UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(x) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended May 31, 1998 or
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
------------------------
Commission File Number: 000-21788
Exact name of registrant as specified in its charter:
DELTA AND PINE LAND COMPANY
State of Incorporation: Delaware
I.R.S. Employer Identification Number: 62-1040440
Address of Principal Executive Offices (including zip code)
One Cotton Row, Scott, Mississippi 38772
Registrant's telephone number, including area code:
(601) 742-4000
Indicate by check mark whether Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
YES (x) NO ( )
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock,$0.10 Par Value --38,329,329 shares outstanding as of June 29,1998.
<PAGE>
3
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - May 31, 1997,
August 31, 1997, and May 31, 1998 1
Consolidated Statements of Income - Three Months
Ended May 31, 1997 and May 31, 1998 2
Consolidated Statements of Income - Nine Months
Ended May 31, 1997 and May 31, 1998 3
Consolidated Statements of Cash Flows - Nine Months
Ended May 31, 1997 and May 31, 1998 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal
Proceedings 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures
19
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(Unaudited)
May 31, August 31, May 31,
1997 1997 1998
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 869 $ 1,890 $ 15,015
Receivables, net 127,495 95,437 183,707
Inventories 46,138 42,886 58,931
Prepaid expenses 1,230 2,167 1,000
Deferred income taxes 1,907 3,069 3,069
-------------- ------------- -------------
Total current assets 177,639 145,449 261,722
-------------- ------------- -------------
PROPERTY, PLANT and EQUIPMENT,
net 62,351 63,022 66,691
EXCESS OF COST OVER NET ASSETS OF
BUSINESS ACQUIRED, net 4,711 4,689 4,617
INTANGIBLES, net 3,150 3,674 3,518
OTHER ASSETS 5,045 3,822 2,853
============== ============= ============
$ 252,896 $ 220,656 $ 339,401
============== ============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ $ $
263 259 23,940
Accounts payable 9,638 19,113 11,747
Accrued expenses 98,605 91,196 134,441
Income taxes payable 17,345 1,956 7,329
-------------- ------------- ------------
Total current liabilities 125,851 112,524 177,457
-------------- ------------- ------------
LONG-TERM DEBT, less current
maturities 32,430 30,572 56,114
DEFERRED INCOME TAXES 2,888 4,038 4,038
MINORITY INTEREST IN SUBSIDIARIES - 991 2,220
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; 1,066,666 shares authorized;
800,000 shares issued and 80 80 80
outstanding
Common stock, par value $0.10 per share;
100,000,000 shares authorized; 37,616,899;
37,724,116 and 38,381,549 shares issued;
37,534,099; 37,609,850 and 38,267,283
shares outstanding 3,761 3,772 3,838
Capital in excess of par value 21,377 22,865 35,233
Retained earnings 68,352 48,894 64,508
Cumulative foreign currency
translation adjustments (368) (907) (1,914)
Treasury stock at cost,
82,800; 114,266 and 114,266 shares (1,475) (2,173) (2,173)
-------------- ------------- -----------
Total stockholders' equity 91,727 72,531 99,572
-------------- ------------- -----------
$ 252,896 $ 220,656 $ 339,401
============== ============= ============
The accompanying notes are an integral part of these balance sheets.
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED
(in thousands, except per share amounts)
(Unaudited)
May 31, May 31,
1997 1998
NET SALES AND LICENSING FEES $ 116,425 $ 126,029
COST OF SALES 73,704 86,011
-------------- --------------
GROSS PROFIT 42,721 40,018
-------------- --------------
OPERATING EXPENSES:
Research and development 3,897 4,809
Selling 3,256 4,327
General and administrative 2,500 3,684
Unusual charges related to acquisitions 433 2,221
---------------- ----------------
10,086 15,041
-------------- ---------------
OPERATING INCOME 32,635 24,977
INTEREST EXPENSE, net of capitalized
interest of $133 and $50 (861) (1,332)
OTHER 81 (420)
--------------- ------------------
INCOME BEFORE INCOME TAXES 31,855 23,225
PROVISION FOR INCOME TAXES (11,293) (9,260)
------------- -------------------
NET INCOME 20,562 13,965
DIVIDENDS ON PREFERRED STOCK (18) (24)
----------------- ------------------
NET INCOME APPLICABLE TO COMMON SHARES $ 20,544 $ 13,941
============= ================
BASIC EARNINGS PER SHARE:
NET INCOME PER SHARE $ 0.55 $ 0.36
================ ================
NUMBER OF SHARES USED IN BASIC EARNINGS
PER SHARE CALCULATION 37,427 38,133
=============== ==============
DILUTED EARNINGS PER SHARE:
NET INCOME PER SHARE $ 0.52 $ 0.34
================ ================
NUMBER OF SHARES USED IN DILUTED EARNINGS
PER SHARE CALCULATION 39,831 41,328
=============== ===============
DIVIDENDS PER SHARE $ 0.0225 $ 0.03
============== ================
The accompanying notes are an integral part of these statements.
