net income applicable to common shares 7,827 10,935 15,237 6,850 1,783
Balance Sheet Summary:
Current assets $ 29,269 $ 36,296 $111,940 $145,449 $174,502
Current liabilities 18,833 24,695 75,966 112,524 116,136
Working capital 10,436 11,601 35,974 32,925 58,366
Total assets 72,394 87,542 179,660 220,656 251,791
Long-term debt 14,047 12,814 31,465 30,572 47,070
Stockholders' equity 38,024 47,860 69,341 72,531 80,651
Per Share Data:
Net income applicable to common shares -Basic(2) $ 0.21 $ 0.29 $ 0.41 $ 0.1 $ 0.05
Book value(2) 1.03 1.29 1.86 1.93 2.12
Cash dividends 0.045 0.045 0.062 0.078 0.12
Weighted average number of shares
used in per share calculations - Basic(2) 37,065 37,077 37,292 37,579 38,011
- ----------
(1) In 1997 the Company announced a production and cost optimization program
which resulted in the Company taking a special charge of $19.0 million
along with $1.7 million for nonrecurring charges related to acquisitions.
In 1998, the Company reported (a) a $17.5 million special charge for
inventory write offs due to a reduction in cotton acreage in 1998, the
further realignment of the Company's product line to seed with new
technologies and the recall of certain products that did not meet quality
standards and (b) $5.1 million in costs associated with the Company's
evaluation of various strategic alternatives and the Monsanto Merger.
(2) Adjusted for the effects of applying SFAS No. 128, "Earnings per share".
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
Increased sales of the Company's transgenic cotton varieties containing both the
Bollgard and Roundup Ready gene technologies, and the increased commercial sales
of D&PL cotton varieties containing the Roundup Ready gene technology are the
major reasons that D&PL reported record sales despite the fact that acreage
planted in cotton with the U.S. declined to 12.8 million acres from 1997 levels
of 13.8 million acres. Commodity prices and the cold wet weather in some areas
and drought conditions in other areas during the cotton planting season
contributed to the reduction in cotton acreage planted to levels well below
initial USDA and Company estimates. Furthermore, a substantial number of acres
were abandoned for which no technology fees were assessed. The Company sold
sufficient quantities of seed containing the transgenic traits to plant
approximately 4.5 million acres in 1998 versus approximately 2.5 million acres
in 1997. First year sales by D&PL's China joint venture, although impressive,
fell below best case estimates of up to 500,000 acres when only 200,000 were
actually planted. Even so, the joint venture may report a slight profit in its
first full year of operation. Export sales increased to $11.5 million in 1998
from $10.6 million in 1997.
In 1998, the Company recorded special and nonrecurring pretax charges of
$22,662,000 that relate to additional inventory reserves and, to a lesser
degree, to costs related to the evaluation of various strategic alternatives
which culminated in the Company entering into a merger agreement with Monsanto.
The unprecedented level of inventory reserves and write offs were a result of
excess inventory quantities resulting from a 7% reduction in acreage and the
further realignment of the Company's product line. Furthermore, the Company's
domestic market share declined slightly which the Company believes resulted from
the second quarter recall of certain varieties that contained both the Bollgard
and Roundup Ready technology. The accelerated shift to transgenic products
significantly complicates inventory management and product line design and will
require continued dedicated efforts to effectively manage the Company's ever
changing product line. The costs related to the merger are primarily fees for
legal advice, investment bankers and other professionals.
In 1997, D&PL announced a program to optimize production and cost operating
efficiencies which included the idling of three of its less efficient delinting
plants, the write down of assets whose value has been impaired as a result of
implementing the plan, plant consolidation costs relating to implementation of a
new process manufacturing system and costs to phase out certain products. The
Company reduced its existing domestic work force as a result of the plant
closings and by offering an early retirement program to all employees who met
certain uniformed criteria.
D&M International, LLC, is a venture formed in 1995 through which D&PL (the
managing member) and Monsanto plan to introduce, in combination, cottonseed in
international markets combining D&PL's acid delinting technology and elite
germplasm and Monsanto's Bollgard gene technology. In November 1995, D&M
International, LLC formed a subsidiary, D&PL China Pte Ltd. ("D&PL China"). In
November 1996, D&PL China concluded negotiations with parties in Hebei Province,
one of the major cotton producing regions in the People's Republic of China, to
form Hebei Ji Dai Cottonseed Technology Company Ltd. ("Ji Dai"), a joint venture
controlled by D&PL China. In June 1997, Ji Dai commenced construction of a new
cottonseed conditioning and storage facility in Hebei, China, under terms of the
joint venture agreement. The new facility was completed in December 1997. During
the 1997 growing season, the joint venture harvested and produced sufficient
seed to plant up to 500,000 acres of Deltapine cottonseed varieties containing
Bollgard gene. In 1998, the joint venture had initial sales of enough seed to
plant up to 200,000 acres. The Copmany anticipates that the carry over inventory
will be sold in the 1999 and subsequent seasons.
In December 1997, D&M International, LLC, announced a joint venture with Centro
Integral Agropecuaria ("CIAGRO"), a distributor of agricultural inputs in the
Argentine cotton region, for the production and sale of genetically improved
cottonseed. The new joint venture, CDM Mandiyu, is owned 60% by D&M
International, LLC, and 40% by CIAGRO. The cotton region, comprised of the
Provinces of Chaco, Santiago del Estero, Catamarca and Jujuy, presently has 2.5
million acres of cotton requiring 21,000 tons of cotton planting seed per year.
