<PAGE>
As filed with the Securities and Exchange Commission on May 12, 2000
Registration No. 333-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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MONSANTO COMPANY
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 2879 43-1878297
(State or other jurisdiction (Primary Standard (I.R.S. Employer
of incorporation or organization) Industrial Identification Number)
Classification
Code Number)
</TABLE>
800 North Lindbergh Boulevard
St. Louis, Missouri 63167
(314) 694-1000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
--------------
R. William Ide III, Esq.
Monsanto Company
800 North Lindbergh Boulevard
St. Louis, Missouri 63167
(314) 694-1000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------
Copies to:
<TABLE>
<S> <C> <C> <C>
Richard T. Collier, Esq. Eric S. Robinson, Esq. Matthew G. Hurd, Esq. John W. White, Esq.
Don W. Schmitz, Esq. Wachtell, Lipton, Rosen & Katz Sullivan & Cromwell Cravath, Swaine & Moore
Pharmacia Corporation 51 West 52nd Street 125 Broad Street Worldwide Plaza
100 Route 206 North New York, NY 10019 New York, NY 10004-2498 825 Eighth Avenue
Peapack, NJ 07977 (212) 403-1000 (212) 558-4000 New York, NY 10019
(908) 901-8000 (212) 474-1000
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Proposed Maximum
Title of Each Class of Proposed Maximum Aggregate
Securities to Be Amount to Be Offering Price Offering Amount of
Registered Registered(1) per Unit Price(2) Registration Fee
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<S> <C> <C> <C> <C>
Common stock, par value
$.01 per share......... $100,000,000 $26,400
</TABLE>
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- --------------------------------------------------------------------------------
(1) Includes an aggregate of shares which the underwriters have the option
to purchase from the Registrant solely to cover over-allotments.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o) under the Securities Act of 1933.
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY +
+NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN +
+OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE +
+SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion. Dated May 12, 2000.
Shares
MONSANTO COMPANY
Common Stock
-----------
This is an initial public offering of shares of common stock of Monsanto
Company. All of the shares of common stock are being sold by Monsanto.
Prior to this offering, there has been no public market for the common stock.
It currently is estimated that the initial public offering price per share will
be between $ and $ . Monsanto intends to list the common stock on the New
York Stock Exchange under the symbol "MON."
See "Risk Factors" beginning on page 10 to read about factors you should
consider before buying shares of the common stock.
-----------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR
ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
-----------
<TABLE>
<CAPTION>
Per Share Total
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<S> <C> <C>
Initial public offering price.................................. $ $
Underwriting discount.......................................... $ $
Proceeds, before expenses, to Monsanto......................... $ $
</TABLE>
To the extent that the underwriters sell more than shares of common
stock, the underwriters have the option to purchase up to an additional
shares from Monsanto at the initial public offering price less the underwriting
discount.
-----------
The underwriters expect to deliver the shares in New York, New York on ,
2000.
Goldman, Sachs & Co. Salomon Smith Barney
J.P. Morgan & Co. Morgan Stanley Dean Witter
Bear, Stearns & Co. Inc. Merrill Lynch & Co.
-----------
Prospectus dated , 2000.
<PAGE>
[product pictures to come]
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this document.
This summary does not contain all of the information that you should consider
before investing in our common stock. You should read the entire prospectus
carefully, especially the risks of investing in our common stock discussed
under "Risk Factors."
In this prospectus, the terms "we," "us," "our" and "Monsanto" refer to
both the issuer in this offering and our predecessor, the agricultural products
business of the former Monsanto Company (we refer to the former Monsanto
Company as "old Monsanto"). In connection with the merger of old Monsanto and
Pharmacia & Upjohn, Inc., old Monsanto changed its name from "Monsanto Company"
to "Pharmacia Corporation." The term "Pharmacia" refers to Pharmacia
Corporation following the merger.
Monsanto, our logo and other trademarks, trade names and service marks of
Monsanto mentioned in this document, including Roundup(R), Roundup Ready(R),
Roundup Ultra(R), Roundup Dry(R), Posilac(R), Lasso(R), Harness(R), Machete(R),
Maverick(R), Latitude(R), DEKALB(R), Hybritech(R), Holden's(R), YieldGard(R),
MaisGard(R), Bollgard(R), NewLeaf(R), Asgrow(R), Hartz(R), Avadex(R) and
Enviro-Chem(R) are the property of, or are licensed by, Monsanto, Pharmacia or
a subsidiary of Monsanto or Pharmacia.
OUR COMPANY
We are a leading global provider of technology-based solutions and
agricultural products for growers and downstream customers, such as grain
processors and consumers, in the agricultural markets. The combination of our
herbicides, seeds and related genetic trait products provides growers with
integrated solutions to more efficiently and cost effectively produce crops at
higher yields, while controlling weeds, insects and diseases. Our base
business, led by Roundup and coupled with the latest tools in biotechnology,
genomics and molecular breeding, gives us a unique set of assets and
capabilities. Our integrated product offerings seek to improve farm
productivity and food quality developed through our broad technology platform.
Our product innovations have transformed farming practices and create value for
growers and other agricultural customers around the world.
Our family of Roundup herbicides provides a strong foundation for our
overall business. Over the past three decades, we have grown our Roundup
herbicide business, the core of our Agricultural Productivity segment, into the
world's best-selling herbicide and one of the most recognized global
agriculture brands. While Roundup competes with numerous other herbicides sold
by a variety of companies, its sales in 1998 were more than five times those of
the next largest selling herbicide. Our sales volumes of Roundup and other
glyphosate-based herbicides have grown at an average annual growth rate of
approximately 20% over the last 10 years. In this same period, these products
maintained an average sales growth rate of approximately 11%, even as we
reduced prices significantly and our patents expired in countries outside the
United States. Roundup's success is based on its ability to provide growers
with improved economic and environmental benefits, as well as our low-cost
manufacturing position and formulations expertise. We seek to expand Roundup
volumes by further promoting changes in farming practices, pricing
competitively, developing new proprietary formulations, and introducing crops
that are developed through biotechnology and are tolerant of Roundup and other
glyphosate-based herbicides. In addition to Roundup, our Agricultural
Productivity segment includes our selective herbicides and animal agriculture
businesses.
Our Seeds and Genomics segment holds leading positions in seeds, seed
traits and genetic technologies that protect crops from insects, viruses and
diseases and that provide effective weed
3
<PAGE>
control options. Our global seed infrastructure enables us to coordinate our
agricultural chemicals and seeds and traits research to introduce new products
more rapidly and efficiently to our customers. Our research efforts in our
Seeds and Genomics segment focus on developing capabilities that add value for
growers, processors and consumers through biotechnology and advanced gene-based
breeding techniques. In 1999, we held the No. 1 or No. 2 seed market share
position in key markets for corn and soybeans, as well as the No. 1 position in
the European wheat market. Acreage planted with our traits grew from
approximately 3 million in 1996 to approximately 86 million in 1999, accounting
for over 70% of the worldwide acres planted with herbicide-tolerant and insect-
resistant traits. Our trait products are available through an extensive network
of seed company partners which have licensed our technologies. We also have one
of the largest efforts in conventional plant breeding for the crops on which we
have chosen to focus.
Over the last several years, we have made a step change in our research and
development to focus on gene-based capabilities. Our integrated efforts in this
area are threefold. First, our genomics research and development helps us
understand the structure and function of genes as well as how those genes are
activated. Second, our molecular breeding effort combines our genomics
capabilities and conventional breeding expertise to significantly speed up
commercialization of new seeds with desired attributes, without genetically
modifying plants. Finally, our biotechnology research and development focuses
on genetically enhancing crops via incorporation of tailored genes to add
specific benefits. We have integrated our products and technologies to provide
customers with unique solutions. As a result, we believe we are well positioned
to maintain our leadership positions and to take advantage of industry
developments.
STRATEGY
Growth in world population, combined with a general increase in global
prosperity, are increasing the demand for food. Our goal is to create and
deliver integrated agricultural solutions that substantially increase the
volume and quality of global food production while reducing economic costs and
environmental effects. We aim to achieve this by integrating our traditional
agricultural products with advanced technological tools, including genomics,
biotechnology and molecular breeding. Our strategy is built around the
following focus areas:
. CONTINUE TO DEVELOP INTEGRATED SOLUTIONS FOR GROWERS. We are continuing
to integrate our agricultural chemicals with our seed and technology
products to offer agricultural solutions to growers that meet their
production needs. For example, we expect that combining diverse input
and output traits in the best seed varieties will offer significant
additional value to growers. These and other integrated solutions have
the potential to significantly alter crop production systems. We are
well positioned to take advantage of this opportunity, with our global
seed infrastructure, current portfolio of seed trait products and
integrated genetic technology system.
. MAXIMIZE THE GROWTH OF THE ROUNDUP BUSINESS. We aim to increase our
sales and income from Roundup by:
. ENCOURAGING EXPANDED ADOPTION OF CONSERVATION TILLAGE TECHNIQUES BY
GROWERS WORLDWIDE. Conservation tillage, a farming practice that
leaves crop stubble in place and replaces plowing to control weeds
with the judicious use of herbicides, has environmental and economic
benefits because it reduces soil erosion and moisture evaporation
while increasing efficiency. We estimate that conservation tillage is
currently practiced on only approximately 200 million of the estimated
600 million acres in developed countries on which this farming
technique could be practiced. Roundup is the herbicide of choice in
most conservation tillage markets today, and we will work to expand
our position in this key area.
4
<PAGE>
. INCREASING SALES OF ROUNDUP READY CROPS, WHICH TOLERATE ROUNDUP
HERBICIDE FOR EFFECTIVE WEED CONTROL. With crops developed to tolerate
Roundup, Roundup can be used to control a broad spectrum of weeds,
even after crops have begun to grow. We expect additional weed control
opportunities for Roundup with the introduction of Roundup Ready crops
into new markets and with the development of new products with the
Roundup Ready technology.
. SELECTIVELY REDUCING PRICES TO ENCOURAGE NEW USES FOR ROUNDUP AND TO
INCREASE OUR SALES VOLUMES, THUS CAPTURING GAINS FROM PRICE
ELASTICITY. We have implemented a strategic pricing plan for Roundup
in which we have selectively reduced prices to increase use. This
price elasticity strategy has contributed to a substantial increase in
our sales volumes. Historically, the growth in volumes has more than
offset price decreases.
. INTRODUCING ADDITIONAL PROPRIETARY FORMULATIONS OF ROUNDUP. We expect
to continue to introduce proprietary formulations of Roundup, such as
Roundup Ultra, to address specific market needs.
. MAINTAINING OUR POSITION AS A LOW-COST, HIGH-QUALITY GLYPHOSATE
PRODUCER. We are a low-cost producer of glyphosate, the active
ingredient for Roundup, and we expect to continue to improve our
glyphosate manufacturing processes and thereby reduce our
manufacturing costs.
. BUILDING ON OUR RELATIONSHIPS WITH OUR DISTRIBUTION PARTNERS. Our
business is supported by a network of wholesalers, distributors and
retailers that offer an array of Monsanto products. We expect to
continue to focus on and strengthen these relationships.
. ACCELERATE THE DEVELOPMENT AND COMMERCIALIZATION OF NEW PRODUCTS. We
expect to remain a leader in the development and introduction of new
technologies for food and agricultural production by:
. REDUCING THE TIME AND COST OF DISCOVERING NEW PRODUCTS.
. USING GENOMICS CAPABILITIES TO SPEED INVENTION AND DEVELOPMENT OF
NEW TECHNOLOGIES. We expect our genomics capabilities to reduce the
time and cost of discovering new products by accelerating the
identification of genes for crop improvement and by expanding the
available pool of genes for new product development. We are focused
on identifying specific genes that will have the greatest benefit to
our customers. We also are applying genomics techniques to the
commercialization of improved plant varieties through a process
known as molecular breeding.
. EXPANDING OUR TECHNOLOGICAL EXPERTISE VIA STRATEGIC
RELATIONSHIPS. We have established numerous strategic relationships
that expand the scope of our research and provide access to new
technologies and markets. These relationships are designed to
accelerate product innovations, improve the value that we bring to
our customers and allow our technologies to be as broadly applied as
possible, through our own and others' capabilities.
. USING OUR GLOBAL SEED INFRASTRUCTURE TO ACCELERATE THE
COMMERCIALIZATION OF NEW PRODUCTS. Our seed assets provide a rich
source of diverse germplasm, the source of seed quality and attributes
desired by growers, and accelerate the introduction of our seed traits
developed through genomics and biotechnology. In addition, our strong
seed market position provides access to a broad customer base.
5
<PAGE>
. HELPING TO BROADEN PUBLIC UNDERSTANDING AND ACCEPTANCE OF NEW
TECHNOLOGIES AND PRODUCTS. Recently, advocacy groups have challenged the
safety of foods produced from biotechnology crops. We have a number of
initiatives to educate consumers on the safety and benefits of plant
biotechnology. To accomplish this, we are working in cooperation with
the food industry and other agricultural technology companies. We also
continue to support a rigorous review process for new products by
regulatory bodies worldwide.
6
<PAGE>
OUR RELATIONSHIP WITH PHARMACIA CORPORATION
We currently are a wholly owned subsidiary of Pharmacia. After the
completion of this offering, Pharmacia will own approximately % of our
outstanding common stock, or % if the underwriters exercise their over-
allotment option in full. Pharmacia has informed us that it has no present
plans to dispose of its interest in our common stock.
Prior to this offering, we will enter into agreements with Pharmacia
related to the transfer of our business operations from Pharmacia. These
agreements will provide for, among other things, the transfer from Pharmacia to
us of assets and the assumption by us of liabilities relating to our business.
Substantially all of these transfers will be completed prior to the closing of
this offering. For more information regarding the assets and liabilities to be
transferred to us, see "Arrangements between Monsanto and Pharmacia," "Merger
and Reorganization Transactions Occurring Prior to This Offering," "Unaudited
Pro Forma Condensed Combined Financial Statements" and our combined financial
statements and the notes to these statements that are included elsewhere in
this document.
The agreements between us and Pharmacia also will govern our various
interim and ongoing relationships. See "Risk Factors--Risks Related to Our
Relationship with Pharmacia" and "Arrangements Between Monsanto and Pharmacia."
7
<PAGE>
THE OFFERING
Common stock offered........ shares
Common stock to be
outstanding immediately
after this offering....... shares
Common stock to be held by
Pharmacia immediately
after this offering....... shares
Dividend policy............. Our board of directors intends to declare
quarterly dividends on our common stock. We
expect that the first quarterly dividend payment
will be $ per share (an annual amount of
$ per share), which we expect to declare in the
quarter of 2000. See "Dividend Policy."
Use of proceeds............. We expect to use the estimated $ million of
net proceeds from this offering to pay off a
substantial portion of the commercial paper
obligations issued by Pharmacia that are to be
assumed by Monsanto. If the overallotment option
is exercised, we expect to use the estimated
$ million of additional net proceeds to
reduce further such commercial paper obligations.
See "Use of Proceeds."
New York Stock Exchange
symbol.................... MON
Unless we specifically state otherwise, the information in this document
does not take into account the possible issuance of up to additional shares
of our common stock, which the underwriters have the option to purchase from us
solely to cover over-allotments. If the underwriters exercise this option in
full, there will be shares of our common stock outstanding following this
offering. See "Underwriting."
We expect to grant options to management as of the date of this offering to
purchase shares of our common stock at an exercise price equal to the
initial public offering price. See "Management--Incentive Plans--Monsanto 2000
Management Incentive Plan."
----------------
We were incorporated in Delaware on February 9, 2000 as a wholly owned
subsidiary of old Monsanto under the name "Monsanto Ag Company." On March 31,
2000, we changed our name to "Monsanto Company." Our principal executive
offices are located at 800 North Lindbergh Boulevard, St. Louis, Missouri
63167, and our telephone number is (314) 694-1000. Our website is .
The information and content contained on our website are not part of this
document.
8
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following summary historical and pro forma financial data should be
read together with "Unaudited Pro Forma Condensed Combined Financial
Statements," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our historical combined financial statements and the
notes to those combined financial statements included elsewhere in this
prospectus. The combined operating results data and other selected data set
forth below for the years ended December 31, 1999, 1998, and 1997 and the
combined financial position data as of December 31, 1999 are derived from our
audited combined financial statements included elsewhere in this document. The
combined operating results data and other selected data for the years ended
December 31, 1996 and 1995 are derived from old Monsanto's unaudited combined
financial data that is not included in this document. In the opinion of
management, this unaudited financial data has been prepared on a basis
consistent with the audited financial statements included in this document and
includes all adjustments, which are only normal recurring adjustments,
necessary for a fair statement of the operating results and financial position
for the unaudited periods.
The historical financial information may not be indicative of our future
performance and does not reflect what our financial position and results of
operations would have been had we operated as a separate, stand-alone entity
during the periods presented.
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
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(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Net Sales.................................. $5,248 $4,448 $3,673 $2,928 $2,429
Income from Operations(1).................. 625 55 13 506 512
Income (Loss) Before Income Taxes.......... 263 (60) 1 531 544
Net Income (Loss).......................... 150 (125) 31 319 365
OTHER SELECTED DATA:
Capital Expenditures....................... $ 632 $ 432 $ 298 $ 216 $ 98
Depreciation and Amortization.............. 547 368 245 171 142
EBIT(2).................................... 506 34 21 530 517
EBIT (excluding unusual items)(2)(3)....... 607 638 654 610 534
EBITDA (excluding unusual items)(2)(3)..... 1,154 1,006 899 758 676
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
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PRO FORMA
ACTUAL (UNAUDITED)
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(IN MILLIONS)
<S> <C> <C>
FINANCIAL POSITION:
Total Assets.............................................. $11,101 $
Working Capital........................................... 2,323
Long-Term Debt of Parent Attributable to Monsanto Company
Agricultural Business.................................... 4,278
Equity.................................................... 4,645
</TABLE>
- --------
(1) Income from operations for 1999 included $50 million for accelerated
business integration costs and the reversal of restructuring reserves
established in 1998; for 1998 included $583 million for restructuring
charges and the write-off of acquired in-process research and development;
for 1997 included $633 million for the write-off of acquired in-process
research and development; for 1996 included restructuring and other unusual
charges of $95 million; for 1995 included net restructuring expenses and
other unusual items of $17 million.
(2) EBIT is defined as earnings before interest and taxes. EBITDA is defined as
earnings before interest, taxes, depreciation and amortization. EBITDA
eliminates the effect of depreciation of tangible assets and amortization
of intangible assets, most of which were acquired in seed company
acquisitions accounted for under the purchase method of accounting. The
presentation of EBITDA (excluding unusual items) is intended to supplement
investors' understanding of our operating performance. It is not intended
to replace net income, cash flows, financial position or comprehensive
income, and it is not a measure of financial performance as determined in
accordance with accounting principles generally accepted in the United
States. EBITDA (excluding unusual items) may not be comparable to other
companies' EBITDA performance measures because those companies may not
exclude unusual items.
(3) Unusual items for 1999 included $101 million for accelerated business
integration costs, failed merger costs, restructuring reversals and a gain
on the sale of a business; for 1998 included $604 million for restructuring
costs, the write-off of acquired in process research and development and
charges to cancel DEKALB Genetics Corporation stock options; for 1997
included $633 million for the write-off of acquired in-process research and
development; for 1996 included $80 million for restructuring and other
unusual charges which were partially offset by minority interest associated
with certain asset impairments; for 1995 included net restructuring
expenses and other unusual items of $17 million.
9
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RISK FACTORS
You should carefully consider the following risks and the other information
contained in this document, including the financial statements and related
notes, before investing in our common stock. The trading price of our common
stock could decline due to any of these risks, and you could lose all or part
of your investment. If any of the events described below were to occur, our
business, prospects, financial condition, results of operations or cash flow
could be materially adversely affected.
RISKS RELATED TO OUR BUSINESS
NEGATIVE PUBLICITY CONCERNING, OPPOSITION TO, AND LEGAL DEVELOPMENTS AFFECTING,
PRODUCTS DEVELOPED THROUGH BIOTECHNOLOGY COULD HAVE A NEGATIVE IMPACT ON OUR
SALES, PROFITS OR STOCK PRICE
The commercial success of our products developed through biotechnology may
be adversely affected by claims that genetically modified plant products are
unsafe for consumption, pose risks of damage to the environment and create
legal, social and ethical dilemmas. The development and sales of our products
have been, and may in the future be, delayed or impaired because of adverse
public perception or regulatory concerns about the safety of our products and
the potential effects of these products on other plants, animals, human health
and the environment. For instance,
. some countries, primarily in the European Union, have instituted a de
facto moratorium on the planting of some genetically modified seeds or
on the import of grain produced from these seeds;
. some countries, including Japan, and the European Union have imposed
labeling requirements on genetically modified agricultural and food
products, which may affect the acceptance of these products;
. a court decision in Brazil has delayed planting of Roundup Ready
soybeans in that country;
. partly in response to criticism by opponents of biotechnology, the
Clinton Administration has recently announced steps to strengthen
science-based governmental regulation of agricultural biotechnology
products and consumers' access to information about the products of
agricultural biotechnology;
. companies in food-related industries, such as the Archer Daniels
Midland Company, have paid premiums for non-genetically modified crops,
and other companies, such as Gerber Products Company, have announced
that they will not use genetically modified crops; and
. advocacy groups have engaged in publicity campaigns and filed lawsuits
in various countries against companies, including ours, seeking to halt
biotechnology approval activities or influence public opinion against
products developed through biotechnology.
Failure to maintain or secure consumer confidence in, or to receive
governmental approvals for, our products could have a significant negative
impact on our sales, profits or stock price.
WE DEPEND HEAVILY ON SALES OF OUR ROUNDUP HERBICIDES
Our business is substantially dependent upon the sale of our family of
Roundup and other glyphosate-based herbicides, which in 1999 accounted for
approximately 73% of our Agricultural Productivity segment sales and
approximately 50% of our total sales. Further, our agricultural chemicals
business is less diversified with respect to product offerings than the
agricultural chemicals businesses of our principal competitors, which may give
these competitors an advantage in meeting
10
<PAGE>
customer needs. Should an event occur that adversely affects nonselective
herbicides in general, or Roundup in particular, our business would be
adversely affected and our competitors that offer a broader array of products
may have a competitive advantage. In addition, we have shifted the focus of our
research and development efforts from agricultural chemicals to biotechnology
and genomics products.
INCREASED GENERIC AND BRANDED COMPETITION FOR ROUNDUP HERBICIDES FOLLOWING THE
EXPIRATION OF OUR U.S. PATENT PROTECTION IN SEPTEMBER 2000 COULD NEGATIVELY
AFFECT OUR SALES AND PROFITS
Our sales and profits could be adversely affected when our patent
protecting glyphosate, the active ingredient in Roundup, expires in the United
States in September 2000. Sales of the family of Roundup herbicides protected
by this patent in the United States, excluding our Roundup lawn and garden
products, represented approximately 20% of our total company sales in 1999.
Following the expiration of our patent, these herbicides are likely to face
increasing competition from lower-priced generic and branded glyphosate
products.
Our sales and profits may decline as we reduce our prices on Roundup
herbicides. As our patent protection on Roundup has expired in countries
outside the United States, we have implemented, and expect to continue to
follow, a price-elasticity strategy that seeks to offset price declines through
increasing sales volumes. We reduced our prices on Roundup products in the
United States by 16% to 22% in September 1998 for the following growing season
and expect to reduce such prices further. There is no assurance that any
increase in volumes will offset price reductions. If they do not, our profits
will decline.
BECAUSE OUR PRODUCT DEVELOPMENT EFFORTS DEPEND ON NEW TECHNOLOGIES THAT REQUIRE
SUBSTANTIAL TIME AND RESOURCES TO DEVELOP, WE DO NOT KNOW WHETHER OUR EFFORTS
WILL BE SUCCESSFUL
We invested $409 million, $536 million and $695 million in research and
development in 1997, 1998 and 1999, respectively. Our substantial investments
may not result in significant increased revenues, particularly over the next
several years. To date, companies have developed and commercialized relatively
few genetically enhanced agricultural products. It takes many years and
significant capital investment for a discovery to develop into a viable
product. Even then, commercialization involves risks of failure inherent in the
development of products based on innovative technologies. These risks include
the possibility that:
. these technologies or any or all of the products based on these
technologies will be ineffective, or otherwise will fail to receive
necessary regulatory clearances;
. the products will be difficult to produce on a large scale or will be
uneconomical to market;
. proprietary rights of third parties will prevent us or our
collaborators from marketing products; and
. third parties will market superior or equivalent products or will reach
the market with their products first.
THE VALUE OF OUR INTELLECTUAL PROPERTY COULD DIMINISH DUE TO TECHNOLOGICAL
DEVELOPMENTS OR CHALLENGES BY COMPETITORS, MAKING OUR PRODUCTS LESS COMPETITIVE
The increasing importance of technology development and intellectual
property protection in the agricultural industry increases the risk that
technological advances by others could render our products less competitive.
Our intellectual property rights are material to the operation of our
business. We rely on a combination of patents, copyrights, trademarks and trade
secrets, confidentiality provisions, Plant
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Variety Protection Act registrations and licensing arrangements to establish
and protect our intellectual property. However, our business could be
negatively affected by any of the following:
. our pending patent, Plant Variety Protection and trademark registration
applications may not be allowed or may be challenged successfully by
our competitors;
. our products may rely on the technology of others and, therefore,
require us to obtain intellectual property licenses from other parties
in order for us to sell our products;
. we may be unable to obtain such intellectual property licenses that are
necessary or useful to our business on favorable terms, or at all; or
. litigation involving our intellectual property rights may have adverse
results.
Claims of intellectual property infringement may require us to enter into
costly royalty or license agreements, subject us to substantial damage claims
or cause us to stop using such technology absent a license agreement. See
"Business--Legal Proceedings" for a summary of our material pending litigation,
including several decisions adverse to us.
THIRD PARTIES MAY INFRINGE ON OUR INTELLECTUAL PROPERTY RIGHTS, AND WE MAY
EXPEND SIGNIFICANT RESOURCES ENFORCING OUR RIGHTS OR BE COMPETITIVELY
DISADVANTAGED
If we fail to protect our intellectual property rights from infringement by
third parties, our competitive position could suffer, which could harm our
profits. We spend significant resources to monitor and deter unauthorized use
of our intellectual property rights. We may not be able to detect or prevent
infringement or may lose our competitive position in the market before we do
so. See "Business--Legal Proceedings" for a summary of material suits we have
filed against our competitors alleging patent infringement.
THE SCOPE OF PATENT PROTECTION FOR OUR BIOTECHNOLOGY AND GENOMICS INTELLECTUAL
PROPERTY IS UNCERTAIN
Patent positions in biotechnology and genomics generally are uncertain and
involve complex legal and factual questions that will determine which company
has the right to develop a particular product. Our competitors may be able to
commercialize our biotechnology or genomics discoveries. Very little case law
now exists regarding the enforceable breadth of claims in biotechnology and
genomics patents. There has been, and continues to be, intense debate on the
scope and appropriateness of patent protection for both partial gene sequences
and full-length genes. The biotechnology and genomics patent situation outside
the United States is even more uncertain and currently is undergoing review and
revision in many countries. Changes in either the patent laws or in
interpretations of patent laws in the United States and other countries may
diminish the value of our intellectual property.
FAILURE TO OBTAIN REGULATORY APPROVALS COULD DELAY OR PREVENT SALES OF OUR
PRODUCTS
The field-testing, production and marketing of our products are subject to
extensive regulations and numerous governmental approvals, which substantially
increase our costs and the time it takes to bring our products to market.
Regulatory authorities can block the sale or import of our products or order a
recall of products already on the market, which could adversely affect our
business. For example, we failed to obtain approval to market our bovine growth
hormone in the European Union. Regulatory authorities also can impose
conditions that delay production and sale of our products, or that make the
sale of our products technically or commercially unfeasible. For instance,
regulatory and political hurdles have delayed approval of the planting or
importing of our Roundup Ready corn in the European Union and our Roundup Ready
soybeans in Brazil.
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Regulations and government policies concerning genetically modified
products vary widely among jurisdictions where our products are sold. The
proliferation of Bacillus thuringiensis (Bt) products, which contain traits
resistant to certain insects, in multiple crops could result in significant
regulatory restrictions on the total acres planted with such crops in order to
prevent the development of insect resistance. For example, the U.S.
Environmental Protection Agency (EPA) imposed limitations on the planting of Bt
corn, including minimum acreage requirements for non-genetically modified corn.
Separately, the U.S. Department of Agriculture (USDA) has proposed a rule
defining the term "organic" that excludes genetically modified crops. The scope
and content of these regulations are subject to varying degrees of controversy,
public interest and political circumstances, and, as a result, regulations have
changed and may change substantially in the future. For example, the EPA has
required us and other Bt producers to conduct additional monitoring of the
effects of Bt-related products on non-target species. The U.S. Food and Drug
Administration (FDA) has announced that it will strengthen its review of foods
produced from agricultural biotechnology to include a mandatory procedure for
notification of the FDA at least 120 days prior to marketing a product, to make
supporting scientific information available to the public, and to include
guidelines for voluntary labeling of non-biotech food. In addition, the
establishment of new organizations at the national and international levels
responsible for monitoring or studying the safety and environmental effects of
genetically modified crops and foods could lead to the adoption of more
burdensome regulations.
WE FACE AGGRESSIVE COMPETITION IN ALL AREAS OF OUR BUSINESS, AND IF WE DO NOT
COMPETE EFFECTIVELY, OUR BUSINESS WILL BE HARMED
The agricultural industry is highly competitive, rapidly changing and
undergoing consolidation, and we may not be able to compete effectively. Our
principal competitors are major international agrochemical and agricultural
biotechnology corporations, including companies that are part of much larger
pharmaceutical or chemical companies, with substantially greater resources than
we have for research and development, production or marketing. In addition, we
face competition from biotechnology and genomics companies, from academic
research institutions, and from seed and food companies with conventional
biotechnology research and development programs. We are unable to predict what
effect consolidations in the industry may have on price, selling strategies,
intellectual property or our competitive position.
As new products enter the market, our products may become obsolete or our
competitors' products may be more effective, or more effectively marketed and
sold, than our products. Changes in technology and customer preferences may
result in short product life cycles. To remain competitive, we will need to
develop new products and enhance our existing products in a timely manner. We
anticipate that we may have to adjust prices on many of our products to stay
competitive and our profit margins may fall. In addition, new competitors may
emerge, and entire product lines may be threatened by new technologies or
market trends that reduce the value of these product lines. Our failure to
maintain our competitive position could have a material adverse effect on our
business and results of operations.
OUR BUSINESS IS HIGHLY SEASONAL AND WE HAVE HISTORICALLY INCURRED LOSSES IN OUR
THIRD AND FOURTH QUARTERS
The sale of agricultural chemicals and seeds is dependent upon planting and
growing seasons, which vary from year to year, resulting in both highly
seasonal patterns and substantial fluctuations in our quarterly sales and
profitability. For example, in 1999, approximately 60% of our sales were
recorded in the first half of the year, which corresponds to the period that
farmers in the northern hemisphere purchase most of their seeds and chemicals
for the planting season. We had net income of approximately $369 million in the
first half of 1999 compared to a net loss of approximately $219
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million in the second half of 1999. The net loss for the second half of 1999
included $81 million of unusual items. See footnote 17 to our combined
financial statements included elsewhere in this document.
UNEXPECTED FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS MAY CAUSE OUR STOCK
PRICE TO DECLINE
A large proportion of our costs are fixed, due in part to our significant
sales, research and development and production costs. Thus, declines in
revenue, even if small, could disproportionately affect our quarterly operating
results and could cause such results to differ materially from expectations.
Other factors that could affect our quarterly operating results or cause them
to differ materially from expectations include:
. demand for and acceptance of our products;
. weather conditions;
. competitive pressures resulting in lower selling prices;
. unanticipated delays or problems in the introduction of new products;
. increased costs of, or limited amount of, raw materials or supplies;
and
. results of litigation.
WE REQUIRE A SUBSTANTIAL AMOUNT OF SHORT-TERM FINANCING TO FUND OUR WORKING
CAPITAL; ANY DOWNGRADE IN OUR CREDIT RATING COULD NEGATIVELY AFFECT OUR
BUSINESS
Like many other agricultural companies, we regularly extend credit to our
customers to enable them to acquire agricultural chemicals and seeds at the
beginning of the growing season on terms that permit payment following the
sales of their crops after harvest. These credit practices, combined with the
seasonality of our sales, make us dependent on our ability to obtain
substantial short-term financing to fund our cash flow requirements. Our need
for short-term financing typically peaks in the second quarter, varying with
the timing of the planting season for a particular year. For example, last
year, our total debt increased to its annual peak of approximately $6.1 billion
on April 30, 1999, an increase of approximately $1.4 billion from our total
debt level on December 31, 1998.
We expect to continue to access the commercial paper market to meet our
seasonal financing needs in the future. Downgrades in our credit rating or
other limitations on our ability to access short-term financing would adversely
affect our business and results of operations.
SUBSTANTIALLY ALL OF OUR DEBT CONSISTS OF VARIABLE-RATE OBLIGATIONS, WHICH
CREATES INTEREST RATE AND REFINANCING RISKS
As of the closing of this offering, the majority of our debt will consist
of variable-rate, medium-term bank notes and commercial paper obligations, each
of which we will assume from Pharmacia at the closing of this offering, and
which will expose us to interest rate and refinancing risks. Changes in
interest rates could adversely affect our results of operations, particularly
in the second and third quarters, when our short-term debt levels are highest.
We may over time refinance all or part of our commercial paper with medium-
and/or long-term debt with fixed interest rates, subject to market conditions.
We expect any such refinancing would be at higher interest rates than that for
short-term commercial paper. There is no assurance that we will be able to
refinance our debt when it matures.
OUR BUSINESS IS SUBJECT TO WEATHER CONDITIONS, COMMODITY PRICES AND OTHER
FACTORS BEYOND OUR CONTROL, WHICH MAY NEGATIVELY AFFECT SALES OF OUR PRODUCTS
Factors beyond our control may adversely affect the volumes and prices of
the agricultural chemicals and seeds we sell. Our business is sensitive to
weather conditions, including extremes such as drought, and to natural
disasters, each of which affect commodity prices, product
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performance, seed yields and decisions by growers regarding purchases of seeds,
traits and chemicals. Commodity prices, government agricultural programs and
consumer preferences also affect growers' decisions about the types and amounts
of crops to plant. All of these factors may negatively influence sales of our
products and affect our pricing opportunities, selling strategies and
collection practices. If we fail to forecast accurately and manage inventory
effectively, there could be an unexpected shortfall or surplus of our products,
which could have a material adverse effect on our business.
WE MAY NOT PREVAIL IN ONGOING LITIGATION AND MAY BE REQUIRED TO PAY SUBSTANTIAL
DAMAGES
We are involved in several major lawsuits regarding contract disputes,
intellectual property issues, biotechnology, antitrust allegations and other
matters. An adverse outcome in any of these lawsuits could have a material
adverse effect on our cash flow and results of operations. Litigation is costly
and time-consuming, and diverts our management and key personnel from our
business operations. Material pending litigation includes:
. a $174.9 million March 1998 jury verdict, which we are appealing, in
favor of Mycogen Corporation for damages in connection with a gene
technology contract dispute;
. a $65 million April 1999 jury verdict, which we are appealing, in favor
of Aventis CropScience S.A. (formerly Rhone Poulenc Agrochimie S.A.)
for compensatory and punitive damages in connection with our Roundup
Ready corn;
. October 1998 lawsuits by Pioneer Hi-Bred International, Inc. claiming
misappropriation of trade secrets related to corn breeding, patent law
violations and other matters;
. November 1999, December 1999 and February 2000 class action lawsuits
made on behalf of purchasers of some of our genetically modified crops
containing our patented technology and growers of non-genetically
modified crops;
. a January 2000 lawsuit by Delta and Pine Land Company seeking
unspecified compensatory damages for lost stock market value of not
less than $1 billion, as well as punitive damages, arising from the
failure of our proposed merger with Delta and Pine Land; and
. two March 2000 lawsuits by E.I. DuPont de Nemours and Company seeking
damages and equitable relief for alleged federal antitrust and state law
violations in connection with glyphosate-related and glyphosate-tolerant
soybean business matters.
We have generally not established reserves for the foregoing matters. These
and other pending litigation matters are discussed under "Business--Legal
Proceedings."
OUR PRODUCTS MAY LOSE THEIR EFFECTIVENESS OR CAUSE DAMAGES THAT MAY IMPOSE
LIABILITY ON US
It is possible that weeds could develop resistance to Roundup or our other
herbicides. It is also possible that pests could develop a resistance to one or
more of the pest protections in our plant products. In either case, our
products would become less attractive to our customers and our profits might
decline. In addition, we may be held liable if any product we develop, or any
product that is made with the use or incorporation of any of our technologies,
causes injury or damages, which may adversely affect our business or profits.
WE DERIVE A SUBSTANTIAL PORTION OF OUR REVENUES FROM FOREIGN MARKETS, WHICH
SUBJECTS US TO ADDITIONAL BUSINESS RISKS
Changes in exchange rates between the U.S. dollar and other currencies will
result in increases or decreases in our costs and earnings, and also may affect
the book value of our assets outside the United States and the amount of our
shareholders' equity. We record our transactions and prepare our financial
statements in U.S. dollars, but a significant portion of our earnings and
expenditures are in other currencies. Operations outside the United States
provided approximately 45% of our 1999
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net sales. To the extent we sell our products in U.S. dollars in foreign
markets, currency fluctuations may result in our products becoming too
expensive for foreign customers.
International operations are subject to a number of other risks and
uncertainties, including:
. changes in political or economic conditions;
. trade protection measures and trade agreements;
. import or export licensing requirements;
. changes in regulatory requirements;
. economic downturns, civil disturbances or political instability;
. currency restrictions;
. price controls;
. nationalization; and
. potentially burdensome taxation.
Any of these factors could adversely affect our international operations
and, consequently, our operating results.
IF WE LOSE KEY MANAGEMENT OR OTHER PERSONNEL, OUR BUSINESS MAY BE ADVERSELY
AFFECTED
We depend on the experience and expertise of our senior executive officers
and other personnel. Although we have entered into employment agreements with
some of our executives, those employment agreements are for limited periods of
time, and not all key personnel have employment agreements. Competition among
biotechnology and genomics companies for qualified employees is intense, and
the loss of qualified employees or an inability to attract, retain and motivate
additional highly-skilled employees required for our activities could hinder
our ability to conduct research activities successfully and develop marketable
products.
PENDING LITIGATION WITH OUR KEY LICENSEE IN COTTON MAY ADVERSELY AFFECT OUR
MARKETING RELATIONSHIP
We have granted a license for our Roundup Ready cotton, our Bollgard
insect-resistant cotton and combinations of these traits to Delta and Pine
Land, a leading breeder, producer and marketer of cotton seed. The failure of
our proposed merger with Delta and Pine Land and the related litigation between
us may adversely affect this relationship with an important marketing partner.
OUR CURRENT AND FORMER OPERATIONS EXPOSE US TO RISKS OF ENVIRONMENTAL
LIABILITIES
Increasingly stringent environmental regulations restrict the amount and
types of pollutants that can be released from our operations into the
environment. Compliance with these and any future regulations could require
significant capital investments in pollution control equipment or changes in
the way we make our products. In addition, because we use hazardous and other
regulated materials in our product development programs and manufacturing
processes, we are subject to risks of accidental contamination, personal injury
claims and civil and criminal fines, any of which could be material to our cash
flow or earnings. For example,
. we have remediated, and currently are remediating, some of our
operating plant sites, as well as certain properties that we have sold;
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. we are funding, along with other potentially responsible parties, the
cleanup of approximately 10 Superfund sites where we (or our
predecessors) and others disposed of wastes in the past;
. we have agreed to indemnify Pharmacia for any liability associated with
contamination from past operations at all properties to be transferred
from Pharmacia to us and at certain sites used in old Monsanto's former
businesses; and
. we are responsible for certain environmental liabilities arising from
the operations of old Monsanto's former chemicals businesses in the
event that Solutia Inc. is unable to satisfy its legal obligations.
These and other environmental matters are described in more detail under
"Business--Environmental Matters."
WE HAVE NO OPERATING HISTORY AS A SEPARATE COMPANY AND MAY NO LONGER HAVE
ACCESS TO PHARMACIA FINANCIAL SUPPORT
In the past, we operated our business as an unincorporated division of old
Monsanto, and we have no operating history as a separate company. Historically,
our business was able to rely on the financial support of our parent company.
Following this offering, we may no longer have access to Pharmacia's financial
or other resources.
OUR HISTORICAL FINANCIAL INFORMATION MAY NOT BE REPRESENTATIVE OF OUR RESULTS
AS A SEPARATE COMPANY
The historical financial information we have included in this document has
been derived from old Monsanto's consolidated financial statements and does not
reflect what our financial position, results of operations and cash flows would
have been had we been a separate, stand-alone entity during the periods
presented. Old Monsanto did not account for us as, and we were not operated as,
a single stand-alone entity for the periods presented. In addition, the
historical information is not necessarily indicative of what our results of
operations, financial position and cash flows will be in the future. We have
not made adjustments to reflect many significant changes that will occur in our
cost structure, funding and operations as a result of the separation of our
businesses from those of Pharmacia, including changes in our employee base,
changes in our tax structure, increased costs associated with reduced economies
of scale and increased costs associated with being a public, stand-alone
company.
For additional information, see "Unaudited Pro Forma Condensed Combined
Financial Statements," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our historical combined financial
statements and the notes to those combined financial statements.
RISKS RELATED TO OUR RELATIONSHIP WITH PHARMACIA
OUR AGREEMENTS WITH PHARMACIA ARE NOT THE RESULT OF ARM'S-LENGTH NEGOTIATIONS
Our agreements with Pharmacia will be finalized while we are a wholly owned
subsidiary of Pharmacia. Each of these agreements may be more favorable or less
favorable to us than if it had been negotiated at arm's-length.
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WE MAY HAVE LIABILITY IN CONNECTION WITH OUR TAX SHARING AGREEMENT WITH
PHARMACIA
As part of the separation of our businesses from those of Pharmacia, we
will enter into a tax sharing agreement with Pharmacia. Under that tax sharing
agreement, we will be liable for some taxes with respect to periods before the
separation date, including all taxes attributable to the separation of the
pharmaceutical assets in foreign jurisdictions from the agricultural assets in
these jurisdictions. While the amounts of these costs and liabilities presently
are not determinable, it is possible these costs and liabilities may be
material to our earnings.
WE MAY BE UNABLE TO PURSUE BUSINESS OPPORTUNITIES AVAILABLE TO US BECAUSE OF
OUR RELATIONSHIP WITH PHARMACIA
Our ability to take advantage of specific business opportunities is subject
to procedures in our certificate of incorporation relating to allocation of
business opportunities between Pharmacia and us. As a result, we may be unable
to pursue successfully business opportunities available to both Pharmacia and
us. See "Arrangements Between Monsanto and Pharmacia--Allocation of Corporate
Opportunities" for a description of this provision relating to allocation of
business opportunities between the companies. In addition, nothing restricts
Pharmacia from competing with us, except as provided in the intellectual
property transfer agreement as described under "Arrangements Between Monsanto
and Pharmacia--Intellectual Property Transfer Agreement."
