UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(x) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended November 30, 1997 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 -- 37,852,087 shares outstanding as of January 5,
1998.
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
INDEX
Page No.
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - November 30, 1996,
August 31, 1997, and November 30, 1997 1
Consolidated Statements of Operations - Three Months
Ended November 30, 1996 and November 30, 1997 2
Consolidated Statements of Cash Flows - Three Months
Ended November 30, 1996 and November 30, 1997 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
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)
November 30, August 31, November 30,
1996 1997 1997
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,519 $1,890 $4,140
Receivables, net 6,446 95,437 11,000
Inventories 60,779 42,886 68,447
Prepaid expenses 1,463 2,167 1,878
Income tax receivable - - 2,295
Deferred income taxes 1,907 3,069 3,069
-------------- ------------- -------------
Total current assets 72,114 145,449 90,829
-------------- ------------- -------------
PROPERTY, PLANT and EQUIPMENT, net 57,893 63,022 65,111
EXCESS OF COST OVER NET ASSETS OF
BUSINESS ACQUIRED, net 4,769 4,689 4,659
INTANGIBLES, net 3,176 3,674 3,615
OTHER ASSETS 4,439 3,822 2,515
============== ============= =============
$ 142,391 $ 220,656 $ 166,729
============== ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 12,708 $ 259 $ 11,995
Accounts payable 17,868 19,113 32,673
Accrued expenses 11,136 91,196 11,775
Income taxes payable 1,823 1,956 -
-------------- ------------- -------------
Total current liabilities 43,535 112,524 56,443
-------------- ------------- -------------
LONG-TERM DEBT, less current maturities 31,463 30,572 36,114
DEFERRED INCOME TAXES 2,888 4,038 4,038
MINORITY INTEREST IN SUBSIDIARIES - 991 1,149
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;
50,000,000 shares authorized; 37,581,209; 37,724,116 and
37,954,711 shares issued; 37,581,209; 37,609,849
and 37,840,445 shares outstanding 3,758 3,772 3,795
Capital in excess of par value 20,910 22,865 25,626
Retained earnings 39,988 48,894 43,094
Cumulative foreign currency translation adjustments (231) (907) (1,437)
Treasury stock at cost, 0; 114,266 and 114,266 shares - (2,173) (2,173)
-------------- ------------- -------------
Total stockholders' equity 64,505 72,531 68,985
-------------- ------------- -------------
$142,391 $ 220,656 $ 166,729
============== ============= =============
The accompanying notes are an integral part of these balance sheets.
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
(in thousands, except per share amounts)
(Unaudited)
November 30, November 30,
1996 1997
NET SALES AND LICENSING FEES $ 6,317 $ 5,340
COST OF SALES 5,129 3,273
-------------- --------------
GROSS PROFIT 1,188 2,067
-------------- --------------
OPERATING EXPENSES:
Research and development 2,590 3,632
Selling 2,421 2,876
General and administrative 2,594 2,602
Unusual charges related to acquisitions 396 47
---------------- ----------------
8,001 9,157
--------------- ----------------
OPERATING LOSS (6,813) (7,090)
INTEREST EXPENSE, net of capitalized interest of $132 and $57 (269) (343)
OTHER 257 66
-------------- ----------------
LOSS BEFORE INCOME TAXES (6,825) (7,367)
INCOME TAX BENEFIT 2,457 2,726
------------- ------------------
NET LOSS (4,368) (4,641)
DIVIDENDS ON PREFERRED STOCK (13) (24)
----------------- --------------------
NET LOSS APPLICABLE TO COMMON SHARES $ (4,381) $ (4,665)
=============== ==================
PRIMARY EARNINGS PER SHARE:
NET LOSS PER SHARE $ (0.12) $ ( 0.12)
============== =================
NUMBER OF SHARES USED IN PRIMARY EARNINGS
PER SHARE CALCULATIONS 37,573 37,721
=============== ===============
FULLY DILUTED EARNINGS PER SHARE:
NET LOSS PER SHARE $ (0.12) $ (0.12)
================= =================
NUMBER OF SHARES USED IN FULLY DILUTED EARNINGS
PER SHARE CALCULATIONS 37,573 37,721
================ ================
DIVIDENDS PER SHARE $ 0.017 $ 0.030
================ ================
The accompanying notes are an integral part of these statements.