The new venture, CDM Mandiyu S.R.L., has been producing high quality cottonseed,
integrating CIAGRO's local market and distribution knowledge and D&PL's cotton
breeding and production capabilities with Monsanto's biotechnology expertise.
CDM Mandiyu has been licensed to sell D&PL cotton varieties containing
Monsanto's Bollgard gene technology. Commercialization is planned for fiscal
1999 pending final approval from certain Argentine governmental agencies. Future
plans include the production and sale of Roundup Ready cottonseed varieties.
In July 1998, D&PL China and the Anhui Provincial Seed Corporation formed a new
joint venture, Anhui An Dai Cotton Seed Technology Company, Ltd, which is
located in Hefei, Anhui Province, China. Under the terms of the joint venture
agreement, the newly formed entity will produce, condition and sell acid
delinted D&PL varieties of cottonseed which contain Monsanto's Bollgard gene. In
the fall of 1998, the Company harvested sufficient seed from seed plots in Anhui
to plant up to 350,000 acres.
In November, 1998, D&M International LLC and Maeda Administracao e Participacoes
Ltda, an affiliate of Agropem Agro Pecuria Maeda S.A., formed a new joint
venture in Minas Gerais, Brazil. The new company, MDM Maeda Deltapine Monsanto
Algodao Ltd., will produce, condition and sell acid-delinted D&PL varieties of
cottonseed. It is anticipated that the new company will produce and delint
enough cottonseed in 1999 to plant up to 900,000 acres. The newly formed company
will introduce transgenic cotton seed varieties, both Bollgard and Roundup
Ready, into the Brazilian market as soon government approvals are obtained.
The Company reached an agreement with parties in Zimbabwe in 1997 to form a
joint venture that will provide high quality acid delinted seed to farmers in
Zimbabwe. Initially, the plant was to continue to process and sell locally
developed and owned varieties which will be genetically transformed so they
contain the Bollgard gene technology and potentially other technologies
developed in the future. The introduction of these technologies into locally
developed germplasm is expected to provide both large commercial growers as well
as the small communal growers a significant economic advantage over those who do
not use these technologies. The Zimbabwean government has refused to approve the
joint venture contract without certain changes which are unacceptable to D&M
International, LLC. The Company believes government approval will be
forthcoming, although modifications to the current agreement may be necessary
and negotiations are ongoing.
The Company's delinting plants in South Africa and Argentina process foundation
seed grown in these countries. The use of Southern Hemisphere winter nurseries
and seed production programs such as these can accelerate the introduction of
new varieties because D&PL can raise at least two crops per year by taking
advantage of the Southern Hemisphere growing season. In addition, the Company
introduced Deltapine varieties which contain Bollgard in South Africa in the
fall of 1998. Sales are ongoing and inventory sufficient to plant up to 65,000
acres is available.
The results of operations of D&PL's wholly owned Australian subsidiary continue
to be disappointing. Although the Company began selling seed containing the
Bollgard gene (Ingard(TM) in Australia) in 1997, operating results and product
market share remain at unacceptable levels. The Company, through its Australian
operations, is identifying smaller potential export markets for the Company's
products throughout Southeast Asia. The adaptability of the Company's germplasm
must be evaluated before such sales can be made and the recent instability of
the economies in some of the countries in this region will make successful
market development a challenge.
NET SALES AND LICENSING FEES
In 1998, D&PL's consolidated net sales and licensing fees increased 5.0% to
$192.3 million from 1997 sales of $183.2 million. The increase is primarily the
result of (a) increased sales of stripper cottonseed containing Monsanto's
Roundup Ready gene (b) increased sales of picker cottonseed containing both the
Bollgard and Roundup Ready genes, and ( c ) the commercial introduction of
soybean seed containing Monsanto's Roundup Ready Gene. These increases were
partially offset by lower sales of picker cottonseed varieties resulting from
inclement weather during the planting season and commodity prices. The USDA
estimated that the planted cotton acreage will approximate 12.8 million acres in
1998 which is a decrease of 7.2% from 1997 cotton acres planted of 13.8 million.
Soybean unit sales also increased 8.7% over 1997 due to increased planted
soybean acres and market share gains by the Company's varieties. In 1998, the
Company and Monsanto changed the method used to calculate the acres to be used
for billing purposes for the Bollgard and Roundup Ready gene technologies. In
prior years, the farmers were billed based on their stated planting rates,
which, if within a prescribed range for a particular geographic territory, were
used for purposes of calculating the number of licensed acres and therefore
billable acres. In 1998 assumed planting rates were established by D&PL and
Monsanto for seven specific territories and farmers were billed for the number
of acres that could be planted for each bag of seed sold, using the
predetermined territorial formula. In 1998, total transgenic seed sales
comprised approximately 60% of total domestic unit sales of cottonseed, compared
to 36% in 1997. Roundup Ready soybean units comprised 44.0% of total units sold
in 1998 versus less than 1% in 1997.
International sales (including exports) increased 46.3% in 1998 to $21.8 million
from $14.9 million in 1997, primarily from the initial sales derived from Hebei
Jai Dai, the joint venture in Shiujiazhuang, Hebei, People's Republic of China.
Although the level of sales by the Company's first Chinese joint venture were
below initial estimates, the venture may report a slight profit in 1998, its
first full calendar year of operation.