<PAGE>
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED
(in thousands, except per share amounts)
(Unaudited)
May 31, May 31,
1997 1998
NET SALES AND LICENSING FEES $ 189,167 $ 208,614
COST OF SALES 119,933 139,382
-------------- ---------------
GROSS PROFIT 69,234 69,232
-------------- ---------------
OPERATING EXPENSES:
Research and development 10,116 12,405
Selling 9,443 11,852
General and administrative 7,539 8,500
Unusual charges related to acquisitions 940 2,268
---------------- ------------------
28,038 35,025
-------------- -----------------
OPERATING INCOME 41,196 34,207
INTEREST EXPENSE, net of
capitalized interest of $421 and $149 (2,083) (2,570)
OTHER 467 (254)
---------------- -------------------
INCOME BEFORE INCOME TAXES 39,580 31,383
PROVISION FOR INCOME TAXES (14,073) (12,278)
---------------- ------------------
NET INCOME 25,507 19,105
DIVIDENDS ON PREFERRED STOCK (45) (72)
---------------- ---------------------
NET INCOME APPLICABLE TO COMMON SHARES $ 25,462 $ 19,033
=============== ================
BASIC EARNINGS PER SHARE:
NET INCOME PER SHARE $ 0.68 $ 0.50
================ =================
NUMBER OF SHARES USED IN BASIC EARNINGS
PER SHARE CALCULATION 37,581 37,899
=============== =================
DILUTED EARNINGS PER SHARE:
NET INCOME PER SHARE $ 0.64 $ 0.47
================= ================
NUMBER OF SHARES USED IN DILUTED EARNINGS
PER SHARE CALCULATION 39,638 40,516
=============== ================
DIVIDENDS PER SHARE $ 0.0563 $ 0.09
============== =================
The accompanying notes are an integral part of these statements.
<PAGE>
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
(in thousands)
(Unaudited)
May 31, May 31,
1997 1998
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $25,507 $ 19,105
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization 3,691 5,030
Minority interest in subsidiaries - 1,229
Effects of foreign currency translation losses (123) (1,007)
Changes in current assets and liabilities:
Receivables (60,845) (88,270)
Inventories (4,678) (16,045)
Prepaid expenses 133 1,167
Accounts payable (5,316) (7,366)
Accrued expenses 43,526 43,245
Income taxes payable 14,007 5,373
Increase in intangible and other assets (393) (323)
-------------- -----------
Net cash provided by (used in)
operating activities 15,509 (37,862)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (10,835) (8,529)
Proceeds from sale of investment - 1,350
-------------- -----------
Net cash used in investing activities (10,835) (7,179)
-------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of short-term debt (29,462) (21,018)
Payments of long-term debt (19,070) (35,092)
Dividends paid (2,159) (3,491)
Proceeds from long-term debt 27,130 60,634
Proceeds from short-term debt 20,035 44,699
Purchase of common stock (1,475) -
Proceeds from exercise of stock options and tax benefit
of stock option exercises 636 12,434
-------------- ---------------
Net cash (used in) provided by
financing activities (4,365) 58,166
-------------- ---------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 309 13,125
CASH AND CASH EQUIVALENTS, as of August 31 560 1,890
============== ===============
CASH AND CASH EQUIVALENTS, as of May 31 $ 869 $ 15,015
============== ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the nine months for:
Interest paid, net of capitalized
interest $ 2,200 $ 2,200
Income taxes $ 2,300 $ 400
The accompanying notes are an integral part of these statements.
<PAGE>
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except percentages and share amounts)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the generally accepted accounting principles for interim
financial information and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for the fair presentation of the consolidated financial statements
have been included. Due to the seasonal nature of Delta and Pine Land Company
and subsidiaries' (the "Company") business, the results of operations for the
three and nine month periods ended May 31, 1997 and May 31, 1998, are not
necessarily indicative of the results to be expected for the full year. For
further information reference should be made to the consolidated financial
statements and footnotes thereto included in the Company's Annual Report to
Stockholders on Form 10-K for the fiscal year ended August 31, 1997.
In October 1997, the Board of Directors authorized a 4 for 3 stock split for all
common and preferred shares outstanding effected in the form of a dividend, with
no change in par value, distributed on November 20, 1997 to stockholders of
record on November 10, 1997. This stock split has been reflected in the
accompanying financial statements.
Certain prior year balances have been reclassified to conform to the current
year presentation. Shares outstanding and per share amounts have been restated
to reflect the adoption of Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings per Share". This statement requires, among other things, the
presentation of basic earnings per share and diluted earnings per share. Basic
earnings per share excludes dilution and is computed by dividing net income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity.
