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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-16167
MONSANTO COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 43-1878297
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
800 NORTH LINDBERGH BLVD., ST. LOUIS, MO 63167
(Address of principal executive offices)
(Zip Code)
(314) 694-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES NO X
--------- -----------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class October 31, 2000
----- ----------------
Common Stock, $0.01 par value 258,033,000 shares
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<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
The Statement of Consolidated Income (Loss) of Monsanto Company
and subsidiaries for the three months and nine months ended September
30, 2000 and the three months and nine months ended September 30, 1999,
the Condensed Statement of Consolidated Financial Position as of
September 30, 2000 and December 31, 1999, the Condensed Statement of
Consolidated Cash Flow for the nine months ended September 30, 2000 and
nine months ended September 30, 1999, and related Notes to Financial
Statements follow. Unless otherwise indicated, "Monsanto" and "the
company" are used interchangeably to refer to Monsanto Company or to
Monsanto Company and consolidated subsidiaries, as appropriate to the
context. With respect to the time period prior to the separation of
Monsanto's businesses from those of Pharmacia Corporation (Pharmacia)
on September 1, 2000, references to "Monsanto" or "the company" also
refer to the agricultural division of Pharmacia. See Note 1 to Notes to
Financial Statements. Unless otherwise indicated, "earnings per pro
forma share" and "per pro forma share" mean basic and diluted earnings
per pro forma share. In tables, all dollars are in millions, except per
pro forma share data.
<TABLE>
<CAPTION>
MONSANTO COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME (LOSS)
(Dollars in millions, except per pro forma share)
Unaudited
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ----------------------
2000 1999 2000 1999
------- ------ ------ ------
Net Sales $1,003 $983 $4,293 $4,119
Cost of Goods Sold 549 557 2,035 1,940
------- ------ ------ ------
Gross Profit 454 426 2,258 2,179
Operating Expenses:
Selling, General and Administrative Expenses 300 324 988 926
Research and Development Expenses 140 179 431 517
Amortization and Adjustments of Goodwill 29 25 178 91
Interest Expense 67 60 210 206
Interest Income (8) (7) (23) (17)
Restructuring and Other Special Items 26 39 67 39
Other Expense - Net 7 4 35 34
-------- ------- ------- -------
Income (Loss) Before
Income Taxes (107) (198) 372 383
Income Tax Expense (Benefit) (41) (71) 169 141
-------- ------- ------ ------
Net Income (Loss) $ (66) $ (127) $ 203 $ 242
======== ======= ====== ======
Basic and Diluted Earnings (Loss)
per Pro Forma Common Share $ (0.25) $ (0.49) $ 0.79 $ 0.94
======== ======== ====== ======
Pro Forma Common Shares Outstanding (in millions) 258.0 258.0 258.0 258.0
======== ======== ====== ======
See the accompanying notes to consolidated financial statements.
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
MONSANTO COMPANY AND SUBSIDIARIES
CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(Dollars in millions, except per share)
(unaudited)
September 30, December 31,
2000 1999
------------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 218 $ 26
Trade receivables (net of allowances of $158 in 2000 and $151 in 1999) 2,994 2,028
Miscellaneous receivables 307 350
Deferred tax asset 219 130
Inventories 1,356 1,440
Other current assets 64 53
--------- ---------
Total Current Assets 5,158 4,027
--------- ---------
Property, Plant and Equipment - net 2,599 2,219
Goodwill and Other Intangible Assets - net 3,675 4,016
Other Assets 701 839
--------- ---------
Total Assets $ 12,133 $ 11,101
========= =========
LIABILITIES AND SHAREOWNER'S EQUITY
Current Liabilities:
Short-term debt $ 2,025 $ 89
Accrued liabilities 1,134 1,149
Accounts payable 434 466
--------- ---------
Total Current Liabilities 3,593 1,704
--------- ---------
Long-Term Debt 994 4,278
Postretirement and Other Liabilities 880 474
Shareowner's Equity:
Common stock (authorized: 1,500,000,000 shares, par value $0.01;
issued: 220,000,000) (See note 5) 2 -
Additional contributed capital 7,073 -
Accumulated other comprehensive loss (396) (281)
Retained earnings (deficit) (13) -
Parent company's net investment - 4,926
---------- --------
Total Shareowner's Equity 6,666 4,645
---------- --------
Total Liabilities and Shareowner's Equity $ 12,133 $ 11,101
========== ========
See the accompanying notes to consolidated financial statements.
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
MONSANTO COMPANY AND SUBSIDIARIES
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOW
(Dollars in millions)
Unaudited
Nine Months Ended
September 30,
--------------------
2000 1999
----- -----
<S> <C> <C>
Total Cash Provided (Required) by Operations $ (271) $ (78)
------- ------
Cash Flows Provided (Required) by Investing Activities:
Property, plant and equipment purchases (447) (407)
Acquisitions and investments (110) (75)
Investments and property disposal proceeds - 325
------- ------
Net Cash Flows Provided (Required) by Investing Activities (557) (157)
------- ------
Cash Flows Provided (Required) by Financing Activities:
Net change in short-term financing 767 (142)
Long-term debt proceeds - -
Long-term debt reductions - -
Net transactions with parent 253 378
------- ------
Cash Flows Provided (Required) by Financing Activities 1,020 236
------- ------
Increase in Cash and Cash Equivalents 192 1
Cash and cash equivalents beginning of year 26 37
------- -----
Cash and cash equivalents at end of period $ 218 $ 38
======= =====
</TABLE>
The effect of exchange rate changes on cash and cash equivalents was not
material. All interest expense on debt specifically attributable to Monsanto is
included in the Statement of Consolidated Income (Loss). However, no cash
payments for interest were made by Monsanto during the three and nine months
ended September 30, 2000 and 1999 due to the fact that all interest payments
during these periods were made by Pharmacia.