In 1997, D&PL's consolidated net sales and licensing fees increased 19.5% to
$183.2 million, from 1996 sales of $153.3 million. This increase is primarily
the result of increased Bollgard seed sales and licensing fees over 1996 and
seed sales and licensing fees received from the first sale of commercial
quantities of Roundup Ready cottonseed. Domestic picker cottonseed unit sales
decreased by 4.5% while domestic stripper cottonseed units increased 279.6% (due
to the conversion of the High Plains market) despite a 5.4% reduction in the
total number of cotton acres planted in the U.S. to 13.8 million from 14.7
million. Net billable Bollgard acres increased to 2.4 million in 1997 from 1.8
million in 1996. Net billable Roundup Ready acres were 0.8 million in 1997.
Soybean unit sales also increased 40.9% over 1996 primarily due to an increase
in planted acres which resulted in part from cold, wet weather early in the
planting season (when cotton is typically planted) and higher soybean prices,
causing a shift in planted acres to soybean from cotton.
International sales increased to $14.9 million in 1997 from $12.6 million in
1996, primarily attributable to licensing fees received from sales in Australia
and Mexico of cottonseed varieties containing Monsanto's Bollgard gene, the
positive effects of which were partly offset by reduced export sales.
GROSS PROFIT
D&PL's consolidated gross profit after special and nonrecurring charges was
$53.6 million in 1998 compared to $55.5 million in 1997. Special pretax charges
of approximately $17.5 million were recorded in 1998 that relate (a) additional
inventory reserves established to provide for excess inventory resulting from a
7% reduction in planted cotton acres in 1998 and the further realignment of the
Company's product line to seed with new technologies, and (b) a recall of
certain products that did not meet the Company's quality standards. Gross margin
(expressed as a percentage of sales) before the special charges was consistent
between 1998 and 1997 at 36%.
D&PL's consolidated gross profit after special charges was $55.5 million in 1997
compared to $55.8 million in 1996. In 1997 the Company recorded special charges
of $11.5 million that related to the earlier than expected phase out of certain
products and other reserves established for a production cost and plant
optimization program, the negative impact of which was offset by increased unit
sales and increased licensing fees. Gross margin (expressed as a percentage of
sales) before special charges was consistent between 1997 and 1996 at
approximately 36%.
OPERATING EXPENSES
In 1998, the Company's total operating expenses increased, as planned, to $42.2
million before special charges, from $34.8 million before special charges in
1997 and $28.6 million before special charges in 1996. International operating
expenses are expected to increase $1.0 million in 1999 due to new international
ventures and other general expansion while domestic operating expenses are
expected to increase about $5.0 million.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased 22.0% to $16.7 million in 1998 from
$13.7 million in 1997. The increase was primarily related to additional
transgenic costs associated with development and evaluation of new technologies,
transformation of the Company's product line and collaboration with outside
research providers.
Research and development expenses increased 39.8% to $13.7 million in 1997 from
$9.8 million in 1996. The increase was primarily the result of additional
transgenic costs associated with evaluation of new technologies, transformation
of the Company's Sure Grow and Paymaster product lines, increased Technical
Service Department costs, increased varietal testing in certain international
markets and further expansion of research programs related to international
activities.
SELLING EXPENSES
Selling expenses increased 35.8% in 1998 to $15.0 million from $11.1 in 1997.
The increase was primarily due to an aggressive advertising and promotional
program and expansion of the international sales and marketing in China.
Selling expenses increased 18.1% to $11.1 million in 1997 from $9.4 million in
1996. The increase was primarily due to the expansion of sales and marketing
departments for the Paymaster Division and the International Division, primarily
in Australia.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were essentially flat between 1998 and 1997.
General and administrative expenses increased 7.4% to $10.1 million in 1997 from
$9.4 million in 1996. The increase is primarily attributable to the expansion of
the Company's information systems department, and additional staff for the
International and Paymaster Divisions.
SPECIAL CHARGES AND UNUSUAL CHARGES RELATED TO ACQUISITIONS
In connection with the evaluation and pursuit of various strategic alternatives
and ultimately the planned merger with Monsanto (see Item 1), the Company
incurred in 1998 approximately $5.1 million associated with legal, investment
banker and other professional fees. The Company also recorded additional
inventory reserves as discussed above.
In connection with the 1997 production and cost optimization program, the
Company recorded a special charge of $19.0 million of which $11.5 million was
included in cost of sales and $7.5 million was included in operating expenses.
These charges include costs associated with the plan to optimize operating
efficiencies, plant consolidation costs, costs to phase out certain products,
the write down of assets whose value has been impaired as a result of the plan
and, to a lesser extent, severance costs.
In connection with the merger with the Sure Grow Companies, the Company recorded
special charges of approximately $1.7 million during fiscal 1997 for costs
associated with this transaction including legal costs incurred in connection
with the U. S. Department of Justice's review of that transaction.
INTEREST EXPENSE
Interest expense increased 47.0% to $3.2 million in 1998 from $2.2 million in
1997. The increase was primarily due to higher outstanding borrowings throughout
the year used to finance international ventures and higher inventory levels, the
effects which were partially offset by lower interest rates.
Interest expense decreased 8.3% to $2.2 million in 1997 from $2.4 million in
1996 due primarily to lower interest rates partially offset by higher
outstanding borrowings.
OTHER
In 1996, 1997 and 1998, other income included primarily gains on sales of fixed
assets and accounts payable discounts received for early payments.
NET INCOME AND EARNINGS PER SHARE
Net income applicable to common shares decreased by 74.0% in 1998 to $1.8
million from $6.9 million in 1997, and decreased by 88.3% from 1996 net income
of $15.2 million. Net income per share (basic) before special charges was $0.41,
$0.58, and $0.43 in 1996, 1997 and 1998, respectively. Net income per share
(basic) after special charges was $0.41, $0.18, and $0.05 in 1996, 1997 and
1998, respectively. The number of shares deemed outstanding for those periods
increased because of the exercise of stock option grants pursuant to the 1993
Stock Option Plan and the 1995 Long-Term Incentive Plan. Furthermore, the effect
of all stock splits are included in all earnings per share calculations.