WE MAY HAVE POTENTIAL BUSINESS CONFLICTS OF INTEREST WITH PHARMACIA WITH
RESPECT TO OUR PAST AND ONGOING RELATIONSHIPS THAT COULD HARM OUR BUSINESS
OPERATIONS
Conflicts of interest may arise between Pharmacia and us in a number of
areas relating to our past and ongoing relationships, including:
. labor, tax, employee benefit, indemnification and other matters arising
from the separation of our businesses from those of Pharmacia;
. intellectual property matters;
. employee retention and recruiting;
. business combinations involving us;
. sales or distributions by Pharmacia of all or any portion of its
ownership interest in us; and
. the nature, quality and pricing of transition services and shared
services to be provided by Pharmacia or us.
We may not be able to resolve any potential conflicts, and, even if we do,
the resolution may be less favorable than if we were dealing with an
unaffiliated party. See "Arrangements Between Monsanto and Pharmacia--
Separation Agreement--Dispute Resolution." The agreements we have entered into
with Pharmacia may be amended upon agreement between Pharmacia and us.
OUR DIRECTORS AND EXECUTIVE OFFICERS MAY HAVE CONFLICTS OF INTEREST BECAUSE OF
THEIR OWNERSHIP OF PHARMACIA COMMON STOCK AND POSITIONS WITH PHARMACIA
Ownership of Pharmacia common stock by our directors and officers after the
separation of our businesses from those of Pharmacia and the presence of
Pharmacia officers and directors on our board of directors could create, or
appear to create, potential conflicts of interest when directors and officers
are faced with decisions that could have different implications for Pharmacia
and us. For information regarding directors' and officers' ownership of
Pharmacia common stock, see "Management--Stock Ownership of Directors and
Executive Officers." A majority of our directors following this offering will
be directors or officers of Pharmacia.
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CONTROL BY PHARMACIA WILL LIMIT YOUR ABILITY TO INFLUENCE THE OUTCOME OF
MATTERS REQUIRING STOCKHOLDER APPROVAL AND COULD DISCOURAGE POTENTIAL
ACQUISITIONS OF OUR COMPANY BY THIRD PARTIES
As long as Pharmacia owns a majority of our outstanding common stock,
Pharmacia will continue to be able to elect our entire board of directors and
take stockholder action with respect to any matters without the vote of any
other stockholder. Such matters could include:
. the composition of our board of directors and, through it, decisions
with respect to our business direction and policies, including the
appointment and removal of officers;
. any determinations with respect to mergers or other business
combinations;
. our acquisition or disposition of assets;
. our capital structure;
. changes to the agreements relating to the separation of our businesses
from those of Pharmacia;
. payment of dividends on our common stock;
. determinations with respect to our tax returns; and
. other aspects of our business direction and policies.
In addition, while Pharmacia owns a majority of our common stock, a
supermajority approval by at least 80% of our directors is required with
respect to specified matters with significant financial or strategic
consequences. See "Management--Board Structure and Compensation--Governance
Provisions."
Pharmacia's voting control and board influence may have the effect of
discouraging many types of transactions involving a change of control,
including transactions in which you as a holder of our common stock might
otherwise receive a premium for your shares over the then-current market price.
Furthermore, Pharmacia is not prohibited from selling a controlling interest in
us to a third party.
RISKS RELATED TO THE SECURITIES MARKETS AND OWNERSHIP OF OUR COMMON STOCK
THE PRICE OF OUR COMMON STOCK MAY BE SUBJECT TO WIDE FLUCTUATIONS AND MAY TRADE
BELOW THE INITIAL PUBLIC OFFERING PRICE
Before this offering, there has not been a public market for our common
stock, and an active public market for our common stock may not develop or be
sustained after this offering. The market price of our common stock could be
subject to significant fluctuations after this offering. Among the factors that
could affect our stock price are the preceding risk factors, as well as:
. quarterly variations in our operating results compared to market
expectations;
. changes in expectations as to our future financial performance,
including financial estimates by securities analysts;
. speculation in the press or investment community, especially regarding
acceptance of biotechnology;
. strategic moves by us or our competitors, such as acquisitions or
restructurings; and
. general market conditions.
Stock markets in general, and the markets for biotechnology and genomics
stocks in particular, have experienced extreme volatility that has often been
unrelated to the operating performance of a particular company. These broad
market fluctuations may adversely affect the trading price of our
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common stock. In particular, we cannot assure you that you will be able to
resell your shares at or above the initial public offering price, which was
determined by negotiations between the representatives of the underwriters and
us. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price.
PROVISIONS IN OUR CERTIFICATE OF INCORPORATION AND BYLAWS MAY DELAY OR PREVENT
AN ACQUISITION OF OUR COMPANY THAT STOCKHOLDERS MAY CONSIDER FAVORABLE, WHICH
COULD DECREASE THE VALUE OF YOUR SHARES
Our certificate of incorporation and bylaws and Delaware law contain
provisions that become effective if we are no longer controlled by Pharmacia
that could make it harder for a third party to acquire us without the consent
of our board of directors. These provisions include a classified board of
directors and limitations on actions by our stockholders by written consent. In
addition, our board of directors has the right to issue preferred stock without
stockholder approval, which could be used to dilute the stock ownership of a
potential hostile acquiror. Although we believe these provisions provide for an
opportunity to receive a higher bid by requiring potential acquirors to
negotiate with our board of directors, these provisions apply even if the offer
may be considered beneficial by some stockholders.
OUR SHARE PRICE MAY DECLINE BECAUSE OF THE ABILITY OF PHARMACIA AND OTHERS TO
SELL SHARES OF OUR COMMON STOCK
Sales of substantial amounts of our common stock after this offering, or
the possibility of such sales, could adversely affect the market price of our
common stock and impede our ability to raise capital through the issuance of
equity securities. See "Shares Eligible for Future Sale" for a discussion of
possible future sales of our common stock.
After this offering, we will have outstanding shares of our common
stock, % of which will be owned by Pharmacia, and we will have reserved an
additional shares of our common stock for issuance pursuant to stock
options. Pharmacia has advised us that its current intention is to continue to
hold all of our common stock it beneficially owns. However, Pharmacia has no
contractual obligation to retain its shares of our common stock, except for the
180-day period after the date of this document during which it has agreed not
to sell any of its shares without the consent of the representatives of the
underwriters, as described under "Underwriting." Subject to applicable federal
and state securities laws, after the expiration of this 180-day waiting period
(or before, with such consent), Pharmacia may sell any and all of the shares of
our common stock that it beneficially owns or distribute any or all of these
shares of our common stock to its stockholders. In addition, after the
expiration of this 180-day waiting period, we could sell additional shares of
our common stock, subject to Pharmacia's preemptive rights described under
"Arrangements Between Monsanto and Pharmacia--Corporate Agreement." Sales or
distributions by Pharmacia or us of our common stock in the public market or to
Pharmacia's stockholders, or the perception that such sales or distributions
could occur, could adversely affect prevailing market prices for the shares of
our common stock.
In connection with this offering, we intend to file a registration
statement on Form S-8 to register shares of our common stock that are or
will be reserved for issuance under our stock incentive and stock purchase
plans.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING INFORMATION
You should not rely on forward-looking statements in this prospectus. These
statements involve known and unknown risks, uncertainties and other factors
that may cause our actual results, levels of activity, performance or
achievements to be materially different from any results, levels of activity,
performance or achievements expressed or implied by any forward-looking
statement. These factors include, among other things, those listed under "Risk
Factors" and elsewhere in this prospectus. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"could," "expects," "intends," "plans," "anticipates," "believes," "estimates,"
"predicts" or "potential," or the negative of these terms or other comparable
terminology. Although we believe that the expectations reflected in forward-
looking statements are reasonable, we cannot guarantee future results, levels
of activity, performance or achievements. We assume no obligation to update any
of the forward-looking statements after the date of this prospectus.
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MERGER AND REORGANIZATION TRANSACTIONS OCCURRING PRIOR TO THIS OFFERING
THE MERGER
On December 19, 1999, old Monsanto entered into a merger agreement with
Pharmacia & Upjohn, pursuant to which a wholly owned subsidiary of old Monsanto
merged with and into Pharmacia & Upjohn, with Pharmacia & Upjohn surviving as a
wholly owned subsidiary of old Monsanto. In connection with the merger, old
Monsanto changed its name from "Monsanto Company" to "Pharmacia Corporation."
The merger became effective on March 31, 2000.
OUR FORMATION
Old Monsanto and Pharmacia & Upjohn stated their intention in the merger
agreement that, as promptly as practicable following the merger, the combined
company would reorganize the agribusiness unit under the Monsanto name as a
direct or indirect subsidiary and sell up to 19.9% of that subsidiary by means
of an initial public offering of its common stock to be listed on the New York
Stock Exchange.
Until the completion of this offering, we will continue as a wholly owned
subsidiary of Pharmacia. We and Pharmacia will enter into agreements providing
for the separation of our businesses from those of Pharmacia, including a
separation agreement. These agreements generally will provide for, among other
things:
. the transfer from Pharmacia to us of assets and the assumption by us of
liabilities relating to our business, in each case, to the extent agreed
to by Pharmacia and us;
. the transfer and licensing to us of intellectual property relating to
our business; and
. various interim and ongoing relationships between the parties, including
transitional services that we and Pharmacia will provide to each other
and shared services that Pharmacia will provide to us.
These agreements will be made in the context of a parent-subsidiary
relationship. The terms of these agreements may be more or less favorable than
those we could have negotiated with unaffiliated third parties. For more
information regarding the separation arrangements, see "Arrangements Between
Monsanto and Pharmacia."
OUR CAPITALIZATION
The debt on our historical Statement of Combined Financial Position
represents the amount of debt incurred by old Monsanto that was specifically
attributable to us, primarily for seed company acquisitions. Following this
offering, Pharmacia will retain the debt that was attributable to us, and these
debt obligations will not be assumed by us. Upon the closing of this offering,
as described in the separation agreement, we will assume from Pharmacia $
billion of commercial paper and variable-rate, medium-term notes. Between
$ and $ billion of the commercial paper obligations that we are
assuming from Pharmacia were incurred to support our seasonal working capital
requirements, which typically peak in the second quarter, varying with the
timing of seasonal planting in the northern hemisphere. The proceeds of this
offering will be used to repay a portion of the commercial paper assumed from
Pharmacia. The factors considered in determining our initial capitalization
include the amount of debt incurred by old Monsanto that was specifically
attributable to us, our expected financing requirements for working capital and
capital expenditures, as well as our desired credit ratings.
22
<PAGE>
BENEFITS OF THE REORGANIZATION
We believe that we will realize benefits from the separation of our
businesses from those of Pharmacia, including the following:
. GREATER STRATEGIC FOCUS. As a result of having our own board of
directors and separate management team, we expect to have a sharper
focus on our business and strategic opportunities.
. BETTER INCENTIVES FOR EMPLOYEES AND GREATER ACCOUNTABILITY. We expect
the motivation of our employees and the focus of our management will be
strengthened by incentive compensation programs tied to the market
performance of our common stock. The separation will enable us to offer
our employees compensation directly linked to the performance of our
business, which we expect to enhance our ability to attract and retain
qualified personnel.
. MORE FOCUSED INVESTOR BASE. As a separate company, we will provide an
opportunity to invest in a business focused on agriculture and
biotechnology. Our company will be followed by analysts who focus on
this sector. We expect that this will allow for a more efficient equity
valuation of our business than if it were to be valued as a part of a
larger pharmaceuticals company.
23
<PAGE>
USE OF PROCEEDS
We estimate that our net proceeds from this offering will be approximately
$ million, after deducting underwriting discounts and commissions and
estimated offering expenses of approximately $ million. If the underwriters
exercise their over-allotment option in full, we estimate that our net proceeds
will be approximately $ million. We plan to use the net proceeds from this
offering to repay a portion of the commercial paper that we will assume from
Pharmacia contemporaneously with the closing of this offering.
We expect that we will repay approximately $ billion of commercial paper
with a weighted average interest rate of % and maturity dates from to
with the proceeds from this offering.
DIVIDEND POLICY
Our board of directors intends to declare quarterly dividends on our common
stock. We expect that the first quarterly dividend payment will be $ per
share (an annual amount of $ per share), which we expect to declare in the
quarter of 2000. The declaration and payment of dividends by us is subject
to the discretion of our board of directors. Our board of directors will take
into account such matters as:
. general economic and business conditions;
. our strategic plans;
. our financial results and condition;
. contractual, legal and regulatory restrictions on our ability to pay
dividends; and
. such other factors as our board of directors may consider to be
relevant.
24
<PAGE>
CAPITALIZATION
Set forth below as of December 31, 1999 is our actual capitalization and
our unaudited pro forma capitalization that gives effect to the pro forma
adjustments described in "Unaudited Pro Forma Condensed Combined Financial
Statements." You should read the information below together with "Selected
Financial Data," "Unaudited Pro Forma Condensed Combined Financial Statements"
and the notes to the pro forma financial statements, our historical combined
financial statements and the notes to those statements, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-------------------
PRO FORMA(1)
ACTUAL (UNAUDITED)
------ ------------
(IN MILLIONS)
<S> <C> <C>
Short-term debt of parent attributable to Monsanto Company
Agricultural Business.................................... $ 89 $
Long-term debt of parent attributable to Monsanto Company
Agricultural Business ................................... 4,278
Equity.................................................... 4,645
------ ----
Total Capitalization.................................... $9,012 $
====== ====
</TABLE>
- --------
(1) Reflects pro forma adjustments giving effect to the separation of Monsanto
Company Agricultural Business from Pharmacia and this offering as of
December 31, 1999 as described in the "Unaudited Pro Forma Condensed
Combined Financial Statements" and the notes to those statements.
25
<PAGE>
MONSANTO COMPANY AGRICULTURAL BUSINESS
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
On December 19, 1999, old Monsanto and Pharmacia & Upjohn announced that
they had entered into a definitive merger agreement to combine in a merger of
equals transaction, with the combined entity following the merger being renamed
"Pharmacia Corporation." In connection with the merger agreement, the parties
announced a plan to create a wholly owned subsidiary, to be named "Monsanto
Company," and to offer up to 19.9% of Monsanto in an initial public offering.
Upon completion of Monsanto's initial public offering, Pharmacia will own at
least 80.1% of Monsanto's outstanding common stock. Monsanto will be comprised
of the former Agricultural Products segment of old Monsanto and certain smaller
research and business operations referred to in these unaudited pro forma
condensed combined financial statements as Monsanto Company Agricultural
Business ("Monsanto Ag").
We prepared the following unaudited pro forma condensed combined financial
statements of Monsanto Ag as of and for the year ended December 31, 1999 to
illustrate the estimated effects of the separation of our businesses from those
of Pharmacia, this offering and related transactions described in the notes to
unaudited pro forma condensed combined financial statements as if they had
occurred as of the beginning of the period presented for purposes of the
unaudited Pro Forma Condensed Combined Statement of Income, and on December 31,
1999, for purposes of the unaudited Pro Forma Condensed Combined Statement of
Financial Position. The pro forma adjustments are based on currently available
information and upon estimates and assumptions that management believes provide
a reasonable basis for presenting the significant effects directly attributable
to the separation of Monsanto Ag from Pharmacia, this offering and related
transactions.
The unaudited pro forma condensed combined financial statements should be
read together with the historical combined financial statements and the notes
to those statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," included elsewhere in this prospectus.
The unaudited pro forma condensed combined financial statements are
presented for illustrative purposes only. The unaudited Pro Forma Condensed
Combined Statement of Financial Position is not necessarily indicative of the
financial position of Monsanto Ag that would have been attained had the
separation of the businesses, this offering and the related transactions been
consummated on December 31, 1999. The unaudited Pro Forma Condensed Combined
Statement of Income does not give effect to any changes in our cost structure
that may occur as a result of the separation of Monsanto Ag's businesses from
Pharmacia and are not necessarily indicative of the results of operations that
Monsanto Ag would have attained had the separation of the businesses, this
offering and the related transactions been completed as of January 1, 1999, nor
are they indicative of future operating results.
26
<PAGE>
MONSANTO COMPANY AGRICULTURAL BUSINESS
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
------------------------------------
HISTORICAL PRO FORMA
MONSANTO AG ADJUSTMENTS AS ADJUSTED
----------- ----------- -----------
UNAUDITED
(IN MILLIONS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
NET SALES................................ $5,248 -- $5,248
Cost of goods sold....................... 2,556 -- 2,556
------ ------
GROSS MARGIN............................. 2,692 -- 2,692
Operating Expenses....................... 2,067 -- 2,067
------ ------
INCOME FROM OPERATIONS................... 625 -- 625
Interest (expense) income--net........... (243) (a)
Other (expense) income--net.............. (119) -- (119)
------ ---- ------
INCOME BEFORE INCOME TAXES............... 263
Income tax provision..................... (113) (a)
------ ---- ------
NET INCOME .............................. $ 150 $ $
====== ==== ======
BASIC AND DILUTED NET INCOME PER SHARE OF
COMMON STOCK............................ $
======
SHARES OF COMMON STOCK OUTSTANDING.......
======
</TABLE>
The accompanying notes are an integral part of these pro forma financial
statements.
27
<PAGE>
MONSANTO COMPANY AGRICULTURAL BUSINESS
PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL POSITION
(IN MILLIONS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
------------------------------------
PRO FORMA
HISTORICAL ------------------------
MONSANTO AG ADJUSTMENTS AS ADJUSTED
----------- ----------- -----------
UNAUDITED
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents................ $ 26 $ (b) $
(c)
(d)
Trade receivables--net................... 2,028 -- 2,028
Deferred tax asset....................... 130 -- 130
Inventories.............................. 1,440 -- 1,440
Miscellaneous receivables and other
current assets.......................... 403 -- 403
------- ---- -----
TOTAL CURRENT ASSETS................... 4,027
------- ---- -----
Property, plant and equipment--net....... 2,099 11 (e) 2,110
Goodwill--net............................ 2,943 2,943
Other intangible assets--net............. 1,073 24 (f) 1,097
Deferred tax asset....................... 418 211 (g) 629
Other assets............................. 541 63 (e) 604
------- ---- -----
TOTAL ASSETS........................... $11,101 $ $
======= ==== =====
LIABILITIES AND EQUITY
Short-term debt of Parent attributable to
Monsanto Ag............................. $ 89 $
Accounts payable......................... 466 $117 (e) 583
Accrued compensation and benefits........ 147 192 (e) 339
Restructuring reserves................... 26 -- 26
Miscellaneous short-term accruals........ 976 17 (h) 993
------- ---- -----
TOTAL CURRENT LIABILITIES.............. 1,704 326 1,941
------- ---- -----
Long-term debt of Parent attributable to
Monsanto Ag............................. 4,278 (i)
Other liabilities........................ 474 (f)
213 (h)
11 (g)
Equity................................... 4,645 (31)(f)
(j)
------- ---- -----
TOTAL LIABILITIES AND EQUITY........... $11,101 $ $
======= ==== =====
</TABLE>
The accompanying notes are an integral part of these pro forma financial
statements.
28
<PAGE>
MONSANTO COMPANY AGRICULTURAL BUSINESS
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(a) To reflect the reduction of interest expense and the associated increase in
income tax expense resulting from the reduction in long-term borrowings of
$ billion as described in note (i) below. The increase in income tax
expense has been calculated assuming a combined federal and state income
tax rate of 38%.
(b) Represents the receipt by Monsanto Ag of $ in proceeds from this
offering (consisting of the assumed sale of million shares at $ per
share), net of underwriting discounts of $ and estimated expenses of
this offering of $ .
(c) To reflect the use of net proceeds from this offering to reduce debt.
(d) To reflect a contribution of $ in cash from Pharmacia in order to adjust
Monsanto Ag's cash balance to $ pursuant to the separation agreement.
(e) To record the transfer of certain corporate assets and liabilities of
Pharmacia, which had been related to the joint operations of Pharmacia's
agricultural and pharmaceutical businesses but which, pursuant to the
separation agreement, will be contributed to or assumed by Monsanto Ag.
These assets and liabilities principally consist of an aircraft, certain
information technology assets, accrued compensation and benefits,
environmental liabilities, and other miscellaneous corporate assets and
liabilities.
(f) To record the accrued net pension assets and liabilities reflecting the
estimated excess of pension-related obligations over pension-related assets
associated with certain pension plans sponsored by old Monsanto and
attributable to employees of Monsanto Ag and certain former employees
terminating employment with old Monsanto prior to 1995. Such assets and
liabilities will be assumed by Monsanto Ag pursuant to the employee
benefits allocation agreement. Monsanto Ag is expected to retain costs
related to its active employees and certain former employees terminating
employment with old Monsanto prior to 1995. Consequently, future pension
costs for Monsanto Ag are likely to be different than the historical
amounts.
(g) To record the deferred taxes associated with the pro forma adjustments
referred to in notes (e), (f) and (h).
(h) To record estimated liabilities relating to employee postretirement benefit
plans, other than pensions, sponsored by old Monsanto and attributable to
employees of Monsanto Ag and certain former employees terminating
employment with old Monsanto prior to 1995 that will be assumed by Monsanto
pursuant to the employee benefits allocation agreement. The liabilities
relating to the postretirement benefit plans have been allocated to
Monsanto Ag based upon the estimated percentage of the accumulated
postretirement benefit obligations related to such employees in proportion
to the accumulated postretirement benefit obligation of old Monsanto.
Monsanto Ag is expected to retain costs related to its active employees and
certain former employees terminating with old Monsanto prior to 1995.
Consequently, future postretirement costs for Monsanto Ag likely are to be
different than the historical accounts.
(i) To reflect the reduction of long-term debt resulting from the capital
contribution from Pharmacia and the repayment of debt using the net
proceeds received from this offering as described in note (c).
29
<PAGE>
(j) To reflect the effect on equity related to the pro forma adjustments
referred to in notes (d), (e), (f), (g), (h) and (i) as follows (in
millions):
<TABLE>
<S> <C>
Proceeds from this offering................................... $
Capital contribution from Pharmacia...........................
------
Subtotal....................................................
Deferred taxes relating to the pro forma adjustments.......... 200
Transfer of certain corporate assets and liabilities.......... (235)
Transfer of assets and liabilities relating to pension plans.. 55
Transfer of liabilities relating to postretirement benefit
plans........................................................ (230)
------
Net increase in equity...................................... $
======
</TABLE>
30
<PAGE>
SELECTED FINANCIAL DATA
The following selected historical and pro forma financial data should be
read together with "Unaudited Pro Forma Condensed Combined Financial
Statements," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our historical combined financial statements and the
notes to those statements included elsewhere in this document. The combined
operating results data and other selected data set forth below for the years
ended December 31, 1999, 1998, and 1997 and the combined financial position
data as of December 31, 1999 are derived from our audited combined financial
statements included elsewhere in this document. The combined operating results
data for the years ended December 31, 1996 and 1995 are derived from old
Monsanto's unaudited combined financial data and other selected data that is
not included in this document. In the opinion of management, this unaudited
financial data has been prepared on a basis consistent with the audited
financial statements included in this document and include all adjustments,
which are only normal recurring adjustments, necessary for a fair statement of
the operating results and financial position for the unaudited periods.
The historical financial information may not be indicative of our future
performance and does not reflect what our financial position and results of
operations would have been had we operated as a separate, stand-alone entity
during the periods presented.
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
------- ------- ------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS:
Net Sales............................... $ 5,248 $ 4,448 $3,673 $2,928 $2,429
Gross Margin............................ 2,692 2,299 1,944 1,591 1,284
Selling, general and administrative
expenses............................... 1,222 1,135 869 722 550
Research and development expenses....... 695 536 409 210 200
Acquired in-process research and
development............................ -- 402 633 -- --
Amortization and adjustments of
goodwill............................... 128 77 20 10 8
Restructuring and other unusual items... 22 94 -- 143 14
Income from Operations(1)............... 625 55 13 506 512
Income (Loss) Before Income Taxes....... 263 (60) 1 531 544
Net Income (Loss)....................... 150 (125) 31 319 365
OTHER SELECTED DATA:
Capital Expenditures.................... $ 632 $ 432 $ 298 $ 216 $ 98
Depreciation and Amortization........... 547 368 245 171 142
EBIT(2)................................. 506 34 21 530 517
EBIT (excluding unusual items)(2)(3).... 607 638 654 610 534
EBITDA (excluding unusual items)(2)(3).. 1,154 1,006 899 758 676
YEAR-END FINANCIAL POSITION:
Total Assets............................ $11,101 $10,891 $5,123 $3,650 $2,851
Working Capital......................... 2,323 1,879 1,000 719 416
Long-Term Debt of Parent Attributable to
Monsanto Ag............................ 4,278 4,388 1,000 -- --
Equity.................................. 4,645 4,125 2,386 2,193 1,109
</TABLE>
- --------
(1) Income from operations for 1999 included $50 million for accelerated
business integration costs and the reversal of restructuring reserves
established in 1998; for 1998 included $583 million for restructuring
charges and the write-off of acquired in-process research and development;
for 1997 included $633 million for the write-off of acquired in-process
research and development; for 1996 included restructuring and other unusual
charges of $95 million; for 1995 included net restructuring expenses and
other unusual items of $17 million.
31
<PAGE>
(2) EBIT is defined as earnings before interest and taxes. EBITDA is defined as
earnings before interest, taxes, depreciation and amortization. EBITDA
eliminates the effect of depreciation of tangible assets and amortization
of intangible assets, most of which were acquired in seed company
acquisitions accounted for under the purchase method of accounting. The
presentation of EBITDA (excluding unusual items) is intended to supplement
investors' understanding of our operating performance. It is not intended
to replace net income, cash flows, financial position or comprehensive
income, and it is not a measure of financial performance as determined in
accordance with accounting principles generally accepted in the United
States. EBITDA (excluding unusual items) may not be comparable to other
companies' EBITDA performance measures because those companies may not
exclude unusual items.
(3) Unusual items for 1999 included $101 million for accelerated business
integration costs, failed merger costs, restructuring reversals and a gain
on the sale of a business; for 1998 included $604 million for restructuring
costs, the write-off of acquired in process research and development and
charges to cancel DEKALB stock options; for 1997 included $633 million for
the write-off of acquired in-process research and development; for 1996
included $80 million for restructuring and other unusual charges which were
partially offset by minority interest associated with certain asset
impairments; for 1995 included net restructuring expenses and other unusual
items of $17 million.
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
BACKGROUND
Our combined financial statements have been prepared on a carve-out basis
using old Monsanto's historical accounting records because, prior to the
separation of our businesses from those of Pharmacia, the agricultural
businesses that will be transferred to us on the separation date were included
in the assets and liabilities of old Monsanto. Old Monsanto provided general
and administrative services for our businesses, including finance, legal,
treasury, information systems, public affairs, regulatory and human resource
services. The costs of these services have been allocated to us and included in
our combined financial statements based upon the relative levels of use of
these services. All of the allocations and estimates in the combined financial
statements are based on assumptions and estimates that management believes to
be reasonable under the circumstances. These allocations and estimates,
however, are not necessarily indicative of the costs and expenses that would
have resulted if we had operated as a separate entity. For information relating
to our relationship with Pharmacia and services that Pharmacia will provide to
us following the separation, see "Arrangements Between Monsanto and Pharmacia."
For more information regarding these and other allocations made in connection
with the preparation of our combined financial statements, see Note 1 and the
other notes to those statements.
The results of operations and changes in financial position included in our
combined financial statements, which are discussed below, reflect the
historical results of operations and cash flows of the businesses that were
part of old Monsanto during each respective period and that are being
transferred to us; however, they do not reflect any significant changes that
will occur in our operations or funding as a result of the separation of our
businesses from those of Pharmacia. This discussion and analysis should be read
together with the selected financial data and the combined financial statements
and accompanying notes to those statements included in this prospectus.
We manage our business in two segments: Agricultural Productivity, and
Seeds and Genomics. The Agricultural Productivity segment consists of our crop
protection products, animal agriculture and environmental technologies
businesses. The Seeds and Genomics segment is comprised of our global seeds and
related traits business and our genetic technology platforms.
In 1997, we began to implement a strategy to create a global seed
infrastructure to provide the breeding and distribution capabilities for our
seed traits. To build this capability, we acquired a number of seed companies
in 1997 and 1998, including the Asgrow Agronomics business, Holden's Foundation
Seeds Inc., Corn States Hybrid Service, Inc., Sementes Agroceres S.A., Plant
Breeding International Cambridge, certain international seed operations of
Cargill, Incorporated and DEKALB Genetics. The amortization of goodwill and
increased interest expense related to these acquisitions significantly reduced
net income in 1998 and 1999. In addition, a number of unusual items, including
in-process research and development expense related to the acquisitions,
significantly lowered net income in each of the three years from 1997 to 1999.
USE OF EBITDA (EXCLUDING UNUSUAL ITEMS)
The primary operating performance measure for our two segments is earnings
before interest and taxes (EBIT). EBIT was $506 million in 1999, $34 million in
1998 and $21 million in 1997. However, in recent years unusual items
significantly affected our results. Moreover, our recent seed company
acquisitions have resulted in a substantial increase in amortization expense
associated with goodwill and other intangible assets. Accordingly, management
believes that earnings before interest, taxes, depreciation, amortization and
unusual items (EBITDA (excluding unusual items)), is an appropriate measure for
evaluating the operating performance of our business. EBITDA (excluding
33
<PAGE>
unusual items) eliminates, among other things, the effect of depreciation of
tangible assets and amortization of intangible assets, most of which resulted
from the seed company acquisitions accounted for under the purchase method of
accounting. In particular, it also eliminates the effect of the items described
under "--Events Affecting Comparability." The presentation of EBITDA (excluding
unusual items) is intended to supplement investors' understanding of our
operating performance. EBITDA (excluding unusual items) may not be comparable
to other companies' EBITDA performance measures. It is not intended to replace
net income, cash flows, financial position or comprehensive income, as
determined in accordance with accounting principles generally accepted in the
United States.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
Net sales............................................. $5,248 $4,448 $3,673
====== ====== ======
Net income (loss)..................................... $ 150 $ (125) $ 31
Add: Interest expense (net)........................... 243 94 20
Income tax provision (benefit)...................... 113 65 (30)
------ ------ ------
EBIT(1)........................................... 506 34 21
Add: Unusual items.................................... 101 604 633
------ ------ ------
EBIT (excluding unusual items).................... 607 638 654
Add: Depreciation..................................... 238 205 184
Amortization and adjustment of intangible assets.... 309 163 61
------ ------ ------
EBITDA (excluding unusual items) (2).............. $1,154 $1,006 $ 899
====== ====== ======
</TABLE>
- --------
(1) Earnings before interest and taxes
(2) Earnings before interest, taxes, depreciation and amortization and unusual
items. See "--Use of EBITDA (excluding unusual items)."
Net sales increased 18% in 1999 to $5.2 billion from $4.4 billion in the
prior year, primarily reflecting the inclusion of a full year of sales from
seed companies acquired late in 1998. Excluding the 1998 seed company
acquisitions and the divestiture of the tomato business, net sales increased
3%. The increase in net sales reflected increased sales of the family of
Roundup herbicides and increased trait fee revenues, partially offset by a
decrease in revenues of $141 million in our environmental technologies business
and our Roundup lawn and garden business. Net sales increased 21% in 1998 to
$4.4 billion from $3.7 billion in 1997, led by a significant increase in
Roundup and other glyphosate product sales, and the inclusion of a full year of
seed sales from seed companies acquired in 1997 and increased trait fee
revenues. Excluding seed company acquisitions in 1997 and 1998, net sales
increased 17%.
Selling, general and administrative expenses increased 41% over the three-
year period from 1997 to 1999 as a result of the inclusion of a full year of
operating expenses of the acquired seed companies and increased general and
administrative services provided to our business, mainly in the area of
information technology, legal, regulatory and public affairs. In addition, our
1999 results were negatively affected by an increase in bad debt expense to $70
million, as compared to $45 million in 1998 and $30 million in 1997. This
increase in bad debt expense was primarily the result of weak economic
conditions in Brazil, Eastern Europe and the Commonwealth of Independent
States. In response to these events, we shifted the business in parts of
Central Europe and the Commonwealth of Independent States primarily to a cash
basis and increased our focus on collections in Brazil. Research and
development expenses increased 70% from 1997 to 1999, again due to the
inclusion of a full year of the operating expenses of the acquired seed
companies, and due to increased
34
<PAGE>
spending on genomics research and biotechnology. Amortization and adjustments
of intangible assets quintupled during the same period due to higher goodwill
amortization from seed company acquisitions.
Other expenses increased nearly $100 million in 1999 compared with 1998,
primarily as a result of costs associated with a failed merger with Delta and
Pine Land and other miscellaneous expenses associated with various legal
settlements and the renegotiation of certain contracts. Other (expense) income
decreased $29 million in 1998 compared to 1997 primarily due to the inclusion
in 1998 of a $20 million charge related to the cancellation of employee stock
options in connection with the DEKALB Genetics acquisition.
Net interest expense increased from $20 million in 1997 to $94 million in
1998 and $243 million in 1999 as our long-term debt increased significantly to
$4.3 billion at December 31, 1999 from $1.0 billion at December 31, 1997 in
connection with the seed company acquisitions. While our 1998 results included
interest on the higher debt level for a short period of time, 1999 earnings
reflected a full year of interest on approximately $4.3 billion of long-term
acquisition debt.
Income tax expense for 1999 of $113 million increased from income tax
expense for 1998 of $65 million, primarily from the increase in pretax income
and due to the non-deductibility of a portion of goodwill. Income tax expense
for 1998 of $65 million increased from an income tax benefit for 1997 of $30
million, primarily due to the fact that a portion of in-process research and
development write-offs in 1998 were nondeductible for tax purposes. The income
tax benefit of $30 million on $1 million of pretax income in 1997 was primarily
the result of the U.S. tax benefit on export sales (see Note 8 to our combined
financial statements).
Net income in 1999 was $150 million and included a full year of operating
results, amortization and interest expense related to the seed companies
purchased late in 1998. Our net loss in 1998 was $125 million, compared with
net income of $31 million in 1997, reflecting higher interest and amortization
expenses in 1998.
UNUSUAL ITEMS (BEFORE TAX)
In each of the past three years, our results have included unusual items
that significantly affected net income. The pretax income (expense) components
of the unusual items for the years ended December 31, 1999, 1998 and 1997 were
as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Restructuring charges................................. $ -- $(182) $ --
In-process research and development write-offs........ -- (402) (633)
Accelerated integration costs......................... (61) -- --
Failed merger costs................................... (85) -- --
Gain on the sale of Stoneville Pedigreed Seed
Company.............................................. 35 -- --
Reversal of restructuring reserves.................... 11 -- --
Other................................................. (1) (20) --
----- ----- -----
Total unusual items................................. $(101) $(604) $(633)
===== ===== =====
</TABLE>
In addition to the discussion below, further details regarding the specific
impact to the Statement of Combined Income (Loss) can be found under "--Events
Affecting Comparability."
In 1999, we recorded a net pretax charge of $101 million that included $61
million of costs associated with the accelerated integration of our
agricultural chemical and seed operations and $85 million related to a failed
merger with Delta and Pine Land. These costs were partially offset by a pretax
gain of $35 million on the divestiture of Stoneville Pedigreed Seed Company and
an $11 million reversal of restructuring liabilities established in 1998.
35
<PAGE>
In 1998, we recorded pretax restructuring charges of $182 million as part
of our overall strategy to cut costs and to integrate our acquired seed
businesses via the closure of certain facilities, reductions in work force, and
sale of our tomato business, the operations of which were no longer consistent
with our strategic objectives. We also recorded a pretax charge of $20 million
related to the cancellation of employee stock options in connection with the
DEKALB Genetics acquisition. In addition, we recognized $402 million of in-
process research and development write-offs primarily arising from our
purchases of DEKALB Genetics, Plant Breeding International and the
international seed operations of Cargill. We incurred a $633 million in-process
research and development write-off in 1997 related to our acquisitions of
Asgrow, Holden's, Corn States, Agroceres and the remaining minority interest in
Calgene, Inc., which conducts biotechnology research in cotton and produce.
AGRICULTURAL PRODUCTIVITY SEGMENT
AGRICULTURAL PRODUCTIVITY NET SALES
<TABLE>
<CAPTION>
1999 1998 1997
------- ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
NET SALES
Glyphosate products, excluding Roundup lawn
and garden products.................................. $ 2,482 $2,289 $1,979
All other............................................. 1,104 1,211 1,131
------- ------ ------
Total net sales................................... $ 3,586 $3,500 $3,110
======= ====== ======
</TABLE>
Net sales for our Agricultural Productivity segment increased 2% in 1999 to
$3.6 billion as lower prices for our family of Roundup herbicides were more
than offset by higher sales volumes of these products. Sales were also affected
by a decline in revenues from selective chemistry products and Roundup lawn and
garden products, offset in part by higher sales of animal agriculture products.
Net sales in 1998 increased 13% over 1997, to $3.5 billion, due to higher sales
volumes for our Roundup herbicides, including Roundup lawn and garden products,
and increased sales of animal agriculture products and selective chemistry
products. Our other net sales declined during the period from 1997 to 1999
primarily due to declining sales from our environmental technologies business.
Net sales of glyphosate products (excluding Roundup lawn and garden
products) grew 8% from 1998 to 1999 and 16% from 1997 to 1998. Volumes from
1997 to 1999 for glyphosate products, excluding Roundup lawn and garden
products, grew at a rate slightly above the past decade's 20% average annual
volume growth rate principally due to strong volume growth in the United
States, Canada, Brazil, Argentina and Australia. Higher sales volumes in the
United States in 1999 were largely offset by lower selling prices announced in
late 1998. We also reduced selling prices of Roundup over this three-year
period in most markets outside the United States in response to generic
competition in those regions. However, outside the United States, the effect of
lower selling prices was more than offset by increased sales volumes. Sales
growth of Roundup during the period also resulted from increased adoption of
conservation tillage, use of Roundup in new applications and increased use of
Roundup over the top of Roundup Ready crops.
Our business results are affected by changes in foreign economies and
foreign currency exchange rates, as well as by worldwide climatic conditions.
Our sales growth described above was adversely impacted by weak economic
conditions in certain world areas, which lessened the demand for herbicides,
especially in Eastern Europe and the Commonwealth of Independent States in 1999
and in Southeast Asia in 1998. Drought conditions in key areas of Brazil during
the 1999 planting season decreased demand for herbicides and limited sales
volume growth of Roundup in 1999.
36
<PAGE>
Net sales in 1999 also were negatively affected by a change in the
distribution method for our Roundup lawn and garden products. In connection
with the change in distribution, we chose to reduce inventory in the
distribution channel during the year. Net sales from these products declined
34% in 1999 compared to 1998, which was a 27% increase over 1997 sales.
Our net sales of selective chemistry products from 1997 to 1999 were
relatively unchanged. Worldwide selective chemistry sales declined 5% from 1998
to 1999, reflecting the downturn in the agricultural economy in the United
States as well as the continued poor economic environment in the Commonwealth
of Independent States. The launch of a new selective wheat herbicide in 1999 in
the United States and Canada mitigated some of the decrease in overall sales.
Our selective chemistry products sales increased 6% from 1997 to 1998, driven
by sales increases in Western Europe and Latin American markets which were
partially offset by decreased sales in Southeast Asia, Japan and Canada.
Net sales of our animal agriculture business during the three-year period
benefited from strong growth in the sales of Posilac. Annual sales of this
product increased 12% in 1999 compared to 1998 and 26% in 1998 compared to 1997
due to increased sales volumes over the period.
Net sales from our environmental technologies business, Enviro-Chem,
declined 46% from 1997 to 1999 as a result of a downward trend in metal and
fertilizer prices that began in 1997.
AGRICULTURAL PRODUCTIVITY EBIT AND EBITDA (EXCLUDING UNUSUAL ITEMS)
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
EBIT(1)................................................. $ 897 $ 869 $ 888
Add: Unusual items...................................... 27 45 --
------ ------ ------
EBIT (excluding unusual items)........................ 924 914 888
Add: Depreciation....................................... 178 169 160
Amortization and adjustment of intangible assets...... 7 6 7
------ ------ ------
EBITDA (excluding unusual items)(2)..................... $1,109 $1,089 $1,055
====== ====== ======
</TABLE>
- --------
(1) Earnings before interest and taxes.
(2) Earnings before interest, taxes, depreciation, amortization and unusual
items. See "--Use of EBITDA (excluding unusual items)."
EBIT for our Agricultural Productivity segment increased 3% in 1999
compared with 1998 and decreased slightly from 1997 to 1998. Cost of goods sold
for our Agricultural Productivity segment increased 23% during the period 1997
to 1999, while sales volumes for our family of Roundup herbicides and Posilac
increased by 56% and 41%, respectively, over the period.
Agricultural Productivity segment gross margin improved slightly in 1999 on
higher overall volume and lower unit cost in our family of Roundup herbicides.
The increase in gross margin, coupled with a slight decline in operating
expenses, primarily lower restructuring expense, led to an overall increase in
EBIT in 1999 for the Agricultural Productivity segment.
In 1998, Agricultural Productivity segment gross margin improved 8% on
higher overall product volumes and improved unit costs in our Roundup family.
However, an overall increase in operating expenses offset gross margin gains,
resulting in a 2% decline in EBIT for the Agricultural Productivity segment.
The increase in 1998 operating expenses was due largely to increases in general
and administrative services provided to our business, including information
technology, legal, regulatory and public affairs services. Other (expense)
income-net was relatively unchanged from 1997 to 1998.
37
<PAGE>
EBIT (excluding unusual items) in 1999 was $924 million, compared with $914
million in 1998 and $888 million in 1997. The unusual items in the Agricultural
Productivity segment primarily related to accelerated integration costs in 1999
and to restructuring expenses in 1998.
SEEDS AND GENOMICS SEGMENT
SEEDS AND GENOMICS NET SALES
The financial results of our Seeds and Genomics segment were significantly
affected by the seed company acquisitions made in 1997 and 1998. We acquired
Asgrow, Holden's, Corn States and Agroceres in 1997 for a total cost of $1.3
billion. In 1998, we acquired DEKALB Genetics, Plant Breeding International and
certain international seed operations of Cargill for a total cost of $4.1
billion. These acquisitions were part of our strategy to build a global seed
infrastructure to provide breeding and distribution capabilities for our seed
traits.
Net sales for the Seeds and Genomics segment were $1.7 billion in 1999,
compared with $0.9 billion in 1998 and $0.6 billion in 1997. The $0.8 billion
increase in 1999 primarily reflected the inclusion of our 1998 seed company
acquisitions for a full year, and to a lesser extent an increase in trait fee
revenues. The growth in 1998 was largely driven by increased demand for our
seeds and seed traits developed through biotechnology and, to a lesser degree,
due to the inclusion of a full year of operations for the 1997 seed company
acquisitions. Seed and technology trait fee revenues, particularly for products
containing Roundup Ready technology, increased strongly during the period. The
number of acres planted with Roundup Ready soybeans increased 227% in 1998 and
46% in 1999, the product's third and fourth years in the marketplace,
respectively. Revenues from technology fees, both in connection with our seed
sales and from licensing our technology to other seed companies, increased 45%
in 1999 and 160% in 1998 as the number of acres planted with crops possessing
biotechnology traits increased. Roundup Ready soybeans, Roundup Ready cotton
and YieldGard insect-resistant corn showed the most significant increases.