Non-cash transactions for the nine months ended September 30, 2000 include a
reclassification of $1.2 billion of long-term debt to short-term debt and the
transfer of $2.1 billion of debt to Pharmacia in exchange for additional equity
in Monsanto.
See the accompanying notes to consolidated financial statements.
3
<PAGE>
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
Note 1 - Basis of Presentation
Monsanto Company and subsidiaries is comprised of the operations,
assets and liabilities that were previously the agricultural division
of Pharmacia Corporation (Pharmacia). This agricultural business was
transferred to Monsanto from Pharmacia on September 1, 2000, pursuant
to the terms of a Separation Agreement dated as of that date (the
"Separation Agreement").
The Statement of Consolidated Income (Loss), the Condensed
Statement of Consolidated Financial Position and the Condensed
Statement of Consolidated Cash Flow for all periods prior to September
1, 2000 have been prepared on a carve-out basis, which reflects the
historical operating results, assets, and liabilities of these business
operations. The costs of certain services provided by Pharmacia
included in the Statement of Consolidated Income (Loss) have been
allocated to Monsanto based on methodologies that management believes
to be reasonable, but which do not necessarily reflect what the results
of operations, financial position, or cash flows would have been had
Monsanto been a separate, stand-alone public entity during all periods
presented. Financial information for the first nine months of 2000
should not be annualized. Monsanto has historically generated the
majority of its sales during the first half of the year, primarily
because of the concentration of sales due to the timing of the planting
and growing season. Earnings per pro forma share information was
prepared using the number of common shares outstanding (258,033,000)
after Monsanto's partial initial public offering (IPO) which closed on
October 23, 2000.
On October 23, 2000, Monsanto sold 38,033,000 shares of its common
stock at $20 per share in an IPO, including 3,033,000 shares of common
stock with respect to which the underwriters exercised their
over-allotment option. Subsequent to the offering, Pharmacia continues
to own 220,000,000 shares of common stock, representing 85.3 percent
ownership of Monsanto. The total net proceeds to Monsanto were $723
million.
The accompanying Condensed Statement of Consolidated Financial
Position as of September 30, 2000 and December 31, 1999, the Statement
of Consolidated Income (Loss) for the three months and nine months
ended September 30, 2000 and the three months and nine months ended
September 30 1999, and the Condensed Statement of Consolidated Cash
Flow for the nine months ended September 30, 2000 and nine months ended
September 30, 1999 have not been audited, but have been prepared in
conformity with accounting principles generally accepted in the United
States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. In the opinion of
management, these unaudited consolidated financial statements contain
all adjustments necessary to present fairly the financial position,
results of operations and cash flows for the interim periods reported.
This Quarterly Report on Form 10-Q should be read in conjunction with
the audited combined financial statements for the year ended December
31, 1999 and the unaudited combined financial statements for the six
months ended June 30, 2000 as presented in Monsanto's Registration
Statement on Form S-1 filed on October 17, 2000, as amended.
Note 2 - 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 that all derivatives be recognized on the balance sheet as
assets or liabilities and measured at fair value. The accounting
treatment of gains and losses resulting from changes in the value of
derivatives depends on the use of the derivative and whether it
qualifies for hedge accounting. Monsanto will adopt SFAS No. 133 and
its amendments in the first quarter of 2001 and does not expect it to
have a material impact on its financial position, results of operations
and cash flows.
In December 1999, the Securities and Exchange Commission (SEC)
released Staff Accounting Bulletin No. 101 (SAB No. 101), "Revenue
Recognition in Financial Statements," which provides guidance related
to revenue recognition. Implementation of this guidance is required no
later than the fourth quarter of this year.
4
<PAGE>
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED- (continued)
SAB No. 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.
Monsanto is currently in the process of assessing the impact of
adopting SAB No. 101 on its revenue recognition policies and on prior
revenue transactions. While the company has not finalized its review,
it currently estimates that it will recognize a SAB No. 101 pre-tax
cumulative adjustment within a range of $30 million to $60 million
related primarily to seed trait royalties that had been recognized at
the time the seeds were shipped to customers, but which will now be
recognized when the royalty periods begin.
Prior to the formation of Monsanto Company on February 9, 2000,
Pharmacia had effected an accounting change with respect to SAB No. 101
in response to a specific dialogue with the Securities and Exchange
Commission related to the sale of certain agency rights. The financial
statements of Monsanto have been retroactively adjusted to recognize
the $32 million of proceeds from the sale over 20 years.
Note 3 - Inventory
Components of inventories as of September 30, 2000 and December
31, 1999 were as follows:
<TABLE>
<S> <C> <C>
September 30, December 31,
2000 1999
------------ -------------
Finished goods $ 585 $ 705
Goods in process 488 412
Raw materials and supplies 317 346
-------- -------
Inventories, at FIFO cost 1,390 1,463
Excess of FIFO over LIFO cost (34) (23)
-------- -------
Total $ 1,356 $ 1,440
======== =======
</TABLE>
Note 4 - Comprehensive Income (Loss)
Comprehensive income (loss) includes all non-shareowners changes
in equity and consists of net income (loss), foreign currency
translation adjustments and unrealized gains and losses on
available-for-sale securities. Comprehensive loss for the three months
ended September 30, 2000 and 1999 was $138 million and $118 million,
respectively. Comprehensive income for the nine months ended September
30, 2000 and 1999 was $88 million and break-even, respectively.