2. RECENT ACCOUNTING PRONOUNCEMENTS
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 does not expect the
adoption of SFAS No. 133 to have a material effect on its financial statements.
3. INVENTORIES
Inventories consisted of the following (in thousands):
<TABLE>
<S> <C> <C> <C>
May 31, August 31, May 31,
1997 1997 1998
Finished goods $ 23,306 $ 28,114 $ 43,173
Raw materials 21,888 16,121 15,922
Growing crops 1,887 300 989
Supplies and other 991 876 1,533
--------------- ------------- ---------------
48,072 45,411 61,617
Less reserves (1,934) (2,525) (2,686)
--------------- -------------- ---------------
$ 46,138 $ 42,886 $ 58,931
============= ============ =============
</TABLE>
Substantially all finished goods and raw material inventory is valued at the
lower of average cost or market. Growing crops are recorded at cost.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following (in thousands):
<TABLE>
<S> <C> <C> <C>
May 31, August 31, May 31,
1997 1997 1998
Land and improvements $ 4,156 $ 4,360 $ 4,487
Buildings and improvements 29,305 32,425 35,001
Machinery and equipment 35,458 29,658 37,381
Germplasm 7,500 7,500 7,500
Breeder and foundation seed 2,000 2,000 2,000
Construction in progress 7,693 8,276 6,010
--------------- --------------- ---------------
86,112 84,219 92,379
Less accumulated depreciation (23,761) (21,197) (25,688)
--------------- -------------- ---------------
$ 62,351 $ 63,022 $ 66,691
============== ============= ==============
</TABLE>
5. MERGER
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 subject to adjustment as
described below (the "Exchange Ratio"). The Exchange Ratio will be reduced if
the Final Average Price of Monsanto Common Stock is more than $67.95. If the
Final Average Price of Monsanto Common Stock is less than $40.77, the Company
will have the right to terminate the merger agreement, unless Monsanto elects to
increase the Exchange Ratio. The "Final Average Price" of Monsanto Common Stock
is the average closing price for such stock for the 30 New York Stock Exchange
trading days ending on the earlier of (i) August 6, 1998 or (ii) the second day
preceding the meeting of the Company's shareholders to vote on the merger.
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. The consummation of the Monsanto/AHP merger is subject to
various conditions, including the approval of stockholders of both Monsanto and
AHP. It is not a condition to the Company's merger with Monsanto that the
Monsanto/AHP Merger be consummated, and it is not possible to determine at this
time whether the Monsanto/AHP Merger will be consummated before or after the
Company's merger with Monsanto, or at all. However, the Company has been advised
by Monsanto that it currently expects that the Monsanto/AHP Merger will be
consummated prior to the Company's merger with Monsanto, in which case the
Company's stockholders will not have the opportunity to vote on the Monsanto/AHP
Merger. Also in such an event, each share of Delta and Pine Land Common Stock
issued and outstanding immediately prior to the effective time of the Company's
merger with Monsanto (other than shares owned by Monsanto, the Company or their
respective subsidiaries), will be converted into 0.991875 shares of AHP Common
Stock.
The merger of D&PL with and into Monsanto is subject to review by the United
States Department of Justice ("USDOJ") under the Hart-Scott-Rodino Anti-Trust
Improvements Act of 1976 ("H-S-R Act"). On June 18, 1998, Monsanto and D&PL
announced that they have received requests for additional information and other
documentary materials from the USDOJ under the H-S-R Act concerning Monsanto's
previously announced acquisition of D&PL. This request extends the waiting
period under the H-S-R Act during which the parties are prohibited from closing
the transaction. Monsanto and D&PL are complying with the USDOJ's requests for
information and documents as quickly as possible.
6. CONTINGENCIES
In May 1998, five D&PL shareholders (Joseph E. Sleiman, Howard Lasker, Aaron
Rosenberg, Robert Weiss and William Mott) each filed a class action complaint in
the Chancery Court, New Castle County, Delaware naming the D&PL Board of
Directors individually, D&PL and Monsanto as defendants. These suits have been
consolidated by the Delaware Court. The suits seek an injunction to block the
merger of D&PL with Monsanto, alleging the D&PL directors have breached
fiduciary duties and that the merger agreement between D&PL and Monsanto does
not provide D&PL shareholders with an adequate value for their stock. The
Company believes these suits have no merit and anticipates a vigorous defense of
these suits.