SEEDS AND GENOMICS EBIT AND EBITDA (EXCLUDING UNUSUAL ITEMS)
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
EBIT(1)............................................... $(391) $(835) $(867)
Add: Unusual items.................................... 74 559 633
----- ----- -----
EBIT (excluding unusual items)...................... (317) (276) (234)
Add: Depreciation..................................... 60 36 24
Amortization and adjustment of intangible assets.... 302 157 54
----- ----- -----
EBITDA (excluding unusual items)(2)................... $ 45 $ (83) $(156)
===== ===== =====
</TABLE>
- --------
(1) Earnings before interest and taxes
(2) Earnings before interest, taxes, depreciation, amortization and unusual
items. See "--Use of EBITDA (excluding unusual items)."
EBIT for the Seeds and Genomics segment in 1999 was a loss of $391 million,
compared with a loss of $835 million in 1998 and a loss of $867 million in
1997. Seeds and Genomics segment cost of goods sold as a percentage of sales
improved from 59% to 51% from 1997 to 1999 due to trait revenue growth and
synergies from seed business integration. Operating expenses, excluding unusual
items and amortization, increased primarily due to the inclusion of a full year
of operating expenses in 1999 from the seed companies acquired in 1998 and
1997. Additionally, we continued to expand our investment in genomics and
biotechnology.
38
<PAGE>
In 1998 and 1997, EBIT was significantly negatively affected by costs
related to our seed company acquisitions and restructuring actions. In 1998,
unusual items included in-process research and development write-off expense of
$402 million and restructuring expense and other unusual charges of $157
million, which included $20 million related to the cancellation of DEKALB
Genetics stock options in connection with the DEKALB Genetics acquisition. The
$633 million unusual charge in 1997 was the result of in-process research and
development write-off expense for seed companies acquired in that year. EBIT in
1999 and 1998 was also negatively affected by intangible asset amortization of
$302 million and $157 million, respectively. The increase in intangible asset
amortization was due primarily to increased goodwill from the seed company
acquisitions.
EVENTS AFFECTING COMPARABILITY
1999 EVENTS
In 1999, we recorded a net pretax charge of $101 million ($81 million after
tax) resulting from the failed merger with Delta and Pine Land and costs
associated with the accelerated integration of agricultural chemical and seed
operations which were partially offset by the reversal of restructuring
liabilities established in 1998 and the gain on the sale of Stoneville.
The 1999 net unusual items were recorded in the statement of combined
income (loss) in the following categories:
<TABLE>
<CAPTION>
UNUSUAL RESTRUCTURING
CHARGES REVERSALS TOTAL
------- ------------- -----
(IN MILLIONS)
<S> <C> <C> <C>
Cost of goods sold................................ $ (20) $-- $ (20)
Amortization and adjustments of goodwill.......... (8) -- (8)
Restructuring and other unusual items............. (33) 11 (22)
Other (expense) income--net....................... (51) -- (51)
----- ---- -----
Income (loss) before income taxes................. (112) 11 (101)
Income tax benefit (provision).................... 24 (4) 20
----- ---- -----
Net Income (Loss)............................... $ (88) $ 7 $ (81)
===== ==== =====
</TABLE>
During 1999, we recorded in "Other (expense) income--net" a one-time pretax
charge of $85 million equal to the amount of a termination fee and other
expenses associated with a failed merger with Delta and Pine Land. We also
recorded a pretax charge of $61 million principally associated with our
continued focus on improving operating efficiency through accelerated
integration of our agricultural and seed operations. The charge of $61 million
was comprised of facility shutdown charges of $39 million, workforce reduction
costs of $12 million and asset impairments of $10 million, and was recorded in
the statement of combined income (loss) as cost of goods sold of $20 million,
amortization of goodwill of $8 million and restructuring expense of $33
million. The affected employees are entitled to receive severance benefits
pursuant to established severance policies or by governmentally mandated labor
regulations.
The facility shutdown charges included $14 million for contractual research
and other commitments, $9 million for intangible assets, $8 million for
inventories, $6 million for leasehold termination costs and $2 million for
property, plant and equipment write-offs. During 1999, these actions resulted
in cash payments of $2 million for contractual obligations and asset write-offs
of $19 million. Commitments of $18 million resulting from these actions were
reclassified to other liabilities.
The workforce reduction charge reflected involuntary employee separation
costs for 305 employees worldwide and included charges for positions in
administration of $8 million and research
39
<PAGE>
and development of $4 million. As of December 31, 1999, 125 of the planned
employee eliminations had been completed; approximately 55 of these employees
received cash severance payments totaling $2 million in the aggregate during
1999, and 70 employees elected deferred payments totaling $4 million, which
were paid in January 2000. At December 31, 1999, these deferred payments were
classified in the Statement of Combined Financial Position as other
liabilities. The remaining balance for employee severance relating to 180
positions was $6 million at December 31, 1999. We expect these employee
reductions to be completed by June 2000.
Cash payments to complete the remaining accelerated integration actions
will be funded from operations and are not expected to significantly impact our
liquidity. The accelerated integration actions are expected to result in annual
pretax cash savings of $24 million.
Offsetting the restructuring and unusual charges in 1999 was a pretax gain
of $11 million from the reversal of restructuring reserves established in 1998.
These restructuring reversals were principally required as a result of actual
severance and facility shutdown costs that were lower than originally
estimated. In addition, we recognized a pretax gain of $35 million on the sale
of Stoneville and miscellaneous other expense of $1 million which was recorded
in "Other (expense) income--net."
1998 EVENTS
In 1998, we recorded in-process research and development, net restructuring
and other unusual items of $604 million ($504 million after tax), which were
recorded in the statement of combined income (loss) in the following
categories:
<TABLE>
<CAPTION>
WORK FORCE FACILITY ASSET
REDUCTIONS CLOSURES IMPAIRMENTS OTHER TOTAL
---------- -------- ----------- ----- -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Cost of goods sold........... $-- $ (5) $(43) $ -- $ (48)
Acquired in-process research
and development............. -- -- -- (402) (402)
Amortization and
adjustments of goodwill..... -- (1) (38) -- (39)
Restructuring and other
unusual items............... (63) (31) -- -- (94)
Other (expense) income--net.. -- -- (1) (20) (21)
---- ---- ---- ----- -----
(Loss) before income taxes... (63) (37) (82) (422) (604)
Income tax benefit........... 21 12 17 50 100
---- ---- ---- ----- -----
Net (loss)................. $(42) $(25) $(65) $(372) $(504)
==== ==== ==== ===== =====
</TABLE>
In December 1998, the old Monsanto board of directors approved a plan to
reduce costs and to integrate our acquired seed businesses. The plan included
the closure of certain facilities, reductions in the current workforce and the
sale of our tomato business. The plan provided for the elimination of
approximately 710 jobs, primarily in manufacturing and administrative
functions, by the end of 1999, at a total cost of $69 million. This amount
included workforce reduction costs of $6 million related to 60 positions
originally accrued as part of a restructuring plan approved in 1996. Those
workforce reductions had been delayed principally as a result of a failed
merger with American Home Products Corporation; old Monsanto remained committed
to accomplishing these workforce reductions and transferred the remaining
accrual to the 1998 plan. The employees affected by the 1998 restructuring plan
were entitled to receive severance benefits pursuant to established severance
policies or by governmentally mandated labor regulations.
40
<PAGE>
The plan also included pretax amounts for asset impairments, primarily for
property, plant and equipment, intangible assets and inventories, totaling $82
million. These asset impairments were recorded because of the decision to sell
the tomato business. As a result, the net assets of this business were
reclassified as assets held for sale and carried at their net realizable value
at December 31, 1998 based on estimated sale proceeds of approximately $33
million. This business was sold during the second quarter of 1999. It produced
net income of $11 million in 1998 and a net loss of $5 million in 1997. The
aftertax effect of suspending depreciation on assets held for sale was not
material in 1999, 1998 or 1997.
The December 1998 restructuring amounts also included pretax charges of $37
million for the shutdown or rationalization of certain production and
administrative facilities. Rationalization entails the consolidation, shutdown
or movement of facilities to achieve more efficient operations. Approximately
40 facilities, located primarily in the United States, Europe and Latin
America, were affected by these actions. Charges for these shutdowns included
$17 million for property, plant and equipment, $1 million for intangible
assets, and $4 million for inventories. Leasehold termination costs of $8
million and various facility closure costs of $7 million, principally for
facilities shutdown costs and equipment dismantling, are also included in the
shutdown charges. The closure or rationalization of these facilities was
completed by December 31, 1999.
Through December 31, 1999, cash payments of $39 million were made to
eliminate approximately 460 positions. Employee severance payments of $8
million in connection with the elimination of 125 positions were deferred and
paid in January 2000. Eighty positions contemplated in the plan were eliminated
through attrition. As of December 31, 1999, the remaining reserve balance for
employee severance related to approximately 45 positions was $10 million. We
expect these employee reductions to be completed by June 2000. In addition, $9
million in facility shutdown payments were incurred in connection with the 1998
restructuring plan.
Cash payments to complete the 1998 plan will be funded from operations and
are not expected to significantly impact our liquidity. The restructuring
actions are expected to result in annual pretax savings of $60 million.
In 1998, we also recorded pretax charges of $422 million related to the
acquisition of Plant Breeding International, DEKALB Genetics and certain
international seed operations of Cargill, of which $402 million related to the
write-off of acquired in-process R&D and $20 million related to the
cancellation of DEKALB Genetics stock options in connection with the DEKALB
Genetics acquisition. Management believed that the technological feasibility of
the acquired in-process R&D had not been established and that the research had
no alternative future uses. Accordingly, the amounts allocated to in-process
research and development were required to be expensed immediately under
generally accepted accounting principles.
In-process research and development charges for the seed company
acquisitions covered numerous seed breeding projects, no single one of which
was significant, as is typical in the seed industry. These projects consisted
of conventional breeding programs for corn, wheat and other hybrids;
conventional breeding for soybean varieties; and the development of crops
modified through biotechnology. The in-process research and development
projects were valued by a discounted cash flow method with risk-adjusted
discount rates, generally from 12% to 20%, which took into account the stage of
development of each in-process research and development category. Successful
commercialization of products developed through these projects is expected to
occur five to nine years after program initiation. Although there are risks
associated with the ultimate completion and commercialization of these research
projects (see "Risk Factors"), the failure of any one project would not
materially affect the total value of the research programs. The in-process
projects were at various stages of completion at the dates of acquisition. In
1999, we had expenses of $82 million for biotechnology-related activities and
$47 million for conventional breeding activities related to
41
<PAGE>
completing these in-process research and development projects. During the next
eight years, management expects to spend approximately $250 million on
biotechnology-related activities and $180 million on conventional breeding
activities to complete these in-process research and development projects: $120
million in 2000, $100 million in 2001, $80 million in 2002, $60 million in
2003, $60 million in 2004, and $10 million thereafter. We intend to fund these
costs, consisting primarily of salary and benefit expenses for research and
development employees, with cash generated from existing businesses. Revenues
from the in-process research and development projects related to the 1998
acquisitions began in 1999. Revenues from the in-process research and
development projects related to the 1997 acquisitions began in 1998.
1997 EVENTS
During 1997, we acquired several seed companies that specialize in various
stages of seed production. These acquisitions included Asgrow, Holden's, Corn
States and Agroceres. We also acquired the remaining interest in Calgene. The
company recorded pretax charges of $633 million ($404 million aftertax) for the
write-off of acquired in-process research and development related to these
acquisitions.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Our working capital increased $0.4 billion to $2.3 billion at year-end
1999, compared with $1.9 billion at the end of 1998, primarily because of an
increase in trade receivables and decreases in short-term debt. Trade
receivables at the end of 1999 increased $379 million, or 23%, compared with
the prior year end largely because of higher sales levels. Our operations
provided cash of $389 million in 1999 compared to a use of cash of $520 million
in 1998 primarily reflecting improved management of working capital and
increased net income. To the extent our cash provided by operations was not
sufficient to fund our cash needs at certain times during the year, old
Monsanto contributed cash from other operations or used borrowings to finance
these requirements, including the seed company acquisitions. Such borrowings
were specifically attributed to us. See Note 9 to our combined financial
statements.
Improved working capital management, proceeds from divestitures, and funds
from old Monsanto were used to reduce debt by $343 million in 1999 (short-term
debt was reduced by $233 million and long-term debt was reduced by $110
million).
In the three years presented, property, plant, and equipment purchases
largely were related to capacity expansions and improvements of manufacturing
facilities in the United States, Latin America and Western Europe. Agricultural
Productivity segment capital expenditures of approximately $450 million in 1999
primarily were used to expand our manufacturing facilities to meet increasing
sales volumes for our family of Roundup herbicides and for Posilac. Seeds and
Genomics segment capital expenditures of $184 million primarily were related to
modernization and upgrade of recently acquired seed production facilities. As a
result of these investments, net property, plant and equipment at the end of
1999 was approximately $330 million higher than at year end 1998.
Acquisitions and investments of $108 million in 1999 primarily included
joint ventures and equity investments in plant biotechnology. Major investments
in 1998 of $4.1 billion included the acquisitions of DEKALB Genetics, Plant
Breeding International and certain international seed operations of Cargill.
Major investments in 1997 of $1.6 billion included the acquisitions of
Holden's, Corn States, the remaining interest in Calgene, Asgrow and Agroceres.
See Note 4 to our combined financial statements for further details. Major
sources of cash in 1999 were investment and property disposal proceeds which
included a net refund of approximately $290 million, representing a portion of
the original Cargill purchase price.
42
<PAGE>
DEBT CAPITALIZATION AND AVAILABLE FINANCING SOURCES
The debt on our historical Statement of Combined Financial Position
represents the amount of debt incurred by old Monsanto that was specifically
attributable to us, primarily for seed company acquisitions. Following this
offering, Pharmacia will retain the debt that was attributable to us, and these
debt obligations will not be assumed by us. Upon the closing of this offering,
as described in the separation agreement, we will assume from Pharmacia $
billion of commercial paper and variable-rate, medium-term notes. Between $
and $ billion of the commercial paper obligations that we are assuming from
Pharmacia were incurred to support our seasonal working capital requirements,
which typically peak in the second quarter, varying with the timing of seasonal
planting in the Northern Hemisphere. The proceeds of this offering will be used
to repay a portion of the commercial paper assumed from Pharmacia. The factors
considered in determining our initial capitalization include the amount of debt
incurred by old Monsanto that was specifically attributable to us, our expected
financing requirements for working capital and capital expenditures, as well as
our desired credit ratings.
We expect to finance our operations through the issuance of commercial
paper for seasonal working capital needs. Our working capital needs are the
highest in the first and second quarters, as we extend credit to our customers
to enable them to acquire agricultural chemicals and seeds on terms that permit
payment following the sales of their crops after harvest. These credit
practices, combined with the seasonality of our sales, make us dependent upon
our ability to obtain substantial short-term financing to fund our cash flow
requirements. We believe that we have sufficient financial flexibility to
finance these requirements and to access the global capital markets on terms
and in amounts satisfactory to us, although there can be no assurance that this
will be the case.
In addition, we expect financing obtained through this offering and other
short-term sources to be sufficient to satisfy our working capital, capital
expenditures, research and development, and debt service requirements during
the next 12 to 18 months. We expect cash flows from operations and access to
capital markets to satisfy our financing needs beyond that period.
OUTLOOK
Our family of Roundup herbicides continues to face increasing competition
from generic producers in certain markets outside the United States. Patents
protecting Roundup expired in various countries in 1991. Compound per se patent
protection for the active ingredient in Roundup herbicide expires in the United
States in September 2000. As our patent protection on Roundup has expired in
countries outside the United States, we have implemented, and expect to
continue to follow, a price-elasticity strategy that seeks to offset price
declines through increasing sales volumes. Following our price-elasticity
strategy, we reduced our prices on the family of Roundup products in the United
States by 16% to 22% in September 1998 for the following growing season and
expect to reduce such prices further. Management expects technological advances
in manufacturing processes and formulations, as well as rapidly expanding
production capacity, to continue to improve our glyphosate manufacturing cost
structure and to help maintain our leadership position. We believe growth
potential remains for Roundup by encouraging expanded adoption of conservation
tillage techniques by growers worldwide; increasing sales of Roundup Ready
crops, which tolerate Roundup herbicide for effective weed control; selectively
reducing prices to encourage new uses for Roundup and to increase volumes, thus
capturing gains from price elasticity; introducing additional proprietary
formulations of Roundup; maintaining our position as a low-cost, high-quality
glyphosate producer; and building on our relationships with our distribution
partners.
We continue to address concerns of consumers, public interest groups and
government regulators regarding the agricultural and food products developed
through biotechnology. We are investing significant amounts in 2000 to address
these concerns, including participating in an
43
<PAGE>
integrated, industry-wide initiative involving major companies with an interest
in agricultural biotechnology. This initiative includes using consumer media to
provide consumers with improved information sources on biotechnology. For more
information on biotechnology, see "Risk Factors" and "Business--Acceptance of
Plant Biotechnology."
We continue to be involved in intellectual property disputes with several
parties regarding biotechnology products. Management expects that such disputes
will continue to occur as the agricultural biotechnology industry evolves. See
"Risk Factors" and "Business--Legal Proceedings."
RISK MANAGEMENT
We continually evaluate risk retention and insurance levels for product
liability, property damage, and other potential areas of risk. We devote
significant efforts to maintaining and improving safety and internal control
programs, which reduce our exposure to certain risks. Management decides the
amount of insurance coverage to purchase from unaffiliated companies and the
appropriate amount of risk to retain based on the cost and availability of
insurance and the likelihood of a loss. Since 1986, our liability insurance has
been a "claims made" policy form. Management believes that the current levels
of risk retention are consistent with those of comparable companies in the
industries in which we operate. There can be no assurance that we will not
incur losses beyond the limits of, or outside the coverage of, our insurance.
We do not expect our liquidity, financial position and profitability to be
affected materially by the levels of risk retention that we accept.
EURO CONVERSION
On January 1, 1999, 11 of the 15 member countries of the European Union
established fixed conversion rates between their national currencies and the
euro. During the transition period, from January 1, 1999, until June 30, 2002,
both the national currencies and the euro will be legal currencies. Beginning
July 1, 2002, the euro will be the sole legal tender for transactions in these
countries.
In September 1997, we formed a cross-functional team and engaged a
consultant to address issues associated with the euro conversion. As of January
1, 1999, we began to engage in euro-denominated transactions and were legally
compliant. We expect to have all affected information systems fully converted
by April 2002. We do not expect the euro conversion to have a material effect
on our competitive position, business operations, financial position or results
of operations.
MARKET RISK MANAGEMENT
We are exposed to market risk, including changes in commodity prices,
currency exchange rates and interest rates. To manage the volatility relating
to market risks, we entered into various derivative transactions and
participated in old Monsanto's currency risk management programs. We do not
hold or issue derivative financial instruments for trading purposes.
44
<PAGE>
The tables below provide information about derivative instruments and other
financial instruments that are sensitive to changes in commodity prices and
interest rates. The financial instruments are grouped by market risk exposure
category. Instrument denominations are indicated in parentheses. For
instruments denominated in currencies other than the U.S. dollar, the
information is presented in U.S. dollar equivalents.
COMMODITY PRICE RISK-SENSITIVE INSTRUMENTS
Commodity futures and options contracts are used to hedge the price
volatility of certain commodities, primarily soybeans and corn. This hedging
activity is intended to manage the price paid to production growers for corn
and soybean seeds. The following significant commodity price risk-sensitive
instruments, all of which are expected to mature in 2000, were specifically
attributable to us as of December 31, 1999:
<TABLE>
<S> <C>
PURCHASED CORN FUTURES CONTRACTS:
Contract volumes (million bushels).................................... 13.6
Weighted average price (per bushel)................................... $ 2.05
Contract amount (in millions)......................................... $28
Contract Fair Value as of December 31, 1999 (in millions)............. $28
PURCHASED SOYBEAN FUTURES CONTRACTS:
Contract volumes (million bushels).................................... 15.9
Weighted average price (per bushel)................................... $ 4.89
Contract amount (in millions)......................................... $78
Contract Fair Value as of December 31, 1999 (in millions)............. $75
SOLD LEAN HOGS FUTURES CONTRACTS:
Contract volumes (million hundred weight)............................. 0.2
Weighted average price (per hundred weight)........................... $54.40
Contract amount (in millions)......................................... $ (9)
Contract Fair Value as of December 31, 1999 (in millions)............. $ (9)
</TABLE>
- --------------------------------------------------------------------------------
Contract amounts are used to calculate the contractual payments and quantity of
the commodity to be exchanged.
CURRENCY EXCHANGE RATE RISK-SENSITIVE INSTRUMENTS
As of December 31, 1999, our foreign currency risk was managed by old
Monsanto jointly with foreign currency risks of other old Monsanto businesses,
and it is not practicable to determine foreign currency risks specifically
attributable to us. Old Monsanto's policy was to purchase currency option
contracts to manage currency exposure for anticipated transactions (for
example, expected export sales in the following year denominated in foreign
currencies), and to use currency option and forward contracts to manage other
currency exposures (primarily for receivables and payables denominated in
currencies other than a specific Monsanto entity's functional currencies). This
hedging activity was intended to protect old Monsanto from adverse fluctuations
in foreign currencies compared with the entities' functional currencies.
Following the separation of our businesses from those of Pharmacia, we plan to
continue to manage our currency risk, either through our own risk management
programs or through those maintained by Pharmacia.
45
<PAGE>
CERTAIN INTEREST RATE RISK-SENSITIVE INSTRUMENTS OF PARENT
The following significant interest rate risk-sensitive instruments were
legal obligations of old Monsanto as of December 31, 1999. See "Merger and
Reorganization Transactions Occuring Prior to This Offering."
Even though these instruments represent debt that was specifically
attributable to us, these obligations will not be assumed by us and will remain
obligations of Pharmacia.
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE
FAIR
VALUE AS
OF
DECEMBER
2000 2001 2002 2003 2004 THEREAFTER TOTAL 31, 1999
---- ---- ---- ---- ---- ---------- ------ --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LONG-TERM DEBT:
Fixed rate
Principal amount..... -- $500 -- $700 -- $1,993 $3,193 $2,839
Average interest
rate................ -- 5.4% -- 6.0% -- 6.2% 6.2% --
Variable rate
Principal amount(1).. -- $664 $91 $330 -- -- $1,085 $1,112
Average interest
rate(2)............. -- 5.9% 4.9% 5.3% -- -- 5.6% --
SHORT-TERM DEBT:
Variable rate
Principal amount..... $69 -- -- -- -- -- $ 69 $ 72
Average interest
rate(2)............. 7.5% -- -- -- -- -- 7.5% --
</TABLE>
- --------
(1) Includes commercial paper that is assumed to be renewed through 2001 when
Pharmacia's $1.0 billion credit facility expires.
(2) Average variable rates are based on 1999 year-end variable rates. Actual
rates may be higher or lower.
Upon the closing of this offering, Monsanto will receive a capital
contribution from Pharmacia and will assume of commercial paper and
variable-rate medium-term bank notes from Pharmacia. See "Merger and
Reorganization Transactions Occuring Prior to This Offering--Our
Capitalization."
46
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BUSINESS
INTRODUCTION
We are a leading global provider of technology-based solutions and
agricultural products for growers and downstream customers in the agricultural
markets. The combination of our herbicides, seeds and related genetic trait
products provides growers with integrated solutions to more efficiently and
cost effectively produce crops at higher yields, while controlling weeds,
insects and diseases. Our base business, led by Roundup and coupled with the
latest tools in biotechnology, genomics and molecular breeding, gives us a
unique set of assets and capabilities. Our integrated product offerings seek to
improve farm productivity and food quality developed through our broad
technology platform. Our product innovations have transformed farming practices
and create value for growers and other agricultural customers around the world.
The foundation of our business is the family of Roundup herbicides, which
provides growers with effective weed control at a competitive price. Over the
past three decades, we have grown our Roundup herbicide business, the core of
our Agricultural Productivity segment, into one of the most recognized global
agriculture brands. Roundup is the world's best-selling herbicide, with sales
in 1998 more than five times those of the next largest selling herbicide. Our
sales volumes of Roundup and other glyphosate-based products have grown at an
average annual rate of approximately 20% over the last 10 years. In this same
period, these products maintained an average annual sales growth rate of
approximately 11%, even as we reduced prices significantly. Recently, much of
the growth in the use of Roundup has come from the adoption of conservation
tillage, a farming practice that reduces soil erosion and moisture evaporation
while increasing farm efficiency by replacing plowing with the judicious use of
herbicides to control weeds. We seek to continue to expand sales volumes of
Roundup primarily through competitive pricing, expanded adoption of
conservation tillage, development of new, proprietary formulations,
introduction of crops developed through biotechnology that are tolerant of
Roundup and other glyphosate-based herbicides, and maintaining our position as
a low-cost, high-quality glyphosate producer. In addition to Roundup, our
Agricultural Productivity segment includes our selective herbicides and animal
agriculture businesses.
Through our Seeds and Genomics segment, we offer seeds, traits and genetic
technologies. Our research efforts in our Seeds and Genomics segment focus on
developing capabilities that add value for growers, processors and consumers
through biotechnology and advanced gene-based breeding techniques. In 1999, we
held the No. 1 or No. 2 seed market share position in key markets for corn and
soybeans, as well as the No. 1 position in the European wheat market. We have
introduced more new biotechnology traits than any of our competitors, including
traits for herbicide-resistance and traits that protect crops from insects,
viruses and diseases. As a result, in 1999, seeds with Monsanto traits
accounted for over 70% of the acres planted with herbicide-tolerant or insect-
resistant traits. We use our seed assets, including a leading collection of
genetic material, referred to as germplasm, and our global production and
distribution infrastructure to accelerate product development and expand our
market access.
Looking ahead, the agricultural industry faces the challenge of meeting the
growing demand for food, while facing limitations on the availability of
productive farm land due to global urbanization, changes in farming practices
driven by environmental concerns and a limited supply of farm labor in
developed countries. Technological innovations are an important tool in helping
to address these challenges. To meet growers' needs for new technologies, we
have created a leading, integrated plant genetics system, with platforms in
biotechnology, plant genomics and molecular breeding. Integration of these
platforms creates what we believe to be the world's strongest system for
producing improved plants of high commercial value.
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INDUSTRY OVERVIEW
The crop input industry includes machinery, fertilizers, chemical crop
protection products, and seeds and associated traits. Throughout most of the
twentieth century, growers have benefited from the development of improved
inputs and farming practices as well as the introduction of new farmlands,
which enabled food production to keep pace with the growing demand for food.
More recently, however, the rate at which growers have been able to further
improve crop productivity has declined as improved farming practices have
become more fully implemented around the world, as land in developed countries
available for conversion to farming has declined, and as concerns about the
environmental impact of farming have increased. At the same time, the global
demand for food has continued to increase with population growth and increasing
wealth.
New technologies that provide growers with additional options to increase
productivity began to emerge in the 1990s. Key among these technologies have
been biotechnology innovations that are beginning to allow growers to take
greater advantage of the genetic potential of crops. Nonselective herbicides,
which control all vegetation, are being combined with enhanced, herbicide-
tolerant seeds to replace traditional selective herbicides, while insect-
resistant seeds can reduce the use of chemical insecticides. Grower acceptance
of these gene-based technologies is transforming the traditional agricultural
inputs industry by further linking the seed and chemical crop protection
industries. In addition, increased research is resulting in the development of
powerful genomics-based capabilities that are likely to increase the power of
biotechnology and breeding and accelerate the development of novel crop and
animal-based products that create value for growers, processors, food companies
and consumers.
CROP PROTECTION CHEMICALS
Crop protection products, including herbicides, insecticides and
fungicides, are used to protect the yield and increase the quality of crops by
controlling weeds, insects and diseases. Sales of these products grew
significantly in the 1960s, 1970s and 1980s with the introduction of new, more
effective chemistries and an increasing demand for food. In recent years, the
growth in agricultural chemical sales has slowed because fewer innovative
chemical products have come to market, seeds enhanced through biotechnology
have reduced the need for chemical treatments, and the number of production
acres has declined in developed countries. Global sales of crop protection
products in 1999 are shown below.
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AGRICULTURAL CHEMICAL SALES
GLOBAL SALES OF AGRICULTURAL CHEMICALS BY REGION - 1999
Total = $28.1 billion
[Pie chart illustrating the following information:
United States and Canada 30.4%
Western Europe 23.5%
Latin America (including Mexico) 16.1%
Asia/Eastern Europe/Rest of World 30.0%]
Source: Phillips McDougall
GLOBAL SALES OF AGRICULTURAL CHEMICALS BY CATEGORY - 1999
Total = $28.1 billion
[Pie chart illustrating the following information:
Herbicides 50.8%
Insecticides 25.1%
Fungicides 20.4%
Other 3.7%]
Worldwide sales of herbicides, which are used to control weeds, were
approximately $14 billion in 1999. There are two types of herbicides:
. selective herbicides, which represented 74.2% of 1999 global herbicide
sales, control only certain weeds and do not harm crops for which they
are designed; and
. nonselective herbicides, which represented 25.8% of 1999 global
herbicide sales, control a broad spectrum of vegetation including
crops, unless the crops have been specifically designed to tolerate the
herbicide.
The global herbicide market share of nonselective herbicides has grown from
approximately 14.3% in 1991 to approximately 25.8% in 1999 while the market
share of selective herbicides has correspondingly declined. Glyphosate, a
chemical that we discovered and patented and continue to market under the
trademark Roundup, has the largest market share of the nonselective herbicide
market.
Global sales of insecticides, used to control insects that feed on crops,
were approximately $7 billion in 1999. Fungicides, used to prevent and treat
crop diseases, accounted for approximately $6 billion in global sales in 1999.
CROP SEEDS AND TRAITS
Seeds constitute a major component of the global agricultural input
industry. The global commercial seed trade market was worth over $23 billion in
1999. While the rate of yield increases from hybrids has slowed in the last two
decades, the application of biotechnology and genomics to seed development is
dramatically increasing innovation in the seed industry. Biotechnology enables
gene-by-gene analysis and enhancement of crops and is augmenting traditional
breeding by enabling faster, targeted development of performance-enhancing
traits. Traits are generally categorized as "input" or "output" traits,
depending on whether they create value at the input stage of production or
after harvesting.
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Key input traits to improve agronomic qualities include:
. Herbicide Tolerance. Herbicide-tolerant crops enable growers to spray
their fields with nonselective herbicides that control weeds while
leaving the crop unharmed.
. Insect Resistance. Biotechnology traits that confer resistance to
certain insects minimize applications of chemical insecticides. An
example of this is the insertion of a gene of a common soil
microorganism, Bt, which has created crops resistant to certain
insects.
. Disease Resistance. Virus-resistant crops enable growers to protect
their plants from damaging viral diseases for which there are often no
effective agricultural chemical solutions.
Traits that produce herbicide-tolerant or insect-resistant crops first became
commercially available in the mid-1990s and now can be purchased in a number of
crops, including corn, canola, soybean and cotton. Also, traits that produce
virus-resistant crops are now available for potato. In addition to these
commercially available traits, scientists are working on developing traits to
increase the amount of grain produced on a given acre of land by increasing
plants' abilities to withstand adverse conditions and by selecting for high-
growth characteristics.
Output traits have begun to be introduced into the market. These traits
currently are designed to create higher-quality animal feed and in the future
are expected to include human nutritional benefits.
Growers have rapidly adopted the first generation of seed traits with acres
planted. The number of global planted acres of herbicide-tolerant and insect-
resistant crops grew from less than 5 million acres in 1995 to approximately
120 million acres in 1999. Despite this rapid growth, the total number of acres
covered currently represents only a small fraction of the approximately 3
billion acres of crops cultivated worldwide. We believe additional growth will
come from further adoption of currently available traits and the development of
new input and output traits.
We expect that plant genomics, which is the study of the genetic structure
of plants, will substantially accelerate the development of traits. Genomics
tools allow the identification and characterization of thousands of genes in
parallel as well as the tracking of genes throughout the breeding process. This
capability substantially increases the power of biotechnology tools and the
traditional breeding process. As a result, researchers can more rapidly
identify genes that may enhance the performance of crops in the field or
improve the nutritional content of harvested crops. The application of plant
genomics to biotechnology and plant breeding should allow faster introduction
of desired attributes into crops that, in turn, we expect will result in more
rapid commercialization. We believe that future applications of plant genetic
technology may extend beyond traditional agricultural applications.
Increasingly, technological capabilities, such as genomics and biotechnology,
are expected to be important for success in the industry.
STRATEGY
The growth in world population combined with a general increase in global
prosperity are creating an increasing demand for food. Our goal is to create
and deliver integrated agricultural solutions that substantially increase the
volume and quality of global food production while reducing economic costs and
environmental effects. We expect to achieve this by integrating our traditional
agricultural products with advanced technological tools, including genomics,
biotechnology and molecular breeding. Our strategy is built around the
following focus areas:
. CONTINUE TO DEVELOP INTEGRATED SOLUTIONS FOR GROWERS. We are continuing
to integrate our agricultural chemicals with our seed and technology
products to offer agricultural solutions to growers that meet their
production needs. The integration of our seed assets with our seed and
chemical field operations began in 1999. As this initiative progresses,
we will continue to look for opportunities to more effectively and
efficiently develop and deliver value-added
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<PAGE>
innovations to our customers. For example, we expect that the combining
of diverse input and output traits into the best seed varieties will
offer significant additional value to growers. These and other integrated
solutions have the potential to significantly alter crop production
systems. We are well positioned to take advantage of this opportunity,
given our global seed infrastructure, current portfolio of seed trait
products and integrated genetic technology system.
. MAXIMIZE THE GROWTH OF THE ROUNDUP BUSINESS. We aim to increase our
sales and income from Roundup by:
. ENCOURAGING EXPANDED ADOPTION OF CONSERVATION TILLAGE TECHNIQUES BY
GROWERS WORLDWIDE. We will continue to promote the adoption of
conservation tillage through selective price reductions as well as
through education of farmers on the environmental and cost benefits of
converting to conservation tillage.
. INCREASING PLANTINGS OF ROUNDUP READY CROPS, WHICH TOLERATE ROUNDUP
HERBICIDE FOR EFFECTIVE WEED CONTROL. We expect additional weed
control opportunities for Roundup with the introduction of Roundup
Ready crops into new markets and with the development of new products
with Roundup Ready technology.
. SELECTIVELY REDUCING PRICES TO ENCOURAGE NEW USES FOR ROUNDUP AND TO
INCREASE VOLUMES, THUS CAPTURING GAINS FROM PRICE ELASTICITY.
. INTRODUCING ADDITIONAL PROPRIETARY FORMULATIONS OF ROUNDUP. We expect
to continue to develop new, improved proprietary formulations that
provide growers added benefits.
. MAINTAINING OUR POSITION AS A LOW-COST, HIGH-QUALITY GLYPHOSATE
PRODUCER.
. BUILDING ON OUR RELATIONSHIPS WITH OUR DISTRIBUTION PARTNERS.
. ACCELERATE THE DEVELOPMENT AND COMMERCIALIZATION OF NEW PRODUCTS. We
expect to remain a leader in the development and introduction of new
technologies for food and agricultural production by:
. REDUCING THE TIME AND COST OF DISCOVERING NEW PRODUCTS.
. USING GENOMICS CAPABILITIES TO SPEED INVENTION AND DEVELOPMENT OF
NEW TECHNOLOGIES. We expect our genomics capabilities to reduce the
time and cost of discovering new products by accelerating the
identification of genes for crop improvement and by expanding the
available pool of genes for new product development. We also are
applying genomics techniques to the commercialization of improved
plant varieties through a process known as molecular breeding.
. EXPANDING OUR TECHNOLOGICAL EXPERTISE VIA STRATEGIC
RELATIONSHIPS. We have established numerous strategic relationships
that expand the scope of our research and provide access to new
technologies and markets.
. USING OUR GLOBAL SEED INFRASTRUCTURE TO ACCELERATE THE
COMMERCIALIZATION OF NEW PRODUCTS. Our seed assets provide a rich
source of diverse germplasm and accelerate the introduction of our
seed traits developed through genomics and biotechnology.
. HELP TO BROADEN PUBLIC UNDERSTANDING AND ACCEPTANCE OF NEW TECHNOLOGIES
AND PRODUCTS. We have a number of initiatives to educate consumers on
the safety and benefits of plant biotechnology. We are investing
significant amounts in 2000 to address these concerns, including
participating in an integrated, industry-wide initiative involving
major companies with an interest in agricultural biotechnology. This
initiative includes using consumer media to provide consumers with
improved information sources on biotechnology. We also continue to
support a rigorous review process for new products by regulatory bodies
worldwide.
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PRODUCTS
Financial information about our Agricultural Productivity segment and our
Seeds and Genomics segment can be found under "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Agricultural
Productivity Segment," "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Seeds and Genomics Segment" and Note 15 to
our historical combined financial statements included elsewhere in this
prospectus.
AGRICULTURAL PRODUCTIVITY
Our Agricultural Productivity segment consists of our crop protection
products, animal agriculture and environmental technologies businesses. In
1999, this segment accounted for approximately 68% of our net sales.
Crop Protection Products
Our crop protection business focuses on the herbicide market and includes
our family of Roundup herbicides, the leading worldwide agricultural herbicide
brand; glyphosate sold to other major herbicide manufacturers; and selective
chemistries used primarily for weed control in corn, wheat and rice. Our global
herbicides business is the largest in the world, with estimated 1998 market
share of approximately 21%.
Roundup
Roundup, which is sold in more than 80 countries, is the world's best-
selling herbicide, with net sales in 1998 more than five times greater than
those of the next largest selling herbicide. We discovered glyphosate in 1970,
and began marketing it under the Roundup brand in 1976. Today, Roundup
herbicides are sold for agricultural, industrial and residential weed control.
We have developed a broad family of Roundup herbicides to meet grower
needs, including formulations that:
. more effectively control difficult-to-kill weeds;
. are absorbed more rapidly to minimize losses due to rain; and
. allow faster visual indication of weed control.
We continue to invest to grow this business. We are using our strong
capabilities in the area of formulation technology and our understanding of the
interactions between seed germplasm, chemicals, biotechnology traits and
growing conditions to develop proprietary Roundup herbicides and more powerful
glyphosate-based solutions. In addition, we are implementing proprietary
improvements to our glyphosate production processes to reduce marginal costs
and increase capacity.
Specifically, we seek to expand the use of Roundup through the following
initiatives:
. Expand Adoption of Conservation Tillage. Roundup is the herbicide of
choice in most conservation tillage markets today. Conservation tillage
is a farming practice that replaces plowing with the judicious use of
herbicides to control weeds, which reduces soil erosion, moisture
evaporation and labor, energy and equipment costs for growers. As a
nonselective herbicide, Roundup is an excellent fit for conservation
tillage since it effectively controls a variety of weeds and can be
applied before a crop emerges without any residual effect.
Price reductions for Roundup have reduced the costs of conservation
tillage for growers, thus contributing to the growth of this practice
globally. As the adoption of conservation tillage has
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<PAGE>
expanded, and growers have substituted the use of nonselective herbicides
for plowing, sales of Roundup have increased. While we estimate that
global acreage under conservation tillage grew from approximately 90
million acres in 1995 to approximately 200 million acres in 1999, we
believe this represents only approximately 35% of the crop acres in
developed countries on which conservation tillage could be practiced.
Developing countries contain approximately 1.7 billion additional acres,
much of which we believe is suitable for conservation tillage.
We intend to promote the expansion of conservation tillage globally
through a combination of selective price reductions for Roundup and
continued education of growers about the economic and environmental
benefits of conservation tillage.
. Increase Sales of Roundup Ready Crops. Roundup and other glyphosate
herbicides can be applied over the top of our Roundup Ready crops,
controlling weeds without injury to the crop. This integration of
agricultural chemicals and enhanced seeds offers growers a cost-
effective solution for weed control. To date, we have introduced
Roundup Ready soybeans, corn, canola and cotton. In 1999, approximately
65 million acres were planted with Roundup Ready crops. We expect to
continue to introduce new Roundup Ready crop technology, including
Roundup Ready sugar beets, Roundup Ready wheat and second-generation
Roundup Ready corn, each subject to completion of field trials and
receipt of regulatory and other governmental approvals.
We have significantly increased our herbicide sales in key geographic
areas by offering an integrated weed control system using Roundup Ready
technology. As a result, over 50% of U.S. and over 80% of Argentine
post-emergent soybean weed control now allows use of nonselective
products like Roundup rather than selective herbicides. We believe more
herbicide-tolerant crops will be developed and approved for planting in
various countries, and additional business will shift from selective to
nonselective herbicides.
. Pursue Our Price Elasticity Strategy. Price decreases in Roundup
historically have been followed by substantial expansion in the use of
Roundup. As Roundup has become more economical, growers have used
Roundup in new applications, have treated more acres with Roundup in
existing applications and have used higher amounts of Roundup per
treated acre. This historical growth in volumes has more than offset
our decline in prices, causing sales to grow and reinforcing our price
elasticity strategy for the brand. For example, we believe that the
1999 global average price decline in Roundup of approximately 11% was a
key factor in an approximately 20% increase in global volumes in that
year. We expect to continue to implement this price elasticity strategy
globally to increase sales volumes for Roundup.
. Develop Proprietary Formulations. We expect to continue to enhance our
family of Roundup herbicides and to maintain premium pricing for our
proprietary brands relative to generic competition, even after our
patent for Roundup expires in the United States. We have competed with
generic glyphosate products for many years outside the United States
and retained a substantial share of global sales, suggesting that
growers are loyal to our branded Roundup herbicides. According to one
recent journal article, Roundup is one of the most recognized
agricultural chemical names. In addition, growers have demonstrated a
willingness to purchase our premium brands, such as Roundup Ultra. We
also have developed products like Roundup Dry, which offers more
convenience to growers by reducing packaging disposal and increasing
ease of product handling.
Between 1992 and 1999, we expanded our glyphosate production capacity more
than four-fold and reduced our per-gallon cost of manufacturing glyphosate by
more than 35%. We plan to continue to expand our capacity for producing
glyphosate to meet expected volume growth. We also expect to continue to
develop and implement proprietary manufacturing process enhancements to reduce
our unit costs. In addition, we have entered into agreements with eight other
major agrochemical
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manufacturers to supply them with glyphosate. We believe that these
manufacturers' interest in establishing these purchasing relationships with us
evidences the cost advantage of our production process.
Our glyphosate patent in the United States expires in September 2000.
Although we currently do not have glyphosate patent protection outside the
United States, our global sales volumes of Roundup and our other glyphosate
herbicides have consistently increased, with more than 70% of our glyphosate
sales volume in 1999 coming from outside the United States.