Note 5 - Earnings (Loss) Per Pro Forma Common Share
On October 23, 2000, Monsanto sold 38,033,000 shares of its common
stock at $20 per share in an IPO, including 3,033,000 shares of common
stock with respect to which the underwriters exercised their
over-allotment option on October 20, 2000. Subsequent to the offering,
Pharmacia continues to own 220,000,000 shares of common stock,
representing 85.3 percent ownership of Monsanto. The total net proceeds
to Monsanto were $723 million. Basic and diluted earnings per pro forma
share information was prepared for all periods presented using common
shares outstanding (258,033,000) after the IPO.
In addition, in connection with the offering Monsanto issued a
one-time founder's grant of options to all of its employees. At October
23, 2000, approximately 22 million options were granted, each of which
has an exercise price of $20 per share. Founder's options vest to
employees in increments of 50% in 2002 and 2003 with a maximum term of
10 years. These options did not have a dilutive effect on earnings per
pro forma share for the period presented.
5
<PAGE>
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED- (continued)
Note 6 - Restructuring and Other Special Items
In the third quarter of 2000, Monsanto recorded a pretax charge of
$26 million to operating expenses in connection with the elimination of
certain nutrition research and development programs, as part of its
ongoing plan to focus on key projects. The plan, of which this action
was a part, encompassed a decision to more stringently focus on the
company's four key crops of corn, soybeans, wheat and cotton and
included the elimination of food and biotech research programs and the
shutdown of administrative and manufacturing facilities. In conjunction
with the elimination of these projects, certain fixed and intangible
assets were written off.
In total, the pretax charge of $26 million was comprised of
workforce reduction costs of $21 million, asset impairments of $3
million and other exit costs of $2 million. The costs were recorded in
the Statement of Consolidated Income (Loss) as restructuring expense.
The asset impairments consisted of $2 million for equipment write-offs
and $1 million for intangible assets. The other exit costs consisted of
contractual termination payments resulting from the exit of certain
research programs.
The workforce reduction charge reflected involuntary employee
separation costs for 215 employees worldwide and included charges of
$12 million for positions in research and development, and $8 million
for positions in administration and $1 million for positions in
manufacturing. The affected employees are entitled to receive severance
benefits pursuant to established severance policies or by
governmentally mandated labor regulations. During the third quarter of
2000, 48 employee terminations for this plan were completed at a cost
of $3 million. Exit costs associated with contract terminations of $1
million had been paid as of September 30, 2000. The company expects the
employee reductions, asset dispositions and other exit activities to be
completed by March 31, 2001.
In the first nine months of 2000, Monsanto recorded net pretax
charges of $183 million to operating expenses in connection with the
elimination of certain nutrition, laureate oils, and wheat quality
research and development programs, as part of its plan to focus on key
projects. The plan encompassed a decision to more stringently focus on
the company's four key crops of corn, soybeans, wheat and cotton and
included the elimination of food and biotech research programs and the
shutdown of certain administrative and manufacturing facilities. In
conjunction with the elimination of these projects, inventories, fixed
assets and intangible assets (including goodwill, product rights and
licensed technologies) were written off.
In total, the net charge of $183 million was comprised of asset
impairments of $132 million, workforce reduction costs of $52 million
and other exit costs of $3 million, net of prior restructuring reserve
reversals of $4 million. The costs were recorded in the Statement of
Consolidated Income (Loss) as cost of goods sold of $32 million,
amortization and adjustment of goodwill of $84 million and
restructuring expense of $67 million. The asset impairments consisted
of $32 million for laureate oil inventories, $87 million for intangible
assets, and $13 million for equipment write-offs.
The workforce reduction charges for the nine-month period
reflected involuntary employee separation costs for 590 employees
worldwide and included charges of $26 million for positions in
administration, and $25 million for positions in research and
development and $1 million for positions in manufacturing. The affected
employees are entitled to receive severance benefits pursuant to
established severance policies or by governmentally mandated labor
regulations. As of September 30, 2000, 180 employee terminations (132
terminations related to second quarter actions and 48 terminations
related to third quarter actions) were completed at a cost of $14
million. The other exit costs included expenses associated with
contract terminations and equipment dismantling. As of September 30,
2000, $1 million of these exit costs had been paid. The company expects
the employee reductions, asset dispositions and other exit activities
to be completed by June 2001.
For the three and nine months ended September 30, 1999, Monsanto
recorded a net pretax charge of $67 million to operating expenses
associated with the continuing focus on improving operating efficiency
through accelerated integration of its agricultural and seed
operations. These charges were net of a reversal of $1 million for
6
<PAGE>
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED- (continued)
restructuring liabilities established in 1998. The charge of $67
million was comprised of facility shutdown charges of $39 million,
workforce reductions of $18 million related to 360 positions, and asset
impairments of $10 million and was recorded in the Statement of
Consolidated Income (Loss) as cost of goods sold of $20 million,
amortization and adjustments of goodwill of $8 million and
restructuring expense of $39 million. 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 improvements, and $2 million for property, plant and
equipment write-offs. These actions were substantially completed by
September 2000.