Between August 1997 and February 1998, numerous farmers filed arbitration claims
against the Company and Monsanto with state agencies, primarily Mississippi,
alleging that Roundup Ready(R) 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 1997 crops. All of the pending Mississippi
claims, except three, have now been settled. In June 1998, non-binding decisions
on these claims adverse to Monsanto and the Company were rendered by an
arbitration panel of the Mississippi Department of Agriculture and Commerce in
the aggregate amount of approximately $2,000,000. A motion for reconsideration
of this panel's decision is pending. Pursuant to the terms of the Roundup Ready
Gene License and Seed Services Agreement (the "Roundup Agreement") between D&PL
and Monsanto, Monsanto has assumed responsibility for the defense and settlement
of these claims. Under the Roundup 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 the subject claims 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
lawsuit filed in the District Court of Falls County, Texas, in August 1996; this
suit remains pending. Another lawsuit was filed in October 1996, in the District
Court for Natchitoches Parish, Louisiana. The settlement of this case has now
been conditionally approved by the Court on a class action basis with final
settlement hearings scheduled for July 10, 1998. A previous Texas lawsuit
brought in 1996 was settled in 1997 with no material impact on the Company or
its financial statements. In the two remaining cases, the plaintiffs allege,
among other things, that D&PL's NuCOTN varieties, which contain Monsanto's
Bollgard(R) gene, did not perform as these farmers had anticipated and, in
particular, did not fully protect their cotton crops from certain lepidopteran
insects. Pursuant to the terms of the Bollgard Gene License and Seed Services
Agreement (the "Bollgard Agreement") between D&PL and Monsanto, Monsanto has
assumed responsibility for the defense of these claims. Some of these claims for
failure of the Bollgard gene are 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 pro rata 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 NuCOTN, 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. In the event that any of these suits is not
settled, 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 financial statements.
In October 1996, Mycogen Plant Science, Inc. ("Mycogen") and Agrigenetics, Inc.
filed a lawsuit in U.S. District Court in Delaware naming D&PL, Monsanto and
DeKalb Genetics ("DeKalb") as defendants alleging that two of Mycogen's then
recently issued patents have been infringed by the defendants by making,
selling, and licensing seed that contains the Bollgard gene. The suit sought
injunctions against alleged infringement, compensatory damages, treble damages
and attorney's fees and court costs. In February 1998, the Court returned a
verdict in favor of D&PL, Monsanto and DeKalb on all counts finding Mycogen's
patents invalid. Mycogen has moved to set aside this verdict. 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.
On July 18, 1996, the USDOJ, Antitrust Division , 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. No further action has been taken by the USDOJ on
this matter. At the present time, the ultimate outcome of the investigation
cannot be predicted.
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 $850,000 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 including seed arbitration
complaints 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
On May 8, 1998, Delta and Pine Land Company and subsidiaries ("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 to
expiration of the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976. Under terms of the merger agreement, the Company's
stockholders would be entitled to receive 0.8625 shares of Monsanto's common
stock in exchange for each share of D&PL stock they hold subject to adjustment
as described below (the "Exchange Ratio"). The Exchange Ratio will be reduced if
the Final Average Price of Monsanto Common Stock is more than $67.95. If the
Final Average Price of Monsanto Common Stock is less than $40.77, the Company
will have the right to terminate the merger agreement, unless Monsanto elects to
increase the Exchange Ratio. The "Final Average Price" of Monsanto Common Stock
is the average closing price for such stock for the 30 New York Stock Exchange
trading days ending on the earlier of (i) August 6, 1998 or (ii) the second day
preceding the meeting of the Company's shareholders to vote on the merger.
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. The consummation of the Monsanto/AHP Merger is subject to
various conditions, including the approval of stockholders of both Monsanto and
AHP. It is not a condition to the D&PL/Monsanto Merger that the Monsanto/AHP
Merger be consummated. It is not possible to determine at this time whether the
Monsanto/AHP Merger will be consummated before or after the D&PL/Monsanto
Merger, or at all. However, D&PL has been advised by Monsanto that Monsanto
currently expects that the Monsanto/AHP Merger will be consummated prior to the
D&PL/Monsanto Merger, in which case D&PL stockholders will not have the
opportunity to vote on the Monsanto/AHP Merger. Also in such event, each share
of D&PL Common Stock issued and outstanding immediately prior to the effective
time of the D&PL/Monsanto Merger (other than shares owned by Monsanto, D&PL or
their respective subsidiaries), will be converted into 0.991875 shares of AHP
Common Stock.
D&PL, a Delaware corporation, 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 sale in the United States of cotton planting seed
containing Bollgard(R) 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 cotton seed delinting facility in Lubbock, Texas owned by
Mycogen by December 31, 1998.
In the 1980's, as a component of its long-term growth strategy, the Company
began to market its products, primarily cotton seed, internationally. 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 licensed from Monsanto would be effective
and help farmers in those countries to control certain lepidopteran cotton
pests.