The Roundup lawn-and-garden business sells Roundup that is formulated and
sized for homeowner use. On October 1, 1998, we entered into an agency and
marketing agreement with The Scotts Company with respect to the Roundup lawn
and garden business. Pursuant to this agency and marketing agreement, Scotts
has global responsibility for marketing, sales, product distribution and
finance for our Roundup lawn and garden products. The Roundup lawn and garden
business holds the market-leading position in the United States, Canada, France
and Australia in the non-selective category.
Selective Chemistries
Our selective chemistries business primarily serves growers in the corn,
rice and wheat markets. Our Lasso, Harness and related brands of herbicides
collectively hold the No. 2 acetanilide position for pre-emergent control of
grassy weeds in the United States. We also sell Machete, a leading herbicide
for control of grasses in Asian rice production, and Avadex, an herbicide for
control of wild oats, a significant weed problem in North American wheat
production. These products have established strong market positions based on
performance, competitive pricing and field support.
We recently have launched two new products for wheat in certain markets:
Maverick, a post-emergent herbicide for control of several key weeds; and
Latitude, a fungicide for management of "take all" disease in wheat, which,
until Latitude's introduction, could not be effectively controlled. We expect
the use of these products to grow significantly once regulatory approval is
received in other markets in the next two years. In addition, selective
chemistries play an important role in rounding out the portfolio of products we
offer to growers.
Animal Agriculture
We are the world's largest producer of recombinant bovine growth hormone,
which increases milk production in dairy cows. We market this product under the
brand name Posilac in the United States, and license the product for sale
outside the United States. Nearly one-third of the over nine million dairy cows
in the United States are in herds supplemented with Posilac. These cows have
shown an average increase in milk production of roughly nine pounds per day, or
approximately 15%.
Our animal agriculture business focuses on improving animal productivity in
the dairy and swine industries. We use our expertise in biotechnology and
genomics to develop innovative products that improve the productivity of dairy
cattle and swine. We also are the second-largest swine genetics company in the
United States, operating under the DEKALB Choice Genetics brand name. DEKALB
Choice Genetics offers several improved swine genetic lines that increase swine
producer productivity measures, such as fertility and pigs per litter. We
expect to use our expertise in biotechnology and genomics to continue to
develop innovative products in animal agriculture, and expand our market share.
We have a highly efficient sales and marketing model for Posilac, unique in
the industry, pursuant to which we sell and ship our products directly to
customers. We believe this model allows us to provide superior customer service
at a lower cost.
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Enviro-Chem
Enviro-Chem is a full-service engineering and construction company that
specializes in engineering, procurement and construction of sulfuric acid,
nitric acid and urea plants using proprietary process technology. It also sells
a portfolio of unique products and systems to solve industrial air pollution
problems. Enviro-Chem serves clients in fertilizer, chemical, metallurgical,
refinery, power generation and other process industries.
SEEDS AND GENOMICS
Our Seeds and Genomics segment represented approximately 32% of our 1999
net sales. This segment is comprised of our global seeds and related traits
business and our genetic technology platforms.
Seeds and Related Traits
Our global seeds and associated traits business is based on our ability to
deliver valuable, technology-based products to growers of major crops around
the world. We primarily focus on serving the markets for corn, soybeans, cotton
and wheat. In 1999, we held the No. 1 or No. 2 seed market share position in
key markets for corn and soybeans as well as the No. 1 position in the European
wheat market.
We are a leading provider of biotechnology seed traits, which are
characteristics expressed in plants, such as herbicide tolerance or insect
resistance. We are developing such traits using biotechnology and genomics
tools and seed breeding. We currently make our traits available through our
seed products or by licensing the traits to other seed companies for sale in
their seeds. Fees from these licenses represent a significant portion of our
net sales from traits.
Growers have embraced our seed traits, paying fees or premiums above
conventional seed prices for traits, and market penetration has been rapid. For
example, Roundup Ready soybeans, introduced in 1996, represented over 50% of
the approximately 70 million acre U.S. soybean market and over 80% of the
approximately 18.5 million acre Argentine soybean market in 1999. In aggregate,
the acreage of our Roundup Ready, YieldGard and Bollgard products has grown
from approximately 3 million acres in 1996 to approximately 86 million in 1999.
GROWTH OF MONSANTO WORLDWIDE BIOTECH TRAIT ACREAGE
million acres
[Bar graph with years on the horizontal axis and millions of acres on
the vertical axis illustrating the following information:
1996 3
1997 17
1998 58
1999 86]
MONSANTO TRAIT ACREAGE BY REGION - 1999
million acres
Total = 86.1 million acres
[Pie chart illustrating the following information:
North America 68.7
South America 16.9
Rest of World 0.5]
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Because seeds are the delivery vehicle for traits, we have built a global
seed infrastructure to provide the backbone for our breeding, production and
distribution activities. We built this infrastructure by acquiring and
consolidating a number of seed company operations around the world
and integrating the sales and service functions of this global seeds enterprise
with our agricultural productivity operations. This infrastructure enables us
to coordinate our agricultural productivity and seeds and traits research to
introduce new products to our customers rapidly and efficiently.
Corn. Globally, corn is one of the largest crops by seed value and
represents our major crop focus. Our major corn seed brands are DEKALB Genetics
and Asgrow, which together hold the No. 2 position in the U.S. market,
accounting for approximately 13% retail market share in 1999. Through Corn
States, we license our germplasm and traits to nearly 200 seed corn companies
that sell to growers representing an additional 35% of the corn acres in the
United States. Our brands also hold the No. 1 position in the three major Latin
American hybrid corn markets (Brazil, Argentina and Mexico), accounting for
more than 45% of 1999 sales in those markets. In addition, we have a
significant position in corn in Asia.
We have introduced corn input trait products directed toward meeting grower
needs by improving crop performance and reducing input costs. Our first input
traits include Roundup Ready corn and YieldGard insect-resistant corn. Roundup
Ready corn provides superior weed control by protecting corn against over-the-
top applications of our Roundup herbicide and other glyphosate herbicides.
YieldGard provides resistance to European corn borers, which historically have
cost U.S. growers an estimated $1 billion annually in crop yield losses and
pest control expenditures. In 1999, we commercialized YieldGard corn in
Argentina under the registered name MaisGard, and currently plan, subject to
regulatory approval, to commercialize corn with both YieldGard and Roundup
Ready traits throughout Latin America.
Soybeans. Soybeans represent our second largest crop focus. To date, our
primary market for soybean seeds and Roundup Ready soybeans has been in North
America. We sell our soybeans under the Asgrow, DEKALB Genetics and Hartz seed
brands in the United States, and the First Line Seeds brand in Canada.
Combined, our brands hold the No. 1 seed share position in the U.S. soybean
market, accounting for approximately 25% of 1999 market sales. We also license
the traits for Roundup Ready soybeans to both large and smaller seed companies
in the United States. Outside North America, Roundup Ready soybeans are sold in
Argentina and we have filed for regulatory approval in Brazil. In Brazil, we
are the second largest supplier of seed germplasm.
Cotton. Our third major crop focus is cotton. We have licensed the traits
for our Roundup Ready cotton, our Bollgard insect-resistant cotton and
combinations of these traits to Delta and Pine Land, a leading breeder,
producer and marketer of cotton seeds. We also license these traits to
Stoneville, a company that we sold in December 1999, and other smaller cotton
seed companies. Bollgard insect-resistant cotton protects against several of
the most economically damaging insects, including the cotton bollworm. U.S.
cotton growers have widely adopted both the Roundup Ready and Bollgard traits.
In addition, our Bt cotton has been adopted elsewhere, including Australia and
China.
Wheat. Wheat represents our fourth major crop focus. We hold the No. 1 seed
share position in the European wheat market. Currently, our wheat crop activity
is located primarily in Western Europe and consists of the breeding and
licensing activities of our Plant Breeding International conventional seed in
the United Kingdom, France and Germany, and the sale of our Hybritech brand
hybrid wheat seeds, primarily in France. We are developing Roundup Ready wheat
and other traits for the wheat market in the United States and Canada.
Other Crops. We hold leading market positions in several other crops,
including sunflower, sorghum, canola and rape seed, in major markets around the
world. In addition, we sell Roundup Ready canola in both the United States and
Canada.
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Genetic Technology System
Our integrated genetic technology system is targeted at developing a deep
understanding of the genetic makeup of plants and other organisms, and using
that knowledge to improve crop production. We believe that our expertise in
improving crops provides us with unique competitive tools.
We believe we are now in a position to build upon our earlier agrochemical
and biotechnology successes to accelerate our advances in improving food
production. We have created a genomics capability that substantially expands
the power of biotechnology to identify and improve genetic material and that
provides a significant increase in the ability of breeding technologies to
incorporate enhanced traits into crops. Integration of our breeding,
biotechnology and genomics capabilities through highly developed management
systems promises to provide us with the ability to produce improved plants of
high commercial value in the future.
TECHNOLOGY
Our integrated genetic technology system for improving crops provides us
with a significant ability to invent and develop new products. We base our
technology strategy on the convergence of three major platforms: biotechnology,
genomics and molecular breeding.
Integration of these platforms creates what we believe to be the world's
strongest system for producing improved plants of high commercial value. We
believe this integrated technology platform has transformed and will continue
to transform the agricultural industry, resulting in market expansion and
increased market share for our products.
BIOTECHNOLOGY
Genes are the fundamental genetic instructions determining what an organism
is, how it behaves and how it responds to its environment. Biotechnology refers
to capabilities that began to emerge in the 1970s to isolate, understand and
modify genes. We committed early to applying this technology toward the study
and improvement of plants. Our specific biotechnology accomplishments include:
. identifying one of the first genes that would confer a commercially
useful trait in a plant;
. inventing the capability to efficiently insert new genes into plants,
commonly called plant transformation; and
. creating one of the first stable genetically transformed plants.
We continue to pursue the cutting-edge application of biotechnology to
plants. We employ more than 400 scientists at our principal research facilities
in St. Louis, Missouri and at our wholly owned subsidiaries, Calgene,
Agracetus, Inc., DEKALB Genetics and Plant Breeding International (now part of
Monsanto PLC). Currently, we have leading expertise and substantial capacity in
critical areas of plant biotechnology, including:
. Plant Transformation. We possess advanced capabilities to introduce
valuable genes into major crops. We are able to conduct over 20,000
independent plant transformations annually.
. Gene Expression. We possess an advanced capability to regulate when and
in what plant tissues specific genes are turned on or off. This enables
us to direct genetic improvement to specific parts of the plant.
. Metabolic Engineering. We have a proven capability to regulate complex
plant metabolisms through genetic improvements.
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. Gene Stacking. We have proven experience in combining genes to achieve
multiple traits or in achieving single complex traits requiring multiple
genes.
. Field Testing. We have substantial capacity to test plants under both
greenhouse and field conditions. We have obtained more than twice as
many field trial approvals from the U.S. Department of Agriculture as
our nearest competitor.
. Regulatory Management. We have obtained regulatory approval for more
agricultural biotechnology products than any of our competitors.
GENOMICS
Genomics enhances the results we can achieve through our breeding and
biotechnology platforms by allowing us to analyze thousands of genes in
parallel. This genomics approach, which is more efficient than the
biotechnology approach of identifying useful genes one by one, represents the
culmination of converging advances in biology, chemistry, robotics and
computing. As a result, it is now possible to decipher the entire genome of a
plant. By understanding all the genes in an organism, we can apply
biotechnology to an even greater range of products than was previously
possible. Examples of potential resulting products include drought-tolerant
corn and high-protein soybeans.
In order to increase our ability to understand the biological processes of
commercial organisms, we made a strategic commitment to become a world leader
in developing and applying genomics technologies to the discovery and
development of products based on the genetic improvement of crop plants. The
three components of our genomics strategy are to:
. build an internal and external network of collaborative centers of
excellence in genomics;
. integrate genomics with biotechnology, molecular breeding and our
germplasm assets; and
. create commercial value by applying genomics technologies to crop
plants, microbes and animal breeding.
This platform creates an unprecedented potential to improve crops to meet
the needs of our growing world population. Agricultural genomics could
potentially create products improving food and feed safety, crop productivity
and animal agriculture, non-arable land utilization, quality of consumer food
products and pharmaceutical manufacturing.
The integration of genomics and breeding, known as molecular breeding,
reduces the uncertainty inherent in traditional breeding. We believe that our
molecular breeding capability will enable us to enhance the performance of our
seed products and reduce product cycle times. In 1999, we identified thousands
of new DNA markers and analyzed over 5 million genotypes.
We invested $695 million in research and development in 1999, $536 million
in 1998 and $409 million in 1997. We have created one of the largest and most
effective genomics programs in the world, involving approximately 500 of our
employees and the dedicated efforts of 200 additional scientists through our
partnerships. Internal operations include:
. Cereon Genomics LLC (Cambridge, Massachusetts). Cereon is our wholly
owned subsidiary, formed to collaborate with Millennium Pharmaceuticals,
Inc., with comprehensive capabilities in genomics.
. Monsanto Research (St. Louis, Missouri). In St. Louis, our genomics
capabilities are focused on the commercial application of genomics
technology and are closely integrated with our biotechnology program.
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. DEKALB Genetics (Mystic, Connecticut). DEKALB Genetics focuses on the
application of functional genomics for the improvement of corn.
. Monsanto Research (Ankeny, Iowa). In Ankeny, we have built the world's
largest plant molecular breeding facility.
. Monsanto Research (Bangalore, India). In Bangalore, our genomics
capabilities are focused on bioinformatics, the application of computer
hardware and software to biological information.
Our external network includes:
. Millennium Pharmaceuticals. Millennium Pharmaceuticals is a leader in
human genomics and our partner in forming Cereon. Millennium
Pharmaceuticals has granted us an exclusive license to its extensive
genomics technologies for use in plant agriculture.
. Mendel Biotechnology. Mendel Biotechnology is a plant functional
genomics company established by world-leading academic scientists.
Mendel provides us with classes of proprietary genes for the development
of commercial traits in our core crops.
. Paradigm Genetics. Paradigm Genetics is a plant functional genomics
company established by world-leading plant scientists. Paradigm provides
us with functional characterizations of our proprietary genes.
. Incyte Pharmaceuticals Inc. Incyte Pharmaceuticals is an established
genomics company. Incyte provides us access to its genomics
capabilities.
. University Relationships. Multiple agreements with top university
scientists provide us with access to emerging genomics technologies and
capabilities.
We intend to use these genomics capabilities to discover genes that will
create new traits in crops, such as:
. resistance to insects and disease;
. resistance to environmental stresses, such as drought, heat and cold;
. higher crop yields;
. increased content of oil, protein and other nutrients; and
. modified nutritional composition of oils.
Germplasm and Molecular Breeding. Our seed companies have thousands of seed
varieties, called germplasm, for our crops. The diversity of our germplasm
enables our breeders to be effective at selecting commercial varieties with
traits of value to farmers.
Plant breeders create new varieties by pollinating one plant with another.
Historically, plant breeding has been done without any direct knowledge of the
genes that underlie desired characteristics, such as grain yield. Today, we are
applying our genomics technology to make the plant-breeding process faster and
more cost effective through molecular breeding. In 1999, at our world-leading
molecular breeding center in Ankeny, Iowa, we analyzed more than 2.5 million
genetic characterizations on crop samples.
Molecular breeding allows us to use varieties of crops that have not
traditionally been part of the plant breeding process. Many untapped varieties
may contain better versions of genes for yield, disease resistance, drought
tolerance or other traits. Genomics allows plant breeders to integrate these
genes into commercial crop varieties efficiently. Our breeders are currently
using this approach
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in corn, soybeans and cotton. This ability to improve crops through molecular
breeding is complementary to the biotechnology approach to crop improvement.
Our molecular breeding and germplasm-based gene discovery efforts are
dependent on the strength of our ongoing plant breeding operation. In
conjunction with the establishment of our genomics platform, we have created
one of the world's largest plant breeding platforms, encompassing more than
1,000 people located at over 150 breeding stations in over 15 countries. At
these stations, our breeders manage over 3.5 million test plots per year,
continually investigating plant yield and other characteristics in our core
crops.
Comprehensive Gene-to-Seed Capabilities. Our leading technology position
has resulted in the planting of seeds with Monsanto traits on more than 70% of
the acres planted with herbicide-tolerant and insect-resistant traits in 1999.
We have integrated our strong position in biotechnology with germplasm,
genomics and molecular breeding to create world-leading "gene-to-seed"
capabilities for the discovery, development and commercialization of industry-
transforming products for agriculture. We have a team of over 200
bioinformaticians, biostatisticians and computer scientists, as well as
proprietary knowledge management systems that enable increasingly rapid
discovery and development of improved crops.
As a result of our comprehensive gene-to-seed capabilities, we have a
promising pipeline of new products. Two examples of products that we are
planning to introduce, subject to completion of field trials and receipt of
regulatory and other governmental approval, include corn rootworm-resistant
corn and second-generation Bollgard insect-resistant cotton.
We have designed our corn rootworm-resistant corn to offer protection
against the corn rootworm and related insects. Losses from corn rootworm are
significant and currently available insecticides have limited effectiveness in
controlling this underground pest. Second-generation Bollgard insect-resistant
cotton contains a combination of insect-resistant traits to help growers
improve their insect-resistance management programs.
ACCEPTANCE OF PLANT BIOTECHNOLOGY
The safety of food and the health of consumers is our first priority,
regardless of whether the product is a traditional pesticide or a biotechnology
trait. Recently, advocacy groups have challenged the safety of foods produced
from biotechnology crops, and have raised concerns about their potential effect
on consumers and the environment. See "Risk Factors--Risks Related to Our
Business." However, biotechnology has enjoyed and continues to enjoy
substantial support from members of the scientific community, based on the
testing and safety of these products.
In 1999, we received more than 25 separate regulatory approvals (food, feed
or environmental) in eight different countries (Argentina, Bulgaria, Canada,
China, Japan, Romania, Russia and the United States) for production and/or
import of our plant biotech products. Additionally, the major U.S. grain
handlers (ConAgra, Inc., Cargill and Archer Daniels Midland) have committed to
accepting biotech grain for the 2000 growing season. While a few food companies
have chosen to remove genetically modified ingredients from their products, the
Grocery Manufacturers of America continues to support biotechnology as "a safe
way to produce healthier food in greater quantities, as well as to ensure a
cleaner environment."
We believe there is a low awareness of biotechnology issues among the
general public in the United States, but that most consumers support the
benefits associated with plant biotechnology, including reduction of
insecticide use, higher yielding crops and the promise of more nutritious
foods. Our market research indicates that the most consistent food safety
concern across several countries (Brazil, Canada, France, Germany, Japan, the
United Kingdom and the United States) is the
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presence of pesticides and agricultural chemicals in food. In addition, based
upon our studies, more consumers are most concerned about nutritional content
of food, healthfulness of food and artificial ingredients in food than they are
about biotech foods.
We have undertaken several initiatives to provide consumers information
about the safety of these products, and support essential testing, safety
procedures and regulatory review systems for biotech crops. Independent market
research indicates that the more consumers know about biotechnology, the more
likely they are to support it. Therefore, we and other major companies with an
interest in agricultural biotechnology have plans to spend up to $50 million
over the next few years in an integrated, industry-wide initiative to provide
consumers with information regarding the safety of plant biotechnology. This
initiative will use consumer media (television, newspapers, magazines, consumer
hotlines and other materials) to provide consumers with sources of more
information about biotechnology, such as websites.
We are committed to maintaining an open dialogue with all those interested
in plant biotechnology. In addition, we expect that as we continue to develop
biotechnology products with direct benefits to consumers, such as foods with
improved nutrition, taste or texture, consumer acceptance of biotechnology will
broaden.
STRATEGIC ALLIANCES
We use strategic partnerships and alliances to augment our access to
innovative and enabling technologies, to expand the use of our technology
platforms into new arenas and to improve the market access of our products.
Our technology partnerships generally provide preferred access to leading
edge, pre-commercial technological developments. For example, in 1997, we
established one of the largest genomic agricultural companies in the world,
Cereon, with Millennium Pharmaceuticals. Through this five-year alliance,
Millennium Pharmaceuticals has granted us an exclusive license to use its
genomics technologies in the field of plant agriculture. We have developed
additional alliances with other leading genomics institutions, including Mendel
Biotechnology, Incyte Pharmaceuticals and Paradigm Genetics, to further extend
and deepen our access to technology.
We entered into the Renessen LLC joint venture with Cargill in 1999 to
develop and market enhanced crops for the grain processing and animal feed
industries. This joint venture combines our seed assets and technology
capabilities with Cargill's global grain processing, marketing and risk
management infrastructure. Renessen's products under development include seeds
designed to enhance processing efficiency and corn, soybean and wheat products
designed to deliver better nutrition in animal feed. Other alliances, such as
with Savia, S.A. de C.V., a leading global vegetable seeds company, provide
additional avenues for commercialization of Roundup Ready products and other
technology platforms.
We will continue to use this network of relationships to enhance our
ability to offer outstanding integrated solutions to our customers, thereby
strengthening our leadership position within the agricultural industry.
SALES AND MARKETING
We have a worldwide distribution and sales and marketing organization that
reaches growers throughout the world. We have consolidated the sales forces of
our crop protection and seeds and traits operations, creating a sales and
service force that is one of the industry leaders in size and capability. In
North America, we sell our crop protection products and seeds and license our
traits to growers through more than 13,000 retail and dealer locations. In
addition, we license a broad
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package of our trait products to more than 300 seed companies that do business
in the United States and certain international markets. In other parts of the
world, we sell our crop protection and seeds and license our traits products
through a combination of distributors and retailers, as well as directly to
growers. We sell and ship our animal agriculture products directly to dairy
growers.
We market our Roundup products for residential use through Scotts, a
leading provider of lawn and garden products. Scotts receives a commission for
its services as our agent based on a varying percentage of the earnings before
interest and taxes related to the Roundup lawn and garden business. Scotts is
also responsible for contributing annually towards the expenses of the Roundup
lawn and garden business.
We support our products in all global markets with a sales and product
development organization that educates growers about our newest products,
innovative farming practices and the integration of new products with existing
ones. We also use marketing programs to promote our products. These include
advertising, public relations, sales promotion, event marketing and direct
marketing programs. For these purposes, we maintain a proprietary database of
crop protection products and seeds and traits customers in North America and
several other key markets.
CUSTOMERS
We sell to a variety of customers in the agricultural industry, including
individual growers, seed companies, independent retailers and agricultural
cooperatives, as well as to other major agricultural chemical producers. While
no single customer represents more than 10% of our consolidated revenues, our
three largest U.S. agricultural distributors represented, in aggregate,
approximately 17% of our net sales in 1999. We seek to build strong
partnerships with our customers, and we have signed multiyear contracts and
supply agreements with many of our larger customers. Consistent with industry
practice, we accept product returns, and we regularly extend credit to our
customers to enable them to acquire agricultural chemicals and seeds at the
beginning of the growing season on terms that permit payment following the
sales of their crops after harvest.
INTELLECTUAL PROPERTY
We seek patent and other intellectual property protection for most of our
important discoveries and improvements that are likely to be incorporated into
our products or that give us a competitive advantage. We rely on a broad
portfolio of patents in the United States and many foreign countries to obtain
intellectual property protection for our products and processes. We have
patented many of the tools and processes by which our seeds containing biotech
traits are created.
Although patents protecting Roundup herbicide have expired in most
countries, compound per se patent protection for the active ingredient in
Roundup herbicide continues in the United States until September 20, 2000. We
also have several patents on our glyphosate formulations and manufacturing
processes, some of which will not expire until 2015 and beyond. Our insect-
resistant plant products, including our NewLeaf potato, YieldGard corn and
Bollgard cotton, are protected by patents that extend at least until 2013. Our
herbicide-tolerant plant products, including Roundup Ready cotton, corn, canola
and soybeans, are protected by patents that extend at least until 2014. Our
Posilac bovine growth hormone is protected by a United States patent that
expires in 2008 and by patents in other countries, most of which expire in
2005. Other patents protect various aspects of bovine growth hormone
manufacturing in the United States and expire as late as 2012, with
corresponding patents in other countries of varying terms.
We also obtain licenses from other parties relating to certain products and
processes as necessary. In addition, we file trademark applications for our
branded products to preserve our products' identity and enhance customer
loyalty.
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MATERIALS
We are both a producer and significant purchaser of a variety of basic and
intermediate raw materials. Our major raw materials are typically purchased
through long-term contracts. We are not dependent on any one supplier for a
significant amount of our raw materials, but certain important raw materials
are obtained from a few major suppliers.
We purchase our North American supply of elemental phosphorus, a key raw
material for the production of Roundup herbicide, from P4 Production, LLC, a
joint venture between us and Solutia operated by Solutia under an operating
agreement with P4 Production. We anticipate that, prior to this offering,
Pharmacia will acquire nearly all of Solutia's 40% ownership interest in P4
Production. Following the acquisition, Pharmacia will own a 99% interest in P4
Production, will hire the Solutia employees working at the facilities and will
assume operation of the facilities. Pharmacia will transfer its interest in P4
Production and the operation of the facilities to us pursuant to the separation
agreement.
We also produce directly, or contract with third parties for the production
of, hybrid corn seed, soybean seed and wheat seed in growing locations
throughout the world. Cotton seed is produced through international joint
ventures with Delta and Pine Land. The availability and cost of seed is
primarily dependent upon seed yields, weather conditions, grower contract
terms, commodity prices and global supply and demand. We attempt to minimize
the risks related to weather by producing seed at multiple growing locations,
where practical.
In general, where we have limited sources of raw materials, we have
developed contingency plans to minimize the effect of any interruption or
reduction in supply. While temporary shortages of raw materials may
occasionally occur, these items are generally sufficiently available to cover
current and projected requirements. Global sourcing strategies for key
materials help ensure reliable supplies and competitive costs. However, their
continuing availability and price are subject to unscheduled plant
interruptions occurring during periods of high demand, domestic and world
market and political conditions, and the direct or indirect effect of U.S. and
other countries' government regulations.
COMPETITION
The global markets for our agricultural products are highly competitive. We
expect competition to intensify as the result of continuing industry
consolidation, patent expiration for Roundup in the United States and increased
expenditures on the development and commercialization of biotechnology traits.
Competitive success in crop protection products is dependent upon price,
product performance, the quality of solutions offered to growers, and the
quality of service to distributors and growers. Our major competitors in the
agricultural productivity market are Novartis AG and AstraZeneca PLC (which
plan to combine their agribusinesses as a new company, to be called Syngenta),
Aventis, American Cyanamid (which BASF AG has agreed to buy), DuPont, and Dow
Agrosciences which, with us, represent over 70% of worldwide agrochemical sales
in 1999. Significant competition for Roundup also has come from glyphosate
producers in China, that sell to both local and export markets. The experience
in China demonstrates that new glyphosate facilities can be developed at
relatively modest cost. Manual control of weeds by growers is a primary
alternative to herbicides in many developing countries. Control of weeds by
plowing competes with conservation tillage in developed countries. In developed
countries, the number of acres that are farmed organically, although small in
magnitude, has grown rapidly in the last few years.
The industry has seen substantial growth in the use of nonselective
herbicides, particularly of Roundup and other glyphosate products, at the
expense of selective herbicides. A key reason behind
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this shift has been the development of crops tolerant of Roundup, which allow
the spraying of glyphosate-based products after planting. As a result, these
products are increasingly displacing the selective herbicides traditionally
applied over these crops. Other companies (including Aventis, American
Cyanamid, DuPont and Novartis) have developed or are developing crops tolerant
of their herbicides.
We are the primary supplier of glyphosate to most of our largest
competitors. Competition in the U.S. glyphosate market will increase once our
patent expires in September 2000. We anticipate a further decline in price
following the expiration of the patent and some loss of market share. We are
encouraged, however, that although our main glyphosate products are currently
without patent protection in most of the world, we have retained a leadership
position in most major markets.
Our largest competitors in the seeds business are Pioneer, a subsidiary of
DuPont, and Novartis. Although the seed industry has consolidated in recent
years, hundreds of small seed companies compete with us in local and regional
markets. Product performance (in particular, crop yield), customer service,
intellectual property and price are important determinants of market success.
In addition, strong distributor and grower relationships have been important in
the United States and other countries.
Our agronomic traits compete directly with traits developed by other
companies as well as with agricultural chemicals. Currently, Aventis, Dow,
Novartis and DuPont are significant competitors in trait development, and other
agrichemical marketers produce chemical products that compete with some of our
Roundup and Roundup Ready systems. Academic researchers and smaller biotech
companies are other likely sources of new traits. The primary factors
underlying the competitive success of traits are public acceptance,
performance, timeliness of introduction, value and environmental friendliness.
Competition for the discovery of new agricultural traits based on
biotechnology and/or genomics is likely to come not only from firms already in
the business but from academic researchers, biotech boutiques and the numerous
firms that are investigating gene function with principal focus on human
applications.
SEASONALITY
Historically, we have recorded our highest levels of sales and income in
the first half of the year, consistent with the purchasing and growing patterns
of growers in North America, our largest market. In recent years, sales in the
third and fourth quarters have increased because of significant growth in South
America driven by the adoption of conservation tillage. However, this trend has
not altered our prevailing sales and income pattern worldwide. Sales and income
may shift somewhat between quarters depending on variations in when a grower
chooses to plant crops, which in turn is dictated by the grower's desire to
achieve ideal growing conditions.
EMPLOYEES
As of January 31, 2000, we had approximately 14,000 employees worldwide.
Roughly half our employees are based in the United States. Other employees are
located in over 60 countries around the world, with concentrations in Brazil
and Belgium. In the United States, no employees are represented by unions.
Outside the United States, various local agreements apply. We believe we have a
satisfactory relationship with our employees.
FACILITIES AND PROPERTIES
Our general offices are located in St. Louis County, Missouri. We also have
additional research facilities in St. Louis County. We and our subsidiaries own
or lease manufacturing facilities,
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laboratories, agricultural facilities, office space, warehouses and other land
parcels in North America, South America, Europe, Asia, Australia and Africa. In
addition to the facilities in St. Louis County, Missouri, our principal
properties include chemicals manufacturing facilities at the following
locations: Alvin, Texas; Antwerp, Belgium; Augusta, Georgia; Fayetteville,
North Carolina; Luling, Louisiana; Muscatine, Iowa; Rock Springs, Wyoming; Sao
Jose dos Campos, Brazil; Soda Springs, Idaho; and Zarate, Argentina. Another
significant chemicals manufacturing facility is under construction in Camacari,
Brazil. Our principal properties are suitable and adequate for their use.
Utilization of these facilities may vary with seasonal, economic and other
business conditions, but none of the principal properties is substantially
idle. The facilities generally have sufficient capacity for existing needs and
expected near-term growth, and expansion projects are undertaken as necessary
to meet future needs. Most of these properties are owned in fee. However, we
lease the land underlying facilities that we own in Alvin, Texas. In certain
instances, we have granted leases on portions of plant sites not required for
current operations.
GOVERNMENT REGULATION
We are subject to extensive laws and regulations governing pesticides, new
plant varieties and food and feed safety in the countries in which we
manufacture or sell our products. In virtually all countries, we must obtain
regulatory approvals prior to marketing our products.
In the United States, three agencies are responsible for regulating the
products of agricultural biotechnology. The EPA regulates the field testing and
commercial application of plants modified through biotechnology to resist pests
and diseases. The FDA regulates the safety of foods and seeds derived from new
plant varieties. The USDA regulates the field testing, interstate shipment and
introduction into the environment and agriculture of plants developed through
biotechnology.
Current FDA policy is to apply the same statutory safety standards to foods
from plant varieties developed through biotechnology as are applied to foods
developed through traditional plant breeding. FDA policy describes the process
for food and feed safety review of new plant varieties, including those derived
through the application of modern biotechnology. FDA policy does not require
that foods derived from biotechnology plants be labeled as such, unless those
foods have been modified in a way that results in relevant nutritional or
safety information, such as:
. foods that are not substantially equivalent in nutrition and composition
to foods produced from traditionally bred varieties;
. foods that have been modified to include an allergen or toxin; or
. basic varieties that have been changed.
Consumer and environmental opponents of the technology and at least two
sympathetic members of Congress have urged that labeling be required.
The FDA held three public hearings to discuss and receive comments on its
current policy on foods developed through biotechnology. Subsequently, the
Clinton Administration and the FDA announced that the FDA will require
notification of the FDA 120 days prior to the introduction of biotechnology
food products, that the scientific data submitted for review will be made
available to the public, and that the FDA will develop guidelines for voluntary
labeling of non-biotech foods. We have assessed the safety of all our
commercial agricultural biotechnology products, submitted those assessments to
the FDA, and voluntarily consulted with the FDA pursuant to its 1992 Policy on
New Plant Varieties. The Commissioner of the FDA has reaffirmed that its
current policy is effective, and that all foods from plants developed through
biotechnology presently in the market are safe.
The European Union has a complicated regulatory process which is currently
in the process of modification and is subject to considerable debate. As a
result, approval of Roundup Ready corn,
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Bollgard cotton and other biotechnology crops continues to be delayed. In the
European Union, the environmental safety of biotechnology products is regulated
by the 90/220 Council Directive, while foods and food ingredients, including
those derived from biotechnology, are regulated by the Novel Foods and Food
Ingredients Regulation (NFR). Under Directive 90/220, the European Commission's
Directorate-General of the Environment regulates environmental releases of
biotechnology products for research and development, as well as placements of
biotechnology products on the market. Under the NFR, there are two procedures
for regulating foods and food ingredients: (1) a simplified notification
procedure that applies to products that are substantially equivalent to
existing foods and food ingredients and (2) a full authorization procedure for
products that are not substantially equivalent. Once a product is approved, it
is cleared for marketing and consumption in all European Union member states.
Commercial cultivation of biotechnology crops in the European Union requires
further authorization through registration as an official plant variety in the
national catalogue of each member state where planting will occur. There is no
European Union-wide legislation for variety registration, but rather,
individual decisions are taken at the national level.
Our regulatory organization is comprised of over 300 scientists and
regulatory affairs experts located throughout the world to support our
agricultural chemical, biotechnology, seed, animal health and nutrition
products. We employ premier scientists in several disciplines, including
environmental sciences, product safety assessment, ecology, product
characterization and statistics, to ensure that the safety data supporting our
products meets the highest standard. We work closely with other scientists
during the new product discovery and development phases to assure that all
questions regarding food, feed and environmental safety are addressed early in
the commercialization process. Our success in obtaining regulatory approvals
for biotechnology-derived products has been clearly demonstrated. In the United
States, we have obtained more USDA Petitions for Deregulation since 1988 than
all our competitors combined, and we have completed nearly half of the 46 total
FDA final consultations to date. Globally, our products have been the first
biotechnology products approved in numerous countries. We are actively involved
in international regulatory organizations that promote the need for harmonized
data requirements and the use of science-based, risk-based assessments in the
regulatory decision-making process.
ENVIRONMENTAL MATTERS
Our operations are subject to environmental laws and regulations in the
jurisdictions in which we operate. Some of these laws restrict the amount and
type of pollutants that can be released from our operations into the
environment. Other laws, such as the U.S. Superfund law, can impose liability
for the entire cost of cleanup upon any former or current site owners or
operators or parties who sent waste to these sites, without regard to fault or
the lawfulness of the original disposal activity. These laws and regulations
may be amended from time to time and become increasingly stringent. We are
dedicated to long-term environmental protection and compliance programs that
reduce and monitor emissions of hazardous materials into the environment, as
well as to the remediation of identified existing environmental concerns. While
the costs of compliance with environmental laws and regulations cannot be
predicted with certainty, we do not expect such costs to have a material
adverse effect upon our capital expenditures, earnings or competitive position.
We are a potentially responsible party at several Superfund sites, where we
or our predecessors have disposed of wastes in the past. We have settled our
liability at a number of these sites, but may on occasion continue to receive
notices alleging potential liability under the Superfund law. Under the terms
of the separation agreement, we are responsible for remedial liabilities at
existing and former manufacturing locations and certain off-site disposal and
formulation facilities. We maintain approximately $6.5 million in environmental
reserves for remedial liabilities, which includes amounts for remediation at
several of our operating plants.
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On March 7, 2000, the U.S. Department of Justice filed suit on behalf of
the EPA in U.S. District Court for the District of Wyoming against old
Monsanto, Solutia and P4 Production, seeking civil penalties for alleged
violations of Wyoming's environmental laws and regulations, and of an air
permit issued in 1994 by the Wyoming Department of Environmental Quality. The
permit had been issued for a coal coking facility in Rock Springs, Wyoming that
is currently owned by P4 Production. The United States sought civil penalties
of up to $25,000 per day (or $27,500 per day for violations occurring after
January 30, 1997) for the air violations, and immediate compliance with the air
permit. In light of the government's lawsuit, the companies have voluntarily
dismissed a declaratory judgment action that they had previously brought, and
have raised the same issues as an affirmative defense to this action, arguing
that it is precluded by the doctrine of res judicata because the companies have
already paid a $200,000 fine covering the same Clean Air Act violations
pursuant to a consent decree entered in the First Judicial District Court in
Laramie County, Wyoming on June 25, 1999. On April 12, 2000, the Department of
Justice revised its settlement demand, from $2.5 million to $1.9 million plus
injunctive relief to ensure P4 Production's compliance with the Clean Air Act.
On April 21, 2000, the companies filed a motion for dismissal or summary
judgment on the grounds of claim preclusion, including the doctrines of res
judicata and release. Pursuant to the separation agreement, we have assumed any
liabilities resulting from this matter.
On September 28, 1999, we entered into a consent order with the EPA whereby
we agreed to immediately investigate contamination at the Heizer Creek landfill
near Nitro, West Virginia and to propose a remedy based on our results. We used
the Heizer Creek landfill for approximately one year between 1958 and 1959 to
dispose of plant waste from our former Nitro, West Virginia manufacturing
location. In 1999, the EPA identified elevated levels of dioxin in one sample
taken at the former landfill. We are in the process of investigating the
contamination at the site and will submit the results to the EPA. We cannot
accurately estimate the cost of remediation until we complete the investigation
and a cleanup remedy is selected. The EPA is investigating several other
landfills in the area. We are potentially liable at two of those landfills.
LEGAL PROCEEDINGS
Pursuant to the separation agreement, at the time of the separation of our
businesses from those of Pharmacia, we will assume liabilities related to
certain legal proceedings. As a result, although Pharmacia or old Monsanto will
remain the named defendant, we will manage the litigation and indemnify
Pharmacia for costs, expenses and judgments arising from this litigation. In
addition, we also will manage certain litigation in which Pharmacia or old
Monsanto is the named plaintiff and we will pay the fees and costs of, and
receive any benefits from, this litigation. The following describes certain
proceedings to which Pharmacia or we are a party and for which we will assume
any liabilities or receive any benefits.
PROCEEDINGS RELATED TO BIOTECHNOLOGY RIGHTS
On May 19, 1995, Mycogen Plant Sciences, Inc. filed suit against old
Monsanto in the U.S. District Court in California alleging infringement of its
patent involving synthetic Bt genes, and seeking damages and injunctive relief.
On November 10, 1999, the court granted summary judgment in our favor and
dismissed all of Mycogen's patent claims, finding Mycogen's patent invalid on
the basis of our prior invention. Previously, the court had also held that
products containing Bt genes made prior to January 1995 did not infringe
Mycogen's patent. Mycogen has filed an appeal with the Court of Appeals for the
Federal Circuit seeking to overturn the dismissal. Old Monsanto is also a party
in interference proceedings against Mycogen in the U.S. Patent and Trademark
Office to determine the first party to invent certain inventions related to Bt
technology, and has requested a stay of the interference proceeding pending
determination of Mycogen's appeal.
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On March 19, 1996, old Monsanto filed suit in the U.S. District Court in
Delaware seeking damages and injunctive relief against Mycogen Plant Sciences,
Inc., Agrigenetics, Inc. and Ciba-Geigy Corporation (now Novartis Seeds, Inc.)
for infringement of our patent relating to synthetic Bt genes. Trial of this
matter ended June 30, 1998, with a jury verdict that while the patent was
literally infringed by the defendants, the patent was not enforceable due to a
finding of prior invention by another party and was not infringed due to the
defense of the reverse doctrine of equivalents. On September 8, 1999, the
district court affirmed in part the jury's verdict on the issue of prior
invention but overturned the finding of non-infringement on the reverse
doctrine of equivalents. The matter is now on appeal.
In June 1996, Mycogen Corporation, Mycogen Plant Sciences, Inc. and
Agrigenetics filed suit against old Monsanto in California State Superior Court
in San Diego alleging that we failed to license, under an option agreement,
technology relating to Bt corn and glyphosate-tolerant corn, cotton and canola.
On October 20, 1997, the court construed the agreement as a license to receive
genes rather than a license to receive germplasm. Jury trial of the damage
claim for lost future profits from the alleged delay in performance ended March
20, 1998, with a verdict against us awarding damages totaling $174.9 million.
The case is now on appeal before the California Court of Appeal for the Fourth
Appellate District. The plaintiffs have filed a cross appeal seeking to
reinstate claims for damages that were dismissed prior to trial. They are also
seeking to obtain a determination that the contract entitles it to a license of
our germplasm, and to overturn an award of monetary sanctions against them in
connection with this litigation.
On October 22, 1996, Mycogen Corporation filed suit against old Monsanto,
DEKALB Genetics (subsequently acquired by us) and Delta and Pine Land in the
U.S. District Court in Delaware alleging infringement of two Bt-related
patents. The jury trial concluded on February 3, 1998, with a verdict in favor
of all defendants. Mycogen's patents were invalidated on the basis that we were
a prior inventor. On September 8, 1999, the district court issued a revised
order that upheld the jury verdict and ruled that Mycogen's patents were
invalid due to their prior invention and lack of enablement. On December 6,
1999, Mycogen filed an appeal in the Court of Appeals for the Federal Circuit.
On March 27, 1997, Pioneer filed an action against old Monsanto, which is
now pending following transfer to the U.S. District Court for the Eastern
District of Missouri, alleging entitlement to a license to certain DEKALB
Genetics corn transformation patents that DEKALB Genetics was attempting to
enforce in separate proceedings (see the Rockford Litigation discussed below).
The court has denied and dismissed all of Pioneer's license claims. The
litigation remains pending only to consider old Monsanto's counterclaim to
recover damages from Pioneer and to terminate a 1993 Bt corn technology license
granted to Pioneer under which Pioneer is selling Yieldgard insect-resistant
corn. All of Pioneer's motions for summary judgment have been denied and jury
trial is set to commerce in August 2000.