The costs were recorded in the Statement of Consolidated Income (Loss)
in the following line items:
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cost of Goods Sold $ - $ 20 $ 32 $20
Amortization and Adjustments of Goodwill 8 84 8
Restructuring and Other Special Items 26 39 67 39
---- ---- ---- ----
Total before Tax 26 67 183 67
Income Tax Expense (Benefit) (5) (23) (39) (23)
---- ---- ---- ----
Net (Income) Loss $21 $ 44 $144 $ 44
==== ==== ==== ====
</TABLE>
The pretax (income)/expense components of the restructuring and other
special items were as follows:
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Restructuring charges $26 $ - $71 $ -
Accelerated integration costs 60 60
Reversal of restructuring reserves (1) (4) (1)
Write-off of obsolete inventories 32
Write-off of goodwill 8 84 8
---- ---- ---- ----
Total pretax restructuring and special items $26 $67 $183 $67
==== ==== ==== ====
</TABLE>
7
<PAGE>
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED- (continued)
Activities related to restructuring and other special items for the
nine months ended September 30, 2000 were as follows:
<TABLE>
<CAPTION>
Workforce Facility Asset
Reductions Closures Impairments Total
---------- -------- ----------- -----
<S> <C> <C> <C> <C>
Restructuring and Other Special Items
-------------------------------------
January 1, 2000 Reserve Balance $24 $2 $ - $26
---- --- --- ---
Additions for 2nd quarter 2000 actions 31 1 129 161
Additions for 3rd quarter 2000 actions 21 2 3 26
Costs charged against reserves:
Pre-2000 plans (19) (2) (21)
2nd quarter 2000 actions (11) (11)
3rd quarter 2000 actions (3) (1) (4)
Reversal of reserves related to
pre-2000 plans (4) (4)
Reclassification of reserves to other
balance sheet accounts:
Inventory (32) (32)
Property (13) (13)
Goodwill (84) (84)
Other intangible assets (3) (3)
Other liabilities (3) (3)
---- --- --- ---
September 30, 2000 Reserve Balance $36 $2 $ - $38
==== === === ===
</TABLE>
Note 7 - Commitments and Contingencies
Pharmacia is a party to a number of lawsuits and claims relating
to Monsanto, for which Monsanto assumed responsibility upon its
separation from Pharmacia and which Monsanto is vigorously defending.
Such matters relate to a variety of issues. Certain of the lawsuits and
claims seek damages in very large amounts, or seek to restrict the
company's business activities. Although the results of litigation
cannot be predicted with certainty, it is management's belief that the
final outcome of such litigation will not have a material adverse
effect on Monsanto's financial position, results of operations or cash
flows.
In April 1999, a jury verdict was returned against DEKALB Genetics
Corporation (DEKALB) (which is now a wholly owned subsidiary of
Monsanto), 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, believes it 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's combined financial statements with respect to the
award for punitive damages.
8
<PAGE>
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED- (continued)
On March 20, 1998, a jury verdict was returned against Pharmacia
in a lawsuit filed in the California Superior Court. The lawsuit was
brought by Mycogen Corporation (Mycogen), Agrigenetics, Inc. and
Mycogen Plant Science, Inc. claiming that Pharmacia delayed providing
access to certain gene technology under a 1989 agreement with Lubrizol
Genetics Inc., a company which Mycogen subsequently purchased. The jury
awarded $174.9 million in future damages. This jury award was
overturned on appeal by the California Court of Appeals. The California
Supreme Court has granted Mycogen's petition requesting further review.
We will continue to vigorously pursue our position on appeal. No
provision has been made in Monsanto's combined financial statements
with respect to this verdict.
Note 8 - Segment Information
Monsanto 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 business lines. The Seeds and Genomics
segment is comprised of the global seeds and related traits businesses
and genetic technology platforms. Sales between segments were not
significant. Business segment data for the three months and nine months
ended September 30, 2000 and September 30, 1999 were as follows for net
sales and EBIT (earnings before interest expense and taxes).
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- --------------------
2000 1999 2000 1999
------- ------ ------ ------
Agricultural Productivity Segment:
---------------------------------
Net Sales $ 810 $ 773 $ 3,104 $ 2,873
======== ========= ======= =======
EBIT (earnings before interest and taxes) $ 170 $ 124 $ 973 $ 830
======== ========= ======= =======
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- ---------------------
2000 1999 2000 1999
------- ------ ------ ------
Seeds and Genomics Segment:
--------------------------
Net Sales $ 193 $ 210 $ 1,189 $ 1,246
======== ========= ======= =======
EBIT ((loss) before interest and taxes) $ (218) $ (269) $ (414) $ (258)
======== ========= ======= =======
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- ----------------------
2000 1999 2000 1999
------- ------ ------ ------
Total Monsanto Company and Subsidiaries:
---------------------------------------
Net Sales $ 1,003 $ 983 $ 4,293 $ 4,119
======== ========= ======= =======
EBIT (earnings (loss) before interest and taxes) (48) (145) 559 572
Interest expense - net (59) (53) (187) (189)
Income tax expense (benefit) 41 71 (169) (141)
-------- ---------- -------- --------
Net Income (loss) $ (66) $ (127) $ 203 $ 242
========= ========== ======== ========
</TABLE>
9
<PAGE>
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Monsanto Company and subsidiaries is comprised of the operations, assets and
liabilities that were previously the agricultural division of Pharmacia
Corporation (Pharmacia). This agricultural business was transferred to Monsanto
from Pharmacia on September 1, 2000, pursuant to the terms of a Separation
Agreement dated as of that date (the "Separation Agreement"). The Statement of
Consolidated Income (Loss), the Condensed Statement of Consolidated Financial
Position and the Condensed Statement of Consolidated Cash Flow for all periods
prior to September 7, 2000 have been prepared on a carve-out basis, which
reflects the historical operating results, assets, and liabilities of these
business operations. The costs of certain services provided by Pharmacia
included in the Statement of Consolidated Income (Loss) have been allocated to
Monsanto based on methodologies that management believes to be reasonable, but
which do not necessarily reflect what the results of operations, financial
position, or cash flows would have been had Monsanto been a separate,
stand-alone public entity during all periods presented. Financial information
for the first nine months of 2000 should not be annualized. Monsanto has
historically generated the majority of its sales during the first half of the
year, primarily because of the concentration of sales due to the timing of the
planting and growing season. Earnings per pro forma share information was
prepared using the number of common shares outstanding (258,033,000) after
Monsanto's partial initial public offering (IPO) which closed on October 23,
2000.