LIQUIDITY AND CAPITAL RESOURCES
The seasonal nature of the Company's business significantly impacts cash flow
and working capital requirements. The Company maintains credit facilities, uses
early payments by customers and uses cash from operations to fund working
capital needs. For more than 17 years D&PL has borrowed on a short-term basis to
meet seasonal working capital needs.
D&PL purchases seed from contract growers in its first and second fiscal
quarters. Seed conditioning, treating and packaging commence late in the first
fiscal quarter and continue through the third fiscal quarter. Seasonal
borrowings normally commence in the first fiscal quarter and peak in the third
fiscal quarter. Loan repayments normally begin in the middle of the third fiscal
quarter and are typically completed by the first fiscal quarter of the following
year. D&PL also offers distributors, dealers and farmers financial incentives to
make early payments. In fiscal 1998, D&PL received approximately $5.0 million in
early payments. To the extent D&PL attracts early payments from customers, bank
borrowings under the credit facility are reduced.
The Company records receivables for licensing fees on Bollgard and Roundup Ready
seed sales as the seed is shipped, usually in the Company's second and third
quarters. The Company has contracted the billing and collection activities for
Bollgard and Roundup Ready licensing fees to Monsanto. In September, the
technology fees are due at which time D&PL receives payment from Monsanto. D&PL
then pays Monsanto its royalty for the Bollgard and Roundup Ready licensing
fees.
In April 1998, the Company entered into a syndicated credit facility with its
existing lender and two other financial institutions which provides for
aggregate borrowings of $110 million. This agreement provides a base commitment
of $55 million and a seasonal commitment of $55 million. The base commitment is
a long-term loan that may be borrowed upon at any time and is due April 1, 2001.
The seasonal commitment is a working capital loan that may be drawn upon from
September 1 through June 30 of each fiscal year and expires April 1, 2001. Each
commitment offers variable and fixed interest rate options and requires the
Company to pay facility or commitment fees and to comply with certain financial
covenants. At August 31, 1998, the Company had $9.0 million available for
borrowing under the base commitment. In addition the lead lender has approved a
$25.0 million credit line that can be activated by the Company as needed.
The financial covenants under the loan agreements require the Company to: (a)
maintain a ratio of total liabilities to tangible net worth at August 31, of
less than or equal to 2.25 to 1 (4.0 to 1.0 at the Company's other quarter ends)
(b) maintain a fixed charge ratio at the end of each quarter greater than or
equal to 2.0 to 1.0 and ( c ) maintain at all times tangible net worth of not
less than the sum of (i) $40 million , plus (ii) 50% of net income (but not
losses) determined as the last day of each fiscal year, commencing with August
31, 1998. At August 31, 1998 the Company's ratio of total liabilities to
tangible net worth exceeded the permitted ratio. The financial institutions
waived compliance with this covenant. See Note 4 of the Notes to Consolidated
Financial Statements.
Capital expenditures were $16.0 million, $16.5 million and $10.2 million in
fiscal 1996, 1997 and 1998, respectively. The 1996 expenditures exclude
acquisitions which aggregated $2.2 million The Company anticipates that domestic
capital expenditures will approximate $7.0 million in 1999, excluding expected
capital expenditures for foreign joint ventures which will be funded by cash
from operations, borrowings or investments from joint venture partners, as
necessary. Capital expenditures in 1999 for international ventures are expected
to range from $6.0 million to $8.0 million depending on the timing and outcome
of such projects.
Cash provided from operations, early payments from customers and borrowings
under the loan agreement should be sufficient to meet the Company's 1999 working
capital needs.
RISKS AND UNCERTAINTIES
From time to time, the Company may publish forward-looking statements relating
to such matters as anticipated financial performance, existing products,
technical developments, new products, research and development activities,
preparation for year 2000 issues, and similar matters. The Private Securities
Litigation Reform Act of 1995 provides a safe harbor for forward-looking
statements. In order to comply with the terms of the safe harbor, the Company
notes that a variety of factors could cause the Company's actual results and
experience to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements. The risks
and uncertainties that may affect the operations, performance, development and
results of the Company's business include those noted elsewhere in this Item and
the following:
D&PL's contemplated merger with Monsanto is subject to shareholder
approval as well as approval by government agencies. The inability to
complete this merger may have a material effect on the Company. However,
such effect cannot be known at this time.
Demand for D&PL's seed will continue to be affected by government programs
and, most importantly, by weather. Demand for seed is also influenced by
commodity prices and the demand for a crop's end-uses such as textiles,
animal feed, food and raw materials for industrial use. These factors,
along with weather, influence the cost and availability of seed for
subsequent seasons. Weather impacts crop yields, commodity prices and the
planting decisions that farmers make regarding both original planting
commitments and, when necessary, replanting levels.
The planting seed market is highly competitive and D&PL varieties face
competition from a number of seed companies, diversified chemical
companies, agricultural biotechnology companies, governmental agencies and
academic and scientific institutions. A number of chemical and
biotechnology companies have seed production and/or distribution
capabilities to ensure market access for new seed products. The Company's
seed products may encounter substantial competition from technological
advances by others or products from new market entrants. Many of the
Company's competitors are, or are affiliated with, large diversified
companies that have substantially greater resources than the Company.