On November 20, 1997, Aventis filed suit in the U.S. District Court in
North Carolina against old Monsanto and DEKALB Genetics alleging that because
DEKALB Genetics failed to disclose a research report involving the testing of
plants to determine glyphosate tolerance, Aventis was induced by fraud to enter
into a 1994 license agreement relating to technology incorporated into a
specific type of herbicide-tolerant corn. Aventis also alleged that DEKALB
Genetics did not have a right to license, make or sell products using Aventis
technology for glyphosate resistance under the terms of the 1994 agreement. On
April 5, 1999, the trial court rejected Aventis's claim that the contract
language did not convey a license. Jury trial of the fraud claims ended April
22, 1999, with a verdict for Aventis and against DEKALB Genetics. The jury
awarded Aventis $15 million in actual damages and $50 million in punitive
damages. The trial was bifurcated to allow claims for patent infringement and
misappropriation of trade secrets to be tried before a different jury. Jury
trial on these claims ended June 3, 1999, with a verdict for Aventis and
against DEKALB Genetics. The
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district court had dismissed old Monsanto from both phases of the trial prior
to verdict on the legal basis that it was a bona fide licensee of the corn
technology. On or about February 8, 2000, the district court affirmed both jury
verdicts against DEKALB Genetics, and enjoined DEKALB Genetics from future
sales of the specific type of herbicide-tolerant corn involved in the agreement
(other than materials held in DEKALB's inventory on June 2, 1999). Judgment was
entered March 10, 2000. On March 8, 2000, Aventis filed its notice to appeal
certain district court rulings that denied claims for further equitable relief
against us. We, our licensees and DEKALB Genetics (to the extent permitted
under the district court's order and an agreement with Aventis) continue to
sell the specific type of herbicide-tolerant corn pursuant to a royalty-bearing
agreement with Aventis, entered prior to the June 3, 1999 jury verdict. In
addition, we and DEKALB Genetics have announced our intention, as of 2001, to
replace this specific type of herbicide-tolerant corn with new technology not
associated with Aventis's claims in this litigation. On April 19, 2000, the
district court set for trial commencing August 14, 2000 all remaining claims in
the case that were added after the initial filing including allegations that
old Monsanto and DEKALB Genetics have engaged in anticompetitive activities in
connection with the sale of Roundup Ready corn and that certain DEKALB Genetics
patents were the result of contributions of Aventis for which that Company
should be added as a listed co-inventor on the patent. Unspecified actual
damages are sought in connection with these claims.
On October 28, 1998, Pioneer filed two related lawsuits against DEKALB
Genetics and Asgrow, another of our subsidiaries, in the U.S. District Court in
Iowa alleging misappropriation of Pioneer trade secrets related to corn
breeding. On October 8, 1999, Pioneer added us and the prior owners of DEKALB
Genetics and Asgrow (Pfizer Inc. and The Upjohn Company, respectively) as
defendants in the litigation. In addition to state law trade secret
misappropriation claims, Pioneer alleges Lanham Act and patent law violations.
Pioneer also asserts that the defendants have violated an unspecified
contractual obligation not to conduct breeding using Pioneer germplasm. On July
17, 1999, the court denied without prejudice the defendants' motions to dismiss
the initial trade secret claims. On January 4, 2000, the district court allowed
Pioneer to amend its claims to assert that the defendants infringed its
patents.
On November 30, 1999, old Monsanto filed suit against Pioneer in the U.S.
District Court for the Eastern District of Missouri to terminate a technology
license for glyphosate tolerant soybeans and canola granted by it to Pioneer
and assigned by Pioneer in connection with its merger with DuPont. Old Monsanto
alleges that the assignment resulted in unauthorized sales, and therefore
infringed old Monsanto's patents and violated its trademark rights.
On December 22, 1999, Mycogen Plant Sciences, Inc. filed a patent suit
against our subsidiary Monsanto Australia Limited, and against DeltaPine
Australia Limited, in the Federal Court of Australia, Victoria District
Registry. The suit alleges that we have infringed two of Mycogen Plant
Science's Australian patents associated with Bt technology. These patents are
Australian counterparts to patents and inventions found invalid in other
jurisdictions.
On March 27, 2000, DuPont filed a suit against old Monsanto in the U.S.
District Court for the District of South Carolina, seeking damages and
injunctive relief for alleged violations of federal antitrust acts and state
law in connection with glyphosate-related business matters. The complaint
asserts that a DuPont herbicide product has not been successfully introduced
into the marketplace due to alleged anticompetitive practices that have
enhanced our sales of Roundup herbicide and Roundup Ready cotton. Old Monsanto
entered into a glyphosate supply agreement with DuPont in December 1999.
On March 30, 2000, DuPont filed a suit against old Monsanto and Asgrow in
the U.S. District Court for Delaware, seeking damages and equitable relief
including the divestiture of Asgrow by Monsanto for alleged violations of
federal antitrust acts and state law in connection with glyphosate-tolerant
soybean business matters. The complaint asserts that Asgrow breached certain
contract
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obligations and that old Monsanto tortiously interfered with those obligations,
and as a consequence DuPont is asserting previously resolved claims that Asgrow
misappropriated intellectual property of DuPont. The complaint also alleges
that Asgrow's actions improperly accelerated old Monsanto's development of
glyphosate-tolerant soybeans.
ENFORCEMENT OF DEKALB GENETICS' PATENTS
DEKALB Genetics, which we acquired in December 1998, has filed legal
actions to enforce its patents. On April 30, 1996, DEKALB Genetics filed patent
infringement actions in the U.S. District Court for the Northern District of
Illinois against Pioneer, Mycogen Corporation and two of Mycogen's
subsidiaries, and on August 27, 1996, against several Hoechst Schering AgrEvo
GmbH entities (these actions are referred to as the "Rockford Litigation"). The
suits relate to DEKALB Genetic's patents involving herbicide-resistant and/or
insect-resistant fertile, transgenic corn. In particular, these patents cover:
. fertile, transgenic corn plants expressing genes encoding Bt insecticidal
proteins;
. the microprojectile method for producing fertile, transgenic corn plants
covering a bar or pat gene, as well as the production and breeding of
progeny of such plants;
. methods of producing either herbicide-resistant or insect-resistant
transgenic corn; and
. transgenic corn plants containing a bar or pat gene (all lawsuits
related to this patent have been stayed pending resolution of an
interference proceeding at the U.S. Patent and Trademark Office).
In each case, DEKALB Genetics has asked the court to determine that
infringement has occurred, to enjoin further infringement and to award
unspecified compensatory and exemplary damages. By order dated June 30, 1999, a
special master construed the patent claims in a manner largely in accord with
the position of DEKALB Genetics. The judge has adopted the findings of the
special master and appointed a settlement mediator to conduct discussions among
the parties.
On July 2, 1999, DEKALB Genetics sued Pioneer in the U.S. District Court
for the Northern District of Illinois in a patent interference action to
declare that DEKALB Genetics was the first inventor of the microprojectile
method of producing fertile transgenic corn. The court has denied Pioneer's
motion to dismiss. On July 30, 1999, DEKALB Genetics moved to consolidate this
suit with the remainder of the Rockford Litigation for purposes of trial, but
the request has been provisionally denied.
On November 23, 1999, Pioneer sued old Monsanto, DEKALB Genetics and
Novartis Seeds, Inc. in the U.S. District Court for the Eastern District of
Iowa for alleged infringement of Pioneer's patent pertaining to the
microprojectile transformation of corn. This suit has been transferred at old
Monsanto's request to the U.S. District Court for the Northern District of
Illinois for consolidated treatment with the Rockford Litigation. On the same
date, DEKALB Genetics filed an interference action seeking a declaration that
DEKALB Genetics was the first inventor of the microprojectile method of
producing fertile transgenic corn. DEKALB Genetics filed this action in the
U.S. District Court for the Northern District of Illinois.
GROWER LAWSUITS
On November 8, 1999, a class action lawsuit was filed against old Monsanto
in the U.S. District Court for the Northern District of Mississippi by a single
plaintiff purporting to represent a class of purchasers of genetically modified
soybeans that contain our patented technology. The complaint asserts claims
under the Racketeer Influenced and Corrupt Organizations Act and various
antitrust acts, and claims for breach of contract. The plaintiffs seek an award
of antitrust damages, treble
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damages, compensatory damages and attorneys' fees. Old Monsanto filed a motion
to dismiss this lawsuit with prejudice, and on March 8, 2000, plaintiffs filed
an application for voluntary dismissal without prejudice. The expressed
intention of plaintiffs is to seek to refile the suit in connection with a
subsequent action filed in the U.S. District Court for the Southern District of
Illinois.
On December 14, 1999, a class action lawsuit was filed against old Monsanto
in the U.S. District Court for the District of Columbia by six farmers
purporting to represent a class composed of purchasers of genetically modified
soybean and corn seed and growers of non-genetically modified soybean and corn
seed. The complaint alleges that we violated various antitrust laws and
unspecified international laws through our patent license agreements, breached
an implied warranty of merchantability and violated unspecified consumer fraud
and deceptive business practices laws in connection with the sale of
genetically modified seed. The plaintiffs seek declaratory and injunctive
relief in addition to antitrust, treble, compensatory and punitive damages and
attorneys' fees. Old Monsanto filed a motion to dismiss this lawsuit with
prejudice, and on March 7, 2000, plaintiffs filed a motion to voluntarily
dismiss without prejudice. The expressed intention of plaintiffs is to seek to
refile the suit in connection with a subsequent action filed in the U.S.
District Court for the Southern District of Illinois.
On February 14, 2000, a class action lawsuit was filed against old Monsanto
in the U.S. District Court for the Southern District of Illinois by five
farmers purporting to represent various classes of farmers. The complaint
alleges claims virtually identical to those in the Mississippi and District of
Columbia cases.
PROCEEDINGS RELATED TO DELTA AND PINE LAND COMPANY
On December 30, 1999, following old Monsanto's announcement that it had
withdrawn its filing for U.S. antitrust clearance of the proposed merger with
Delta and Pine Land in light of the Department of Justice's unwillingness to
approve the transaction on commercially reasonable terms, two alleged holders
of Delta and Pine Land common stock filed a derivative and class action lawsuit
against old Monsanto, Delta and Pine Land and members of the Delta and Pine
Land board of directors in the Delaware Court of Chancery. On April 3, 2000,
plaintiffs filed an amended complaint against all defendants. This suit alleges
that Delta and Pine Land has been harmed by the termination of the effort to
complete the merger and that the individual defendants have a continuing duty
to seek a value-maximizing transaction for the stockholders. The suit seeks a
declaration that the individual defendants have violated their fiduciary duties
and a direction that the individual defendants take certain actions to maximize
stockholder value. The suit also requests compensatory damages, costs,
disbursements and fees. On January 18, 2000, Delta and Pine Land reinstituted a
suit against old Monsanto in the Circuit Court of the First Judicial District
of Bolivar County, Mississippi, seeking unspecified compensatory damages for
lost stock market value of not less than $1 billion, as well as punitive
damages, resulting from our alleged failure to exercise reasonable efforts to
complete the merger. Old Monsanto requested and obtained a stay of this suit
pending resolution of the Delaware suit filed on December 30, 1999.
OTHER LEGAL PROCEEDINGS
Since the 1984 termination of the class action litigation against various
manufacturers, including old Monsanto, of the herbicide Agent Orange used in
the Vietnam war, old Monsanto has successfully defended against various
lawsuits associated with the herbicide's use. A few matters remain pending,
including three separate actions, now consolidated, filed against old Monsanto
and The Dow Chemical Company in Seoul, Korea in October 1999. Approximately
13,760 Korean veterans of the Vietnam war allege they were exposed to, and
suffered injuries from, herbicides manufactured by the defendants. The
complaints fail to assert any specific causes of action, but seek damages of
300 million won (approximately $250,000) per plaintiff. Pharmacia is also
subject to
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ancillary actions in Korea, including a request for provisional relief pending
resolution of the main lawsuit. On December 2, 1999, plaintiffs filed a class
action lawsuit against old Monsanto and five other herbicide manufacturers in
the U.S. District Court for the Eastern District of Pennsylvania. The
plaintiffs purport to represent a class of over 9,000 Korean and 1,000 U.S.
service persons allegedly exposed to the herbicide Agent Orange and other
herbicides sprayed from 1967 to 1970 in or near the demilitarized zone
separating North Korea from South Korea. The complaint does not assert any
specific causes of action or demand a specified amount in damages. The Judicial
Panel on Multidistrict Litigation has granted provisional transfer of the case
to the U.S. District Court for the Eastern District of New York for coordinated
pretrial proceedings as part of In re "Agent Orange" Product Liability
Litigation, which is the multidistrict litigation proceeding established in
1977 to coordinate Agent Orange-related litigation in the United States.
We are involved in other legal proceedings arising in the ordinary course
of our business. While the results of litigation cannot be predicted with
certainty, we do not believe that the resolution of the proceedings that we are
involved in, either individually or taken as a whole, will have a material
adverse effect on our financial position, profitability or liquidity.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is information concerning our directors and executive
officers. Unless otherwise indicated, each position was with Monsanto or its
predecessor. Prior to this offering, we intend to appoint a chairman of our
board of directors who is unaffiliated with Pharmacia. In addition, within
three months following this offering, we intend to add an additional director
who is unaffiliated with Pharmacia.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ---- --- -----------
<S> <C> <C>
Hendrik A. Verfaillie... 54 President, Chief Executive Officer and Director
Hakan Astrom............ 53 Director
Christopher J.
Coughlin............... 47 Director
Michael Kantor.......... 60 Director
C. Steven McMillan...... 54 Director
William U. Parfet....... 53 Director
John S. Reed............ 61 Director
Martin E. Blaylock...... 59 Vice President, Manufacturing Operations
Carl Casale............. 38 North American Business Lead
Terrell K. Crews........ 44 Chief Financial Officer
Steven L. Engelberg..... 56 Head of Governmental Affairs
Robert T. Fraley,
Ph.D. ................. 47 Chief Technology Officer
Hugh Grant.............. 42 Chief Operating Officer
Janet M. Holloway....... 46 Chief Information Officer
R. William Ide III...... 59 General Counsel
Ganesh M. Kishore,
Ph.D. ................. 46 President of Nutrition Business
Cheryl Morley........... 45 President of Animal Agricultural Group
John M. Murabito........ 41 Human Resources Team Leader
</TABLE>
HENDRIK A. VERFAILLIE has served as our President and Chief Executive
Officer and as one of our directors since February 2000. From 1997 to March
2000, Mr. Verfaillie served as President of old Monsanto. From 1999 to March
2000, Mr. Verfaillie served as Chief Operating Officer of old Monsanto. From
1995 to 1997, Mr. Verfaillie served as Executive Vice President and Advisory
Director of old Monsanto. Mr. Verfaillie has served in a variety of management
positions since he joined old Monsanto in 1976.
HAKAN ASTROM will become a director of Monsanto prior to this offering.
Since 2000, Mr. Astrom has served as Senior Vice President, Corporate
Strategy and Investor Relations of Pharmacia. Since January 1999, Mr. Astrom
has served as Chairman and Managing Director of Pharmacia & Upjohn AB. Since
1995, Mr. Astrom has been responsible for Corporate Strategy and Investor
Relations of Pharmacia & Upjohn AB.
CHRISTOPHER J. COUGHLIN has served as one of our directors since March
2000. Since March 2000, Mr. Coughlin has served as Executive Vice President and
Chief Financial Officer of Pharmacia. From 1998 to March 2000, Mr. Coughlin
served as Executive Vice President and Chief Financial Officer of Pharmacia &
Upjohn. From 1997 to 1998, Mr. Coughlin served as the President of Nabisco
International. From 1996 to 1998, Mr. Coughlin was the Executive Vice President
of Nabisco Holdings Corp. and of Nabisco Inc. and from 1996 to 1997, he also
served as Chief Financial Officer of these companies. From 1995 to 1996, Mr.
Coughlin worked as a consultant.
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MICHAEL KANTOR will become a director of Monsanto prior to this offering.
Since 1997, Mr. Kantor has been a partner at the law firm Mayer, Brown & Platt.
From 1996 to 1997, Mr. Kantor served as the U.S. Secretary of Commerce. Prior to
becoming Secretary of Commerce, from 1993 to 1996, Mr. Kantor served as the U.S.
Trade Representative. In 1992, Mr. Kantor was the national chairman for the
Clinton/Gore presidential campaign. From 1975 to 1992, Mr. Kantor was a partner
at the law firm Manatt, Phelps, Phillips and Kantor. Mr. Kantor is a director of
Pharmacia.
C. STEVEN MCMILLAN will become a director of Monsanto prior to this
offering. Effective July 1, 2000, Mr. McMillan will be President and Chief
Executive Officer of Sara Lee Corporation. In March 1997, Mr. McMillan became
President of Sara Lee and, in December 1997, became its Chief Operating
Officer. From 1993 to 1997, Mr. McMillan was an Executive Vice President of
Sara Lee. Mr. McMillan is a director of Pharmacia, Sara Lee and Dynergy Inc.
WILLIAM U. PARFET will become a director of Monsanto prior to this
offering. Since 1995, Mr. Parfet has been Co-Chairman of MPI Research, LLC.
From 1993 to 1996, Mr. Parfet served as President and Chief Executive Officer
of Richard Allan Medical Industries. Mr. Parfet is a director of Pharmacia,
CMS Energy Corporation, the Financial Accounting Foundation, Stryker
Corporation and Sybron International.
JOHN S. REED will become a director of Monsanto prior to this offering.
From 1998 to April 2000, Mr. Reed was the Chairman and Co-Chief Executive
Officer of Citigroup Inc. From 1984 to 1998, Mr. Reed served as Chairman and
Chief Executive Officer of Citicorp and Citibank, N.A. Mr. Reed is a director
of Pharmacia and Philip Morris Companies, Inc. Mr. Reed also is a member of
The Business Council.
MARTIN E. BLAYLOCK has served as Vice President for Manufacturing
Operations for Monsanto and its predecessor since 1995. Mr. Blaylock joined
old Monsanto in 1962.
CARL CASALE has served as our North American Business Lead since
2000. From 1997 to March 2000, Mr. Casale was Managing Director, U.S. Ag for
old Monsanto. In 1996, Mr. Casale served as Director, Marketing for Ceregen, a
business unit of old Monsanto. From October 1995 to July 1996, Mr. Casale also
held the position of Director, Channel Strategy of old Monsanto. From 1994 to
1995, Mr. Casale served as Western Region Sales Director of old Monsanto.
Mr. Casale joined old Monsanto in 1984 as a sales representative for the
Agricultural Group in Walla Walla, Washington.
TERRELL K. CREWS has served as our Chief Financial Officer since February
2000. From July 1999 to March 2000, Mr. Crews was Chief Financial Officer of
the Agricultural Sector of old Monsanto. From December 1998 to July 1999, Mr.
Crews served as Global Finance Lead for the Global Seed Group of old Monsanto.
From June 1997 to December 1998, Mr. Crews served as the General Auditor and,
prior to that, was the Finance Lead for the Asia Pacific region of old
Monsanto. Mr. Crews served in a variety of other accounting and finance
positions since he joined old Monsanto in 1977.
STEVEN L. ENGELBERG has served as our Head of Governmental Affairs since
2000. From 1996 to March 2000, Mr. Engelberg served as Senior Vice
President of old Monsanto. From 1994 to 1996, Mr. Engelberg served as Vice
President, Worldwide Government Affairs of old Monsanto.
ROBERT T. FRALEY, Ph.d., has served as our Chief Technology Officer since
February 2000. From 1997 to March, 2000, Dr. Fraley served as Co-President of
the Agricultural Sector of old Monsanto. From 1995 to 1997, Dr. Fraley served
as President of Ceregen, a business unit of old Monsanto company. Dr. Fraley
has served in a variety of research positions since he joined old
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Monsanto in 1980. Dr. Fraley is a board member of Renessen, a joint venture
between Cargill and our company, which develops and produces products for the
food industry.
HUGH GRANT has served as our Chief Operating Officer since February 2000,
and from March 2000 to 2000 served as one of our directors. From 1998 to
March 2000, Mr. Grant served as Co-President, Agricultural Sector of old
Monsanto. From 1995 to 1998, Mr. Grant served as General Manager of the
Agricultural Sector for Southeast Asia, Australia, New Zealand and South Korea.
From 1996 to 1998, Mr. Grant also served as Managing Director for all our
business units in Southeast Asia.
JANET M. HOLLOWAY has served as Chief Information Officer for Monsanto and
its predecessor since 1999. From 1997 to 1999, Ms. Holloway was Co-Lead, IT of
the Agricultural Sector of old Monsanto. From 1995 to 1997, Ms. Holloway served
as Director, IT of old Monsanto's Crop Protection business. Ms. Holloway has
held a variety of positions since she joined old Monsanto in 1984.
R. WILLIAM IDE III has served as our General Counsel since 2000. From
1996 to March 2000, Mr. Ide served as Senior Vice President, General Counsel
and Secretary of old Monsanto. From 1993 to 1996, Mr. Ide was a partner at the
law firm Long, Aldridge & Norman. From 1993 to 1994, Mr. Ide served as the
President of the American Bar Association.
GANESH M. KISHORE, PH.D., has served as the President of our Nutrition
Business since 2000. From 1997 to March 2000, Dr. Kishore served as the
Co-President of Nutrition and Consumer Products of old Monsanto. From 1995 to
1997, Dr. Kishore served as the Director, Technology for Ceregen, a business
unit of old Monsanto and as the Assistant Chief Scientist, Chief
Biotechnologist of old Monsanto. Dr. Kishore joined old Monsanto in 1980. Dr.
Kishore serves on the board of directors of Mendel Biotechnology; the Board of
Overseers of the School of Nutrition, Tufts University; and the Scientific
Advisory Board of the Department of Biotechnology, Government of India.
CHERYL MORLEY has served as President of the Animal Agricultural Group of
Monsanto and its predecessor since 1997. From 1995 to 1997, Ms. Morley was
responsible for leading the strategic planning and commercial development
efforts of the Animal Agriculture Group of old Monsanto. Ms. Morley joined old
Monsanto in 1983. She is a director of the Animal Health Institute.
JOHN M. MURABITO has served as Global Human Resources Leader since
2000. From 1998 to March 2000, Mr. Murabito served as the Human Resources Team
Leader for the Agricultural and Nutrition Sectors of old Monsanto. From 1997 to
1998, Mr. Murabito served as Human Resources Operations Team Leader of old
Monsanto. From 1995 to 1997, Mr. Murabito was Group Vice President, Human
Resources for Frito-Lay Companies Eastern U.S. Division.
BOARD STRUCTURE AND COMPENSATION
COMPENSATION
Non-employee directors will receive annual compensation having an
anticipated total annual value of $ .
GOVERNANCE PROVISIONS
On certain matters with significant financial or strategic consequences, a
supermajority approval by at least 80% of our directors is required. These
matters include:
. transactions, capital expenditures, additional debt or other non-
ordinary course financial commitments, including litigation
settlements, valued at $100 million or more, other than matters already
approved as part of our annual operating or capital budgets;
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. any issuance or repurchase of equity securities or other equity
interests, except pursuant to previously granted employee stock options
or under compensation plans approved by our board of directors or in an
amount not exceeding 1% of our outstanding common stock;
. approval of our annual operating and capital budgets and annual
strategic plan;
. selection, compensation and removal of our Chief Executive Officer;
. any change in the size of our board of directors; and
. any certificate of incorporation or bylaw amendments.
After such time that Pharmacia owns less than 50% of our common stock, no
supermajority approval will be required for the items listed above.
COMMITTEES
Our board of directors has the following five committees: (1) executive,
(2) audit and finance, (3) people, (4) public policy and (5) science &
technology. The membership and function of each committee are described below.
Our entire board of directors acts on nominations for directors, and therefore
we do not have a nominating committee.
EXECUTIVE COMMITTEE. Messrs. , , and are members of
our executive committee. Our executive committee has the powers of our board of
directors in directing the management of our business and affairs in the
intervals between meetings of our board of directors (except for certain
matters otherwise delegated by our board of directors, or which by statute, our
certificate of incorporation or our bylaws are reserved for our entire board of
directors). Actions of the executive committee are reported at the next regular
meeting of our board of directors.
AUDIT AND FINANCE COMMITTEE. Messrs. , , and are
members of our audit and finance committee. Our audit and finance committee
assists our board of directors in fulfilling its responsibilities to oversee
our accounting, auditing and financial reporting practices, internal control
policies and procedures and corporate compliance policies. The audit and
finance committee recommends to our board of directors the selection of our
independent auditors; reviews our annual financial statements and discusses
them with our auditors and our internal financial staff prior to their
submission to our board of directors; reviews the independence of the
independent accountants conducting the audit; reviews the services provided by
the independent accountants; reviews the scope of our internal audit program;
discusses with our management and the auditors our accounting system and
related systems of internal control; reviews our compliance programs; and
consults, as it deems necessary, with the independent accountants, internal
auditors and our internal financial staff. The audit and finance committee
recommends the annual operating and capital budgets, long-range plans and
financing plans to our board of directors.
PEOPLE COMMITTEE. Messrs. , , and are members of our
people committee. Our people committee, composed of non-employee directors,
recommends to our board of directors the establishment and modification of our
management incentive plans and corporate governance practices. Our people
committee administers and interprets our management incentive plans and
approves the establishment, modification, and termination of other compensation
plans and agreements. Our people committee reviews plans for executive
succession, determines the salaries of all our executive officers and monitors
our performance as it affects employees, including issues such as diversity and
morale.
PUBLIC POLICY COMMITTEE. Messrs. , , and are members
of our public policy committee. Our public policy committee reviews and
monitors our
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performance as it affects communities, customers and the environment. Our
public policy committee also identifies and investigates emerging issues that
will affect our impact on society, including public acceptance of
biotechnology.
SCIENCE AND TECHNOLOGY COMMITTEE. Messrs. , , and are
members of our science and technology committee. Our science and technology
committee reviews and monitors our science and technology initiatives in areas
such as information technology, technological programs, research and
agricultural biotechnology. Our science and technology committee also
identifies and investigates significant emerging science and technology issues.
STOCK OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the options to purchase Monsanto common
stock, the Pharmacia common stock and the options to purchase Pharmacia common
stock held by our directors and certain of our executive officers as of the
date of this offering. The options to purchase Monsanto common stock will be
granted as of the date of this offering at an exercise price equal to the
initial public offering price.
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
PHARMACIA
SHARES OF SHARES OF COMMON
MONSANTO COMMON PHARMACIA STOCK
STOCK UNDERLYING COMMON STOCK UNDERLYING
OPTIONS TO BENEFICIALLY IN-THE-MONEY
NAME BE GRANTED(/2/) OWNED OPTIONS(/3/)
- ---- ----------------- ------------ ------------
NUMBER PERCENTAGE
------ ----------
<S> <C> <C> <C> <C>
Hendrik A. Verfaillie (1)........ * 231,894 1,462,154
Hakan Astrom..................... * 8,228 325,975
Christopher J. Coughlin.......... * 46,435 440,294
Michael Kantor................... * 800 13,637
C. Steven McMillan............... -- * 5,950 --
William U. Parfet................ * 901,566(4) 3,570
John S. Reed..................... * 91,947 14,395
Robert T. Fraley, Ph.D. (1)...... * 53,847 374,001
Hugh Grant (1)................... * 1,641 160,285
R. William Ide III (1)........... * 68,532 403,148
Ganesh M. Kishore, Ph.D. (1)..... * 33,941 266,409
All directors and executive
officers as a group............. *
</TABLE>
- --------
* Represents holdings of less than one percent.
(1) Such officers participated in the old Monsanto premium stock option
purchase program in 1999. Under this program, the officers were granted an
opportunity to purchase premium stock options from old Monsanto at $7.77
per option with cash or through base salary or bonus reduction over a four-
year period. Participating officers also received an additional premium
stock option grant in 1999. Both stock option grants have a $75 exercise
price at per share of Pharmacia Common Stock. The total number of premium
priced options under contract (including the additional grant) are: Mr.
Verfaillie, 139,768; Dr. Fraley, 51,151; Mr. Grant, 49,874; Mr. Ide,
44,003; and Dr. Kishore, 21,161.
(2) Options will vest over years.
(3) All these options currently are exercisable.
(4) Includes 891,948 shares held by various trusts of which Mr. Parfet acts as
trustee. Mr. Parfet disclaims beneficial ownership of such shares.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Kantor is a partner at the law firm of Mayer, Brown & Platt, which
provided services to Pharmacia in 1999 and has been retained to provide
services to Pharmacia, including the agricultural business, in 2000.
Until his retirement in April 2000, Mr. Reed served as Chairman and Co-
Chief Executive Officer of Citigroup Inc., the parent company of Salomon Smith
Barney Inc., an investment banking firm which provided services to Pharmacia in
1999 and is providing services to Pharmacia in 2000, including in connection
with this initial public offering.
COMPENSATION
Our compensation plan is designed to motivate employees to deliver
outstanding business results by aligning their interests with those of our
stockholders. Our people committee is charged with approving the overall
compensation plan for all employees, setting pay for executive officers,
administering our incentive plans, and making awards to executive officers
under our incentive plans. Compensation is variable and based on contributions
and delivered results. Only when long-term stockholder value is created will
total compensation be at or near the top of the market.
Employee compensation for both executives and non-executives will consist
of three basic components: (1) base pay, (2) performance rewards and (3)
benefits. Base pay is set to reflect the external market value of the
experiences and qualifications that an individual brings to his or her role as
well as the responsibilities of the individual. Base pay is targeted at the
median of the market, which includes representative companies from general
industry, as well as the agriculture and biotech industries. Performance
rewards may include both an annual incentive bonus and long-term incentives in
the form of stock options or other awards. Benefits will be delivered through a
flexible menu of competitive benefits with the current plan design expected to
remain in place through December 2001.
INCENTIVE PLANS
MONSANTO 2000 MANAGEMENT INCENTIVE PLAN
The material features of the Monsanto 2000 Management Incentive Plan,
referred to as the "2000 Plan," are outlined below.
AUTHORIZED SHARES. The total number of shares that may be delivered
pursuant to awards under the 2000 Plan may not exceed the number that equals
7.42% of the outstanding shares immediately after the initial public offering
of the shares (subject to adjustment in the event of a stock split, merger,
consolidation, sale of assets, liquidation, spinoff, distribution of stock or
assets or other change in capitalization).
ADMINISTRATION. The 2000 Plan will be administered by our people committee,
which will be composed of two or more non-employee directors. The people
committee may delegate the administration of the plan, except as it relates to
those officers subject to the reporting requirements of Section 16(a) of the
Securities Exchange Act of 1934 or to the limits on deductibility imposed by
Section 162(m) of the Internal Revenue Code. Determinations of our people
committee concerning any matter arising in connection with the 2000 Plan are
final, binding and conclusive on all interested parties.
PERSONS ELIGIBLE FOR GRANTS. Our people committee may grant awards under
the 2000 Plan to any of our directors, directors of Pharmacia and officers or
employees of Pharmacia or any of our other affiliates. In any three-year
period, the total number of shares for which awards may be made
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to any one participant under the 2000 Plan cannot exceed % of the total
number of shares for which awards may be made under the 2000 Plan.
COMPANY OPTIONS. Our people committee has broad authority to establish the
terms and conditions of the options granted under the 2000 Plan, including the
ability to specify the employees and directors who will be granted options,
subject to certain limitations relating to the power of our people committee to
delegate administration of the 2000 Plan. Under the 2000 Plan, the exercise
price of any option must be no less than the fair market value, as defined in
the 2000 Plan, of our common stock on the grant date.
The 2000 Plan permits our people committee to include various terms in the
options in order to enhance the linkage between stockholder and management
interests. These include escalation of the option price over the term of the
option, permitting participants to deliver shares of our common stock in
payment of the exercise price, offering participants the opportunity to elect
to receive a grant of options instead of a salary increase or bonus, offering
participants the opportunity to purchase options, and making the exercise or
vesting of options contingent upon the satisfaction of performance criteria.
The 2000 Plan permits the granting of dividend equivalent units in connection
with option grants.
The 2000 Plan also provides that the term of any option granted may not
exceed 10 years and that each option may be exercised for such period as may be
specified by our people committee in the grant of the option.
Options granted under the 2000 Plan are not transferable except by will,
the laws of descent and distribution, or upon the holder's death pursuant to a
beneficiary designation. All options may be exercised during the holder's
lifetime only by the holder or the holder's guardian or legal representative.
Incentive stock options may be granted provided they meet the requirements
of the Internal Revenue Code.
In connection with this offering, we expect to grant options to our
management to purchase shares of our common stock effective as of the date
of this offering at an exercise price equal to the initial public offering
price.
AMENDMENT OR TERMINATION. Our people committee may amend or terminate the
2000 Plan at any time, provided that no grants previously made under the plan
are adversely affected without the consent of the affected participants, and
that amendments to change the number of shares authorized for use under the
2000 Plan must be approved by our board of directors.
STOCK APPRECIATION RIGHTS. The 2000 Plan authorizes the grant of stock
appreciation rights. It is expected that stock appreciation rights will be
granted primarily in lieu of options to employees who are foreign nationals or
are employed by us outside the United States, and who are precluded from
receiving stock options by virtue of local law, tax policy or custom or other
reasons as determined by our people committee.
RESTRICTED AND UNRESTRICTED SHARES. The 2000 Plan authorizes the grant of
restricted or unrestricted shares. Our people committee may set the terms and
conditions of restricted stock awards, including restrictions against sale,
transfer or other disposition, and may make the lapse of such restrictions
contingent on the achievement of performance goals. Our people committee also
may grant an award of dividend equivalent units in connection with a restricted
stock award.
NON-U.S. PARTICIPANTS. To accommodate differences in local law, tax policy
or custom, awards granted to employees who are not U.S. nationals or who are
employed outside the United States
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may be subject to special terms, conditions and documentation as provided by
our people committee. Our people committee may also grant substitutes for
awards to non-U.S. employees.
REGISTRATION AND COMPLIANCE WITH APPLICABLE LAW. If our people committee
determines, under U.S. federal, state or local or foreign law or practice, that
government approval or the registration, qualification, or listing of shares of
our common stock is desirable in connection with the granting of awards or
their exercise, or the purchase or receipt of shares pursuant to awards, no
shares pursuant to an affected award may be purchased or received before our
people committee is satisfied that the desired actions have been completed. Our
people committee will not be required to issue any shares of our common stock
pursuant to an award before it has received advice of counsel that such
issuance is in compliance with all applicable laws and securities exchange
rules.
CHANGE OF CONTROL. The 2000 Plan provides that, unless our people committee
determines otherwise at the time of grant, all awards will vest, and any
restrictions and other conditions applicable to awards will lapse, in the event
of a change of control (as defined in the 2000 Plan). Such accelerated vesting
could result in a participant's being considered to receive "excess parachute
payments" (as defined in Section 280G of the Internal Revenue Code), which
payments are subject to a 20% excise tax imposed on the participant. If so, the
participant would be entitled to be made whole for such excise tax under our
excess parachute tax indemnity plan, and we would not be able to deduct the
excess parachute payments or any such indemnity payments.
MONSANTO BROAD-BASED STOCK OPTION PLAN
The material features of the Monsanto Broad-Based Stock Option Plan,
referred to as the "Monsanto Broad-Based Plan," are outlined below.
AUTHORIZED SHARES. The total number of shares that may be delivered
pursuant to options under the Monsanto Broad-Based Plan may not exceed the
number that equals 0.58% of the outstanding shares immediately after the
initial public offering of the shares (subject to adjustment in the event of a
stock split, merger, consolidation, sale of assets, liquidation, spinoff,
distribution of stock or assets or other change in capitalization).
ADMINISTRATION. The Monsanto Broad-Based Plan will be administered by our
people committee, which will be composed of two or more non-employee directors.
Our people committee may delegate the administration of the plan.
Determinations of our people committee concerning any matter arising in
connection with the Monsanto Broad-Based Plan are final, binding, and
conclusive on all interested parties.
PERSONS ELIGIBLE FOR GRANT. Our people committee may grant options under
the Monsanto Broad-Based Plan to all employees of Monsanto, Pharmacia or any of
our other affiliates, other than officers subject to the reporting requirements
of Section 16(a) of the Securities Exchange Act or to the limits on
deductibility imposed by Section 162(m) of the Internal Revenue Code.
COMPANY OPTIONS. Our people committee has broad authority to establish the
terms and conditions of the options granted under the Monsanto Broad-Based
Plan, including the ability to specify the employees who will be granted
options. Under the Monsanto Broad-Based Plan, the exercise price of any option
must be no less than the fair market value, as defined in the Monsanto Broad-
Based Plan, of our common stock on the grant date. The term of options granted
under the Monsanto Broad-Based Plan may not exceed 10 years, and each option
may be exercised for such period as may be specified by the people committee in
the grant of the option.
Options granted under the Monsanto Broad-Based Plan are not transferable
except by will, the laws of descent and distribution or, upon the holder's
death pursuant to a written beneficiary
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designation. All options may be exercised during the holder's lifetime only by
the holder or the holder's guardian or legal representative.
Our people committee may "buy out," with cash, our common stock or a
combination thereof, a participant's options at any time. To do so, our people
committee must provide written notice of its intention and pay the participant
the fair market value of the shares of our stock into which the options were
convertible, less the exercise price of such options and any applicable
withholding taxes.
AMENDMENT OR TERMINATION. The Monsanto Broad-Based Plan may be amended or
terminated by our people committee at any time, provided that no options
previously granted are adversely affected without the consent of the affected
participant, and that amendments to change the number of shares authorized for
use under the Monsanto Broad-Based Plan must be approved by our board of
directors.
NON-U.S. PARTICIPANTS. To accommodate differences in local law, tax policy
or custom, options granted to employees who are not U.S. nationals or who are
employed outside the United States may be subject to special terms, conditions,
and documentation as provided by our people committee. Our people committee may
also grant substitutes for options to non-U.S. employees.
REGISTRATION AND COMPLIANCE WITH APPLICABLE LAW. If our people committee
determines, under U.S. federal, state or local or foreign law or practice, that
government approval or the registration, qualification, or listing of shares is
desirable in connection with the granting of options or their exercise, no
affected option will be exercisable before our people committee is satisfied
that the desired actions have been completed. Our people committee will not be
required to issue any shares of our common stock pursuant to the exercise of an
option before it has received advice of counsel that such issuance is in
compliance with all applicable laws and securities exchange rules.
CHANGE OF CONTROL. The Monsanto Broad-Based Plan provides that unless our
people committee determines otherwise at the grant, all options will become
immediately exercisable in the event of a change of control (as defined in the
plan).
EMPLOYEE STOCK PURCHASE PLANS
Pharmacia and old Monsanto have for many years provided their employees,
and employees of their subsidiaries, with the opportunity to purchase shares of
common stock of Pharmacia or old Monsanto through payroll deductions, under an
employee stock purchase plan. The maximum number of common shares that an
eligible employee may purchase under this plan is based upon the amount the
employee can buy with payroll deductions of up to 10% of the employee's monthly
base compensation over a 40-month period. Our employees will continue to be
able to enroll for new purchases under the Pharmacia employee stock purchase
plan following this offering.
In addition, we are establishing our own employee stock purchase plan,
which will allow both our employees and employees of Pharmacia and its other
subsidiaries to purchase our common stock following this offering. Our employee
stock purchase plan will have the same basic features as the Pharmacia employee
stock purchase plan. We will obtain the shares of our common stock to deliver
to employees under our employee stock purchase plan through open-market
purchases.
We will reimburse Pharmacia for its cost to acquire shares for our
employees under the Pharmacia employee stock purchase plan, and Pharmacia will
reimburse us for our cost to acquire shares for Pharmacia employees under our
employee stock purchase plan.
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PENSION PLANS
The named executive officers (as well as other of our employees) are
eligible for retirement benefits payable under Pharmacia's tax-qualified and
non-qualified defined benefit pension plans, which were formerly old Monsanto's
plans. We intend to establish our own cash balance pension plan and non-
qualified plans, to provide benefits to our employees beginning January 1, 2001
(or if later, after we receive a determination letter from the Internal Revenue
Service regarding our cash balance pension plan). Our pension plans will have
the same basic features as the Pharmacia pension plans.
Effective January 1, 1997, the old Monsanto defined benefit pension plan
was amended. The old Monsanto non-qualified pension plan that provides benefits
to executives that cannot be provided under the old Monsanto qualified plan
because of limitations under federal tax law was similarly amended. The amended
old Monsanto defined benefit pension plans each consists of two accounts: a
"prior plan account" and a "cash balance account."
The opening balance of the prior plan account was the lump sum value of the
executive's December 31, 1996 monthly retirement benefit earned at old Monsanto
prior to January 1, 1997 under the old defined benefit pension plan described
below, calculated using the assumption that the monthly benefit would be
payable at age 55 with no reduction for early payment. The formula used to
calculate the opening balance for employment with old Monsanto was the greater
of 1.4% (1.2% for employees hired by old Monsanto on or after April 1, 1986) of
average final compensation multiplied by years of service, without reduction
for Social Security or other offset amounts, or 1.5% of average final
compensation multiplied by years of service, less a 50% Social Security offset.
Average final compensation for purposes of determining the opening balance was
the greater of (1) average compensation received during the 36 months of
employment prior to 1997 or (2) average compensation received during the
highest three of the five calendar years of employment prior to 1997.
For each year of the executive's continued employment with old Monsanto,
Pharmacia or our company, the executive's prior plan account will be increased
by 4% to recognize that prior plan benefits would have grown as a result of pay
increases.
For each year that the executive is employed by old Monsanto, Pharmacia or
our company after 1996, 3% of annual compensation in excess of the Social
Security wage base and a percentage (based on age) of annual compensation
(salary and annual bonus) will be credited to the cash balance account. The
applicable percentages and age ranges are: 3% before age 30, 4% for ages 30 to
39, 5% for ages 40 to 44, 6% for ages 45 to 49, and 7% for age 50 and over. In
addition, the cash balance account of executives who earned benefits under old
Monsanto's old defined benefit pension plan will be credited each year (for up
to 10 years based on prior years of service with old Monsanto or Pharmacia),
during which the executive is employed after 1996, with an amount equal to a
percentage (based on age) of annual compensation. The applicable percentages
and age ranges are: 2% before age 30, 3% for ages 30 to 39, 4% for ages 40 to
44, 5% for ages 45 to 49, and 6% for age 50 and over.
The estimated annual benefits payable as a single life annuity beginning at
age 65 (assuming that each executive officer remains employed by us until age
65 and receives 4% annual compensation increases) are as follows: Mr.
Verfaillie, $785,296; Dr. Fraley, $708,969; Mr. Grant, $583,785; Mr. Ide,
$264,428; and Dr. Kishore, $661,464.
In addition to the retirement benefits for Mr. Verfaillie and Mr. Grant
based on their years of service as our employee in the United States, Mr.
Verfaillie and Mr. Grant are also eligible for regular retirement benefits
based on their respective years of service as our employee outside the United
States. In addition, Mr. Verfaillie and Mr. Grant participate in Pharmacia's
regular, non-qualified
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pension plan designed to protect retirement benefits for employees serving in
more than one country. However, their total retirement benefits from the
combined plans, when considering their total service, are expected to be
generally comparable to the benefits described in this section.
Mr. Ide has an individual supplemental retirement arrangement with
Pharmacia under which Mr. Ide is entitled to a supplemental retirement benefit,
subject to certain conditions, which is designed to produce a total retirement
benefit from Pharmacia at age 65 comparable to that which a Pharmacia employee
with 30 years of service would receive (taking into account the value of any
pension benefits earned as an active employee of Pharmacia and of Monsanto and
pension benefits received from prior employers).