On October 23, 2000, Monsanto sold 38,033,000 shares of its common stock at $20
per share in an IPO, including 3,033,000 shares of common stock with respect to
which the underwriters exercised their over-allotment option. Subsequent to the
offering, Pharmacia continues to own 220,000,000 shares of common stock,
representing 85.3 percent ownership of Monsanto. The total net proceeds to
Monsanto were $723 million.
We are a 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.
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 seed and related traits
business and our genetic technology platforms. Management's Discussion and
Analysis should be read in conjunction with Monsanto's Consolidated Financial
Statements and the accompanying footnotes and the Quantitative and Qualitative
Disclosures About Market Risk following this section.
The primary operating performance measure for our two segments is earnings
before interest expense and taxes (EBIT). Total company EBIT improved to ($48)
million for the third quarter of 2000 from ($145) million for the same period in
the prior year. Total company EBIT for the nine-month period ended September 30,
2000 decreased 2 percent to $559 million from $572 million for the nine months
ended September 30, 1999. However, in 2000 and in recent years special charges
and other items have significantly affected our results. Additionally, 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 special items (EBITDA (excluding special items))
is an appropriate measure for evaluating the operating performance of our
business. EBITDA (excluding special items) eliminates, among other things, the
effects 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
effects of the special items described under "Events Affecting Comparability"
(also see Note 6 - Restructuring and Other Special Items.). The presentation of
EBITDA (excluding special items) is intended to supplement investors'
understanding of our operating performance. EBITDA (excluding special 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.
10
<PAGE>
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Unless otherwise indicated, "Monsanto" and "the company" are used
interchangeably to refer to Monsanto Company or to Monsanto Company and
consolidated subsidiaries, as appropriate to the context. With respect to the
time period prior to the separation of Monsanto's businesses from those of
Pharmacia on September 1, 2000, references to "Monsanto" or "the company" also
refer to the agricultural division of Pharmacia. See Note 1 to Notes to
Financial Statements. In tables, all dollars are in millions. Trademarks owned
or licensed by Monsanto or its subsidiaries are shown in all capital letters.
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- ---------------
Total Monsanto Company and Subsidiaries: 2000 1999 2000 1999
---------------------------------------- ------- ------ ------ ------
Net sales $ 1,003 $ 983 $ 4,293 $ 4,119
======== ====== ======= =======
Net income(loss) $ (66) $ (127) $ 203 $ 242
Add: Interest expense - net 59 53 187 189
Add: Income tax provision (benefit) (41) (71) 169 141
-------- ------ ------- -------
EBIT (earnings (loss) before interest and taxes) (48) (145) 559 572
Add: pretax restructuring & special items 26 67 183 67
-------- ------ ------- -------
EBIT (excluding special items) (22) (78) 742 639
Add: depreciation and amortization 135 128 410 379
-------- ------ ------- -------
EBITDA (excluding special items) $ 113 $ 50 $ 1,152 $ 1,018
======== ====== ======= =======
</TABLE>
Results of Operations - Third Quarter 2000 Compared with Third Quarter 1999
---------------------------------------------------------------------------
Net sales increased 2% to $1 billion for the three-month period ended September
30, 2000 compared to $983 million for the three-month period ended September 30,
1999. This increase was primarily due to a $27 million increase in sales of
ROUNDUP lawn and garden products compared to the same period in the prior year
due to a one-time change in the distribution method in 1999 and, to a lesser
degree, to increased sales in our selective chemistries business, and increased
sales of seeds with biotechnology traits. Partially offsetting these gains was
an 11% decline in our conventional seeds net sales, part of which was due to the
divestiture of the Stoneville Pedigreed Seed Business in December 1999.
Cost of goods sold decreased 1% to $549 million for the three-month period ended
September 30, 2000 from $557 million for the same period in 1999. The primary
reason for this favorable decrease was a special charge of $20 million to cost
of goods sold in the prior year related to the accelerated integration of our
agricultural chemical and seed operations.
Gross profit increased 7% to $454 million for the third quarter of 2000,
compared to $426 million for the third quarter in 1999. This increase was
primarily the result of a special charge of $20 million in cost of goods sold in
the Seeds and Genomics segment in the prior year, and modest gains in gross
profit in our ROUNDUP lawn and garden and gains in gross profit from sales of
seeds which include biotechnology traits. These increases in gross profit were
partially offset by a slight decline in gross profit our glyphosate family of
products. The decline in the gross profit of glyphosate products was due to an
overall decline in net selling price of our glyphosate family of products as a
result of our continued strategy to selectively reduce glyphosate prices to
encourage new uses and increase sales volumes.
Selling, general and administrative expenses decreased 7%, to $300 million for
the third quarter of 2000, compared to $324 million for the same period in 1999.
This decrease was primarily due to gains from agreements which allow third party
access to glyphosate registration data and a decline in spending related to the
divestiture of the Stoneville Pedigreed Seed Business in December 1999.
Partially offsetting these reductions to selling, general and administrative
expenses were increased spending on biotechnology acceptance and education
programs and increased agency fees payable to The Scotts Company in our ROUNDUP
lawn and garden business due to the increase in sales in our ROUNDUP lawn and
garden business in the third quarter of 2000. See "Our Agreement with The Scotts
Company" for further details.