The production, distribution or sale of crop seed in or to foreign markets
may be subject to special risks, including fluctuations in foreign
currency, exchange rate controls, expropriation, nationalization and other
agricultural, economic, tax and regulatory policies of foreign
governments. Particular policies which may affect the international
operations of D&PL include the testing and quarantine and other
restrictions relating to the import and export of plants and seed products
and the availability (or lack thereof) of proprietary protection for plant
products. In addition, United States government policies, particularly
those affecting foreign trade and investment, may impact the Company's
international operations.
Overall profitability will depend on weather conditions, government
policies in all countries where the Company sells products, worldwide
commodity prices, the Company's ability to successfully open new
international markets, the Company's ability to successfully continue
development of the High Plains market, the technology partners' ability to
obtain timely government approval (and maintain such approval) for existing
and for additional biotechnology products on which they and the Company are
working and the Company's 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.
Due to the varying levels of agricultural and social development of the
international markets in which the Company operates and because of factors
within the particular international markets targeted by the Company,
international profitability and growth may be less stable and predictable
than domestic profitability and growth have been in the past.
Implementation of Financial Accounting Standards
SFAS No. 130, "Reporting Comprehensive Income," establishes new standards for
reporting comprehensive income and its components (revenues, expenses, gains and
losses) in financial statements. This statement is effective for fiscal years
beginning after December 15, 1997. The Company will adopt the disclosure
requirements of SFAS No. 130 beginning in fiscal 1999.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. This statement is
effective for financial statements for periods beginning after December 15,
1997. The Company will not be affected by this statement, because it is in only
one line of business.
SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits," revises employers' disclosures about pension and other postretirement
benefit plans. It does not change the measurement or recognition of those plans.
This statement is effective for fiscal years beginning after December 15, 1997.
The Company will adopt the disclosure requirements of SFAS No. 132 beginning in
fiscal 1999.
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
establishes accounting and reporting standards for the derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. This statement is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. The Company is in the process of
determining the effects of adopting of SFAS No. 133 on its financial statements.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
INDEX
Financial Statements Page(s)
The following consolidated financial statements of Delta and Pine Land Company
and subsidiaries are submitted in response to Part II, Item 8:
Report of Independent Public Accountants...............................19
Consolidated Statements of Income - for each of the three years in the
period ended August 31, 1998........................................20
Consolidated Balance Sheets - August 31, 1997 and 1998...................21
Consolidated Statements of Cash Flows - for each of the
three years in the period ended August 31, 1998........................22
Consolidated Statements of Stockholders' Equity - for each of the
three years in the period ended August 31, 1998........................23
Notes to Consolidated Financial Statements...............................24
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO DELTA AND PINE LAND COMPANY:
We have audited the accompanying consolidated balance sheets of DELTA AND PINE
LAND COMPANY (a Delaware corporation) and subsidiaries as of August 31, 1997 and
1998, and the related consolidated statements of income, cash flows and
stockholders' equity for each of the three years in the period ended August 31,
1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Delta and Pine Land
Company and subsidiaries as of August 31, 1997 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
August 31, 1998, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Memphis, Tennessee,
October 16, 1998.
MANAGEMENT'S REPORT:
The Company is responsible for preparing the financial statements and related
information appearing in this report. Management believes that the financial
statements present fairly the Company's financial position, its results of
operations and its cash flows in conformity with generally accepted accounting
principles. In preparing its financial statements, the Company is required to
include amounts based on estimates and judgments that it believes are reasonable
under the circumstances.
The Company maintains accounting and other systems designed to provide
reasonable assurance that financial records are reliable for purposes of
preparing financial statements and that assets are properly accounted for and
safeguarded. Compliance with these systems and controls is reviewed by executive
management and the accounting staff. Limitations exist in any internal control
system, recognizing that the system's cost should not exceed the benefits
derived.
The Board of Directors pursues its responsibility for the Company's financial
statements through its Audit Committee, which is composed solely of directors
who are not Company officers or employees. The Audit Committee meets at least
annually with the independent public accountants and management. The independent
public accountants have direct access to the Audit Committee, with and without
the presence of management representatives.