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
As permitted by applicable Delaware law, we have included in our
certificate of incorporation a provision to generally eliminate the personal
liability of our directors for monetary damages for breach or alleged breach of
their fiduciary duties as directors. However, this provision does not eliminate
or limit liability of a director for a director's breach of the duty of
loyalty, for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law, for any transaction from which a
director derived an improper personal benefit and for certain other actions. In
addition, our bylaws provide that we are required to indemnify our officers and
directors under a number of circumstances, including those circumstances in
which indemnification would otherwise be discretionary, and we are required to
advance expenses to our officers and directors as incurred in connection with
proceedings against them for which they may be indemnified. At present, we are
not aware of any pending or threatened litigation or proceeding involving a
director, officer, employee or agent of ours in which indemnification would be
required or permitted. We believe that these indemnification provisions are
necessary to attract and retain qualified individuals as directors and
officers.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling us under
the foregoing provisions, we have been informed that, in the opinion of the
SEC, this indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
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ARRANGEMENTS BETWEEN MONSANTO AND PHARMACIA
We have provided below a summary description of the separation agreement
and the key related agreements, which Monsanto and Pharmacia will enter into
prior to this offering. This description, which summarizes the material terms
of such agreements, is not complete. You should read the full text of these
agreements, which will be filed with the SEC as exhibits to the registration
statement of which this prospectus is a part.
SEPARATION AGREEMENT
The separation agreement will contain the key provisions relating to the
separation of our businesses from those of Pharmacia and this offering. The
separation agreement will identify the assets Pharmacia will transfer to us and
the liabilities we will assume from Pharmacia. The separation agreement also
will describe when and how these transfers and assumptions will occur. In
addition, we will enter into additional agreements with Pharmacia governing
various interim and ongoing relationships between Pharmacia and us following
the separation date. These ancillary agreements will include:
. a corporate agreement;
. a tax sharing agreement;
. an intellectual property transfer agreement;
. an employee benefits and compensation allocation agreement;
. a transition services agreement; and
. a shared services agreement.
ASSET TRANSFER
Effective on , 2000, which we refer to as the separation date,
Pharmacia will transfer the following assets to us, except as may be provided
in one of the ancillary agreements:
. any cash necessary to ensure that we will have a cash balance of
$ on the separation date;
. all assets reflected on our balance sheet as of March 31, 2000 or the
accounting records supporting our balance sheet, as adjusted by the pro
forma adjustments set forth in this document (except any of such assets
sold or otherwise disposed of on or prior to the separation date), and
all assets acquired by Pharmacia between March 31, 2000 and the
separation date that would have been included on our balance sheet as
of March 31, 2000 had they been owned on March 31, 2000;
. all other assets primarily related to our business or any former
agribusiness of old Monsanto;
. all computers, desks, equipment and other assets used primarily by
employees of Pharmacia who will become our employees due to the
separation;
. the corporate offices in St. Louis, Missouri;
. contingent gains primarily related to our business or any former
agribusiness of old Monsanto, or otherwise specifically allocated to
us;
. contracts primarily related to our business;
. all outstanding stock, investments or similar interests of specified
old Monsanto subsidiaries;
. specified rights under existing insurance policies; and
. other specified assets.
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EXCLUDED ASSETS
The separation agreement also will provide that Pharmacia will not
transfer certain assets to us.
ASSUMPTION OF LIABILITIES
Effective on the separation date, we will assume the following liabilities
from Pharmacia, except as may be provided in one of the ancillary agreements:
. all liabilities reflected on our balance sheet as of March 31, 2000 or
the accounting records supporting our balance sheet, as adjusted by the
pro forma adjustments set forth in this document (except any of such
liabilities satisfied, paid or discharged on or prior to the separation
date), and all liabilities of Pharmacia incurred or arising between
March 31, 2000 and the separation date that would have been included on
our balance sheet as of March 31, 2000 had they arisen or been incurred
on or prior to March 31, 2000;
. all other liabilities primarily related to our business or any former
agribusiness of old Monsanto, or primarily arising from any asset that
Pharmacia transferred to us;
. environmental and certain other liabilities for certain discontinued
businesses of old Monsanto and all real property transferred to us by
Pharmacia;
. contingent liabilities primarily related to our business, any former
agribusiness of old Monsanto, certain discontinued businesses of old
Monsanto or otherwise specifically allocated to us; and
. other specified liabilities.
We also will agree in the separation agreement to assume any liabilities
of Solutia that were assumed by Solutia when it was separated from old
Monsanto on September 1, 1997, in the event that Solutia fails to pay, perform
or discharge these liabilities.
The parties to the separation agreement will share the responsibility for
contingent environmental liabilities that were not specifically allocated to
either us or Pharmacia and the defense of these claims in proportion to each
party's respective contribution to the site relating to the claim. Any
disagreements as to the assignment of responsibility will be subject to the
dispute resolution procedures described below.
We also will agree in the separation agreement to share contingent
liabilities with Pharmacia that were not specifically allocated to either us
or Pharmacia under the separation agreement. We will pay 57%, and Pharmacia
will pay 43%, of these shared contingent liabilities, unless a joint committee
with members from our company and from Pharmacia decide that a different
allocation is more appropriate. Contingent gains that were not specifically
allocated to either us or Pharmacia will be allocated in the same manner.
Pharmacia will agree in the separation agreement to pay the transaction
costs relating to the separation of our businesses from those of Pharmacia and
this offering (other than underwriting fees and commissions).
EXCLUDED LIABILITIES
The separation agreement will provide that we will not assume specified
liabilities.
THE EX-U.S. PLAN
The transfer of certain international assets and assumption of certain
international liabilities will be accomplished through agreements entered into
between international subsidiaries. The separation
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agreement will acknowledge that circumstances in some jurisdictions outside of
the United States may require the timing of part of the international
separation to be delayed past the separation date.
DELAYED TRANSFERS
If it is not practical to transfer specified assets and liabilities on the
separation date, the separation agreement will provide that these assets and
liabilities will be transferred after the separation date.
FINANCING ARRANGEMENTS
Pharmacia will establish a commercial paper facility under which Pharmacia
will issue assumable commercial paper in the amount of $ prior to the
closing of this offering. The proceeds of such commercial paper borrowings will
be retained by Pharmacia, which also is retaining the specific indebtedness
incurred to finance the acquisitions of the seed companies. We will agree in
the separation agreement to assume the obligations under this commercial paper
at the time of the closing of this offering. We also will agree in the
separation agreement to assume obligations of certain variable-rate, medium-
term bank notes from Pharmacia at the time of the closing of this offering.
TERMS OF ANCILLARY AGREEMENTS GOVERN
If an ancillary agreement expressly provides for the transfer of an asset
or an assumption of a liability, the terms of that ancillary agreement will
determine the manner of the transfer and assumption.
FURTHER ASSURANCES
We and Pharmacia will agree in the separation agreement to use reasonable
efforts to take all actions and do all things reasonably necessary, proper or
advisable to complete and make effective the transactions contemplated by the
separation agreement, to confirm our title to the assets that will have been
transferred to us and the assumption of the liabilities that we will have
assumed, to put us in actual possession and operating control of these assets
and liabilities and to permit us to exercise all rights and to perform our
obligations with respect to these assets and liabilities, subject to applicable
law.
ACCESS TO INFORMATION
We and Pharmacia will agree in the separation agreement:
. prior to or as promptly as practicable after the separation date,
Pharmacia will deliver to us originals or copies of all corporate books
and records related to our business;
. subject to applicable confidentiality provisions or restrictions, each
of us will give the other reasonable access to, and the ability to
duplicate, information developed or obtained prior to the separation
date within its possession relating to the other's businesses, or for
audit, accounting, claims, intellectual property protection, litigation
or tax purposes, as well as for purposes of fulfilling disclosure and
reporting obligations;
. each of us will use reasonable efforts to provide assistance to the
other in connection with any litigation and to make available to the
other certain employees for the purpose of consultation, or directors,
officers, other employees and agents as witnesses, in legal,
administrative or other proceedings;
. the party providing information or consultant or witness services under
the separation agreement is entitled to reimbursement from the other
party for out-of-pocket expenses;
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. each of us will retain all significant information in our possession
relating to the other's business for a specified period of time and if
the information is going to be destroyed, the destroying party will
give the other party the opportunity to receive the information at the
other party's expense;
. each of us agrees not to disclose or otherwise waive any privilege
relating to ourselves or to the other, with certain exceptions; and
. each of us agrees to hold in strict confidence all information
concerning or belonging to the other party obtained prior to the
separation date or furnished pursuant to the separation agreement,
subject to applicable law.
DISPUTE RESOLUTION
We will agree in the separation agreement that, if problems arise between
Pharmacia and us, the following will occur:
. the parties intend to use reasonable best efforts to resolve the
dispute through negotiation;
. if the parties cannot resolve the dispute, either party may deliver an
escalation notice demanding an in-person meeting of our Chief Executive
Officer and Pharmacia's Chief Executive Officer who will then meet with
each other and negotiate in good faith;
. after the delivery of an escalation notice, a party may offer to settle
the dispute upon the payment of a specified sum. If (1) the offeree
does not accept, (2) the offeror made its Chief Executive Officer
available for a meeting and (3) the award or judgment finally obtained
is not more favorable to the offeree than the offer of settlement, then
the offeree will be required to pay the costs of the offeror incurred
after the offer of settlement;
. at any time, the parties may, by mutual consent, attempt to resolve the
dispute through non-binding mediation; and
. after a certain period of time following either the delivery of an
escalation notice or the meeting held pursuant to an escalation notice,
either party may demand that the dispute be resolved by binding
arbitration.
NO REPRESENTATIONS AND WARRANTIES
Pursuant to the separation agreement, Pharmacia will not make any promises
to us as to the assets to be transferred to us, the liabilities to be assumed
by us, our business, the former agribusinesses of old Monsanto, our balance
sheet, or as to any consents or approvals required in connection with the
consummation of the transactions contemplated by the separation agreement. We
will take all assets "as is, where is" and we will bear the economic and legal
risk relating to conveyance of, and title to, the assets.
INDEMNIFICATION
In general, we will agree in the separation agreement to indemnify
Pharmacia and its representatives and affiliates from all liabilities that we
will assume under the separation agreement or any of the ancillary agreements,
including the indebtedness under the commercial paper facility and the
variable-rate medium-term bank notes, and any and all losses by Pharmacia or
its representatives or affiliates arising out of or due to our failure to pay,
perform or discharge in due course these liabilities. In general, Pharmacia
will agree to indemnify us and our representatives and affiliates from all
liabilities that will be retained by Pharmacia under the separation agreement
or any of the ancillary agreements and any and all losses by us or our
representatives or affiliates arising out of or due to Pharmacia's failure to
pay, perform or discharge in due course these liabilities.
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INSURANCE
Under the terms of the separation agreement, we will be entitled to the
benefit of liability insurance coverage under certain Pharmacia policies, to
the extent this coverage existed and coverage limits are not exhausted, for
claims for which we are assuming responsibility. Pharmacia will retain the
benefit of liability insurance coverage under these policies for claims for
which Pharmacia is retaining responsibility. Where our claims and Pharmacia's
claims are covered under the same insurance policies, generally either of us
may claim coverage up to the full extent of the applicable limits of coverage
under the policy, on an as-available basis, without allocation between us and
Pharmacia.
THE INITIAL PUBLIC OFFERING
Under the terms of the separation agreement, the following will be
conditions to the consummation of this offering:
. the separation must have occurred;
. the separation agreement must not have been terminated;
. the registration statement containing this prospectus must be effective;
. our common stock must have been approved for listing on the New York
Stock Exchange;
. our obligations under the underwriting agreement must be met or waived
by the underwriters;
. Pharmacia must own at least 80.1% of our common stock on a fully-diluted
basis;
. no legal restraints must exist preventing the separation or this
offering; and
. the assumable commercial paper facility in the amount of $ , and a
revolving credit facility to support the commercial paper borrowings,
must be in place.
CORPORATE AGREEMENT
The corporate agreement will contain provisions regarding our corporate
governance and certain rights of Pharmacia with respect to us.
REGISTRATION RIGHTS
Under the corporate agreement, Pharmacia will have the right to require us
on four occasions to register for sale the shares of our common stock it holds,
so long as the number of shares that Pharmacia requires us to register, in each
case, is at least 5% of our outstanding common stock. Pharmacia also will have
"piggy back" registration rights. This means that any time we register our
common stock for sale after this offering, Pharmacia will have the right to
include our common stock held by Pharmacia in that offering and sale with
certain exceptions.
We will be obligated to pay all expenses that result from the registration
of our common stock held by Pharmacia, except that Pharmacia has agreed to pay
the registration and filing fees and underwriting discounts and commissions. We
also will agree in the corporate agreement to indemnify Pharmacia against any
liabilities that may result from its sale of our common stock, including
liabilities under the Securities Act.
PREEMPTIVE RIGHTS
Under the terms of the corporate agreement, Pharmacia will have a
continuing right to buy our common stock from us to maintain its ownership of
at least 80.1% of our outstanding equity and voting power on a fully-diluted
basis. The preemptive right will be at prevailing market prices or, in the case
we sell our common stock in a public offering for cash, at a price per share
equal to our net
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proceeds per share in such offering. The preemptive right will expire in the
event Pharmacia sells or disposes of its shares to reduce its ownership
interest of the outstanding equity and voting power to less than 80.1% on a
fully-diluted basis.
CERTAIN COVENANTS
We will agree in the corporate agreement that, for so long as Pharmacia
continues to own at least 50% of our outstanding common stock, we will not,
without Pharmacia's prior written consent, take any action that has the effect
of limiting Pharmacia's ability to freely sell, pledge or otherwise dispose of
shares of our common stock or limiting the legal rights of or denying any
benefit to Pharmacia as our stockholder in a manner not applicable to our
stockholders generally.
We also will agree in the corporate agreement not to take any action or
enter into any commitment or agreement which would adversely affect the pooling
of interests accounting treatment of the business combination between old
Monsanto and Pharmacia & Upjohn.
AUDITING PRACTICES
We and Pharmacia will agree in the corporate agreement that, so long as
Pharmacia is required to consolidate our results of operations and financial
position:
. we will not change independent accounting firms without Pharmacia's
consent;
. we will use reasonable commercial efforts to enable our auditors to date
their opinion on our audited financial statements on the same date as
Pharmacia's auditors date their opinion on Pharmacia's financial
statements;
. we and Pharmacia will exchange all relevant information needed to
prepare financial statements;
. we and Pharmacia will grant each other's internal auditors access to
each other's records; and
. we and Pharmacia will notify each other of any change in accounting
principle.
TAX SHARING AGREEMENT
Following this offering, Monsanto and certain of its subsidiaries will be
included in Pharmacia's consolidated group for U.S. federal income tax purposes
(the "Pharmacia Federal Group") as well as in certain consolidated, combined,
unitary or other similar consolidated returns that include Pharmacia and its
subsidiaries for state and local income tax purposes (a "Pharmacia State
Group"). Prior to this offering, we and Pharmacia will enter into a tax sharing
agreement.
Pursuant to the tax sharing agreement, with respect to tax returns for any
taxable period in which we and any of our subsidiaries (collectively, the
"Monsanto Group") are included in the Pharmacia Federal Group or any Pharmacia
State Group, we generally will be obligated to pay to Pharmacia the amount of
taxes (including estimated taxes) that would be due and payable by us
determined, subject to certain adjustments, as if the Monsanto Group filed its
own tax returns that did not include Pharmacia or other members of the
Pharmacia Federal Group or the Pharmacia State Group, as the case may be. If,
for any taxable period in which the Monsanto Group is included in the Pharmacia
Federal Group or any Pharmacia State Group, the Monsanto Group has a net
operating loss or tax credit that reduces the taxes of the Pharmacia Federal
Group or any Pharmacia State Group, as the case may be, below the amount that
would have been payable if the Monsanto Group had not incurred such loss or tax
credit, Pharmacia must pay to us the amount of the reduction in taxes
attributable to the loss or tax credit. We will be responsible for any taxes
with respect to tax returns that include only the Monsanto Group.
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Pharmacia will be responsible for the preparation and filing of all tax
returns for any taxable period in which the Monsanto Group is included in the
Pharmacia Federal Group or any Pharmacia State Group. We will be responsible
for the preparation and filing of all tax returns that include only the
Monsanto Group.
Pharmacia generally will have sole responsibility for, and control over,
all audits with respect to any tax return for the Pharmacia Federal Group and
any Pharmacia State Group and we generally will have sole responsibility for,
and control over, all audits with respect to all tax returns that include only
the Monsanto Group.
With respect to tax periods beginning on or after the separation date, in
the event of any adjustments to the tax returns of the Pharmacia Federal Group,
any Pharmacia State Group or the Monsanto Group, the liability of Pharmacia or
us, as the case may be, under the tax sharing agreement will be redetermined by
giving effect to such adjustment, and Pharmacia or we, as the case may be, will
be obligated to pay to the other party any differences between the original
liability and the redetermined liability. With respect to tax periods beginning
before the separation date, in the event of any adjustments to the tax returns
of Pharmacia, the Pharmacia Federal Group or any Pharmacia State Group
attributable to DEKALB Genetics Corporation and its subsidiaries, we are
obligated to pay to Pharmacia the amount of any such tax liabilities (including
additional amounts, penalties and interest) determined to be due as a result of
such adjustment. We will also be responsible for the tax liability arising from
transactions pursuant to which the Monsanto Group's pharmaceutical assets in
foreign jurisdictions are separated from the Monsanto Group's agricultural
assets in foreign jurisdictions ("Separation Transactions"). This liability
will be reduced by the present value of any tax asset created as a result of
such transactions. Except for the DEKALB tax liabilities and taxes attributable
to Separation Transactions, Pharmacia will be responsible for and will
indemnify and hold us harmless from all taxes incurred by any member of the
Monsanto Group prior to the separation date.
Pharmacia and we will provide each other all information and other
assistance reasonably requested by the other party in connection with the
preparation and filing of any tax return pursuant to the tax sharing agreement.
Disputes arising between Pharmacia and us relating to matters covered by the
tax sharing agreement are subject to resolution through third-party dispute
resolution provisions.
We will be included in the Pharmacia Federal Group for all taxable periods
during which Pharmacia beneficially owns at least 80% of the total voting power
and value of our outstanding common stock. Each member of a consolidated group
for U.S. federal income tax purposes is jointly and severally liable for the
U.S. federal income tax liability of each other member of the consolidated
group. As such, although the tax sharing agreement provides for the sharing of
liabilities between Pharmacia and us, during the period in which we are
included in the Pharmacia Federal Group, we could be liable for any U.S.
federal income tax liability that is incurred, but not discharged, by any other
member of the Pharmacia Federal Group.
EMPLOYEE BENEFITS AND COMPENSATION ALLOCATION AGREEMENT
The employee benefits and compensation allocation agreement will set forth
the agreement between Pharmacia and us as to the allocation of employees and
their compensation and benefits following our offering.
In general, employees who work exclusively in the businesses being
transferred to us will be transferred to us and our subsidiaries as of the
separation date, and employees who work exclusively in the businesses being
retained by Pharmacia will remain with Pharmacia and its other subsidiaries.
Outside the United States, employees who work as staff employees supporting all
of the businesses
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generally will be allocated to the primary businesses in each country, unless
certain factors dictate otherwise. In the United States, staff employees
working in St. Louis, Missouri generally will be allocated to us and staff
employees working in Chicago, Illinois generally will be assigned to Pharmacia,
as specified in the employee benefits and compensation allocation agreement. In
some cases, staff employees of Pharmacia working in St. Louis will provide
services to both Pharmacia and us under the Shared Services Agreement. See
"Shared Services Agreement." In some cases, the staff employees assigned to one
company will provide support services to the other company under the transition
services agreement. See "Transition Services Agreement." For example, in the
United States, the staff employees transferred to us will continue to provide
services to Pharmacia.
We will assume responsibility for all obligations under any individual
employment letters or similar agreements between Pharmacia and employees who
transfer to us.
It is expected that some of the staff employees will be terminated
following this offering. The employee benefits and compensation allocation
agreement provides that the severance benefits for such employees who are
terminated within two years after our offering will be borne by Pharmacia.
In the United States, employees and former employees allocated to us will
continue to participate in the old Monsanto Company Pension Plan, the related
ERISA Parity Pension Plan and the old Monsanto Company Supplemental Retirement
Plan, each of which will continue to be sponsored by Pharmacia for a period of
time following our offering, and we will bear the costs of their participation.
The period of this continued participation will last until December 31, 2000,
or such later time as we are able to establish our own qualified pension plan
with benefits similar to those provided under the old Monsanto Company Pension
Plan, and obtain a determination letter from the Internal Revenue Service that
the qualified pension plan meets the requirements for tax qualification.
Because the Internal Revenue Service currently is reviewing various issues
regarding cash balance plans generally that could affect our qualified pension
plan, we cannot be sure when we will be able to obtain this determination
letter. At such time as we do obtain the letter, our new pension plans will
assume liability for the pension benefits of our employees and the former
employees allocated to us, as described above. Assets to fund the liabilities
under the qualified pension plan on an accrued-benefits-obligation basis will
be transferred from the trust for the old Monsanto Company Pension Plan to the
trust for our qualified pension plan. Before this split takes place, we will
bear the costs of providing benefits to our employees and former employees
allocated to us under the old Monsanto Company Pension Plan.
We will establish a qualified savings and investment plan, which will be a
qualified defined contribution plan similar to the old Monsanto Company Savings
and Investment Plan, and a related nonqualified plan, which will be similar to
the old Monsanto Company ERISA Parity Savings and Investment Plan, to provide
benefits to our employees as soon as is administratively feasible after the
separation date. The accounts of our employees under the old Monsanto Company
Savings and Investment Plan will be transferred to our new plan. In connection
therewith, a portion of the employee stock ownership plan component of the old
Monsanto Company Savings and Investment Plan also will be transferred to our
plan. Our qualified savings and investment plan will assume a percentage of the
debt obligations of the old Monsanto Company Savings and Investment Plan, and
receive the same percentage of the employer securities financed by that debt,
based upon the relative eligible pay of our employees participating in the plan
as compared to the Pharmacia employees participating in the plan.
Effective as soon after the separation date as is administratively
feasible, we will assume sponsorship of all of old Monsanto's U.S. medical,
life, disability and other welfare benefit plans, and Pharmacia will be a
participating employer in those plans. Outside of the United States, the
company that is going to assume sponsorship of the benefit plans in which both
Pharmacia and our employees will participate will generally be designated as
the host company. Pharmacia will bear the cost of the
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continued participation in the plans assumed by us by Pharmacia employees and
by former employees allocated to Pharmacia, and we will bear the costs of the
continued participation plans by our employees and by former employees
allocated to us in plans assumed by Pharmacia. There may be some deviations
from these general rules where appropriate because of local law or other local
considerations.
Cost-sharing for the benefits provided to one company's employees by plans
sponsored by the other company generally will be based upon the current
methodology used within the Pharmacia group, in which uniform overhead rates
are established for each plan. There will be a single rate for both companies'
employees while they participate in a single plan, and separate rates when the
plans are split as described above. In addition, the employee benefits and
compensation allocation agreement provides that we and Pharmacia will share any
costs or liabilities involving the old Monsanto employee benefit plans and
relating to compliance issues arising before this offering or, after this
offering, if such issues involve the plans in which we and Pharmacia both
participate.
INTELLECTUAL PROPERTY TRANSFER AGREEMENT
The intellectual property transfer agreement, referred to as the "IPTA," is
a master agreement encompassing several agreements which will allocate between
Pharmacia and Monsanto rights relating to patents, patent applications,
invention disclosures, unpatented technology (such as know-how), technology
agreements, trademarks, copyrights and other forms of intellectual property.
The IPTA generally will provide that both parties agree not to disclose
confidential information of the other party. Further, each party will agree not
to use the information except when such use has been agreed to by the other
party.
PATENT RIGHTS
Under the terms of the IPTA, Pharmacia will assign to us ownership of
certain patents, patent applications and invention disclosures directed to
technology related exclusively to the businesses transferred to us. If the
technology is used by both Pharmacia and us, but primarily by Pharmacia, such
patents, patent applications and invention disclosures may be retained by
Pharmacia and licensed to us for use in our business field. If the technology
is used by both Pharmacia and us, but primarily by us, such patents, patent
applications and invention disclosures may be assigned to us and a license
provided to Pharmacia for use in Pharmacia's business field.
The IPTA will provide that both parties will assist each other in (1) the
filing of patent applications, (2) the prosecution of the patent applications
and (3) any patent litigation. Expenses for such assistance will be borne by
the party requesting assistance. Further, the IPTA will specify that for a
period of three years both parties will be obligated to correct any bona fide
error made in allocating the rights between the parties.
We believe that all material patent rights necessary to conduct our
business will be either assigned or licensed to us by Pharmacia under the IPTA.
UNPATENTED TECHNOLOGY
Unpatented technology that relates exclusively to our business as of the
separation date will be assigned to us. Unpatented technology used by both
Pharmacia and us, but primarily by Pharmacia, may be retained by Pharmacia and
licensed royalty-free to us. Unpatented technology used by Pharmacia and us,
but primarily by us, may be assigned to us and licensed royalty-free to
Pharmacia.
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TECHNOLOGY AGREEMENTS
Pharmacia has entered into numerous agreements with third parties relating
to patents, patent applications and/or technology. To the extent such
agreements can be identified as relating exclusively to us, and to the extent
assignment is allowed to be made, Pharmacia will assign to us such agreements
relating exclusively to our business. If the subject technology is used by both
Pharmacia and us, but primarily by us, such agreements may be assigned to us
and a license provided to Pharmacia for use in Pharmacia's business field. In
any case and to the extent that the agreement is used by both businesses, we
and Pharmacia will continue to permit the agreement to be used by both
businesses to the extent the agreement allows. Royalty payments under these
technology agreements will be allocated between us and Pharmacia on a prorated
basis, based on the use of the technology.
TRADEMARKS
Pharmacia will assign to us at the separation date trademarks used
exclusively by us. Pharmacia also will assign to us all marks relating to the
Monsanto name, as well as the block M and the Food, Health and Hope logo. We
will provide a license to Pharmacia, limited to six months, for Pharmacia to
utilize certain trademarks, including the Monsanto name, the block M and the
Food, Health and Hope logo. After six months, Pharmacia will no longer have the
right to use those trademarks.
COPYRIGHTS
Pharmacia will assign to us all copyrights that are primarily used in our
business as of the separation date.
NON-COMPETITION PROVISIONS
For a two-year period following the separation date, we will be obligated
to refrain from commercializing, by selling or transferring for sale or use by
the end user, products in the businesses retained by Pharmacia. For a two-year
period following the separation date, Pharmacia will be obligated to refrain
from commercializing products in the business transferred to us.
Also, for two years after the separation date, we and Pharmacia will each
be obligated to offer the other a first right to negotiate a license for
technology developed after the separation date that has a use in the other's
business field. The term for initiating such negotiation will expire three
years from the separation date. Such negotiation will be conducted in good
faith and will reflect commercially reasonable license terms. Further, the
financial terms of such license will be no less favorable than financial terms
granted to any third party for the subject technology in a similar field of
use.
TRANSITION SERVICES AGREEMENT
The transition services agreement will govern the provision by Pharmacia to
us and by us to Pharmacia of certain support services that are not provided by
Pharmacia to us pursuant to the shared services agreement, such as certain
financial management, accounting, tax, payroll, legal, investor relations,
human resources administration, information technology, data processing,
procurement and real estate management functions. The terms of these services
are generally until December 31, 2000, subject to certain exceptions. We
anticipate that we will negotiate a new
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agreement with Pharmacia for the continued provision of some of these services
for some period after December 31, 2000, but we cannot guarantee that we will
be able to do so.
SHARED SERVICES AGREEMENT
The shared services agreement will govern the provision by Pharmacia to us
of certain support services, such as portions of human resources
administration, financial transaction support, information technology and other
general administrative services.
ALLOCATION OF CORPORATE OPPORTUNITIES
Our certificate of incorporation provides that, unless otherwise provided
in a written agreement between us and Pharmacia, Pharmacia will have no duty to
refrain from engaging in the same or similar activities or lines of business as
our company, and, to the fullest extent permitted by law, neither Pharmacia nor
any officer or director of Pharmacia (except as provided below) will be liable
to us or our stockholders for breach of any fiduciary duty by reason of any
such activities of Pharmacia. In the event that Pharmacia acquires knowledge of
a potential transaction or matter which may be a corporate opportunity for both
Pharmacia and us, Pharmacia will, to the fullest extent permitted by law, have
no duty to communicate or offer such corporate opportunity to us and will, to
the fullest extent permitted by law, not be liable to us or our stockholders
for breach of any fiduciary duty as a stockholder of our company by reason of
the fact that Pharmacia pursues or acquires such corporate opportunity for
itself, directs such corporate opportunity to another person, or does not
communicate information regarding such corporate opportunity to us.
In the event that one of our directors or officers who is also a director
or officer of Pharmacia acquires knowledge of a potential transaction or matter
which may be a corporate opportunity for both us and Pharmacia, such director
or officer will, to the fullest extent permitted by law, have fully satisfied
the fiduciary duty of such director or officer to us and our stockholders with
respect to such corporate opportunity if such director or officer acts in a
manner consistent with the following policy:
. a corporate opportunity offered to any person who is an officer of our
company, and who is also a director but not an officer of Pharmacia,
will belong to us;
. a corporate opportunity offered to any person who is a director but
not an officer of our company, and who is also a director or officer
of Pharmacia, will belong to us if such opportunity is expressly
offered to such person in his or her capacity as a director of our
company, and otherwise will belong to Pharmacia; and
. a corporate opportunity offered to any person who is an officer of
both our company and Pharmacia will belong to us if such opportunity
is expressly offered to such person in his or her capacity as an
officer of our company, and otherwise will belong to Pharmacia.
These corporate opportunities provisions will expire once Pharmacia owns
less than 20% of our common stock and once no person who is a director or
officer of our company is also a director or officer of Pharmacia.
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PRINCIPAL STOCKHOLDER
Prior to this offering, all of the outstanding shares of our common stock
will be owned by Pharmacia. After this offering, Pharmacia will own
approximately % of our outstanding common stock, or approximately % if the
underwriters exercise their over-allotment option in full. Except for
Pharmacia, we are not aware of any person or group that will beneficially own
more than 5% of our outstanding shares of common stock following this offering.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon the completion of this offering, we will be authorized to issue
shares of our common stock, $.01 par value, and shares of undesignated
preferred stock, $.01 par value. The following description of our capital stock
is subject to and qualified in its entirety by our certificate of incorporation
and bylaws, which are included as exhibits to the registration statement of
which this prospectus forms a part, and by the provisions of applicable
Delaware law.
COMMON STOCK
Prior to this offering, there were shares of our common stock
outstanding, all of which were held of record by Pharmacia.
The holders of our common stock are entitled to one vote per share on all
matters to be voted upon by our stockholders. Subject to preferences that may
be applicable to any outstanding preferred stock, the holders of our common
stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by our board of directors out of funds legally
available for that purpose. See "Dividend Policy." In the event of our
liquidation, dissolution or winding up, the holders of our common stock are
entitled to share ratably in all assets remaining after payment of liabilities,
subject to prior distribution rights of our preferred stock, if any, then
outstanding. The holders of our common stock have no preemptive or conversion
rights or other subscription rights. There are no redemption or sinking fund
provisions applicable to our common stock.
PREFERRED STOCK
Our board of directors has the authority, without action by the
stockholders, to designate and issue our preferred stock in one or more series
and to designate the rights, preferences and privileges of each series, which
may be greater than the rights of our common stock. It is not possible to state
the actual effect of the issuance of any shares of our preferred stock upon the
rights of holders of our common stock until the board of directors determines
the specific rights of the holders of our preferred stock. However, the effects
might include, among other things:
. restricting dividends on our common stock;
. diluting the voting power of our common stock;
. impairing the liquidation rights of our common stock; or
. delaying or preventing a change of control of us without further action
by our stockholders.
At the closing of this offering, no shares of our preferred stock will be
outstanding, and we have no present plans to issue any shares of our preferred
stock.
ANTI-TAKEOVER EFFECTS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS AND
DELAWARE LAW
Some provisions of Delaware law and our certificate of incorporation and
bylaws could make the following more difficult, although they have little
significance while we are controlled by Pharmacia:
. acquisition of us by means of a tender offer;
. acquisition of us by means of a proxy contest or otherwise; or
. removal of our incumbent officers and directors.
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These provisions, summarized below, are expected to discourage coercive
takeover practices and inadequate takeover bids. These provisions also are
designed to encourage persons seeking to acquire control of us to first
negotiate with our board of directors. We believe that the benefits of
increased protection give us the potential ability to negotiate with the
proponent of an unfriendly or unsolicited proposal to acquire or restructure us
and outweigh the disadvantages of discouraging such proposals because
negotiation of such proposals could result in an improvement of their terms.
ELECTION AND REMOVAL OF DIRECTORS
Our certificate of incorporation provides that directors may be removed
only by the vote of holders of at least 70% of our outstanding shares of common
stock and, once Pharmacia owns less than 50% of our common stock, directors may
be removed only for cause. After such time that Pharmacia owns less than 50% of
our common stock, our board of directors will be divided into three classes.
The directors in each class will serve for a three-year term, one class being
elected each year by our stockholders. This system of electing and removing
directors may discourage a third party from making a tender offer or otherwise
attempting to obtain control of us if Pharmacia no longer controls us because
it generally makes it more difficult for stockholders to replace a majority of
the directors.
ELIMINATION OF STOCKHOLDER ACTION BY WRITTEN CONSENT
Our certificate of incorporation eliminates the right of stockholders other
than Pharmacia to act by written consent without a meeting. Pharmacia will lose
this right once it owns less than 50% of our common stock.
AMENDMENT OF CERTIFICATE OF INCORPORATION PROVISIONS
The amendment of any of the above provisions in our certificate of
incorporation would require approval by holders of at least 70% of our
outstanding common stock.
STOCKHOLDER MEETINGS
Under our bylaws, only our board of directors and, until Pharmacia owns
less than 50% of our common stock, Pharmacia, may call special meetings of our
stockholders.
REQUIREMENTS FOR ADVANCE NOTIFICATION OF STOCKHOLDER NOMINATIONS AND
PROPOSALS
Our bylaws establish advance notice procedures with respect to stockholder
proposals and nomination of candidates for election as directors, other than
nominations made by or at the direction of our board of directors or a
committee of our board of directors.
AMENDMENTS TO OUR BYLAWS
Our bylaws may only be amended by our board of directors or by the vote of
holders of at least 70% of the outstanding shares.
DELAWARE ANTI-TAKEOVER LAW
Our certificate of incorporation provides that Section 203 of the Delaware
General Corporation Law, an anti-takeover law, does not apply to us until
Pharmacia owns less than 15% of our outstanding common stock.
In general, Section 203 prohibits a publicly held Delaware corporation from
engaging in a "business combination" with an "interested stockholder" for a
period of three years following the date the person became an interested
stockholder, unless the "business combination" or the transaction in which the
person became an interested stockholder is approved in a prescribed manner.
Generally, a "business combination" includes a merger, asset or stock sale, or
other transaction resulting in a
97
<PAGE>
financial benefit to the interested stockholder. Generally, an "interested
stockholder" is a person who, together with affiliates and associates, owns or
within three years prior to the determination of interested stockholder
status, did own, 15% or more of a corporation's voting stock. Section 203 is
not applicable to business combinations with Pharmacia. The existence of this
provision may have an anti-takeover effect with respect to transactions not
approved in advance by the board of directors, including discouraging attempts
that might result in a premium over the market price for the shares of common
stock held by stockholders.
NO CUMULATIVE VOTING
Our certificate of incorporation and bylaws do not provide for cumulative
voting in the election of directors.
UNDESIGNATED PREFERRED STOCK
The authorization of undesignated preferred stock makes it possible for
our board of directors to issue our preferred stock with voting or other
rights or preferences that could impede the success of any attempt to change
control of us. These and other provisions may have the effect of deferring
hostile takeovers or delaying changes of control of our management.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is .
NEW YORK STOCK EXCHANGE LISTING
We intend to list our common stock on the New York Stock Exchange under
the symbol "MON."
98
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
All of the shares of our common stock sold in this offering will be
freely tradable without restriction under the Securities Act, except for any
shares that may be acquired by an affiliate of us, as that term is defined in
Rule 144 under the Securities Act. Persons who may be deemed to be affiliates
generally include individuals or entities that control, are controlled by, or
are under common control with, us and may include our directors or officers as
well as our significant stockholders, if any. Persons who are affiliates will
be permitted to sell the shares of our common stock that are issued in this
offering only through registration under the Securities Act, or under an
exemption from registration, such as the one provided by Rule 144.
The shares of our common stock held by Pharmacia are deemed restricted
securities (as defined in Rule 144) and may not be sold other than through
registration under the Securities Act or under an exemption from registration.
We have granted registration rights to Pharmacia. See "Arrangements Between
Monsanto and Pharmacia--Corporate Agreement--Registration Rights." Pharmacia,
our directors and officers and we have agreed not to offer or sell any shares
of our common stock, subject to exceptions, for a period of 180 days after the
date of this prospectus, without the prior written consent of the
representatives on behalf of the underwriters. See "Underwriting."
99
<PAGE>
UNDERWRITING
We and the underwriters named below have entered into an underwriting
agreement with respect to the shares of our common stock being offered. Subject
to certain conditions, each underwriter has severally agreed to purchase the
number of shares indicated in the following table. Goldman, Sachs & Co.,
Salomon Smith Barney Inc., J.P. Morgan Securities Inc., Morgan Stanley & Co.
Incorporated, Bear, Stearns & Co. Inc. and Merrill Lynch, Pierce, Fenner &
Smith Incorporated are the representatives of the underwriters.
<TABLE>
<CAPTION>
Number of
Underwriters Shares
------------ ---------
<S> <C>
Goldman, Sachs & Co. .................................................
Salomon Smith Barney Inc. ............................................
J.P. Morgan Securities Inc. ..........................................
Morgan Stanley & Co. Incorporated.....................................
Bear, Stearns & Co. Inc...............................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated....................
---------
Total...............................................................
=========
</TABLE>
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional
shares from us to cover such sales. They may exercise that option for 30 days.
If any shares are purchased pursuant to this option, the underwriters will
severally purchase shares in approximately the same proportion as set forth in
the table above.
The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters by us. Such amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.
<TABLE>
<CAPTION>
Paid by Monsanto
-----------------
No Full
Exercise Exercise
-------- --------
<S> <C> <C>
Per Share..................................................... $ $
Total......................................................... $ $
</TABLE>
Shares sold by the underwriters to the public initially will be offered at
the initial public offering price set forth on the cover of this prospectus.
Any shares sold by the underwriters to securities dealers may be sold at a
discount of up to $ per share from the initial public offering price. Any
such securities dealers may resell any shares purchased from the underwriters
to certain other brokers or dealers at a discount of up to $ per share from
the initial public offering price. If all the shares are not sold at the
initial offering price, the representatives may change the offering price and
the other selling terms.
We, our officers and directors and Pharmacia have agreed with the
underwriters not to dispose of or hedge any of their shares of our common stock
or securities convertible into or exchangeable for shares of our common stock
during the 180-day period following the date of this prospectus, except with
the prior written consent of the representatives. See "Shares Eligible for
Future Sale" for a discussion of certain transfer restrictions.
Prior to this offering, there has been no public market for the shares of
our common stock. The initial public offering price will be negotiated between
us and the representatives. Among the factors
100
<PAGE>
to be considered in determining the initial public offering price of the
shares, in addition to prevailing market conditions, will be our historical
performance, estimates of our business potential and earnings prospects, an
assessment of our management and consideration of the above factors in relation
to market valuation of companies in related businesses.
We intend to apply for the common stock to be listed on the New York Stock
Exchange under the symbol "MON." In order to meet one of the requirements for
listing our common stock on the NYSE, the underwriters have undertaken to sell
lots of 100 or more shares of common stock to a minimum of 2,000 beneficial
holders.
In connection with this offering, the underwriters may purchase and sell
shares of our common stock in the open market. These transactions may include
short sales, stabilizing transactions and purchases to cover positions created
by short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in this offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of our common
stock while this offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares
sold by or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of our common stock. As a result, the price of our
common stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the NYSE, in
the over-the-counter market or otherwise.
The underwriters do not expect sales to discretionary accounts to exceed 5%
of the total number of shares of our common stock offered.
We estimate that the total offering expenses, excluding underwriting
discounts and commissions, will be approximately $ which will be paid by
Pharmacia.
We have agreed to indemnify the underwriters against specified liabilities,
including liabilities under the Securities Act.
From time to time, some of the underwriters and their affiliates have
provided, and in the case of Monsanto and Pharmacia may continue to provide,
investment banking services to old Monsanto, Monsanto and Pharmacia, including
in connection with the merger of old Monsanto and Pharmacia & Upjohn, for which
they have received customary compensation.
Michael Kantor, a director of Monsanto and Pharmacia, is a partner at the
law firm Mayer, Brown & Platt. Mayer, Brown & Platt is currently retained by
Morgan Stanley & Co. Incorporated.
John S. Reed, a director of Monsanto and Pharmacia, resigned as Chairman
and Co-Chief Executive Officer of Citigroup Inc. effective as of April 18,
2000. Salomon Smith Barney Inc., one of the underwriters, is a member of
Citigroup.
Salomon Smith Barney Inc. has agreed to underwrite a $1 billion, 120-day
standby credit facility to support Monsanto's commercial paper program. Salomon
Smith Barney Inc. will receive customary compensation for this.
101
<PAGE>
LEGAL MATTERS
Wachtell, Lipton, Rosen & Katz, New York, New York will pass upon the
validity of our common stock being sold in this offering and other legal
matters for us. Cravath, Swaine & Moore, New York, New York will pass upon a
number of legal matters relating to this offering for the underwriters. Each of
these firms has in the past represented and continues to represent one or more
of the underwriters, and Wachtell, Lipton, Rosen & Katz has in the past
represented old Monsanto, on a regular basis and in a variety of matters other
than this offering.
EXPERTS
The combined financial statements of the Monsanto Company Agricultural
Business included in this prospectus have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their report appearing herein, and are
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
The statement of financial position of Monsanto Company as of February 9,
2000 included in this prospectus has been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and is
included in reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to our common stock offered in this prospectus.
This prospectus does not contain all of the information set forth in the
registration statement and the exhibits and schedules to that registration
statement. For further information with respect to us and our common stock, we
refer you to this registration statement and its exhibits and schedules.
Statements contained in this prospectus as to the contents of any contract or
other document are not necessarily complete and, in each instance, reference is
made to the copy of that contract or document filed as an exhibit to the
registration statement, each of these statements being qualified in all
respects by that reference. You may read and copy the registration statement,
including exhibits to the registration statement, at the SEC's public reference
room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the public reference room. Our
filings with the SEC are also available to the public through the SEC's
Internet site at http://www.sec.gov.
Upon completion of this offering, we will be subject to the informational
requirements of the Securities Exchange Act and, in accordance with those
requirements, will file reports, proxy and information statements with the SEC.
You may inspect and copy these reports, proxy and information statements and
other information at the addresses set forth above.