11
<PAGE>
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Research and development expenses decreased 22% to $140 million for the third
quarter of 2000, compared to $179 million for the third quarter of 1999. This
decrease was primarily due to the decision to increase the focus of our research
programs on our four core crops of corn, soybeans, wheat and cotton and to
reduce spending on certain non-core programs.
Interest expense, net of interest income, increased 11% to $59 million for the
third quarter of 2000, compared to $53 million for the third quarter 1999. This
increase was primarily due to higher debt levels during the period due to
working capital requirements. Other expense, net of other income, increased $3
million in the third quarter of 2000 when compared to the same period in the
prior year, due to increased equity losses from affiliates.
Income tax benefit decreased 42% to $41 million for the third quarter of 2000
compared to $71 million for the same period in 1999. This decrease was primarily
due to the 46% improvement in pretax income in the third quarter of 2000
compared to the third quarter of 1999. The increase in the effective tax rate to
38% for the three months ended September 30, 2000 from 36% for the three months
ended September 30, 1999 was primarily the result of the difference in the mix
of earnings projected for 2000 versus 1999.
Net income (loss) improved 48%, to a net loss of $66 million, or $0.25 loss per
pro forma share, for the third quarter 2000, compared with a net loss of $127
million, or $0.49 loss per pro forma share, for the third quarter 1999. However,
the third quarter of 2000 and 1999 include restructuring and special charges net
of taxes of $21 million and $44 million, respectively. (See Events Affecting
Comparability.) Excluding these special charges, net loss would have been $45
million, or $0.17 loss per pro forma share, in the third quarter 2000 compared
with $83 million, or $0.32 loss per pro forma share, for the third quarter 1999.
Agricultural Productivity Segment
--------------------------------
Our Agricultural Productivity segment consists of our crop protection products
(glyphosate herbicides and selective chemistries) and our animal agriculture,
ROUNDUP lawn and garden, and environmental technologies businesses.
<TABLE>
<S> <C> <C>
Three Months Ended
September 30,
Agricultural Productivity Segment: 2000 1999
---------------------------------- ------- ------
Net sales $ 810 $ 773
======= ======
EBIT (earnings before interest and taxes) 170 124
Add: restructuring & special items - net 6 37
------- -------
EBIT (excluding special items) 176 161
Add: depreciation and amortization 52 46
------- -------
EBITDA (excluding special items) $ 228 $ 207
======= =======
</TABLE>
Net sales for our Agricultural Productivity segment increased 5% to $810 million
for the third quarter of 2000, as compared to $773 million in the third quarter
of 1999. This increase was primarily due to an increase in net sales of ROUNDUP
lawn and garden products, selective chemistry products and in our environmental
technologies business, partially offset by lower glyphosate product net sales.
ROUNDUP lawn and garden net sales increased in the third quarter of 2000
primarily due to improvements over reduced 1999 net sales levels that reflected
a change in the distribution method which caused distribution channel
inventories to decline for these products in the prior year quarter. Sales of
selective chemistries increased 26% during the third quarter of 2000 compared to
the same period of the prior year primarily due to increased acetanilides sales
in the United States. Sales in our environmental technologies business,
Enviro-Chem, increased 27% during the third quarter of 2000, compared with the
third quarter of 1999 despite a continued depression in the fertilizer and metal
commodity markets. These net sales gains were partially offset by a slight
decline in net sales of glyphosate products during the third quarter of 2000, as
compared to third quarter of 1999. The decline in net sales was principally due
to lower selling prices, which were only partially offset by increased volumes
outside North America. On September 20, 2000, the compound per se patent
protection for the active ingredient in ROUNDUP herbicide expired in the United
States.
12
<PAGE>
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
EBIT (excluding special items) for the Agricultural Productivity segment
increased 9% for the three-month period ended September 30, 2000, as compared to
the same period in 1999, driven by the increased sales of ROUNDUP lawn and
garden products, selective chemistries products and in our environmental
technologies business. These increases were partially offset by lower gross
profit primarily in our glyphosate family of products as a result of out
continued strategy to selectively reduce glyphosate prices to encourage
increased usage.
Operating expenses for the Agricultural Productivity segment decreased
approximately 13% for the third quarter of 2000 compared with the third quarter
of 1999, primarily due to gains from agreements which allow third party access
to glyphosate registration data and cost reductions related to research and
development in connection with our increased focus on the four key crops of
corn, soybeans, wheat and cotton.
Seeds and Genomics Segment
-------------------------
Our Seeds and Genomics segment consists of our global seeds and related traits
business and our genomics technology platforms.
<TABLE>
<S> <C> <C>
Three Months Ended
September 30,
Seeds and Genomics Segment: 2000 1999
--------------------------- ------- ------
Net sales $ 193 $ 210
======= ======
EBIT (earnings before interest and taxes) (218) (269)
Add: restructuring & special items - net 20 30
------- ------
EBIT (excluding special items) (198) (239)
Add: depreciation and amortization 83 82
------- ------
EBITDA (excluding special items) $ (115) $ (157)
======= =======
</TABLE>
Net sales for the Seeds and Genomics segment declined 8% to $193 million for the
third quarter of 2000 from $210 million in the same period in 1999. Seed net
sales declined 11% primarily due to lower sales of conventional seed varieties
and, to a lesser extent, due to the sale in late 1999 of the Stoneville
Pedigreed Seed business. This decrease was partially offset by an increase in
seed net sales which included biotechnology traits, as we continue to shift more
of our seed offerings to those varieties.
EBIT (excluding special items) for the Seeds and Genomics segment improved to a
loss of $198 million in the third quarter of 2000 versus a loss of $239 million
in the third quarter 1999. These increases were attributed to lower operating
expenses, primarily due to cost reductions in research and development related
to our increased focus on the four key crops of corn, soybeans, wheat and
cotton.