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
FOR THE YEARS ENDED AUGUST 31, 1996 1997 1998
------ ------ ------
NET SALES AND LICENSING FEES $153,271 $183,249 $192,339
COST OF SALES (97,477) (116,289) (121,246)
SPECIAL CHARGES -- (11,500) (17,527)
-------- -------- --------
GROSS PROFIT 55,794 55,460 53,566
OPERATING EXPENSES:
RESEARCH AND DEVELOPMENT 9,794 13,651 16,656
SELLING 9,435 11,053 15,006
GENERAL AND ADMINISTRATIVE 9,383 10,136 10,501
SPECIAL CHARGES AND UNUSUAL CHARGES RELATED TO ACQUISITIONS 1,418 9,200 5,135
-------- -------- --------
30,030 44,040 47,298
-------- -------- --------
OPERATING INCOME 25,764 11,420 6,268
INTEREST EXPENSE, NET (2,418) (2,204) (3,241)
OTHER 383 463 159
-------- -------- --------
INCOME BEFORE INCOME TAXES 23,729 9,679 3,186
PROVISION FOR INCOME TAXES (8,453) (2,766) (1,307)
-------- -------- --------
NET INCOME 15,276 6,913 1,879
DIVIDENDS ON PREFERRED STOCK (39) (63) (96)
-------- -------- --------
NET INCOME APPLICABLE TO COMMON SHARES $ 15,237 $ 6,850 $ 1,783
======== ======== ========
BASIC EARNINGS PER SHARE $ 0.41 $ 0.18 $ 0.05
======== ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES
USED IN PER SHARE CALCULATIONS - BASIC 37,292 37,579 38,011
======== ======== ========
DILUTED EARNINGS PER SHARE $ 0.39 $ 0.17 $ 0.04
======== ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES
USED IN PER SHARE CALCULATIONS - DILUTED 39,264 39,863 40,573
======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF
AUGUST 31
(In thousands, except per share amounts)
ASSETS 1997 1998
------------ ---------
CURRENT ASSETS:
Cash and cash equivalents $ 1,890 $ 8,062
Receivables, net of allowance of $281 and $369 95,437 104,779
Inventories 42,886 50,497
Prepaid expenses 2,167 1,194
Income taxes receivable -- 5,562
Deferred income taxes 3,069 4,408
------------- -------------
Total current assets 145,449 174,502
------------- -------------
PROPERTY, PLANT AND EQUIPMENT, net 63,022 66,840
EXCESS OF COST OVER NET ASSETS OF
BUSINESSES ACQUIRED, net of accumulated amortization of $243 and $369 4,689 4,583
INTANGIBLES, net of accumulated amortization of $475 and $543 3,674 3,488
OTHER ASSETS 3,822 2,378
------------- -------------
TOTAL ASSETS $ 220,656 $ 251,791
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 259 $ 1,263
Accounts payable 19,113 22,831
Accrued expenses 91,196 92,042
Income taxes payable 1,956 --
------------- -------------
Total current liabilities 112,524 116,136
------------- -------------
LONG-TERM DEBT 30,572 47,070
DEFERRED INCOME TAXES 4,038 5,020
COMMITMENTS AND CONTINGENCIES (Notes 7 and 11)
MINORITY INTEREST IN SUBSIDIARIES 991 2,914
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;
429,319 shares authorized; no shares issued or outstanding -- --
Series M Convertible Non-Voting Preferred, par value $0.10 per share;
1,066,667 shares authorized; 800,000 shares issued and outstanding 80 80
Common stock, par value $0.10 per share; 100,000,000 shares authorized;
37,724,116 and 38,469,617 shares issued; 37,609,849,
and 38,355,350 shares outstanding 3,772 3,847
Capital in excess of par value 22,865 35,867
Retained earnings 48,894 46,109
Cumulative foreign currency translation adjustments (907) (3,079)
Treasury stock at cost (114,267 shares in 1997 and 1998) (2,173) (2,173)
------------- -------------
Total stockholders' equity 72,531 80,651
------------- -------------
Total liabilities and stockholders' equity $ 220,656 $ 251,791
============= =============
The accompanying notes are an integral part of these consolidated balance
sheets.
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED AUGUST 31,
(in thousands)
1996 1997 1998
------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 15,276 $ 6,913 $ 1,879
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation and amortization 4,026 5,060 6,654
Noncash items associated with special charges -- 12,242 9,865
Minority interest in subsidiaries -- 991 1,923
Decrease in deferred income taxes (220) (12) (357)
Changes in current assets and liabilities:
Receivables (62,161) (28,787) (9,342)
Inventories (20,984) (5,255) (17,476)
Prepaid expenses (207) (804) 973
Accounts payable 6,828 4,159 3,718
Accrued expenses 43,675 31,195 846
Income taxes (3,283) (1,382) (7,518)
Decrease in intangible and other assets 321 416 157
-------- -------- --------
Net cash (used in) provided by operating activities (16,729) 24,736 (8,678)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (15,960) (16,454) (10,242)
Acquisition of business (1,035) -- --
Sale of investments and property 607 -- 1,350
-------- -------- --------
Net cash used in investing activities (16,388) (16,454) (8,892)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of short-term debt (30,133) (31,226) (35,190)
Payments of long-term debt (11,300) (20,893) (7,930)
Dividends paid (2,332) (3,023) (4,664)
Proceeds from long-term debt 32,433 20,000 24,428
Proceeds from short-term debt 32,190 28,890 36,193
Purchase of common stock -- (2,173) --
Proceeds from exercise of stock options
and tax benefit of stock option exercises 4,984 2,135 13,077
-------- -------- --------
Net cash provided by (used in) financing activities 25,842 (6,290) 25,914
-------- -------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (7,275) 1,992 8,344
EFFECTS OF FOREIGN CURRENCY TRANSLATION LOSSES -- (662) (2,172)
CASH AND CASH EQUIVALENTS, beginning of year 8,192 560 1,890
NET DECREASE IN CASH IN TRANSITION PERIOD (Note 12) (357) -- --
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of year $ 560 $ 1,890 $ 8,062
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid, net of capitalized interest $ 2,400 $ 2,000 $ 3,500
Income taxes paid $ 9,400 $ 4,600 $ 2,600
The accompanying notes are an integral part of these consolidated statements.