We intend to furnish to our stockholders our annual reports containing
combined financial statements audited by our independent auditors and quarterly
reports containing unaudited consolidated financial statements for each of the
first three quarters of each fiscal year.
102
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
MONSANTO COMPANY AGRICULTURAL BUSINESS
Independent Auditors' Report............................................... F-2
Statement of Combined Income (Loss)........................................ F-3
Statement of Combined Financial Position................................... F-4
Statement of Combined Cash Flows........................................... F-5
Statement of Combined Equity............................................... F-6
Statement of Combined Comprehensive Income (Loss).......................... F-6
Notes to Combined Financial Statements..................................... F-7
MONSANTO COMPANY
Independent Auditors' Report............................................... F-30
Statement of Financial Position............................................ F-31
Notes to Statement of Financial Position................................... F-32
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
MONSANTO COMPANY:
We have audited the accompanying statement of combined financial position
of the Monsanto Company Agricultural Business ("Monsanto Ag") as of December
31, 1999 and 1998, and the related statements of combined income (loss), cash
flows, equity and comprehensive income (loss) for each of the three years in
the period ended December 31, 1999. These financial statements are the
responsibility of Monsanto Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such combined financial statements present fairly, in all
material respects, the financial position of Monsanto Ag as of December 31,
1999 and 1998, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
St. Louis, Missouri
March 22, 2000
F-2
<PAGE>
MONSANTO COMPANY AGRICULTURAL BUSINESS
STATEMENT OF COMBINED INCOME (LOSS)
(in millions)
<TABLE>
<CAPTION>
Year Ended December
31,
----------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
NET SALES.............................................. $5,248 $4,448 $3,673
Cost of goods sold..................................... 2,556 2,149 1,729
------ ------ ------
GROSS MARGIN........................................... 2,692 2,299 1,944
------ ------ ------
OPERATING EXPENSES:
Selling, general and administrative expenses......... 1,222 1,135 869
Research and development expenses.................... 695 536 409
Acquired in-process research and development......... -- 402 633
Amortization and adjustments of goodwill............. 128 77 20
Restructuring and other unusual items................ 22 94 --
------ ------ ------
Total operating expenses............................... 2,067 2,244 1,931
INCOME FROM OPERATIONS................................. 625 55 13
Interest expense (net of interest income of $25, $27
and $28 in 1999, 1998 and 1997, respectively)......... (243) (94) (20)
Other (expense) income--net............................ (119) (21) 8
------ ------ ------
INCOME (LOSS) BEFORE INCOME TAXES...................... 263 (60) 1
Income tax (provision) benefit......................... (113) (65) 30
------ ------ ------
NET INCOME (LOSS)...................................... $ 150 $ (125) $ 31
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
MONSANTO COMPANY AGRICULTURAL BUSINESS
STATEMENT OF COMBINED FINANCIAL POSITION
(IN MILLIONS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
- ------
Current Assets:
Cash and cash equivalents................................ $ 26 $ 37
Trade receivables (net of allowances of $151 in 1999 and
$83 in 1998)............................................ 2,028 1,649
Miscellaneous receivables................................ 350 390
Deferred tax asset....................................... 130 212
Inventories.............................................. 1,440 1,400
Other current assets..................................... 53 60
--------- ---------
TOTAL CURRENT ASSETS.................................... 4,027 3,748
--------- ---------
Property, Plant and Equipment:
Land..................................................... 82 86
Buildings................................................ 708 573
Machinery and equipment.................................. 2,187 2,083
Construction in progress................................. 726 479
--------- ---------
Total property, plant and equipment....................... 3,703 3,221
Less accumulated depreciation............................. 1,604 1,452
--------- ---------
Net Property, Plant and Equipment......................... 2,099 1,769
--------- ---------
Goodwill (net of accumulated amortization of $172 in 1999
and
$57 in 1998)............................................. 2,943 3,539
Other Intangible Assets (net of accumulated amortization
of $362 in 1999 and $194 in 1998)........................ 1,073 1,023
Other Assets.............................................. 959 812
--------- ---------
TOTAL ASSETS............................................ $ 11,101 $ 10,891
========= =========
LIABILITIES AND EQUITY
- ----------------------
Current Liabilities:
Short-term debt of Parent Attributable to Monsanto Ag.... $ 89 $ 322
Accounts payable......................................... 466 572
Accrued compensation and benefits........................ 147 121
Restructuring reserves................................... 26 84
Accrued marketing programs............................... 256 200
Miscellaneous short-term accruals........................ 720 570
--------- ---------
TOTAL CURRENT LIABILITIES............................... 1,704 1,869
--------- ---------
Long-Term Debt of Parent Attributable to Monsanto Ag...... 4,278 4,388
Other Liabilities......................................... 474 509
Commitments and Contingencies (see Note 14)
Equity:
Accumulated other comprehensive income................... 12 19
Parent company's net investment.......................... 4,633 4,106
--------- ---------
TOTAL EQUITY............................................ 4,645 4,125
--------- ---------
TOTAL LIABILITIES AND EQUITY............................ $ 11,101 $ 10,891
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
MONSANTO COMPANY AGRICULTURAL BUSINESS
STATEMENT OF COMBINED CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------
1999 1998 1997
----- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Income (loss) before income taxes.................... $ 263 $ (60) $ 1
Adjustments to reconcile to Cash Provided by (Used
in) Operations:
Items that did not use (provide) cash:
Depreciation and amortization...................... 547 368 245
Acquired in-process research and development
expense........................................... -- 402 633
Restructuring and other unusual items.............. 50 202 --
Working capital changes that provided (used) cash:
Trade receivables.................................. (370) (578) (75)
Inventories........................................ (35) (139) (42)
Accounts payable and accrued liabilities........... (93) (779) (339)
Other.............................................. (29) 27 (164)
Other items......................................... 56 37 31
----- ------- -------
NET CASH PROVIDED BY (USED IN) OPERATIONS............ 389 (520) 290
----- ------- -------
INVESTING ACTIVITIES:
Property, plant and equipment purchases.............. (632) (432) (298)
Acquisitions and investments......................... (108) (4,112) (1,598)
Investment and property disposal proceeds............ 325 -- 18
----- ------- -------
NET CASH (USED IN) INVESTING ACTIVITIES.............. (415) (4,544) (1,878)
----- ------- -------
FINANCING ACTIVITIES:
Net change in short-term financing................... (252) (69) 390
Long-term debt proceeds.............................. -- 3,276 1,000
Long-term debt reductions............................ (110) -- --
Net transactions with parent......................... 377 1,858 149
----- ------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES............ 15 5,065 1,539
----- ------- -------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS......................................... (11) 1 (49)
CASH AND CASH EQUIVALENTS:
Beginning of year................................... 37 36 85
----- ------- -------
End of year......................................... $ 26 $ 37 $ 36
===== ======= =======
</TABLE>
The effect of exchange rate changes on cash and cash equivalents was not
material.
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
MONSANTO COMPANY AGRICULTURAL BUSINESS
STATEMENT OF COMBINED EQUITY
(IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
UNREALIZED NET GAINS (LOSSES) ON INVESTMENTS:
Balance at January 1,................................... $ 19 $ 13 $ 16
Unrealized gains (losses) on investments................ (7) 6 (3)
------ ------ ------
BALANCE AT DECEMBER 31,................................. $ 12 $ 19 $ 13
------ ------ ------
PARENT COMPANY'S NET INVESTMENT:
Balance at January 1,................................... 4,106 $2,373 $2,193
Net income (loss)....................................... 150 (125) 31
Net transactions with parent............................ 377 1,858 149
------ ------ ------
BALANCE AT DECEMBER 31,................................. $4,633 $4,106 $2,373
------ ------ ------
TOTAL EQUITY--
BALANCE AT DECEMBER 31,................................. $4,645 $4,125 $2,386
====== ====== ======
STATEMENT OF COMBINED COMPREHENSIVE INCOME (LOSS)
(IN MILLIONS)
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
NET INCOME (LOSS)....................................... $ 150 $ (125) $ 31
------ ------ ------
Other Comprehensive (Loss) Income:
Unrealized net holding (losses) gains
before tax........................................... (11) 10 (5)
Related income tax (provision) benefit................ 4 (4) 2
------ ------ ------
Total other comprehensive (loss) income................. (7) 6 (3)
------ ------ ------
TOTAL COMPREHENSIVE INCOME (LOSS)....................... $ 143 $ (119) $ 28
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
MONSANTO COMPANY AGRICULTURAL BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS
NOTE 1: BACKGROUND AND BASIS OF PRESENTATION
On December 19, 1999, Monsanto Company and Pharmacia & Upjohn, Inc.
announced that they had entered into a definitive agreement to combine in a
merger of equals transaction, with the combined entity following the merger
being renamed "Pharmacia Corporation." Monsanto Company prior to the merger is
hereinafter referred to as "old Monsanto," and Pharmacia Corporation subsequent
to the merger is hereinafter referred to as "Pharmacia." On December 19, 1999,
old Monsanto and Pharmacia & Upjohn, Inc. announced a plan to create a wholly
owned subsidiary, to be named Monsanto Company, and to offer up to 19.9% of
Monsanto Company in an initial public offering. Upon completion of Monsanto
Company's initial public offering, Pharmacia will own at least 80.1% of
Monsanto Company's outstanding common stock. Monsanto Company will be comprised
of the former Agricultural Products Segment of Pharmacia and certain smaller
research and business operations. These operations are referred to herein as
Monsanto Company Agricultural Business ("Monsanto Ag"). Monsanto Ag manages its
business in two segments: Agricultural Productivity, and Seeds and Genomics.
The Agricultural Productivity segment consists of the crop protection products,
animal agriculture and environmental technologies businesses. The Seeds and
Genomics segment is comprised of global seeds and related traits business and
genetic technology platforms.
Monsanto Company and Pharmacia will enter into a separation agreement and
other agreements that will provide for, among other things, the assets to be
contributed to and the liabilities to be assumed by Monsanto Company. The
accompanying combined financial statements have been prepared on a basis which
reflects the historical assets, liabilities, operating results and cash flows
of Monsanto Ag and have been prepared using old Monsanto's historical bases in
such assets and liabilities, as well as old Monsanto's historical results of
operations.
Old Monsanto provided certain general and administrative services to
Monsanto Ag, including finance, legal, treasury, information systems, public
affairs, regulatory and human resources. The costs of these services have been
allocated to Monsanto Ag and included in its combined financial statements
generally based upon relative activity levels which drive the incurrence of the
costs, as well as other methods, all of which management believes to be
reasonable. The allocation methodologies followed in preparing the combined
financial statements do not necessarily reflect what the results of operations,
cash flows, or financial position would have been had Monsanto Ag been a
separate stand-alone public entity. Following the completion of the initial
public offering, Monsanto Company will be responsible for these general and
administrative services using its own resources or purchased services
(including those initially purchased from Pharmacia pursuant to the transition
services agreement) and it will be responsible for the costs and expenses
associated with the management of a public entity.
As described in Notes 10, 11, 12 and 13, Monsanto Ag employees and retirees
participate in various pension, health care, savings and other benefit plans.
The costs related to those plans and attributable to Monsanto Ag are included
in Monsanto Ag's combined financial statements generally based upon the
percentage of Monsanto Ag's payroll costs to total old Monsanto payroll costs.
In connection with the separation of Monsanto Company's businesses from
Pharmacia, an employee benefit allocation agreement will be established to set
forth benefit provisions following the separation.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
Basis of Combination
The combined financial statements are presented on the basis of accounting
principles generally accepted in the United States of America. All significant
intercompany accounts and
F-7
<PAGE>
MONSANTO COMPANY AGRICULTURAL BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
transactions have been eliminated. Other agricultural companies in which
Pharmacia has a significant ownership interest (generally greater than 20%),
and which are to be contributed to Monsanto Company, are included in "Other
Assets" in the Statement of Combined Financial Position. Monsanto Ag's share of
these companies' net earnings or losses is included in "Other (expense)
income--net" in Monsanto Ag's Statement of Combined Income (Loss).
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and that affect revenues and expenses during the
period reported. Estimates are adjusted to reflect actual experience when
necessary. Significant estimates and assumptions are used to account for
restructuring reserves, environmental reserves, self-insurance reserves,
employee benefit plans, asset impairments, in-process research and development,
the allocation of corporate costs, business acquisitions and contingencies.
Actual results may differ from these estimates and assumptions.
Revenue Recognition
Revenues are recognized when title to finished goods inventories is
transferred and goods are delivered to customers. Where the right of return
exists, sales revenues are reduced at the time of sale to reflect expected
returns which are estimated based on historical experience. License revenues
and revenues from the sale of product rights are recognized when the rights
have been contractually conferred to the licensee or purchaser. Additional
conditions for recognition of revenue are that the collection of sales proceeds
is reasonably assured and that there are no further performance obligations
under the sale or license agreement. Interest income from providing customers
extended financing terms is included in revenues as earned, generally based
upon the passage of time, with appropriate reductions for amounts whose
collection is considered doubtful.
Income Taxes
Monsanto Ag's operating results historically have been included in the
consolidated federal and state income tax returns filed by old Monsanto and its
subsidiaries in various U.S. and ex-U.S. jurisdictions. Following completion of
both this merger and the offering, Monsanto Ag will continue to be included in
the Pharmacia consolidated group for all taxable periods during which Pharmacia
beneficially owns at least 80% of the total voting power and value of Monsanto
Company's common stock. The tax provisions reflected in Monsanto Ag's Statement
of Combined Income (Loss) have been computed as if Monsanto Ag were a separate
company. Deferred tax assets and liabilities are recognized for the expected
tax consequences of temporary differences between the tax bases of assets and
liabilities and their reported amounts.
Earnings per Share
Historical earnings per share have not been presented as Monsanto Ag was
wholly owned by Pharmacia, not a separate, legal entity and did not have
capital shares.
Cash and Cash Equivalents
All highly liquid investments with a maturity of three months or less at
the date of purchase are considered to be cash equivalents.
F-8
<PAGE>
MONSANTO COMPANY AGRICULTURAL BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Short-term Investments
Investments in securities are classified in the Statement of Combined
Financial Position as either short-term (with maturities of greater than three
months but less than one year) or long-term (with maturities beyond one year).
Monsanto Ag also has investments in equity securities, all of which are
considered to be available for sale and are classified as other non-current
assets.
Fair Values of Financial Instruments
The recorded amounts of cash, trade receivables, investments in securities,
miscellaneous receivables, third-party guarantees, commodity futures contracts,
accounts payable, interest-rate swaps, and short-term debt approximate their
fair values. Fair values are estimated by the use of quoted market prices,
estimates obtained from brokers, and other appropriate valuation techniques
based on information available at year-end. The fair value estimates do not
necessarily reflect the values that could be realized in the current market.
Inventory Valuation
Inventories are stated at lower of cost or market. Actual cost is used to
value raw materials and supplies. Standard cost, which approximates actual
cost, is used to value finished goods and goods in process. Standard cost
includes direct labor and raw materials, and manufacturing overhead based on
practical capacity. The cost of certain inventories (approximately 51% as of
December 31, 1999) is determined by using the last-in, first-out (LIFO) method,
which generally reflects the effects of inflation or deflation on cost of goods
sold sooner than other inventory cost methods do. The cost of other inventories
generally is determined by the first-in, first-out (FIFO) method. Inventories
at FIFO approximate current cost.
Goodwill and Other Intangible Assets
Goodwill, the excess of cost over the fair value of net assets acquired, is
being amortized using the straight-line method over various periods not
exceeding 40 years. Monsanto Ag periodically reviews goodwill to evaluate
whether changes have occurred that would suggest that goodwill may be impaired
based on the estimated undiscounted cash flows of the assets acquired over the
remaining amortization period. If this review indicates that the remaining
estimated useful life of goodwill requires revision or that the goodwill is not
recoverable, the carrying amount of the goodwill is reduced by the estimated
shortfall of cash flows on a discounted basis. Trademarks that are included in
goodwill are assessed for impairment whenever events indicate a possible loss.
Such assessment involves a review of undiscounted cash flows over the remaining
useful life of the trademark. If this review indicates that the remaining
estimated useful life of the trademark requires revision, the carrying amount
of the trademark is reduced by the estimated shortfall of cash flows on a
discounted basis. Patents obtained in a business acquisition are recorded at
the present value of estimated future cash flows resulting from patent
ownership. The cost of patents is amortized over their remaining legal lives
and the cost of other intangible assets (principally seed germplasm and product
rights) is amortized over their estimated useful lives.
Property, Plant & Equipment
Property, plant and equipment is recorded at cost. Additions and
improvements are capitalized, while routine repairs and maintenance are
expensed as incurred. The cost of plant and equipment is
F-9
<PAGE>
MONSANTO COMPANY AGRICULTURAL BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
depreciated over weighted-average periods of 18 years for buildings and 10
years for machinery and equipment using the straight-line method for financial
reporting purposes. Long-lived assets are reviewed for impairment whenever
conditions indicate a possible loss. Such impairment tests are based on a
comparison of undiscounted cash flows to the recorded value of the asset. If an
impairment is indicated, the asset value is written down to its fair market
value or using discounted cash flows, if fair market value is not readily
determinable.
Environmental Remediation Liabilities
Monsanto Ag follows Statement of Position 96-1, "Environmental Remediation
Liabilities," which provides guidance for recognizing, measuring and disclosing
environmental remediation liabilities. Monsanto Ag accrues for these costs in
the period in which responsibility is established and when costs are probable
and reasonably estimable based on current law and existing technology. Post-
closure and remediation costs for hazardous and other waste facilities at
operating locations are accrued over the estimated life of the facility as part
of its anticipated closure cost.
Foreign Currency
The financial statements for most of Monsanto Ag's ex-U.S. operations are
translated into U.S. dollars at current exchange rates. Unrealized currency
adjustments in the Statement of Combined Financial Position are accumulated in
equity as a component of the parent company's net investment. The financial
statements of ex-U.S. operations in highly inflationary economies are
translated at either current or historical exchange rates, as appropriate.
These currency adjustments are included in net income.
Currencies in which Monsanto Ag has significant exposures are the euro
(which, as of January 1, 1999, replaced the Belgian franc, German mark, Italian
lira, and eight other European currencies), Brazilian real, Argentine peso, and
the U.K. pound sterling. Other currency exposures include the Japanese yen and
the Canadian dollar. Currency restrictions are not expected to have a
significant effect on Monsanto Ag's cash flow, liquidity, or capital resources.
Monsanto Ag designated Ecuador, Turkey, Russia, Romania, and Venezuela as
hyperinflationary countries as of January 1, 1999. Monsanto Ag designated the
Brazilian economy as non-hyperinflationary as of January 1, 1998, and
established the Brazilian real as a functional currency.
Derivative Financial Instruments
Monsanto Ag uses derivative financial instruments to limit its exposure
arising from changes in interest rates and commodity prices and participates in
a foreign currency risk management program sponsored by Pharmacia. Monsanto Ag
does not use derivative financial instruments for trading purposes, nor does it
engage in commodity or interest rate speculation. Monsanto Ag monitors its
underlying market risk exposures on an ongoing basis and believes that it can
modify or adapt its hedging strategies as needed. Gains and losses on contracts
that are designated and effective as hedges are deferred and are included in
the recorded value of the transaction being hedged. Gains and losses on
contracts that are not designated as and effective as hedges are included in
net income immediately.
F-10
<PAGE>
MONSANTO COMPANY AGRICULTURAL BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3: NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires all derivatives to
be recognized as assets or liabilities on the balance sheet and measured at
fair value. Changes in the fair value of derivatives should be recognized in
either Net Income or Other Comprehensive Income, depending on the designated
purpose of the derivative. This statement will be effective for Monsanto Ag on
January 1, 2001. Monsanto Ag is currently determining the impact this statement
will have on its financial position and results of operations.
In December 1999, the Staff of the Securities and Exchange Commission
("SEC") issued Staff Accounting Bulletin 101 ("SAB 101"), "Revenue Recognition
in Financial Statements," which provides guidance related to revenue
recognition. SAB 101 allows companies to report any changes in revenue
recognition related to adoption of its provisions as an accounting change at
the time of implementation. Companies must adopt SAB 101 no later than June 30,
2000, effective as of January 1, 2000. Monsanto Ag is currently determining the
impact this statement will have on its financial position and results of
operations.
NOTE 4: PRINCIPAL ACQUISITIONS, MERGERS AND DIVESTITURES
On December 29, 1999, Monsanto Ag completed the sale of Stoneville
Pedigreed Seed Company. Proceeds were $92 million, resulting in a pre-tax gain
of $35 million.
On December 20, 1999, old Monsanto withdrew its filing for U.S. antitrust
clearance of its proposed merger with Delta and Pine Land Company in light of
the U.S. Department of Justice's unwillingness to approve the transaction on
commercially reasonable terms. On January 3, 2000, Monsanto Ag paid Delta and
Pine Land $80 million in cash, equal to the amount of a termination fee set
forth in the merger agreement, plus reimbursement of $1 million in expenses. In
addition, Monsanto Ag incurred $4 million of other expenses in 1999 related to
the failed merger with Delta and Pine Land, resulting in a total charge of $85
million.
On October 20, 1999, Monsanto Ag and Cargill, Incorporated ("Cargill")
announced that they had reached an agreement that resolves outstanding issues
related to Monsanto Ag's purchase of certain international seed operations of
Cargill as discussed below. Under terms of the agreement, Cargill made a cash
payment of $335 million to Monsanto Ag for the lost use of certain germplasm
and for damages caused by the delay in integrating the acquired seed operations
and for legal expenses. Additionally, Monsanto Ag and Pioneer Hi-Bred
International, Inc. ("Pioneer") announced a resolution of the litigation
between them stemming from Monsanto Ag's purchase of these Cargill
international seed operations. Under terms of this agreement, Monsanto Ag was
required to destroy genetic material derived from Pioneer's seed lines and pay
damages to Pioneer of $42 million. Monsanto Ag also recorded $28 million in the
1999 Statement of Combined Income (Loss) as reimbursement of incremental costs
incurred. As a result, the purchase price for certain international seed
operations of Cargill was reduced by $265 million.
In 1998, Monsanto Ag made strategic acquisitions of several seed companies.
In July 1998, Monsanto Ag acquired Plant Breeding International Cambridge
Limited ("Plant Breeding International") for approximately $525 million. In
October 1998, Monsanto Ag announced the acquisition of certain international
seed operations of Cargill in Asia, Africa, Central and South America, and
Europe, excluding certain operations in the United Kingdom, for approximately
$1.4
F-11
<PAGE>
MONSANTO COMPANY AGRICULTURAL BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
billion. In December 1998, Monsanto Ag completed its acquisition of DEKALB
Genetics Corporation ("DEKALB") for approximately $2.3 billion. Monsanto Ag
accounted for these acquisitions as purchases. Monsanto Ag's final purchase
price allocations for the principal acquisitions made during 1998 were to
goodwill, $2,686 million; germplasm and core technology, $505 million;
trademarks, $222 million; in-process research and development, $402 million;
exit costs and employee termination liabilities, ($64) million; inventories and
other individually insignificant tangible assets and liabilities, $212 million.
The final purchase price allocations were based on final valuation studies. The
following pretax charges were recorded in 1998 for the write-off of acquired
in-process research and development (R&D) related to these acquisitions:
approximately $60 million for Plant Breeding International, approximately $150
million for DEKALB and approximately $190 million for certain Cargill
international seed operations. Management believed that the technological
feasibility of the acquired in-process R&D had not been established and that it
had no alternative future uses. Accordingly, the amounts allocated to in-
process R&D were required to be expensed immediately under accounting
principles generally accepted in the United States.
At the time of and in connection with the 1998 seed company acquisitions,
Monsanto Ag established a plan to integrate the acquired businesses. Monsanto
Ag is in the process of closing or rationalizing (consolidating, shutting down
or moving facilities to achieve more efficient operations) certain assets or
facilities and eliminate approximately 1,400 jobs, primarily in manufacturing
and administrative functions, as part of this integration plan. Approximately
300 of these positions related to Monsanto Ag's existing seed operations and
were therefore included in the December 1998 restructuring plan discussed in
Note 5. The costs related to 1,000 positions and the other actions were
originally estimated to be $78 million, and were recognized as liabilities in
1998. As of December 31, 1999, over 900 positions had been eliminated at a cost
of approximately $50 million. The remaining 200 positions (including an
estimated 100 additional positions identified in 1999) are expected to be
eliminated by the third quarter of 2000 at a cost of $14 million, which will
complete the original plan. In addition, the original liability established in
1998 was reduced during 1999 by $14 million as a result of lower actual
severance costs resulting in an adjustment to the final purchase price
allocations to goodwill.
In 1997, Monsanto Ag also acquired several other seed companies. In
February 1997, Monsanto Ag completed its acquisition of the Asgrow Agronomics
seed business for approximately $250 million. Monsanto Ag completed its
acquisition of the remaining shares of Calgene Inc. that it did not already own
for approximately $270 million during May 1997. In September 1997, Monsanto Ag
completed the acquisitions of Holden's Foundation Seeds Inc. and Corn States
Hybrid Services Inc. for approximately $1.0 billion, and in December 1997,
Monsanto Ag acquired controlling interest in Sementes Agroceres S.A., a
Brazilian seed company, for approximately $160 million. Monsanto Ag recorded
the following pretax charges in 1997 for the write-off of acquired in-process
research and development related to these acquisitions: approximately $102
million for Asgrow, approximately $21 million for Calgene, approximately $435
million for Holden's and Corn States and approximately $75 million for
Agroceres.
The in-process R&D charges for the 1998 and 1997 seed company acquisitions
cover numerous seed breeding projects, no single one of which was significant,
as is typical in the seed industry. These projects consist of conventional
breeding programs for corn, wheat and other hybrids; conventional breeding for
soybean varieties; and the development of transgenic crops. Successful
commercialization of products developed through these projects is expected to
occur five to nine years after program initiation. The in-process R&D projects
were valued using a discounted cash flow method with risk-adjusted discount
rates generally ranging from 12 percent to 20 percent, which took
F-12
<PAGE>
MONSANTO COMPANY AGRICULTURAL BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
into account the stage of completion and the appropriate development cycle of
each in-process R&D category. The in-process projects were at various stages of
completion at the dates of acquisition. Revenues from the in-process R&D
projects related to the 1997 acquisitions began in 1998, and revenues from the
in-process R&D projects related to the 1998 acquisitions began in 1999. On
average, a new seed technology is in the research process or developmental
stage for approximately eight years before it is launched in a commercial
product. Additionally, based on historical experience, Monsanto Ag assumed that
approximately one eighth of the products in the in-process pipeline would be
released or launched each year for the next eight years. From this information,
a weighted-average percent complete was computed. The present value of future
cash flows was then multiplied by the estimated percentage complete as of the
valuation date to determine the value of the acquired in-process R&D.
NOTE 5: RESTRUCTURING AND UNUSUAL ITEMS
In 1999, Monsanto Ag recorded a net aftertax charge of $81 million
associated with restructuring and other unusual items. A net pretax charge of
$101 million from operations resulted from the failed merger between Monsanto
Ag and Delta and Pine Land, combined with costs associated with the accelerated
integration of agricultural chemical and seed operations. These charges were
net of the reversal of restructuring liabilities established in 1998 and the
gain on the sale of Stoneville Pedigreed Seed Company. The 1999 net unusual
items were recorded in the Statement of Combined Income (Loss) in the following
categories:
<TABLE>
<CAPTION>
Unusual Restructuring
Items Reversals Total
------- ------------- -----
(in millions)
<S> <C> <C> <C>
Cost of goods sold.............................. $ (20) $ -- $(20)
Amortization and adjustments of goodwill........ (8) -- (8)
Restructuring and other unusual items........... (33) 11 (22)
Other (expense) income--net..................... (51) -- (51)
----- ----- ----
Income (loss) before income taxes............... (112) 11 (101)
Income tax provision (benefit).................. 24 (4) 20
----- ----- ----
NET INCOME (LOSS) .............................. $ (88) $ 7 $(81)
===== ===== ====
</TABLE>
During 1999, Monsanto Ag recorded in "Other (expense) income--net" a one-
time pretax charge of $85 million equal to the amount of a termination fee and
other expenses associated with the failed merger between Monsanto Ag and Delta
and Pine Land. Monsanto Ag also recorded a pretax charge of $61 million
principally associated with the continued focus on improving operating
efficiency through accelerated integration of its agricultural and seed
operations ("the accelerated integration plan"). The charge of $61 million was
comprised of facility shutdown charges of $39 million, workforce reduction
costs of $12 million, and asset impairments of $10 million, and was recorded in
the Statement of Combined Income (Loss) as cost of goods sold of $20 million,
amortization of intangible assets of $8 million and restructuring expense of
$33 million. The affected employees are entitled to receive severance benefits
pursuant to established severance policies or by governmentally mandated labor
regulations.
The facility shutdown charges included $14 million for contractual research
and other commitments, $9 million for intangible assets, $8 million for
inventories, $6 million for leasehold termination costs, and $2 million for
property, plant and equipment write-offs. During 1999, these
F-13
<PAGE>
MONSANTO COMPANY AGRICULTURAL BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
actions resulted in cash payments of $2 million for contractual obligations and
asset write-offs of $19 million. Commitments of $18 million resulting from
these actions were reclassified to other liabilities.
The workforce reduction charge reflected involuntary employee separation
costs for 305 employees worldwide and included charges for positions in
administration of $8 million and research and development of $4 million. As of
December 31, 1999, 125 of the planned employee eliminations were completed;
approximately 55 of these employees received cash severance payments totaling
$2 million during 1999, and 70 employees elected deferred payments of $4
million which were paid in January 2000. At December 31, 1999, these deferred
payments were classified in the Statement of Combined Financial Position as
other liabilities. The remaining balance for employee severance related to 180
positions was $6 million at December 31, 1999. Monsanto Ag expects these
employee reductions to be completed by June 2000.
Offsetting the restructuring and unusual items in 1999 was a pretax gain of
$11 million from the reversal of restructuring reserves established in 1998.
These restructuring reversals were principally required as a result of lower
actual severance and facility shutdown costs than were originally estimated. In
addition, Monsanto Ag recognized a pretax gain of $35 million for the sale of
Stoneville Pedigreed Seed Company and miscellaneous other expense of $1 million
which was recorded in "Other (expense) income--net".
In 1998, Monsanto Ag recorded in-process research and development charges,
net restructuring and other unusual items of $604 million ($504 million
aftertax). The 1998 net restructuring and unusual items were recorded in the
Statement of Combined Income (Loss) in the following categories:
<TABLE>
<CAPTION>
WORK FORCE FACILITY ASSET
REDUCTIONS CLOSURES IMPAIRMENTS OTHER TOTAL
---------- -------- ----------- ----- -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Cost of goods sold........... $-- $ (5) $(43) $ -- $ (48)
Acquired in-process research
and development............. -- -- -- (402) (402)
Amortization and
adjustments of goodwill..... -- (1) (38) -- (39)
Restructuring and other
unusual items............... (63) (31) -- -- (94)
Other (expense) income--net.. -- -- (1) (20) (21)
---- ---- ---- ----- -----
(Loss) before income taxes... (63) (37) (82) (422) (604)
Income tax benefit........... 21 12 17 50 100
---- ---- ---- ----- -----
Net (loss)................. $(42) $(25) $(65) $(372) $(504)
==== ==== ==== ===== =====
</TABLE>
In December 1998, the old Monsanto's board of directors approved a plan to
reduce costs and to integrate its acquired seed businesses. The plan included
the closure of certain facilities, reductions in the current workforce and the
sale from its tomato business. The plan provided for the elimination of
approximately 710 jobs, primarily in manufacturing and administrative
functions, by the end of 1999, at a total cost of $69 million. This amount
included workforce reduction costs of $6 million related to 60 positions
originally accrued as part of a restructuring plan approved in 1996. Those
workforce reductions had been delayed principally as a result of a failed
merger of old Monsanto with American Home Products Corporation; old Monsanto
remained committed to accomplishing these workforce reductions and transferred
the remaining accrual to the 1998 plan.
F-14
<PAGE>
MONSANTO COMPANY AGRICULTURAL BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The employees affected by the 1998 restructuring plan were entitled to receive
severance benefits pursuant to established severance policies or by
governmentally mandated labor regulations.
The plan also included pretax amounts for asset impairments, primarily for
property, plant and equipment, intangible assets and inventories, totaling $82
million. These asset impairments were recorded because of the decision to sell
the tomato business. As a result, the net assets of this business were
classified as assets held for sale and were carried at their net realizable
value at December 31, 1998 based on estimated sale proceeds of approximately
$33 million. This business was sold during the second quarter of 1999. It
produced net income of $11 million in 1998 and a net loss of $5 million in
1997. The aftertax effect of suspending depreciation on assets held for sale
was not material in 1999, 1998 or 1997.
The December 1998 restructuring amounts also included pretax charges of $37
million for the shutdown or rationalization of certain production and
administrative facilities. Rationalization entails the consolidation, shutdown
or movement of facilities to achieve more efficient operations. Approximately
40 facilities, located primarily in the United States, Europe and Latin
America, were impacted by these actions. Charges for these shutdowns included
$17 million for property, plant and equipment, $1 million for intangible
assets, and $4 million for inventories. Leasehold termination costs of $8
million and various facility closure costs of $7 million, principally for
facilities shutdown costs and equipment dismantling are also included in the
shutdown charges. The closure or rationalization of these facilities was
completed by December 31, 1999. In addition, $9 million in facility shutdown
payments were incurred in connection with the 1998 restructuring plan.
Through December 31, 1999, cash payments of $39 million were made to
eliminate approximately 460 positions. Employee severance payments of $8
million in connection with the elimination of 125 positions were deferred and
paid in January 2000. Monsanto Ag also recorded pretax charges of $422 million
relating to its 1998 seed company acquisitions, of which $402 million related
to the write-off of in-process research and development and $20 million related
to the cancellation of DEKALB stock options associated with that acquisition.
For further discussion of these charges, see Note 4.
As of December 31, 1999, the remaining reserve balance for employee
severance related to approximately 45 positions was $10 million. Monsanto Ag
expects these employee reductions to be completed by June 2000. An additional
80 positions originally contemplated in the plan were eliminated through
attrition. Cash payments to complete the 1998 plan will be funded from
operations and are not expected to significantly impact Monsanto Ag's
liquidity.
F-15
<PAGE>
MONSANTO COMPANY AGRICULTURAL BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Activity related to the 1999 accelerated integration plan, and the 1998 and
1996 restructuring plans and certain unusual items were as follows:
<TABLE>
<CAPTION>
WORK FORCE FACILITY ASSET
REDUCTIONS CLOSURES IMPAIRMENTS TOTAL
RESTRUCTURING & UNUSUAL ITEMS: ---------- -------- ----------- -----
(IN MILLIONS)
<S> <C> <C> <C> <C>
January 1, 1997 Reserve Balance......... $ 41 $ 1 $ -- $ 42
Costs charged against reserves.......... (23) (1) -- (24)
---- ----- ----- ----
December 31, 1997 Reserve Balance....... $ 18 $ -- $ -- $ 18
---- ----- ----- ----
Costs charged against reserves.......... (12) -- -- (12)
1998 Restructuring & Unusual Items(1)... 63 37 82 182
Reclassification of reserves to other
balance sheet accounts:
Inventories............................ -- (4) -- (4)
Property............................... -- (17) (44) (61)
Intangible Assets...................... -- (1) (38) (39)
---- ----- ----- ----
December 31, 1998 Reserve Balance....... $ 69 $ 15 $ -- $ 84
---- ----- ----- ----
Addition for accelerated integration
costs.................................. 12 39 10 61
Costs charged against reserves:
1998 Plan.............................. (39) (9) -- (48)
Accelerated integration plan........... (2) (2) -- (4)
Reversal of reserves related to 1998
Plan................................... (12) 1 -- (11)
Reclassification of reserves to other
balance sheet accounts:
1998 Plan--Other Assets................ -- (5) -- (5)
Accelerated integration plan
Inventories............................. -- (8) -- (8)
Property............................... -- (2) (10) (12)
Intangible assets...................... -- (9) -- (9)
Other liabilities...................... (4) (18) -- (22)
---- ----- ----- ----
December 31, 1999 Reserve Balance....... $ 24 $ 2 $ -- $ 26
==== ===== ===== ====
</TABLE>
- --------
(1) Restructuring reserves recorded in 1998 did not include the charges for
the cancellation of the DEKALB stock options and the write-off of acquired
in-process research and development.
As part of restructuring actions approved prior to 1998, Monsanto Ag
reorganized its worldwide operations, closed a Canadian production facility and
made final payments to complete contractual commitments as part of a United
States production facility shutdown. These actions eliminated approximately 130
positions and were completed by December 31, 1998.
NOTE 6: INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
1999 1998
------ ------
(IN MILLIONS)
<S> <C> <C>
Finished goods............................................... $ 705 $ 867
Goods in process............................................. 412 252
Raw materials and supplies................................... 346 316
------ ------
Inventories, at FIFO cost.................................... 1,463 1,435
Excess of FIFO over LIFO cost................................ (23) (35)
------ ------
TOTAL........................................................ $1,440 $1,400
====== ======
</TABLE>
F-16
<PAGE>
MONSANTO COMPANY AGRICULTURAL BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS--(Continued)
Commodity futures and options contracts are used to hedge the price
volatility of certain commodities, primarily soybeans and corn. This hedging
activity is intended to manage the price paid to production growers for corn
and soybean seeds. Gains and losses on contracts that are designated and
effective as hedges are deferred in inventory and are included in cost of goods
sold when the underlying seed products are sold. As of December 31, 1999,
futures contracts to purchase $106 million of corn and soybeans were
specifically attributable to Monsanto Ag. The excess of FIFO over LIFO cost
decreased $12 million due to reduced inventory levels and lower average cost of
inventory which favorably affected 1999 net income by $7 million.
NOTE 7: INVESTMENTS
As of December 31, Monsanto Ag had investments in securities as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
(in
millions)
<S> <C> <C>
Aggregate fair value............................................... $54 $66
Gross unrealized holding:
Gains............................................................ 22 31
Losses........................................................... 2 --
</TABLE>
NOTE 8: INCOME TAXES
The components of income (loss) before income taxes were:
<TABLE>
<CAPTION>
1999 1998 1997
---- ----- -----
(in millions)
<S> <C> <C> <C>
United States............................................. $198 $ 44 $(171)
Outside United States..................................... 65 (104) 172
---- ----- -----
TOTAL..................................................... $263 $ (60) $ 1
==== ===== =====
</TABLE>
The components of income tax provision (benefit) were:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(in millions)
<S> <C> <C> <C>
Current:
U.S. federal............................................. $ 14 $154 $ 92
U.S. state............................................... 4 16 9
Outside United States.................................... 53 60 78
---- ---- ----
71 230 179
---- ---- ----
Deferred:
U.S. federal............................................. 74 (68) (167)
U.S. state............................................... 7 (7) (17)
Outside United States.................................... (39) (90) (25)
---- ---- ----
42 (165) (209)
---- ---- ----
TOTAL...................................................... $113 $ 65 $(30)
==== ==== ====
</TABLE>
F-17
<PAGE>
MONSANTO COMPANY AGRICULTURAL BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Factors causing Monsanto Ag's income taxes to differ from the U.S. federal
statutory rate were:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
U.S. federal statutory rate............................... $ 92 $(21) $--
U.S. export earnings...................................... (20) (24) (22)
U.S. R&D tax credit....................................... (6) (5) --
Higher (lower) ex-U.S. rates.............................. (8) 8 (9)
Nondeductible goodwill.................................... 46 24 4
Acquired in-process R&D................................... -- 71 7
Equity loss (income)...................................... -- 9 (2)
State income taxes........................................ 7 6 (5)
Other..................................................... 2 (3) (3)
---- ---- ----
INCOME TAXES.............................................. $113 $ 65 $(30)
==== ==== ====
</TABLE>
Deferred income tax balances were related to:
<TABLE>
<CAPTION>
1999 1998
---- ----
(IN
MILLIONS)
<S> <C> <C>
Employee fringe benefits......................................... $ 13 $ 75
Restructuring reserves........................................... 10 29
Inventory........................................................ 14 3
Net operating loss and tax credit carryforwards.................. 305 133
Intangibles...................................................... 157 179
Other............................................................ 106 135
Valuation allowance.............................................. (62) --
---- ----
TOTAL DEFERRED TAX ASSETS........................................ $543 $554
==== ====
Property......................................................... 203 163
Other............................................................ 12 21
---- ----
TOTAL DEFERRED TAX LIABILITIES................................... $215 $184
==== ====
NET DEFERRED TAX ASSETS.......................................... $328 $370
==== ====
</TABLE>
A $62 million valuation allowance was established in connection with
operations in 1999 in Brazil. Monsanto Ag's management concluded that it was
more likely than not that Monsanto Ag would not be able to realize a portion
of deferred tax assets in Brazil. This valuation allowance had no effect on
the 1999 effective tax rate because it was recorded in the parent company's
net investment due to the fact that the losses related primarily to the effect
of Brazil's currency devaluation on an intercompany loan not expected to be
repaid in the foreseeable future. As of December 31, 1999, old Monsanto had
available approximately $287 million in net operating loss carryforwards in
the United States which were specifically attributable to Monsanto Ag. These
expire from 2017 through 2019. As of December 31, 1999, old Monsanto also had
available approximately $453 million in net operating loss carryforwards
outside the United States specifically attributable to Monsanto Ag, the
majority of which do not expire.
Income taxes and remittance taxes have not been recorded on the
undistributed earnings of foreign operations of Monsanto Ag, either because
any taxes on dividends would be offset substantially by foreign tax credits or
because Monsanto Ag intends to reinvest those earnings
F-18
<PAGE>
MONSANTO COMPANY AGRICULTURAL BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
indefinitely. It is not practical to estimate the income tax liability that
might be incurred if such earnings were remitted to the United States.
The purpose of the above information is to show Monsanto Ag's current and
deferred tax amounts as if it had been a separate company for the years 1999,
1998 and 1997. Monsanto Ag did not make any cash payments for taxes in these
years since Monsanto Ag's operating results were included in the Pharmacia
consolidated federal and state tax returns for those years (see Note 2).
NOTE 9: DEBT AND OTHER CREDIT ARRANGEMENTS
The historical financial statements include the portion of old Monsanto's
total debt specifically attributable to Monsanto Ag. The amounts included in
Monsanto Ag's financial statements reflect borrowings of approximately $5.4
billion which were used to finance various seed business acquisitions during
1997 and 1998 (see Note 4). Each of the acquisitions was originally financed by
borrowings of old Monsanto. Since the time the debt was incurred, approximately
$991 million has been repaid by old Monsanto, primarily through the use of net
proceeds received from the issuance of common stock in the fourth quarter of
1998 ($944 million).
Short-term debt specifically attributable to Monsanto Ag at December 31
was:
<TABLE>
<CAPTION>
1999 1998
---- ----
(IN
MILLIONS)
<S> <C> <C>
Notes payable to banks......................................... $ 21 $276
Bank overdrafts................................................ 20 1
Current portion of long-term debt.............................. 48 45
---- ----
Total........................................................ $ 89 $322
==== ====
Weighted average interest rates of notes payable as of December
31:
Banks (1).................................................... 12.8% 8.3%
</TABLE>
- --------
(1) Includes the effect of notes in certain countries which have interest rates
which are higher than those in the United States.