Seeds and Genomics gross profit increased 16% in the third quarter of 2000
compared to the third quarter of 1999. This increase is primarily due to a
special charge of $20 million in cost of goods sold in the Seeds and Genomics
segment in the prior year and higher gross profit from seed sales which include
biotechnology traits which were partially offset by lower gross profit on
conventional seed sales. Cost of goods sold for the Seeds and Genomics segment
decreased 26% for the three months ended September 30, 2000 compared to the same
period in 1999. This decline was due to reduced seed sales, primarily
conventional soybean seed units and other non-core varieties, and to a lesser
degree, as a result of the sale of Stoneville in late 1999.
Selling, general and administrative expenses decreased 8% for the third quarter
of 2000 compared to the third quarter of 1999 primarily due to a one-time charge
of $15 million in the prior year quarter related to a re-negotiated third party
contract in Latin America. Research and development expenses decreased by 15% in
the third quarter of 2000 compared with the same period in 1999 primarily due to
cost reductions related to our increased focus on the four core crops of corn,
soybeans, wheat and cotton.
13
<PAGE>
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Results of Operations - First Nine Months of 2000 Compared with First Nine
Months of 1999
--------------------------------------------------------------------------------
Net sales increased 4% to $4.3 billion for the nine months ended September 30,
2000, compared to $4.1 billion for the same period in 1999. This increase was
primarily due to a 5% increase in glyphosate product sales, and to a lesser
degree, to increased sales of ROUNDUP lawn and garden products and in our
selective chemistries business, as well as an increase in technology fee
revenues. Offsetting these gains was an 8% decline in our seed business revenue,
primarily due to the divestiture of the Stoneville Pedigreed Seed Business in
December 1999 and due to lower sales of conventional seeds.
Cost of goods sold increased 5% to $2.0 billion for the nine-month period ended
September 30, 2000 from $1.9 billion for the same period in 1999. The primary
reason for this increase was an 18% increase in glyphosate sales volumes.
Start-up expenses associated with our new Posilac manufacturing facility in
Augusta, Georgia also contributed to increased cost of goods sold.
Gross profit increased 4% to $2.3 billion for the first nine months of 2000
compared with $2.2 billion for the same period in 1999. This increase was the
result of increased sales of the family of glyphosate products and seed sales
which included biotechnology traits. These gains in gross profit were slightly
offset by lower gross profit in our conventional seed and environmental
technologies business primarily due to lower net sales in the first nine months
of 2000 compared with the same period in 1999.
Selling, general and administrative expenses increased 7%, to $988 million for
the nine months ended September 30, 2000, compared to $926 million for the same
period in 1999. This increase was primarily attributable to increased spending
on biotech acceptance and education programs in 2000. Also contributing to the
increase in selling, general and administrative expenses were increased agency
fees payable to The Scotts Company in our ROUNDUP lawn and garden business due
to the increase in sales during the first nine months of 2000. See "Our
Agreement with The Scotts Company" for further details.
Research and development expenses decreased 17% to $431 million for the
nine-month period ended September 30, 2000 compared to $517 million for the
nine-month period ended September 30, 1999. This decrease is primarily due to
our decision to increase the focus of our research programs on our four core
crops of corn, soybeans, wheat and cotton and to reduce our spending on non-core
programs.
In the nine months ended September 30, 2000, we wrote down $84 million of
goodwill associated with our decision to terminate the nutrition programs at
Calgene. In the nine months ended September 30, 1999, we incurred an $8 million
charge to amortization and adjustments of goodwill related to the termination of
several research programs. Excluding these write-downs, amortization and
adjustments of goodwill was relatively flat in the nine months ended September
30, 2000 compared to the same period in 1999.
Although pretax income declined approximately 3% or $11 million, income tax
expense for the first nine months of 2000 increased $28 million when compared to
the same period in 1999. The increase in the effective tax rate to 45% for the
nine months ended September 30, 2000 from 37% for the nine months ended
September 30, 1999 was primarily the result of the non-deductibility of the $84
million write-down of goodwill in the second quarter of 2000. See "Events
Affecting Comparability" for further details.
Net income declined 16% to $203 million, or $0.79 cents per pro forma share, for
the nine months ended September 30, 2000 compared to $242 million, or $0.94 per
pro forma share, for the nine months ended September 30, 1999. However, the
first nine months of 2000 and 1999 include special charges after tax of $144
million and $44 million, respectively. See "Events Affecting Comparability".
Excluding these special charges in both periods, net income for the first nine
months of 2000 would have been $347 million, or $1.34 per pro forma share, a 21%
increase over net income of $286 million, or $1.11 per pro forma share, for the
first nine months of 1999.
14
<PAGE>
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Agricultural Products Segment
-----------------------------
<TABLE>
<S> <C> <C>
Nine Months Ended
September 30,
2000 1999
------- ------
Net sales $ 3,104 $ 2,873
======= =======
EBIT (earnings before interest and taxes) 973 830
Add: restructuring & special items - net 15 37
------- -------
EBIT (excluding special items) 988 867
Add: depreciation and amortization 151 127
------- -------
EBITDA (excluding special items) $ 1,139 $ 994
======= =======
</TABLE>
Net sales for our Agricultural Productivity segment increased 8% to $3.1 billion
for the nine months ended September 30, 2000, as compared to $2.9 billion for
the nine months ended September 30, 1999. This increase was primarily due to an
18% increase in glyphosate product volumes, excluding ROUNDUP lawn and garden
products, and to a lesser degree resulting from increased sales of ROUNDUP lawn
and garden products and selective chemistries. Glyphosate product sales
increased primarily in the United States and Latin America due to incremental
ROUNDUP READY acres and the continued adoption of conservation tillage. The
increase was consistent with our policy of selectively reducing prices to
encourage new uses and increase sales volumes. ROUNDUP lawn and garden sales
increased in the first nine months of 2000 primarily due to improvements over
reduced sales levels in 1999. The reduced sales levels in 1999 reflected a
change in distribution method which caused distribution channel inventories to
decline for these products. Sales of selective chemistries increased 13% during
the first nine months of 2000 compared to the nine-month period ended September
30, 1999 due to increased acetanilide sales in the United States. Partially
offsetting these increases were slight declines in net sales in our animal
agriculture and environmental technologies business during the nine-month period
ended September 30, 2000.