D&PL sells its products in foreign countries through (i) export sales from the
U.S., (ii) direct in-country 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 addition to
sales through ventures formed by D&M International, LLC, Monsanto's Bollgard
gene is currently sold outside the United States in cotton seed varieties owned
by D&PL in Mexico and Australia.
D&M International, LLC, is a venture formed in 1995 through which D&PL (the
managing member) and Monsanto plan to introduce in combination D&PL's acid
delinting technology and Monsanto's Bollgard gene technology in selected
countries outside the U.S. 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 Cotton
Seed Technology Company Ltd. ("Ji Dai"), a joint venture controlled by D&PL
China. In June 1997, Ji Dai commenced construction of a new cotton seed
conditioning and storage facility in Hebei Province, China, under terms of the
joint venture agreement. The new facility was completed in November 1997. During
the 1997 growing season, the joint venture harvested sufficient seed (assuming
normal production runs) to produce seed sufficient to plant up to 500,000 acres
of Bollgard cotton in Hebei Province in 1998, although only approximately
200,000 acres were actually planted.
In December 1997, D&M International, LLC, announced a joint venture with Centro
Integral Agropecuario ("CIAGRO"), a distributor of agricultural inputs in the
Argentine cotton region, for the production and sale of genetically improved
cotton seed. The new joint venture will be called CDM Mandiyu and will be 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, has been producing high quality cotton
seed, 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 calendar
1998, after final approval from certain Argentine governmental agencies. Future
plans include the production and sale of Roundup Ready cotton, which is
estimated to take place in fiscal 1999.
The Company and parties in Latin America are negotiating to form joint ventures
that will process locally, and/or form distributorships that will import, acid
delinted cotton seed for sale in certain Latin America countries. Initial plans
call for the introduction of D&PL transgenic varieties which have already
performed well in these countries as well as the transformation of locally
developed germplasm into varieties that contain the Bollgard gene technology and
potentially other new technologies. The ventures will also evaluate for
suitability D&PL germplasm developed in the Southern Hemisphere and elsewhere.
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 dramatically 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. Through these
locations, the Company is also evaluating local market opportunities for the
Company's cotton and, where feasible, soybean seed varieties.
The Company's 1997 reorganization of its business among its key operating units
including Deltapine, Paymaster (which includes the stripper varieties acquired
in 1994 and the Hartz varieties acquired in 1996), Sure Grow and International,
has been in effect for over one year now. This new structure has created
competition among the brands, particularly in the sales and research and
development areas.
In 1997, D&PL announced a production and cost optimization program aimed to
improve operating efficiencies. The Company expects this program will reduce its
unit cost of production and reduce the operating expense growth rate in future
years. As part of this program, the Company idled three of its higher cost
delinting facilities and reduced its work force at these facilities. The Company
also reduced its work force further with 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. In 1997, D&M
International, LLC, reached an agreement with parties in Zimbabwe to form a
joint venture to market cotton planting seed to farmers in Zimbabwe. This
venture is subject to approval from Zimbabwean government agencies. 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 it is unlikely that the joint venture will be established in its
present form.
Beginning in early 1996, the Company initiated a company-wide Year 2000
compliance project to ensure the Company's information systems ("IS") and
non-information systems equipment are Year 2000 compliant. The project includes
four phases: (1) identifying systems that need to be assessed; (2) determining
the extent of work required; (3) prioritizing the work and developing an action
plan; and (4) implementing the action plan. In areas which management believes
to be higher risk, the Company is also developing contingency plans. The Company
has determined that its major hardware and software application systems are
compliant as a result of significant upgrades of its operating systems in 1997
and the installation of an Enterprise Resource Planning system also in 1997.
Phase (1) for the non-information systems equipment is complete and the Company
estimates that this area will be Year 2000 compliant by December 1998. The
Company's major customers and suppliers have been contacted to assess their Year
2000 readiness. While the Year 2000 compliance efforts will involve additional
costs, the Company believes, based on available information, that there will be
no significant cost or disruption in business operations of the Company or
adverse effect on financial position of the Company due to the Company's
undertaking of a Year 2000 compliance project.
Acquisitions
In 1996, D&PL acquired Ellis Brothers Seed, Inc. ("EBS"), Arizona Processing,
Inc. ("API"), and Mississippi Seed, Inc. ("MSI"), 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 adjustment for all stock
splits effected through November 1997) for all outstanding shares of EBS, API
AND MSI. The acquisition was accounted for as a pooling-of-interests. The Sure
Grow Companies have continued to market upland picker cotton seed varieties
under their existing brand, Sure Grow. Additionally, through the Company, the
Sure Grow breeding program now has 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 what was then
approximately $6.0 million. The consideration consisted primarily of 800,000
shares (after adjustment for all stock splits effected through November 1997) of
the Company's Series M Convertible Non-Voting 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 cotton seed
varieties have been developed for and marketed primarily in the High Plains of
Texas and Oklahoma ("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 were planted on approximately 80% of
the estimated 4.0 to 5.0 million cotton acres in the High Plains through 1997,
only a small portion of that seed was actually sold by Paymaster. Farmer-saved
seed accounted for up to 85% of the seed needed to plant the acreage in this
market area. Through 1997 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 seed. Unconditioned ("fuzzy") 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 then sold by Paymaster as registered seed
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 allowed 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 1997, 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, exceeding the cost of seed. 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 NuCOTN 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.