Aggregate short-term loan facilities specifically attributable to Monsanto
Ag as described above were $22 million at December 31, 1999, under which loans
totaling $21 million were outstanding as of that date. Interest on these loans
is related to various bank rates. A $1.0 billion credit facility, expiring in
2001, allowed old Monsanto to request that lenders increase their commitments
up to an aggregate of $1.6 billion, and was also specifically attributable to
Monsanto Ag. In August 1999, old Monsanto entered into a $1.5 billion, 364-day
credit facility. There were no borrowings by old Monsanto or Monsanto Ag under
these credit facilities as of December 31, 1999. These facilities are used to
support the issuance of commercial paper. Covenants under these credit
facilities restrict maximum borrowings.
F-19
<PAGE>
MONSANTO COMPANY AGRICULTURAL BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Long-term debt (exclusive of current maturities) specifically attributable
to Monsanto Ag at December 31 was:
<TABLE>
<CAPTION>
1999 1998
------ ------
(IN MILLIONS)
<S> <C> <C>
Commercial paper.............................................. $ 605 $ 668
5 3/8% notes due 2001......................................... 500 499
5.95% junior subordinated deferrable debentures due 2003...... 700 700
Variable-rate medium-term notes due 2003...................... 480 528
5.75% notes due 2005.......................................... 599 598
5 7/8% notes due 2008......................................... 199 199
6.5% debentures due 2018...................................... 498 498
6.6% debentures due 2028...................................... 697 698
------ ------
TOTAL......................................................... $4,278 $4,388
====== ======
</TABLE>
Maturities and sinking-fund requirements on long-term debt specifically
attributable to Monsanto Ag as described above, excluding commercial paper, are
$48 million in 2000, $558 million in 2001, $91 million in 2002, $1,030 million
in 2003, and zero in 2004. The weighted-average maturity of long-term debt as
of December 31, 1999, was approximately 10 years. Commercial paper balances of
$605 million and $668 million as of December 31, 1999 and 1998, respectively,
were classified as long-term debt because old Monsanto had the ability and
intent to renew these obligations beyond 2000.
The estimated fair value of long-term debt specifically attributable to
Monsanto Ag at December 31 was:
<TABLE>
<CAPTION>
1999 1998
--------------- ---------------
RECORDED FAIR RECORDED FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------ -------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Long-term debt............................... $4,278 $3,951 $4,388 $4,590
</TABLE>
No cash payments for interest were made by Monsanto Ag during 1999, 1998 or
1997 due to the fact that all interest payments during these years were made by
old Monsanto.
F-20
<PAGE>
MONSANTO COMPANY AGRICULTURAL BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10: POSTRETIREMENT BENEFITS--PENSIONS
Monsanto Ag's employees participate in certain of Pharmacia's
noncontributory pension plans. No detailed information regarding the funded
status of the plans and components of net periodic pension cost, as it relates
solely to Monsanto Ag, is available. Accordingly, the corresponding net pension
asset or liability has not been included in Monsanto Ag's Statement of Combined
Financial Position. Total pension cost related to Monsanto Ag employees in
1999, 1998 and 1997 and included in the Combined Statement of Income (Loss) was
$49 million, $48 million and $29 million, respectively. The information that
follows relates to the old Monsanto pension plans in which Monsanto Ag
employees participate. The components of pension cost for these plans were:
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Service cost for benefits earned during the year........ $ 65 $ 58 $ 61
Interest cost on benefit obligation..................... 171 170 148
Assumed return on plan assets........................... (200) (156) (167)
Amortization of unrecognized net loss................... 49 22 13
----- ----- -----
TOTAL................................................... $ 85 $ 94 $ 55
===== ===== =====
</TABLE>
Pension benefits are based on an employee's years of service and/or
compensation level. Pension plans were funded in accordance with old Monsanto's
long-range projections of the plans' financial conditions. These projections
took into account benefits earned and expected to be earned, anticipated
returns on pension plan assets, and income tax and other regulations.
Pension costs were determined through the use of the preceding year-end
rate assumptions. Assumptions used as of December 31 for the principal plans in
which Monsanto Ag employees participate were:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Discount rate............................................ 7.75% 6.75% 7.00%
Assumed long-term rate of return on plan assets.......... 9.50% 9.50% 9.50%
Annual rates of salary increase (for plans that base
benefits on final compensation level)................... 4.50% 4.00% 4.00%
</TABLE>
F-21
<PAGE>
MONSANTO COMPANY AGRICULTURAL BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The funded status of old Monsanto's pension plans, in which Monsanto Ag
employees participate at year-end, was:
<TABLE>
<CAPTION>
1999 1998
------ ------
(IN MILLIONS)
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year...................... $2,655 $2,483
Service cost................................................. 65 58
Interest cost................................................ 171 170
Plan Participants' Contributions............................. 1 1
Amendments................................................... 6 10
Actuarial (gain)/loss........................................ (143) 146
Acquisitions/divestitures.................................... -- 9
Settlements.................................................. 15 --
Benefits paid................................................ (248) (222)
------ ------
Benefit obligation at end of year............................ 2,522 2,655
------ ------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year............... 2,146 2,029
Actual return on plan assets................................. 411 310
Employer contribution........................................ 24 17
Plan Participants' Contributions............................. 3 3
Acquisitions/divestitures.................................... -- 9
Settlements.................................................. (4) --
Fair value of benefits paid.................................. (248) (222)
------ ------
Plan assets at end of year................................... 2,332 2,146
------ ------
Unfunded status.............................................. 190 509
Unrecognized initial net gain................................ 9 15
Unrecognized prior service cost.............................. (82) (94)
Unrecognized subsequent gain (loss).......................... 371 (22)
------ ------
Accrued net pension liability................................ $ 488 $ 408
====== ======
</TABLE>
The projected benefit obligation, the accumulated benefit obligation (ABO)
and fair value of plan assets for pension plans with ABOs in excess of plan
assets for old Monsanto were $319 million, $315 million and zero, respectively,
as of December 31, 1999; and $2.1 billion, and $2.0 billion, and $2.0 billion,
respectively, as of December 31, 1998. Plan assets consist principally of
common stocks and U.S. government and corporate obligations.
NOTE 11: POSTRETIREMENT BENEFITS--HEALTHCARE AND OTHER
Monsanto Ag employees participate in certain of Pharmacia's benefit
programs which provide certain health care and life insurance benefits for
retired employees. No detailed information regarding the components of the
total cost and obligations, as it relates solely to Monsanto Ag, is available.
Postretirement benefit costs related to Monsanto Ag employees in 1999, 1998 and
1997 were $23 million, $22 million and $20 million, respectively. The
information that follows related to old Monsanto's benefit programs in which
Monsanto Ag employees participate. Substantially all regular, full-time U.S.
employees and certain employees in other countries may become eligible for
these benefits if they reach retirement age while employed by old Monsanto or
Monsanto Ag. These post-retirement benefits are unfunded and are generally
based on the employees' years of service and/or compensation level. The costs
of postretirement benefits are accrued by the date the employees become
eligible for the benefits.
F-22
<PAGE>
MONSANTO COMPANY AGRICULTURAL BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
As of December 31, the components of the cost of old Monsanto's
postretirement benefits in which Monsanto Ag employees participate, principally
health care and life insurance, were:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Service cost for benefits earned during the year............ $16 $13 $10
Interest cost on benefit obligation......................... 27 27 27
Amortization of unrecognized net (gain) loss................ 15 (1) (3)
--- --- ---
Total..................................................... $58 $39 $34
=== === ===
</TABLE>
Postretirement costs were determined by using the preceding year-end rate
assumptions. Assumptions used as of December 31 for the principal plans were:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Discount rate.............................................. 7.75% 6.75% 7.00%
Initial trend rate for health care costs................... 5.25% 5.75% 7.00%
Ultimate trend rate for health care costs.................. 5.25% 4.75% 5.00%
</TABLE>
A one percent increase in the assumed trend rate for health care costs
would have increased the cost of 1999 postretirement health care benefits for
these plans by $1 million and the accumulated postretirement benefit obligation
by $9 million as of December 31, 1999. A one percent decrease in the assumed
trend rate for health care costs would have decreased the cost of 1999
postretirement health care benefits for these plans sponsored by old Monsanto
by $1 million and the accumulated postretirement benefit obligation by $11
million as of December 31, 1999.
As of December 31, the status of old Monsanto's postretirement health care
and life insurance benefit plans and of its employee disability benefit plans
in which Monsanto Ag employees participate was:
<TABLE>
<CAPTION>
1999 1998
---- ----
(IN
MILLIONS)
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year.......................... $403 $383
Service cost..................................................... 16 13
Interest cost.................................................... 27 27
Actuarial (gain)/loss............................................ (10) 6
Benefits paid.................................................... (16) (26)
---- ----
Benefit obligation at end of year................................ 420 403
---- ----
Unfunded status.................................................. 420 403
Unrecognized prior service cost.................................. 6 10
Unrecognized subsequent (loss)................................... (3) (31)
---- ----
Accrued postretirement liability................................. $423 $382
==== ====
</TABLE>
NOTE 12: EMPLOYEE SAVINGS PLANS
The information that follows relates to old Monsanto's Employee Stock
Ownership Plan (the "ESOP"), in which Monsanto Ag employees participate. The
ESOP held 14.7 million shares of old Monsanto's common stock as of December 31,
1999. At its inception, the ESOP acquired shares by using proceeds from the
issuance of long-term notes and debentures guaranteed by old Monsanto, and a
loan from old Monsanto. Dividends on the common stock owned by the ESOP are
used to
F-23
<PAGE>
MONSANTO COMPANY AGRICULTURAL BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
repay the ESOP borrowings, which were $100 million as of December 31, 1999. A
portion of the ESOP shares is allocated each year to employee savings accounts
as matching contributions. In 1999, 1,302,590 shares were allocated to
participants under the plan. An additional 634,548 shares were released in 1999
awaiting allocation to participants, leaving 7.3 million unallocated shares as
of December 31, 1999. Compensation expense is equal to the cost of the shares
allocated to participants, less cash dividends paid on the shares held by the
ESOP. Compensation expense related to Monsanto Ag employees and included in the
Combined Statement of Income (Loss) in 1999, 1998 and 1997 was $11 million, $5
million and $3 million, respectively. The following information relates to the
old Monsanto ESOP plan in which the Monsanto Ag employees participate for the
year ended December 31.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Total ESOP expense............................................ $31 $21 $18
Interest portion of total ESOP expense........................ 9 10 12
Cash contribution............................................. 37 14 6
Dividends paid on ESOP shares held............................ 2 2 8
</TABLE>
NOTE 13: STOCK OPTION PLANS
The following information, except pro forma net income (loss), relates to
the old Monsanto stock option plans in which eligible Monsanto Ag employees
participate. Old Monsanto granted stock options to Monsanto Ag employees under
two fixed plans. Under the Monsanto Management Incentive Plan of 1996, key
officers and management employees may be granted stock-based awards, including
stock options, of up to 87.6 million shares of common stock. Under this plan,
the exercise price of each option equals not less than the market price of the
stock on the date of grant. An option's maximum term is 10 years. Options are
granted at the discretion of the people committee of the Board of Directors or
its delegate. Options generally vest upon the achievement of business
performance targets or the ninth anniversary of the option grant date,
whichever comes first. Certain options granted to senior management vest upon
the attainment of pre-established prices within specified time periods. Under
the Monsanto Shared Success Stock Option Plan, most regular full-time and
regular part-time employees of old Monsanto were granted options on 330 shares
in 1997 and 500 shares in 1998, and most new regular full-time and regular
part-time employees were granted options on 300 shares in 1999. The maximum
number of shares for which stock options may be granted under this plan is 27.3
million. The exercise price of each option is determined by the Committee and
generally equals the market price of the stock on the date of grant. An
option's maximum term is 10 years.
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation,"
Monsanto Ag has elected to follow the guidance of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," for measurement and
recognition of stock-based transactions with employees. Accordingly, no
compensation cost has been recognized in relation to the old Monsanto option
plans in which Monsanto Ag employees participate. Had the determination of
compensation cost for these plans been based on the fair value at the grant
dates for awards under these plans for employees of Monsanto Ag, consistent
with the method of SFAS No. 123, Monsanto Ag's net income (loss) would have
been adjusted to the pro forma amounts indicated below for the year ended
December 31:
<TABLE>
<CAPTION>
1999 1998 1997
---- ----- ----
(IN MILLIONS)
<S> <C> <C> <C>
Net income (loss):
As reported............................................... $150 $(125) $31
Pro forma................................................. 113 (164) 16
</TABLE>
F-24
<PAGE>
MONSANTO COMPANY AGRICULTURAL BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The pro forma compensation expense may not be representative of
compensation expense that will be incurred on a pro forma basis in future
years.
In computing the pro forma compensation expense, the fair value of each
option grant is estimated on the date of grant by using the Black-Scholes
option-pricing model. The weighted-average fair values of options granted to
employees of Monsanto Ag during 1999, 1998, and 1997 were $13.99, $16.94 and
$9.57, respectively. The following weighted-average assumptions were used for
grants:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Expected dividend yield.............................. 0.34% 0.25% 0.29%
Expected volatility.................................. 39.5% 30.0% 27.0%
Risk-free interest rates............................. 4.4% 5.6% 6.4%
Expected option lives (years)........................ 4.1 4.0 4.3
</TABLE>
NOTE 14: COMMITMENTS AND CONTINGENCIES
Commitments, principally in connection with uncompleted additions to
property, were approximately $11 million as of December 31, 1999. Old Monsanto
was contingently liable as a guarantor for bank loans and for miscellaneous
receivables directly attributable to Monsanto Ag totaling approximately $56
million as of December 31, 1999, and $81 million as of December 31, 1998.
Future minimum payments under noncancelable operating leases, unconditional
inventory purchases, and R&D alliances are $76 million for 2000, $48 million
for 2001, $45 million for 2002, $16 million for 2003, $14 million for 2004 and
$35 million thereafter. Rent expense was $72 million, $54 million and $62
million for the years ended December 31, 1999, 1998 and 1997, respectively. The
more significant concentrations in Monsanto Ag's trade receivables at year-end
were:
<TABLE>
<CAPTION>
1999 1998
---- ----
(IN
MILLIONS)
<S> <C> <C>
U.S. agricultural product distributors............................ $709 $514
Customers in Latin American Southern Cone Countries............... 807 565
European agricultural product distributors........................ 328 305
Customers in Canada............................................... 86 59
Customers in the former Soviet Union.............................. 74 97
Customers in Southeast Asia....................................... 56 41
</TABLE>
Management of Monsanto Ag does not anticipate losses on its trade
receivables in excess of established allowances.
Monsanto Ag's Statement of Combined Financial Position includes accrued
liabilities of $7 million as of December 31, 1999 and 1998, for the remediation
of identified waste disposal sites. Monsanto Ag's future remediation expenses
for waste disposal sites are affected by a number of uncertainties. These
uncertainties include, but are not limited to, the method and extent of
remediation, the percentage of material attributable to Monsanto Ag at the
sites relative to that attributable to other parties, and the financial
capabilities of the other potentially responsible parties. Monsanto Ag does not
expect the resolution of such uncertainties to have a material adverse effect
on its financial position, profitability or liquidity.
Pharmacia is a party to a number of lawsuits and claims relating to
Monsanto Ag, for which Monsanto Company will assume responsibility effective on
the separation date and which
F-25
<PAGE>
MONSANTO COMPANY AGRICULTURAL BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Pharmacia and Monsanto Ag are vigorously defending. Such matters arise out of
the normal course of business and relate to a variety of issues. Certain of the
lawsuits and claims seek damages in very large amounts. Although the results of
litigation cannot be predicted with certainty, it is Pharmacia and Monsanto Ag
management's belief that the final outcome of such litigation will not have a
material adverse effect on Monsanto Ag's financial position, profitability or
liquidity.
In April 1999, a jury verdict was returned against DEKALB (which became a
wholly owned subsidiary of old Monsanto during December 1998), in a lawsuit
filed in U.S. District Court in North Carolina. The lawsuit was brought by
Aventis CropScience S.A. (formerly Rhone Poulenc Agrochimie S.A.) ("Aventis"),
claiming that a 1994 license agreement was induced by fraud stemming from
DEKALB's nondisclosure of relevant information and that DEKALB did not have the
right to license, make or sell products using Aventis's technology for
glyphosate resistance under this agreement. The jury awarded Aventis $15
million in actual damages for unjust enrichment and $50 million in punitive
damages. DEKALB has appealed this verdict, has meritorious grounds to overturn
the verdict and intends to vigorously pursue all available means to have the
verdict overturned. No provision has been made in Monsanto Ag's combined
financial statements with respect to the award for punitive damages.
On March 20, 1998, a jury verdict was returned against old Monsanto in a
lawsuit filed in the California Superior Court. The lawsuit was brought by
Mycogen Corp., Agrigenetics Inc. and Mycogen Plant Sciences Inc. claiming that
old Monsanto delayed providing access to certain gene technology under a 1989
agreement with Lubrizol Genetics Inc., a company which Mycogen Corp.
subsequently purchased. The jury awarded $174.9 million in future damages. Old
Monsanto has filed an appeal of the verdict with the California Court of Appeal
for the Fourth Judicial District. No provision has been made in Monsanto Ag's
combined financial statements with respect to this verdict. Monsanto Ag intends
to vigorously pursue all available means to have this verdict set aside.
NOTE 15: SEGMENT AND GEOGRAPHIC DATA
Monsanto Ag manages its business in two segments: Agricultural
Productivity, and Seeds and Genomics. The Agricultural Productivity segment
consists of the crop protection products, animal agriculture and environmental
technologies businesses. The Seeds and Genomics segment is comprised of global
seeds and related traits businesses and genetic technology platforms. Sales
between segments were not significant.
F-26
<PAGE>
MONSANTO COMPANY AGRICULTURAL BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
AGRICULTURAL SEEDS AND
PRODUCTIVITY GENOMICS TOTAL
------------ --------- -------
(IN MILLIONS)
<S> <C> <C> <C>
Net Sales
1999....................................... $3,586 $1,662 $ 5,248
1998....................................... 3,500 948 4,448
1997....................................... 3,110 563 3,673
Earnings before interest and taxes (1)
1999....................................... $ 897 $ (391) $ 506
1998....................................... 869 (835) 34
1997....................................... 888 (867) 21
Depreciation and amortization expense
1999....................................... $ 185 $ 362 $ 547
1998....................................... 175 193 368
1997....................................... 167 78 245
Total Assets
1999....................................... $5,340 $5,761 $11,101
1998....................................... 4,508 6,383 10,891
Capital Expenditures
1999....................................... $ 448 $ 184 $ 632
1998....................................... 344 88 432
</TABLE>
(1) A reconciliation of earnings before interest and taxes to net income
(loss) for each year follows.
<TABLE>
<CAPTION>
1999 1998 1997
----- ----- ----
(IN MILLIONS)
<S> <C> <C> <C>
Earnings before interest and taxes...................... $ 506 $ 34 $ 21
Interest expense--net................................... (243) (94) (20)
Income tax (provision) benefit.......................... (113) (65) 30
----- ----- ----
Net Income (Loss)....................................... $ 150 $(125) $(31)
===== ===== ====
</TABLE>
Although inflation is relatively low in most of Monsanto Ag's major
markets, it continues to affect operating results. To mitigate the effect of
inflation, Monsanto Ag has implemented measures to control costs, to improve
productivity, to manage new fixed and working capital, and to raise selling
prices when government regulations and competitive conditions permit. In
addition, the current costs of replacing certain assets are estimated to be
greater than the historical costs presented in the financial statements.
Accordingly, the depreciation expense reported in the Statement of Combined
Income (Loss) would be greater if it were stated on a current-cost basis.
Net sales and long-lived assets are attributed to geographic areas based
upon the location of each of Monsanto Ag's legal entities. For example, a sale
from the United States to a customer in Latin America is reported as a U.S.
export sale.
<TABLE>
<CAPTION>
U.S. EX-U.S. TOTAL
------ ------- ------
(IN MILLIONS)
<S> <C> <C> <C>
Net Sales
1999................................................. $2,895 $2,353 $5,248
1998................................................. 2,515 1,933 4,448
1997................................................. 1,988 1,685 3,673
Long-Lived Assets
1999................................................. $5,062 $1,593 $6,655
1998................................................. 5,043 1,763 6,806
</TABLE>
F-27
<PAGE>
MONSANTO COMPANY AGRICULTURAL BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16: OTHER (EXPENSE) INCOME--NET
The significant components of Other (Expense) Income--net were:
<TABLE>
<CAPTION>
1999 1998 1997
----- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Equity affiliate (expense) income......................... $ (18) $(31) $ 6
Gain (loss) on sale of businesses and assets.............. 37 (1) 24
Failed merger costs....................................... (85) -- --
Foreign currency losses................................... (25) (15) (33)
Royalty income............................................ 11 12 4
Other miscellaneous (expense) income...................... (39) 14 7
----- ---- ----
Other (expense) income.................................... $(119) $(21) $ 8
===== ==== ====
</TABLE>
NOTE 17: QUARTERLY DATA
<TABLE>
<CAPTION>
QUARTERLY DATA (UNAUDITED)
---------------------------------------
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net Sales
1999.............................. $1,483 $1,653 $ 983 $1,129 $5,248
1998.............................. 1,172 1,490 916 870 4,448
Gross Margin
1999.............................. $ 784 $ 969 $ 426 $ 513 $2,692
1998.............................. 662 845 465 327 2,299
Income (Loss) from Operations
1999.............................. $ 289 $ 458 $(126) $ 4 $ 625
1998.............................. 284 429 (129) (529) 55
Net Income (Loss)
1999.............................. $ 126 $ 243 $(127) $ (92) $ 150
1998.............................. 193 288 (174) (432) (125)
</TABLE>
Historically, Monsanto Ag's income from operations has been higher during
the first half of the year, primarily because of the concentration of generally
more profitable sales during that part of the year.
Net Income for the third quarter of 1999 included a net aftertax charge of
$44 million primarily related to the accelerated integration of agricultural
and seed operations. The fourth quarter of 1999 includes an aftertax charge of
$53 million for a termination fee and other expenses associated with the failed
merger with Delta and Pine Land. Also included in the fourth quarter of 1999
was an aftertax gain of $7 million principally resulting from the reversal of
restructuring liabilities established in 1998. These restructuring liability
reversals were required as a result of lower actual severance and facility
shutdown costs incurred than were originally estimated. In addition, the fourth
quarter included an aftertax gain of $7 million for the sale of the Stoneville
Pedigreed Seed Company.
F-28
<PAGE>
MONSANTO COMPANY AGRICULTURAL BUSINESS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Net Income for the third quarter of 1998 included an aftertax charge of
$188 million for the write-off of in-process research and development for the
acquisition of Plant Breeding International. Net Income for the fourth quarter
of 1998 included an after-tax charge of $316 million for restructuring, write-
off of in-process R&D and cancellation of DEKALB stock options. The write-off
of in-process R&D in the fourth quarter of 1998 was for the acquisition of
DEKALB and certain international seed operations of Cargill, net of a revision
of the amount of in-process R&D written off in the third quarter related to the
acquisition of Plant Breeding International made in accordance with the SEC's
clarified guidance at that time on in-process R&D.
F-29
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREOWNER OF
MONSANTO COMPANY:
We have audited the accompanying statement of financial position of Monsanto
Company (formerly Monsanto Ag Company) as of February 9, 2000. This financial
statement is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the balance
sheet is free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statement. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such statement of financial position presents fairly, in all
material respects, the financial position of Monsanto Company at February 9,
2000, in conformity with accounting principles generally accepted in the United
States of America.
/s/ Deloitte & Touche LLP
St. Louis, Missouri
March 28, 2000
F-30
<PAGE>
MONSANTO COMPANY
STATEMENT OF FINANCIAL POSITION
<TABLE>
<CAPTION>
FEBRUARY 9,
2000
-----------
<S> <C>
SHAREOWNER'S EQUITY
Capital Stock (issued and outstanding: 1,000 shares, par value
$1.00)........................................................... $1,000
Receivable from Pharmacia Corporation............................. (1,000)
------
Total........................................................... $ --
======
</TABLE>
F-31
<PAGE>
NOTES TO STATEMENT OF FINANCIAL POSITION
1. ORGANIZATION AND PURPOSE--Monsanto Company (the "Company") was incorporated
in Delaware on February 9, 2000 as a wholly owned subsidiary of Pharmacia
Corporation for the purpose of receiving the assets and liabilities of
Pharmacia Corporation's Agricultural Business that are expected to be
contributed to it.
2. SHAREOWNER'S EQUITY--The Company is authorized to issue 1,000 shares of
$1.00 par value capital stock. The Company has issued 1,000 shares to
Pharmacia Corporation; the Company has recorded a receivable from Pharmacia
Corporation of $1,000 related to this purchase.
F-32
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You
must not rely on any unauthorized information or representations. This
prospectus is an offer to sell only the shares offered hereby, but only under
circumstances and in jurisdictions where it is lawful to do so. The
information contained in this prospectus is current only as of its date.
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 10
Cautionary Note Regarding Forward-Looking Information.................... 21
Merger and Reorganization Transactions Occurring Prior to This Offering.. 22
Use of Proceeds.......................................................... 24
Dividend Policy.......................................................... 24
Capitalization........................................................... 25
Unaudited Pro Forma Condensed Combined Financial Statements.............. 26
Selected Financial Data.................................................. 31
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 33
Business................................................................. 47
Management............................................................... 73
Arrangements Between Monsanto and Pharmacia.............................. 84
Principal Stockholder.................................................... 95
Description of Capital Stock............................................. 96
Shares Eligible for Future Sale.......................................... 99
Underwriting............................................................. 100
Legal Matters............................................................ 102
Experts.................................................................. 102
Where You Can Find More Information...................................... 102
Index to Financial Statements............................................ F-1
</TABLE>
------------
Through and including , 2000 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether
or not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealer's obligation to deliver a
prospectus when acting as an underwriter and with respect to an unsold
allotment or subscription.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Shares
MONSANTO COMPANY
Common Stock
------------
[LOGO]
------------
GOLDMAN, SACHS & CO.
SALOMON SMITH BARNEY
J.P. MORGAN & CO.
MORGAN STANLEY DEAN WITTER
BEAR, STEARNS & CO. INC.
MERRILL LYNCH & CO.
Representatives of the Underwriters
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated costs and expenses, other than
underwriting discounts and commissions, payable in connection with the sale of
common stock being registered, all of which will be paid by Pharmacia
Corporation:
<TABLE>
<CAPTION>
AMOUNT
-------
<S> <C>
SEC registration fee............................................. $26,400
New York Stock Exchange listing fee.............................. *
Printing expenses................................................ *
Legal fees and expenses.......................................... *
Accounting fees and expenses..................................... *
Blue sky fees and expenses....................................... *
Transfer agent and registrar fees and expenses................... *
Miscellaneous.................................................... *
-------
Total.......................................................... $ *
=======
</TABLE>
--------
* To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the General Corporation Law of the State of Delaware
provides as follows:
A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation)
by reason of the fact that he is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts
paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a
manner he reasonably believed to be in or not opposed to the best interest
of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
The termination of any action, suit or proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which he reasonably believed to be
in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had reasonable cause to
believe that his conduct was unlawful.
A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment
in its favor by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request
of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses (including attorneys' fees) actually and reasonably incurred by
him in connection with the defense or settlement of such action or suit if
he acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect to
II-1
<PAGE>
any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent
that the Court of Chancery or the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the
Court of Chancery or such other court shall deem proper.
As permitted by the DGCL, the Registrant has included in its certificate of
incorporation a provision to eliminate the personal liability of its directors
for monetary damages for breach of their fiduciary duties as directors, subject
to certain exceptions. In addition, the Registrant's certificate of
incorporation and bylaws provide that the Registrant is required to indemnify
its officers and directors under certain circumstances, including those
circumstances in which indemnification would otherwise be discretionary, and
the Registrant is required to advance expenses to its officers and directors as
incurred in connection with proceedings against them for which they may be
indemnified.
The Underwriting Agreement is expected to provide that the Underwriters are
obligated, under certain circumstances, to indemnify directors, officers and
controlling persons of the Registrant against certain liabilities, including
liabilities under the Securities Act of 1933. Reference is made to the form of
Underwriting Agreement to be filed as Exhibit 1.1 hereto.
Either the Registrant and/or Pharmacia Corporation maintain directors and
officers liability insurance for the benefit of the Registrant's directors and
officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On February 9, 2000, the Registrant issued 1,000 shares of common stock,
par value $1.00 per share, to old Monsanto Company for a subscription
receivable for $1,000. There were no underwriters, brokers or finders employed
in connection with this transaction. The sale of these securities were deemed
to be exempt from registration under the Securities Act in reliance on Section
4(2) of the Securities Act as a transaction by an issuer not involving a public
offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
1.1 --Form of Underwriting Agreement.*
2.1 --Form of Separation Agreement.*
3.1 --Registrant's Certificate of Incorporation.*
3.2 --Registrant's Bylaws.*
4.1 --Form of Specimen Certificate for Registrant's Common Stock.*
5.1 --Opinion of Wachtell, Lipton, Rosen & Katz.*
10.1 --Monsanto 2000 Management Incentive Plan.*
10.2 --Form of Tax Sharing Agreement.*
10.3 --Form of Employee Benefits and Compensation Allocation Agreement.*
10.4 --Form of Intellectual Property Transfer Agreement.*
10.5 --Form of Transition Services Agreement.*
10.6 --Form of Shared Services Agreement.*
10.7 --Form of Corporate Agreement.*
23.1 --Consent of Independent Auditors.
23.2 --Consent of Wachtell, Lipton, Rosen & Katz (included in Exhibit 5.1).*
24.1 --Powers of Attorney.
27.1 --Financial Data Schedule.
99.1 --Consents of Persons Named as about to Become Directors.
</TABLE>
- --------
*To be filed by amendment.
II-2
<PAGE>
(b)Financial Statement Schedules
INDEX TO SCHEDULES
MONSANTO FINANCIAL STATEMENT SCHEDULES
FOR THE THREE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) That for purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this Registration Statement in reliance upon
Rule 430A and contained in a form of prospectus filed by the Registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act of
1933 shall be deemed to be part of this Registration Statement as of the
time it was declared effective.
(2) That for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
(3) To provide to the underwriters at the closing specified in the
underwriting agreement, certificates in such denominations and registered
in such names as required by the underwriters to permit prompt delivery to
each purchaser.
(4) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of
expenses incurred or paid by a director, officer or controlling person of
the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Monsanto Company has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the county of St.
Louis, state of Missouri, on May 12, 2000.
MONSANTO COMPANY
By: /s/ Hendrik A. Verfaillie
----------------------------------
NAME: HENDRIK A. VERFAILLIE
TITLE: PRESIDENT AND CHIEF
EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Hendrik A. Verfaillie President, Chief Executive May 12, 2000
___________________________________________ Officer and Director
HENDRIK A. VERFAILLIE (Principal Executive
Officer)
* Director May 12, 2000
___________________________________________
CHRISTOPHER J. COUGHLIN
* Director May 12, 2000
___________________________________________
RICHARD U. DE SCHUTTER
* Chief Operating Officer May 12, 2000
___________________________________________ and Director
HUGH GRANT
* Chief Financial Officer May 12, 2000
___________________________________________ (Principal Financial
TERRELL K. CREWS Officer and Principal
Accounting Officer)
</TABLE>
- --------
* Michael D. Bryan, by signing his name hereto, does sign this document on
behalf of the above noted individuals, pursuant to powers of attorney duly
executed by such individuals which have been filed as an exhibit to this
Registration Statement.
/s/ Michael D. Bryan
-----------------------------
MICHAEL D. BRYAN
ATTORNEY-IN-FACT
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <C> <S>
1.1 -- Form of Underwriting Agreement.*
2.1 -- Form of Separation Agreement.*
3.1 -- Registrant's Certificate of Incorporation.*
3.2 -- Registrant's Bylaws.*
4.1 -- Form of Specimen Certificate for Registrant's Common Stock.*
5.1 -- Opinion of Wachtell, Lipton, Rosen & Katz.*
10.1 -- Monsanto 2000 Management Incentive Plan.*
10.2 -- Form of Tax Sharing Agreement.*
10.3 -- Form of Employee Benefits and Compensation Allocation Agreement.*
10.4 -- Form of Intellectual Property Transfer Agreement.*
10.5 -- Form of Transition Services Agreement.*
10.6 -- Form of Shared Services Agreement.*
10.7 -- Form of Corporate Agreement.*
23.1 -- Consent of Independent Auditors.
23.2 -- Consent of Wachtell, Lipton, Rosen & Katz (included in Exhibit 5.1).*
24.1 -- Powers of Attorney.
27.1 -- Financial Data Schedule.
99.1 -- Consents of Persons Named as about to Become Directors.
</TABLE>
- --------
* To be filed by amendment.
II-5
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
MONSANTO COMPANY:
We consent to the use in this Registration Statement of Monsanto Company
on Form S-1 of our reports, dated March 22, 2000 and March 28, 2000, on the
financial Statements of Monsanto Company Agriculture Business and Monsanto
Company, respectively, appearing in the Prospectus, which is part of this
Registration Statement.
We also consent to the reference to us under the heading "Experts" in
such Prospectus.
St. Louis, Missouri
May 11, 2000
<PAGE>
EXHIBIT 24.1
------------
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the person whose signature appears below, as a Director or Officer of
Monsanto Company (the "Company"), a Delaware corporation with its general
offices in the County of St. Louis, Missouri, does hereby make, constitute and
appoint R. WILLIAM IDE III, BARBARA L. BLACKFORD, JUDITH A. REINSDORF, JANET L.
HORGAN, SONYA M. DAVIS OR MICHAEL D. BRYAN, or any one of them acting alone, his
or her true and lawful attorneys, with full power of substitution and
resubstitution, in his or her name, place and stead, in any and all capacities,
to execute and sign the registration statement on Form S-1 (the "Registration
Statement") for the registration of shares of common stock of the Company, par
value $0.01 per share, to be issued in the initial public offering by the
Company, any registration statement for the same offering that is to be
effective upon filing pursuant to Rule 462(b) promulgated under the Securities
Act of 1933, as amended, and any and all amendments or post-effective amendments
to the Registration Statement, with all exhibits and any and all documents
required to be filed with respect thereto with the Securities and Exchange
Commission or any regulatory authority, giving and granting unto said attorneys
full power and authority to do and perform such actions as fully as they might
have done or could do if personally present and executing any of said
documents.
Dated and effective as of the 29th of April, 2000.
/s/ Hendrik A. Verfaillie
------------------------------
Hendrik A. Verfaillie,
President, Chief Executive Officer and Director
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the person whose signature appears below, as a Director or Officer of
Monsanto Company (the "Company"), a Delaware corporation with its general
offices in the County of St. Louis, Missouri, does hereby make, constitute and
appoint R. WILLIAM IDE III, BARBARA L. BLACKFORD, JUDITH A. REINSDORF, JANET L.
HORGAN, SONYA M. DAVIS OR MICHAEL D. BRYAN, or any one of them acting alone, his
or her true and lawful attorneys, with full power of substitution and
resubstitution, in his or her name, place and stead, in any and all capacities,
to execute and sign the registration statement on Form S-1 (the "Registration
Statement") for the registration of shares of common stock of the Company, par
value $0.01 per share, to be issued in the initial public offering by the
Company, any registration statement for the same offering that is to be
effective upon filing pursuant to Rule 462(b) promulgated under the Securities
Act of 1933, as amended, and any and all amendments or post-effective amendments
to the Registration Statement, with all exhibits and any and all documents
required to be filed with respect thereto with the Securities and Exchange
Commission or any regulatory authority, giving and granting unto said attorneys
full power and authority to do and perform such actions as fully as they might
have done or could do if personally present and executing any of said
documents.
Dated and effective as of the 11th of May, 2000.
/s/ Christopher J. Coughlin
------------------------------
Christopher J. Coughlin,
Director
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the person whose signature appears below, as a Director or Officer of
Monsanto Company (the "Company"), a Delaware corporation with its general
offices in the County of St. Louis, Missouri, does hereby make, constitute and
appoint R. WILLIAM IDE III, BARBARA L. BLACKFORD, JUDITH A. REINSDORF, JANET L.
HORGAN, SONYA M. DAVIS OR MICHAEL D. BRYAN, or any one of them acting alone, his
or her true and lawful attorneys, with full power of substitution and
resubstitution, in his or her name, place and stead, in any and all capacities,
to execute and sign the registration statement on Form S-1 (the "Registration
Statement") for the registration of shares of common stock of the Company, par
value $0.01 per share, to be issued in the initial public offering by the
Company, any registration statement for the same offering that is to be
effective upon filing pursuant to Rule 462(b) promulgated under the Securities
Act of 1933, as amended, and any and all amendments or post-effective amendments
to the Registration Statement, with all exhibits and any and all documents
required to be filed with respect thereto with the Securities and Exchange
Commission or any regulatory authority, giving and granting unto said attorneys
full power and authority to do and perform such actions as fully as they might
have done or could do if personally present and executing any of said
documents.
Dated and effective as of the 2nd of May, 2000.
/s/ Richard U. De Schutter
------------------------------
Richard U. De Schutter,
Director
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the person whose signature appears below, as a Director or Officer of
Monsanto Company (the "Company"), a Delaware corporation with its general
offices in the County of St. Louis, Missouri, does hereby make, constitute and
appoint R. WILLIAM IDE III, BARBARA L. BLACKFORD, JUDITH A. REINSDORF, JANET L.
HORGAN, SONYA M. DAVIS OR MICHAEL D. BRYAN, or any one of them acting alone, his
or her true and lawful attorneys, with full power of substitution and
resubstitution, in his or her name, place and stead, in any and all capacities,
to execute and sign the registration statement on Form S-1 (the "Registration
Statement") for the registration of shares of common stock of the Company, par
value $0.01 per share, to be issued in the initial public offering by the
Company, any registration statement for the same offering that is to be
effective upon filing pursuant to Rule 462(b) promulgated under the Securities
Act of 1933, as amended, and any and all amendments or post-effective amendments
to the Registration Statement, with all exhibits and any and all documents
required to be filed with respect thereto with the Securities and Exchange
Commission or any regulatory authority, giving and granting unto said attorneys
full power and authority to do and perform such actions as fully as they might
have done or could do if personally present and executing any of said
documents.
Dated and effective as of the 1st of May, 2000.
/s/ Hugh Grant
------------------------------
Hugh Grant,
Chief Operating Officer and Director
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
That the person whose signature appears below, as a Director or Officer of
Monsanto Company (the "Company"), a Delaware corporation with its general
offices in the County of St. Louis, Missouri, does hereby make, constitute and
appoint R. WILLIAM IDE III, BARBARA L. BLACKFORD, JUDITH A. REINSDORF, JANET L.
HORGAN, SONYA M. DAVIS OR MICHAEL D. BRYAN, or any one of them acting alone, his
or her true and lawful attorneys, with full power of substitution and
resubstitution, in his or her name, place and stead, in any and all capacities,
to execute and sign the registration statement on Form S-1 (the "Registration
Statement") for the registration of shares of common stock of the Company, par
value $0.01 per share, to be issued in the initial public offering by the
Company, any registration statement for the same offering that is to be
effective upon filing pursuant to Rule 462(b) promulgated under the Securities
Act of 1933, as amended, and any and all amendments or post-effective amendments
to the Registration Statement, with all exhibits and any and all documents
required to be filed with respect thereto with the Securities and Exchange
Commission or any regulatory authority, giving and granting unto said attorneys
full power and authority to do and perform such actions as fully as they might
have done or could do if personally present and executing any of said
documents.
Dated and effective as of the 29th of April, 2000.
/s/ Terrell K. Crews
------------------------------
Terrell K. Crews,
Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 26
<SECURITIES> 0
<RECEIVABLES> 2,028
<ALLOWANCES> 151
<INVENTORY> 1,440
<CURRENT-ASSETS> 4,027
<PP&E> 3,703
<DEPRECIATION> 238
<TOTAL-ASSETS> 11,101
<CURRENT-LIABILITIES> 1,704
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 4,645
<TOTAL-LIABILITY-AND-EQUITY> 11,101
<SALES> 5,233
<TOTAL-REVENUES> 5,248
<CGS> 2,556
<TOTAL-COSTS> 2,067<F1>
<OTHER-EXPENSES> (119)
<LOSS-PROVISION> 70
<INTEREST-EXPENSE> (243)
<INCOME-PRETAX> 263
<INCOME-TAX> 113
<INCOME-CONTINUING> 150
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 150
<EPS-BASIC> 0
<EPS-DILUTED> 0
<FN>
<F1>Represents operating costs
</FN>
</TABLE>
<PAGE>
Exhibit 99.1
CONSENT OF PERSON NAMED AS
ABOUT TO BECOME A DIRECTOR
Pursuant to Rule 438 promulgated under the Securities Act of 1933, as amended,
the undersigned hereby consents to be named as a person about to become a
director of Monsanto Company in the Registration Statement on Form S-1 of
Monsanto Company dated _______________, 2000.
/s/ Hakan Astrom
------------------------
Hakan Astrom
Dated: 5/12 , 2000
---------
<PAGE>
CONSENT OF PERSON NAMED AS
ABOUT TO BECOME A DIRECTOR
Pursuant to Rule 438 promulgated under the Securities Act of 1933, as amended,
the undersigned hereby consents to be named as a person about to become a
director of Monsanto Company in the Registration Statement on Form S-1 of
Monsanto Company dated _______________, 2000.
/s/ Michael Kantor
------------------------
Michael Kantor
Dated: 3/29 , 2000
---------
<PAGE>
CONSENT OF PERSON NAMED AS
ABOUT TO BECOME A DIRECTOR
Pursuant to Rule 438 promulgated under the Securities Act of 1933, as amended,
the undersigned hereby consents to be named as a person about to become a
director of Monsanto Company in the Registration Statement on Form S-1 of
Monsanto Company dated _______________, 2000.
/s/ C. Steven McMillan
------------------------
C. Steven McMillan
Dated: 5/11 , 2000
---------
<PAGE>
CONSENT OF PERSON NAMED AS
ABOUT TO BECOME A DIRECTOR
Pursuant to Rule 438 promulgated under the Securities Act of 1933, as amended,
the undersigned hereby consents to be named as a person about to become a
director of Monsanto Company in the Registration Statement on Form S-1 of
Monsanto Company dated _______________, 2000.
/s/ William U. Parfet
------------------------
William U. Parfet
Dated: 5/11 , 2000
---------
<PAGE>
CONSENT OF PERSON NAMED AS
ABOUT TO BECOME A DIRECTOR
Pursuant to Rule 438 promulgated under the Securities Act of 1933, as amended,
the undersigned hereby consents to be named as a person about to become a
director of Monsanto Company in the Registration Statement on Form S-1 of
Monsanto Company dated _______________, 2000.
/s/ John S. Reed
------------------------
John S. Reed
Dated: 3/30 , 2000
---------