DELTA AND PINE LAND COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
(in thousands)
(Unaudited)
November 30, November 30,
1996 1997
---------------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ $
(4,368) (4,641)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization 1,189 1,807
Minority interest in subsidiaries - 158
Changes in current assets and liabilities:
Receivables 60,204 84,437
Inventories (19,319) (25,561)
Prepaid expenses (100) 289
Accounts payable 2,914 13,560
Accrued expenses (43,943) (79,421)
Income taxes payable (1,515) (4,251)
Decrease in intangible and other assets 278 46
-------------- ---------------
Net cash used in operating activities (4,660) (13,577)
-------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (4,010) (4,426)
Proceeds from sale of investment - 1,350
-------------- ---------------
Net cash used in investing activities (4,010) (3,076)
-------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of short-term debt - (3,861)
Payments of long-term debt (2) (35,092)
Dividends paid (648) (1,159)
Proceeds from long-term debt - 40,634
Proceeds from short-term debt 10,113 15,597
Proceeds from exercise of stock options and tax benefit
of stock option exercises 166 2,784
-------------- ---------------
Net cash provided by financing activities 9,629 18,903
-------------- ---------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 959 2,250
CASH AND CASH EQUIVALENTS, as of August 31 560 1,890
============== ===============
CASH AND CASH EQUIVALENTS, as of November 30 $ $
1,519 4,140
============== ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the three months for:
Interest paid, net of capitalized interest $ $
300 325
Income taxes $ $
- -
The accompanying notes are an integral part of these statements.
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 month periods ended November 30, 1996 and November 30, 1997, 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.
2. RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share", was issued effective for both interim and annual periods ending after
December 15, 1997. This statement requires, among other things, the presentation
of basic earnings per share and diluted earnings per share. Earlier adoption is
prohibited. Basic earnings per share excludes dilution and is computed by
dividing 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.
Diluted earnings per share is computed similarly to fully diluted earnings per
share. The proforma effects of this accounting change for the three months ended
November 30, were as follows:
Per share amounts 1996 1997
- -------------------------------------------------------------------------------
Primary EPS as reported $ (0.12) $ (0.12)
- -------------------------------------------------------------------------------
Basic EPS $ (0.12) $ (0.12)
- -----------------------------------------------------------------------------
Fully diluted EPS as reported $ (0.12) $ (0.12)
- --------------------------------------------------------------------------------
Diluted EPS $ (0.12) $ (0.12)
- ------------------------------------------------------------------- ------------
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 does not expect the adoption of
SFAS No. 130 to have a material effect on its financial statements.
3. INVENTORIES
Inventories consisted of the following (in thousands):
November 30, August 31, November 30,
1996 1997 1997
Finished goods $ 31,544 $ 28,114 $ 29,638
Raw materials 28,991 16,121 40,068
Growing crops 665 300 109
Supplies and other 1,513 876 1,252
---------------- -------------------------------
62,713 45,411 71,067
Less reserves (1,934) (2,525) (2,620)
--------------- -------------- ---------------
$ 60,779 $ 42,886 $ 68,447
============= ============ =============
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):
November 30, August 31, November 30,
1996 1997 1997
Land and improvements $ 3,864 $ 4,360 $ 4,419
Buildings and improvements 26,189 32,425 33,755
Machinery and equipment 32,675 32,734 36,569
Germplasm, breeder and foundation seed 9,500 9,500 9,500
Construction in progress 7,300 8,276 6,608
--------------- --------------- ---------------
79,528 87,295 90,851
Less accumulated depreciation (21,635) (24,273) (25,740)
--------------- -------------- ---------------
$ 57,893 $ 63,022 $ 65,111
============== ============= ==============
5. CONTINGENCIES
Between August 1997 and October 1997, numerous farmers filed arbitration claims
against the Company and Monsanto Company ("Monsanto") with state agencies,
primarily Mississippi. 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 1997 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 Agreement") between
D&PL and Monsanto, Monsanto has assumed responsibility for the defense of these
claims. Pursuant to 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 these 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.
Another lawsuit was filed in October 1996, in the District Court for
Natchitoches Parish, Louisiana. A second 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(TM)
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 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. 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 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 seeks injunctions against alleged
infringement, compensatory damages, treble damages and attorney's fees and court
costs. 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.
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 $900,000 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 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
Delta and Pine Land Company and subsidiaries ("D&PL" or the "Company"), 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 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. The two parties will exchange certain operating
facilities in the future upon the satisfactory completion of environmental site
assessments and remediation procedures as necessary.
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(TM) gene technology licensed from Monsanto Company
("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.
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 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,
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 in 1998.
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, will produce 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 will be licensed to sell D&PL cotton varieties containing Monsanto's
Bollgard gene technology. Commercialization is planned for calendar 1998, after
final approvalfrom certain Argentinian governmental agencies. Future plans
include the production and sale of Roundup Ready(R) cotton,
which is estimated to take place in fiscal 1999.
Monsanto's Bollgard gene is currently sold in cotton seed varieties owned by
D&PL in the United States, Mexico and Australia.
The Company reached an agreement with parties in Zimbabwe to form a joint
venture that will provide high quality acid delinted seed to farmers in
Zimbabwe. Initially, the seed processing facility will 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
don't use these technologies. This project is presently on hold pending
Zimbabwean government approval.
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 recently completed delinting plants in South Africa and Argentina
processed for the first time foundation seed grown in these countries. Such seed
was exported to the U.S. for sale in the Spring of 1997. 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 1996 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 healthy
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.