The Bollgard Agreement between D&PL and certain of its affiliates and Monsanto
provides for D&PL to commercialize D&PL cotton varieties that contain Monsanto's
Bt gene technology. The gene and the related technology were patented or
licensed from others by Monsanto and were licensed to D&PL for use under the
trade name, Bollgard. 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 of up to 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 service. 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(R) , 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 cotton seed. The Roundup Ready Agreement grants a license to D&PL
and certain of its affiliates the right in the United States to sell cotton seed
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 has been 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.
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 has agreements with other 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 germplasm protection techniques and enabling technologies that the
Company believes have potential commercial applications in varietal crops around
the world.
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 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 cotton seed 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 were expected to plant with the seed purchased. In 1998 the
licensing fee charged to farmers is based on seed drop rates established for
seven geographic regions. Revenue is recognized based on established technology
fee per unit shipped in 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 of other crops 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.
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 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 is not 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 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 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 than domestic
profitability and growth have been in the past.
RESULTS OF OPERATIONS
The following sets forth selected operating data of the Company (in thousands):
<TABLE>
<S> <C> <C> <C> <C>
For the Three Months Ended For the Nine Months Ended
May 31, May 31, May 31, May 31,
1997 1998 1997 1998
Operating results -
Net sales and licensing fees $116,425 $ 126,029 $ 189,167 $ 208,614
Gross profit 42,721 40,018 69,234 69,232
Operating expenses:
Research and development 3,897 4,809 10,116 12,405
Selling 3,256 4,327 9,443 11,852
General and administrative 2,500 3,684 7,539 8,500
Unusual charges related to 433 2,221 940 2,268
acquisitions
Operating income 24,977 41,196 34,207
32,635
Interest expense, net (861) (1,332) (2,083) (2,570)
Income before income taxes 31,855 23,225 39,580 31,383
Net income applicable to common shares 20,544 13,941 25,462 19,033
</TABLE>
The following sets forth selected balance sheet data of the Company as of the
following periods (in thousands):
<TABLE>
<S> <C> <C> <C>
May 31, August 31, May 31,
1997 1997 1998
------------------ ------------------ -------------------
Balance sheet summary-
Current assets $ $ $
177,639 145,449 261,722
Current liabilities 125,851 112,524 177,457
Working capital 51,788 32,925 84,265
Property, plant and equipment, net 62,351 63,022 66,691
Total assets 252,896 220,656 339,401
Outstanding borrowings 32,693 30,831 80,054
Stockholders' equity 91,727 72,531 99,572
</TABLE>
Three months ended May 31, 1998, compared to three months ended May 31, 1997:
Net sales and licensing fees increased approximately $9.6 million to $126.0
million from $116.4 million. The increase in net sales and licensing fees is the
result of increased sales of Roundup Ready stripper cotton seed which carries a
lower gross profit margin per unit than upland picker varieties and first year
sales by the China joint venture, the positive effects of which were partially
offset by lower sales of upland picker cotton seed, driven by lower acreages
planted in cotton in the U.S. due to poor weather conditions during planting and
weak commodity prices.
Operating expenses increased from $10.1 million in the third fiscal quarter of
1997 to $15.0 million in fiscal 1998. This increase is attributable to
additional product development and promotional costs, higher research and
development costs associated with transgenic products, the costs associated with
the development of new technologies, the commencement of operations in China,
and the establishment of research programs in Greece and Spain. Additionally,
the Company incurred unusual charges in connection with the merger with Monsanto
including legal fees, travel costs and investment banking fees. The Company
expects these unusual charges to continue through fiscal year end and until the
merger is consummated.
Interest expense increased by 51% to $1.3 million from $0.86 million primarily
due to higher outstanding borrowings and
lower capitalized interest.
Nine months ended May 31, 1998, compared to nine months ended May 31, 1997:
Net sales and licensing fees increased approximately $19.4 million to $208.6
million from $189.2 million. The increase in net sales and licensing fees is the
result of increased sales of Roundup Ready stripper cotton seed which carries a
lower gross profit margin per unit than upland picker varieties and first year
sales by the China joint venture, partially offset by lower sales of upland
picker cotton seed in the U.S. due to poor weather conditions during planting
and weak commodity prices and lower sales in Australia.