DELTA AND PINE LAND COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED AUGUST 31, 1996, 1997 AND 1998
(In thousands, except share data)
Cumulative
Foreign
Capital in Currency
Preferred Common Excess of Retained Translation Treasury
Stock Stock Par Earnings Adjustments Stock
Value
Balance at August 31, 1995 $ -- $3,708 $11,004 $32,751 $397 $--
Cash dividends, $0.062 per share -- -- -- (2,332) -- --
Net income -- -- -- 15,276 -- --
Exercise of stock options and
tax benefit of stock option exercises -- 48 4,936 -- -- --
Series M Convertible
preferred stock issuance 80 -- 4,806 -- -- --
Net loss applicable to
transition period of acquired
companies (Note 12) -- -- -- (691) -- --
Foreign currency translation adjustment -- -- -- -- (642) --
-------- -------- -------- -------- -------- --------
Balance at August 31, 1996 80 3,756 20,746 45,004 (245) --
Cash dividends, $0.078 per share -- -- -- (3,023) -- --
Net income -- -- -- 6,913 -- --
Exercise of stock options and
tax benefit of stock option exercises -- 16 2,119 -- -- --
Foreign currency translation adjustment -- -- -- -- (662) --
Purchase of common stock -- -- -- -- -- (2,173)
-------- -------- -------- -------- -------- --------
Balance at August 31, 1997 80 3,772 22,865 48,894 (907)
(2,173)
Cash dividends, $0.12 per share -- -- -- (4,664) -- --
Net income -- -- -- 1,879 -- --
Exercise of stock options and
tax benefit of stock option exercises -- 75 13,002 -- -- --
Foreign currency translation adjustment -- -- -- -- (2,172) --
-------- -------- -------- -------- -------- --------
Balance at August 31, 1998 $ 80 $ 3,847 $ 35,867 $ 46,109 $ (3,079) $ (2,173)
======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Merger with Monsanto Company
On May 8, 1998, the Company entered into a merger agreement with Monsanto
Company ("Monsanto"), pursuant to which the Company would be merged with and
into Monsanto. This agreement is subject to the approval of the Company's
stockholders. Under terms of the agreement, the Company's stockholders would be
entitled to receive 0.8625 shares of Monsanto's Common Stock in exchange for
each share of Delta and Pine Land stock they hold. In connection with the
evaluation of various strategic alternatives including the contemplated merger,
the Company, in 1998 incurred legal fees, investment banker fees and other
professional fees approximating $5.1 million, which are included in "Special
Charges and Unusual Charges related to Acquisitions."
Nature of Operations
Delta and Pine Land Company and subsidiaries (the "Company" or "D&PL") breed,
produce, condition and market cotton and soybean planting seed. In connection
with its seed operations, the Company farms approximately 2,600 acres, largely
for the production of cotton and soybean foundation seed.
The Company has annual agreements with various growers to produce seed for
cotton and soybeans. The growers plant seed purchased from the Company and
follow quality assurance procedures required for seed production. If the grower
adheres to established Company quality assurance standards throughout the
growing season and if the seed meets Company quality standards upon harvest, the
Company may be obligated to purchase specified minimum quantities of seed at
prices equal to the commodity market price of the seed, plus a grower premium.
The Company then conditions the seed for sale as planting seed.
Basis of Presentation
The accompanying financial statements include the accounts of Delta and Pine
Land Company and its subsidiaries. The reported results for 1996 and 1997
include the results of operations of Arizona Processing, Inc., Ellis Brothers
Seed, Inc. and Mississippi Seed, Inc., which own Sure Grow Seed, Inc. (the "Sure
Grow Companies" or "Sure Grow"), with which the Company merged in May 1996 in a
pooling-of-interests transaction. The acquired companies were on a fiscal year
ending June 30. As of August 31, 1996, the fiscal year end of the acquired
companies was changed to August 31. The net loss in the two-month transition
period from July 1, 1996 to August 31, 1996 is shown as a single line in the
Consolidated Statements of Stockholders' Equity. Significant inter-company
accounts and transactions have been eliminated in consolidation.
Special Charges
In 1997, D&PL announced a production and cost optimization program aimed to
improve plant operating efficiencies. The Company recorded a $19.0 million
charge in its fourth quarter for the estimated costs associated with this plan,
of which $11.5 million was recorded as a component of Cost of Sales and $7.5
million was included in Special Charges and Unusual Charges Related to
Acquisitions. This special charge included costs associated with the idling of
three plants, the write down of fixed assets, plant consolidation costs and
costs associated with the phase out of certain products.
In 1996, the Company commenced commercial sale of cottonseed containing
Monsanto's Bollgard gene and in 1997, the Company commenced commercial
cottonseed sales containing Monsanto's Roundup Ready gene. As a result of
inserting these genes into the Company's existing product line, the number of
stock keeping units increased significantly. In June 1997, the Company commenced
a review and evaluation of the Company's product line and of the efficiency of
its cottonseed delinting facilities to determine what steps could be taken to
reduce overhead and production costs by reorganizing and/or consolidating the
Company's seed processing into a fewer number of plants. Management determined
that a reduction in the number of existing varieties and those under development
for planned future commercial launch would be necessary so the number of
processing plants could similarly be reduced. Therefore, management elected (i)
to discontinue offering certain products that were previously expected to be
offered for sale for the next several years, (ii) accelerate the planned
discontinuance of other products and (iii) reduce the number and rate of
introduction of certain new varieties. Separately, in connection with the Sure
Grow Seed acquisition in 1996, three additional delinting facilities were added
to the overall capacity of the Company. The decision to reduce the overall stock
keeping units further decreased the volume of production at the three plants
being closed; decreased their efficiency; and increased the cost of inventory
produced at these facilities. In June of 1997, management and the Board of
Directors adopted a formal plan of reorganization, and determined that certain
products would be phased out over an anticipated period of three years and three
delinting facilities would be closed immediately. Based on estimated future
inventory levels needed by the Company, management established reserves for
certain excess and obsolete varieties, reduced certain varieties to net
realizable value due to inefficient operations and excess capacity discussed
above, bought out certain grower contracts for varieties being phased out, wrote
down the value of excess facilities in accordance with SFAS 121 and recorded a
charge for employees affected by the closing of the excess facilities.