The Company is currently addressing its "Year 2000" computer software issues and
has formulated a plan to resolve these matters. Management believes the
Company's applications on operating systems software will be Year 2000 compliant
before 2000. The Company expects no material costs or interruptions to its
operations because a significant portion of the Company's software was replaced
by the purchase of computer software that is already Year 2000 compliant.
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 effected through November
1997) for all outstanding shares of the three companies. The merger was
accounted for as a pooling-of-interests. The acquired 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 approximately
$6.0 million. The consideration consisted primarily of 800,000 shares (after 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 are planted on approximately 80% of
the estimated 4.0 to 5.0 million cotton acres in the High Plains, only a small
portion of that seed is 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 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 unconditioned 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 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 allows D&PL the right of first refusal for any Pima
varieties developed under this program which D&PL partially funds. 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 causes the death of 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.
D&PL has also developed transgenic cotton and transgenic soybean varieties that
are tolerant to Roundup(R) , a 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. 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.
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 protection.
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, 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 estimated to be planted with such seed when the seed is
shipped. 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 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 and actual acreage planted with seed
containing the Bollgard and Roundup Ready genes 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:
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):
For the Three Months Ended
November 30, November 30,
1996 1997
--------------- ---------
Operating results -
Net sales and licensing fees 6,317 5,340
Gross profit 1,188 2,067
Operating expenses:
Research and development 2,590 3,632
Selling 2,421 2,876
General and administrative 2,594 2,602
Unusual charges related to 396 47
acquisitions
Operating loss (6,813) (7,090)
Loss before income taxes (6,825) (7,367)
Net loss applicable to common shares (4,381) (4,665)
The following sets forth selected balance sheet data of the Company as of the
following periods (in thousands):
November 30, August 31, November 30,
1996 1997 1997
------------------ ------------------ -------------------
Balance sheet summary-
Current assets $72,114 $ 145,449 $ 90,829
Current liabilities 43,535 112,524 56,443
Working capital 28,579 32,925 34,386
Property, plant and equipment, net 57,893 63,022 65,111
Total assets 142,391 220,656 166,729
Outstanding borrowings 44,171 30,831 48,109
Stockholders' equity 64,505 72,531 68,985
Three months ended November 30, 1997, compared to three months ended November
30, 1996:
Net sales and licensing fees decreased approximately $1.0 million to $5.3
million from $6.3 million. The decrease in net sales and licensing fees is
primarily the result of lower than expected sales of cotton seed in Australia
and the timing of seed shipments to Mexico and Spain.
Operating expenses increased from $8.0 million in the first fiscal quarter of
1997 to $9.1 million in fiscal 1998. This expected increase is attributable to
additional product development, research and promotional costs, the effects of
which were partially offset by lower costs associated with the United States
Department of Justice review of the acquisition by D&PL of the stock of Arizona
Processing, Inc., Ellis Brothers Seed, Inc. and Mississippi Seed, Inc.
Interest expense increased by 26% to $0.34 million from $0.27 million primarily
due to 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 receivables for technology 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 seed technology 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
technology fees.
The Company borrows funds from a financial institution to meet its working
capital needs. This agreement provides a core commitment of $50 million and a
seasonal commitment of $25 million. The core commitment is a long-term loan that
may be borrowed upon at any time and is due January 1, 2000. 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 January 1, 2000. 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.
Capital expenditures for the first fiscal quarter of 1998 were $4.4 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 a new cotton seed conditioning and storage
facility in Hebei, China. Management believes that domestic and International
capital expenditures
will approximate $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 first quarter of fiscal 1998, the Board of Directors authorized a
quarterly dividend of $0.03 per share, paid December 15, 1997 to the
stockholders of record on December 1, 1997. 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.
The Company is currently negotiating a $110 million Senior Credit Facility with
its existing lender and two participating institutions. The planned facility
will include a $55 million core facility due in 2001 and a $55 million seasonal
facility available September 1 through June 30 each year, also due in 2001. The
new agreement will have covenants and pricing structures similar to the existing
agreements.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
10.29 .. Employment Agreement between Delta and Pine Land Company
and W. Thomas Jagodinski effective September 1, 1997.
10.30 ...Employment Agreement between Arizona Processing, Inc. and
Earl E. Dykes dated May 20, 1996.
10.31 ...Letter Agreement between Delta and Pine Land Company and
James H. Willeke dated September 1, 1995.
11.01 ...Computation of Earnings Per Share
27.01 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter ended November 30,
1997.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DELTA AND PINE LAND
COMPANY
Date: January 14, 1998 /s/ Roger D. Malkin
-------------------
Roger D. Malkin, Chairman and
Chief Executive Officer
Date: January 14, 1998 /s/ W. Thomas Jagodinski
W. Thomas Jagodinski,
Vice President - Finance and Treasurer