Operating expenses increased from $28.0 million in 1997 to $35.0 million in
1998. This expected increase is primarily due to additional domestic product
development and promotional costs, research costs related to new products and
new technologies, the commencement of operations in China, and the establishment
of research programs in Greece and Spain. Additionally, the Company incurred
unusual charges in connection with the merger with Monsanto, including legal
fees, travel costs and investment banking fees. The Company expects these
unusual charges to continue through fiscal year end and until the merger is
consummated.
Interest expense increased by 24% to $2.6 million in 1998 from $2.1 million
in 1997 due to higher outstanding borrowings
and lower capitalized interest.
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 16 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. To the extent D&PL attracts early payments from customers,
bank borrowings under the credit facility are reduced.
The Company records accounts receivable for technology fees on Bollgard and
Roundup Ready seed sales as the seed is shipped, usually in the Company's second
and third quarters. Under the Bollgard Agreement, D&M Partners, a partnership of
Monsanto and D&PL, has contracted the billing and collection activities for
Bollgard and Roundup Ready seed technology fees to Monsanto. In September, the
technology fees are due at which time D&PL receives payment from Monsanto
through D&M Partners. D&M Partners then pays Monsanto its royalty for the
Bollgard and Roundup Ready technology fees.
The Company borrows funds from three financial institutions pursuant to a $110
million syndicated credit facility to meet its working capital needs. The
current agreement, executed the third quarter of 1998, provides a core facility
of $55 million due in 2001 and a seasonal facility of $55 million available
September 1 through June 30 each year, also due in 2001. Both facilities provide
for an option to extend the due dates twice by one year if approved by the
financial institutions. Each facility offers variable and fixed interest rate
options and requires the Company to pay facility or commitment fees and to
comply with certain financial covenants.
Capital expenditures for the third fiscal quarter of 1998 were $2.2 million.
Domestic projects for fiscal 1998 include additional bagged seed storage to
centralize warehousing of bagged seed and minimize storage and handling costs
and an upgrade of computer hardware. The primary international project for
fiscal 1998 to date is the completion of new cotton seed conditioning and
storage facilities in Hebei, China and a delinting facility in Argentina.
Management believes that domestic and international capital expenditures will
not exceed $7.5 million and $8.0 million, respectively, in fiscal 1998. These
capital projects will be funded by cash from operations, borrowings or
investments from joint venture partners, as necessary.
In October 1997, the Board of Directors authorized a 4 for 3 stock split for all
common and preferred shares outstanding effected in the form of a dividend, with
no change in par value, distributed on November 20, 1997 to stockholders of
record on November 10, 1997. This stock split has been reflected in the
accompanying financial statements. A quarterly dividend rate of $0.03 per share
was maintained after the split, which represents a 25% increase in the dividend
rate.
In the third quarter of fiscal 1998, the Board of Directors authorized a
quarterly dividend of $0.03 per share, paid June 12, 1998 to the stockholders of
record on June 1, 1998. On June 22, 1998, the Board of Directors authorized a
fourth quarter dividend of $0.03 per share, to be paid September 11, 1998 to the
stockholders of record on August 31, 1998. It is anticipated that quarterly
dividends of $0.03 per share will continue to paid in the future, although the
Board of Directors reviews this policy quarterly.
Cash provided from operations, early payments from customers and borrowings
under the loan agreement should be sufficient to meet the Company's 1998 working
capital needs.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On May 13, 1998, D&PL shareholder Joseph E. Sleiman filed a class action
complaint in the Chancery Court, New Castle County, Delaware naming the D&PL
Board of Directors individually, D&PL and Monsanto as defendants. The suit seeks
an injunction to block the merger of D&PL with Monsanto, alleging the D&PL Board
of Directors have breached fiduciary duties and that the merger agreement
between D&PL and Monsanto does not provide D&PL shareholders with an adequate
value for their stock. The Company believes this suit has no merit and
anticipates a vigorous defense of this suit.
On May 14, 1998, D&PL shareholder Howard Lasker filed a class action
complaint in the Chancery Court, New Castle County, Delaware naming the D&PL
Board of Directors individually, D&PL and Monsanto as defendants. The suit seeks
an injunction to block the merger of D&PL with Monsanto, alleging the D&PL Board
of Directors have breached fiduciary duties and that the merger agreement
between D&PL and Monsanto does not provide D&PL shareholders with an adequate
value for their stock. The Company believes this suit has no merit and
anticipates a vigorous defense of this suit.
On May 15, 1998, D&PL shareholder Aaron Rosenberg filed a class action
complaint in the Chancery Court, New Castle County, Delaware naming the D&PL
Board of Directors individually, D&PL and Monsanto as defendants. The suit seeks
an injunction to block the merger of D&PL with Monsanto, alleging the D&PL Board
of Directors have breached fiduciary duties and that the merger agreement
between D&PL and Monsanto does not provide D&PL shareholders with an adequate
value for their stock. The Company believes this suit has no merit and
anticipates a vigorous defense of this suit.