The Company continues to use the warehouse facilities situated adjacent to the
delinting plants that were idled. The plants will be held to meet future
production needs if they arise.
For the year ended August 31, 1997, the components of the production and cost
optimization program consisted of the following items and amounts.
in 000's
--------
Cost of Sales Operating Expenses
------------- ------------------
Write-down of delinting facilities - $4,500
Plant consolidation costs, including severance - 2,500
Idling of Scott, Mississippi, Tunica, Mississippi and
Centre, Alabama Plants - 500
Contract cancellation costs due to reduction of varieties $3,000 -
Write down existing inventory to net realizable value 4,500 -
Reserve for expected discontinuance of varieties 4,000 -
-------- --------
$11,500 $7,500
========= ========
In 1998, the Company recorded special and nonrecurring pretax charges of
$22,662,000 that relate to additional inventory reserves and costs related to
evaluation of various strategic alternatives which culminated in the
contemplated merger with Monsanto. The unprecedented level of inventory reserves
and write- offs were a result of excess inventory quantities resulting from a 7%
reduction in acreage and the further realignment of the Company's product line.
The accelerated shift to transgenic products significantly complicates inventory
management and product line design and will require continued dedicated efforts
to effectively manage the Company's ever changing product line. The costs
related to the merger are primarily fees for legal advice, investment bankers
and other professionals.
In connection with the 1996 acquisitions of the Sure Grow Companies and Hartz
Cotton, Inc., (See Note 12), the Company recorded charges anticipated to be
nonrecurring of approximately $1.4 million and $1.7 million for transaction
costs in 1996 and 1997, respectively. These costs primarily include professional
fees (including costs related to the U.S. Department of Justice review of the
Sure Grow acquisition) and are included in "Special Charges and Unusual Charges
Related to Acquisitions" in the accompanying Consolidated Statements of Income.
Cash Equivalents
Cash equivalents include overnight repurchase agreements and other short-term
investments having an original maturity of less than three months.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation and amortization
are provided for financial reporting purposes using the straight-line method
over the estimated useful lives of the assets. Accelerated methods are used for
income tax purposes. The estimated useful lives of the various classes of
property, in years, are as follows:
Land improvements 5-20
Buildings and improvements 10-35
Machinery and equipment 3-15
Germplasm 10-15
Breeder and foundation seed 40
The germplasm, breeder and foundation seed was purchased as part of the
Paymaster and Hartz acquisitions and includes amounts for specifically
identified varieties and for breeding stocks. The amounts associated with
specific varieties are amortized over the expected commercial life of those
varieties. Breeding stocks are amortized over 40 years, since they can be
revitalized from time to time and remain viable indefinitely after such
revitalization.
Intangible Assets and Deferred Charges
Intangible assets consist of trademarks, patents and other intangible assets and
are being amortized using the straight-line method over 5 to 40 years. Excess of
cost over net assets of businesses acquired are being amortized using the
straight-line method over 40 years. Organization costs for foreign ventures are
amortized over five years.
Foreign Currency Translation
Financial statements of foreign operations where the local currency is the
functional currency are translated using exchange rates in effect at period end
for assets and liabilities and average exchange rates during the period for
results of operations. Financial statements of foreign entities in highly-
inflationary economies are translated as though the functional currency is the
United States currency. Translation adjustments are reported as a separate
component of stockholders' equity. Gains and losses from foreign transactions
are included in earnings.
Income Taxes
The Company uses the liability method of accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using enacted tax rates and laws.
Fair Value of Financial Instruments
The fair value of the Company's financial instruments at August 31, 1998
approximates their carrying value.
Revenue Recognition
Domestic revenues from the sale of planting seed, less estimated reserves for
returns, are recognized when the seed is shipped. International revenues are
recognized upon the later of either when the seed is shipped or when letters of
credit are cleared. Revenues from farm operations are recognized at the time
crops are harvested and sold. Costs incurred in producing crops are included as
inventory until these two events occur. Revenues from commercialization
agreements and royalties are recognized when earned and are included in net
sales and licensing fees. Revenues from Bollgard and Roundup Ready licensing
fees (net of estimated distributor and dealer commissions) are recognized based
on the number of acres expected to be planted with such seed when the seed is
shipped and are recorded as sales. Royalties due to licensors of technology are
recorded as cost of sales.
Research and Development
All research and development costs incurred to breed and produce experimental
seed are expensed. Costs incurred to produce sufficient quantities of planting
seed needed for commercialization are carried as inventory until such seed is
sold. Cotton lint and other by-products of seed production are also carried as
inventory until sold.
Derivative Financial Instruments
The Company uses futures and option contracts for its soybean hedging program to
effectively fix the cost of a significant portion of its soybeans. These
contracts are accounted for on a settlement basis, with the net amounts paid or
received under such contracts included in the cost of soybeans. Open futures
contracts and the underlying soybean inventory are marked to market. The Company
does not terminate contracts prior to their expiration. The amount of deferred
losses associated with the soybean hedging program at August 31, 1998 was not
material. The Company does not speculate in derivatives.
Impairment of Assets
D&PL assesses recoverability and impairment of intangible assets and other
long-lived assets whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. D&PL determines if the unamortized
balance can be recovered through projected future operating cash flows. If the
sum of the expected future cash flows is less than the carrying amount of the
asset, an impairment loss is recognized in accordance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of". Otherwise, an impairment loss is not recognized, and D&PL
continues to amortize its intangible assets and other assets based on the
remaining estimated useful life.
Use of Estimates
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