On May 19, 1998, D&PL shareholder Robert Weiss filed a class action
complaint in the Chancery Court, New Castle County, Delaware naming the D&PL
Board of Directors individually, D&PL and Monsanto as defendants. The suit seeks
an injunction to block the merger of D&PL with Monsanto, alleging the D&PL Board
of Directors have breached fiduciary duties and that the merger agreement
between D&PL and Monsanto does not provide D&PL shareholders with an adequate
value for their stock. The Company believes this suit has no merit and
anticipates a vigorous defense of this suit.
On May 20, 1998, D&PL shareholder William Mott filed a class action
complaint in the Chancery Court, New Castle County, Delaware naming the D&PL
Board of Directors individually, D&PL and Monsanto as defendants. The suit seeks
an injunction to block the merger of D&PL with Monsanto, alleging the D&PL Board
of Directors have breached fiduciary duties and that the merger agreement
between D&PL and Monsanto does not provide D&PL shareholders with an adequate
value for their stock. The Company believes this suit has no merit and
anticipates a vigorous defense of this suit.
On June 9, 1998, the Delaware Court issued a consolidation order with
respect to the five shareholder suits listed above.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
11.01Computation of Earnings Per Share
27.01Financial Data Schedule
(b) Reports on Form 8-K.
On May 14, 1998, the Company filed Form 8-K dated May 8, 1998, regarding
the definitive merger agreement with Monsanto. Item 2, Acquisition or
Disposition of Assets, was included in the report.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DELTA AND PINE LAND COMPANY
Date: July 15, 1998 /s/ Roger D. Malkin
-------------------
Roger D. Malkin, Chairman and
Chief Executive Officer
Date: July 15, 1998 /s/ W. Thomas Jagodinski
------------------------
W. Thomas Jagodinski,
Vice President - Finance
and Treasurer
<PAGE>
EXHIBIT 11.01
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE MONTHS ENDED
<TABLE>
<S> <C> <C>
May 31, May 31,
1997 1998
---------------- ----------------
Net income applicable to common shares $ $
20,544 13,941
================ ================
Basic Earnings per Share:
Weighted average shares outstanding 37,427 38,133
---------------- ----------------
Number of shares used in basic EPS calculation 37,427 38,133
================ ================
Net income per share $ 0.55 $ 0.36
================ ================
Diluted Earnings per Share:
Weighted average shares outstanding 37,427 38,133
Weighted average continently issuable shares - 267
Convertible preferred stock 800 800
Stock options
1,604 2,128
---------------- ----------------
Number of shares used in diluted EPS calculation 39,831 41,328
================ ================
Net income per share $ $
0.52 0.34
================ ================
</TABLE>
<PAGE>
EXHIBIT 11.01
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE NINE MONTHS ENDED
<TABLE>
<S> <C> <C>
May 31, May 31,
1997 1998
---------------- ----------------
Net income applicable to common shares $ $
25,462 19,033
================ ================
Basic Earnings per Share:
Weighted average shares outstanding 37,581 37,899
---------------- ----------------
Number of shares used in basic EPS calculation 37,581 37,899
================ ================
Net income per share $ $
0.68 0.50
================ ================
Diluted Earnings per Share:
Weighted average shares outstanding 37,581 37,899
Weighted average continently issuable shares - 89
Convertible preferred stock 800 800
Stock options 1,257 1,728
---------------- ----------------
Number of shares used in diluted EPS calculation 39,638 40,516
================ ================
Net income per share $ 0.64 $ 0.47
================ ================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from SEC
Form 10-Q and is qualified in its entirety by referece to such financial
statements.
</LEGEND>
<CIK> 0000902277
<NAME> Delta and Pine Land Company
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-END> MAY-31-1998
<CASH> 15,015
<SECURITIES> 0
<RECEIVABLES> 183,707
<ALLOWANCES> 0
<INVENTORY> 58,931
<CURRENT-ASSETS> 261,722
<PP&E> 92,379
<DEPRECIATION> 25,688
<TOTAL-ASSETS> 339,401
<CURRENT-LIABILITIES> 177,457
<BONDS> 56,114
0
80
<COMMON> 3,838
<OTHER-SE> 95,654
<TOTAL-LIABILITY-AND-EQUITY> 339,401
<SALES> 126,029
<TOTAL-REVENUES> 126,029
<CGS> 86,011
<TOTAL-COSTS> 15,041
<OTHER-EXPENSES> 420
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,332
<INCOME-PRETAX> 23,225
<INCOME-TAX> 9,260
<INCOME-CONTINUING> 13,965
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,965
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.34
</TABLE>