EBIT (excluding special items) for the Agricultural Productivity segment
increased 14% to $988 million for the nine-month period ended September 30,
2000, compared to $867 million during the same period in 1999. This increase was
primarily due to increased sales of the family of glyphosate products, ROUNDUP
lawn and garden products, and selective chemistries.
Gross profit for the Agricultural Productivity segment increased 5% for the
nine-month period ended September 30, 2000, as compared to the nine-month period
ended September 30, 1999, driven by increased net sales.
Operating expenses for the Agricultural Productivity segment decreased
approximately 4% for the nine-month period ended September 30, 20000 compared
with the same period in 1999, despite the increase in net sales for the segment.
This decrease in operating expenses was primarily due to cost reductions related
to our increased focus on core research and development programs.
15
<PAGE>
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Seeds and Genomics Segment
-------------------------
<TABLE>
<S> <C> <C>
Nine Months Ended
September 30,
-------------
2000 1999
------- ------
Seeds and genomics net sales $ 1,189 $ 1,246
========= ========
EBIT ((loss) before interest and taxes) (414) (258)
Add: restructuring & special items - net 168 30
--------- --------
EBIT (excluding special items) (246) (228)
Add: depreciation and amortization 259 252
--------- --------
EBITDA (excluding special items) $ 13 $ 24
========= ========
</TABLE>
Net sales for the Seeds and Genomics segment declined 5% to $1.2 billion for the
nine months ended September 30, 2000 when compared to the same period in 1999.
Seed net sales declined 8% in the first nine months of 2000 primarily due to
lower sales of conventional seed varieties and due to the sale in late 1999 of
the Stoneville Pedigreed Seed business. This decrease was partially offset by a
10% increase in seed net sales which included biotechnology traits, as the
company continues to strategically shift more of its seed offerings to seeds
with biotechnology traits.
EBIT (excluding special items) for the Seeds and Genomics segment decreased 8%
to a loss of $246 million for the nine-month period ended September 30, 2000
compared to a loss of $228 million for the same period in 1999. This decline was
attributed to lower net sales and increased non-operating expenses.
Seeds and Genomics gross profit increased 3% for the nine months ended September
30, 2000 higher gross profit from seed sales which include biotechnology traits
were partially offset by lower gross profit conventional seed sales. Cost of
goods sold for the Seeds and Genomics segment, decreased 11% for the nine months
ended September 30, 2000 compared to the same period in 1999. This decline was
due to reduced seed sales, primarily conventional soybean seed units and other
non-core varieties, and to a lesser degree, as a result of the sale of
Stoneville in late 1999.
Selling, general and administrative expenses increased 12% for the nine months
ended September 30, 2000 compared to the same period in 1999 primarily due to
increased spending on biotech acceptance and education programs. Largely
offsetting the increases in selling, general and administrative expenses was a
10% decrease in research and development expenses for the nine months ended
September 30, 2000, primarily due to cost reductions related to the increased
focus of our research programs on four core crops of corn, soybeans, wheat and
cotton. Non-operating expenses increased $21 million due primarily to an
increase in equity affiliate losses.
Our Agreement with The Scotts Company
-------------------------------------
In 1998, Monsanto entered into an agency and marketing agreement with Scotts
with respect to our ROUNDUP lawn and garden business. Under the agreement,
beginning in the fourth quarter of 1998, Scotts was obligated to pay us a $20
million fixed fee each year to defray costs associated with the ROUNDUP lawn and
garden business. Scotts' payment of a portion of this fee owed in each of the
first three years of the agreement is deferred and required to be paid at later
dates, together with interest. Monsanto is accruing the $20 million fixed fee
per year owed by Scotts ratably over the periods during which it is being earned
as a reduction of selling, general and administrative expenses. We are also
accruing interest on the amounts owed by Scotts and including such amounts in
interest income. The total amount owed by Scotts, including accrued interest,
was $38 million as of September 30, 2000. Scotts is required to begin paying
these deferred amounts at $5 million per year in monthly installments beginning
October 1, 2002.
17
<PAGE>
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Events Affecting Comparability
------------------------------
In the third quarter of 2000, we recorded a net pretax charge of $26 million to
operating expenses in connection with the elimination of certain nutrition
research and development programs, as part of our ongoing plan to focus on key
projects. The plan encompassed a decision to more stringently focus on our four
key crops of corn, soybeans, wheat and cotton and included the elimination of
food and biotech research programs and the shutdown of administrative and
manufacturing facilities. In conjunction with the elimination of these projects,
fixed and intangible assets were written off.
In total, the net charge of $26 million was comprised of workforce reduction
costs of $21 million, asset impairments of $3 million and other exit costs of $2
million. The costs were recorded in The Statement of Consolidated Income (Loss)
as restructuring expense. The asset impairments consisted of $2 million for
equipment write-offs and $1 million for intangible assets. The other exit costs
consisted of contractual termination payments as a result of the exit of certain
research programs.
The workforce reduction charge reflected involuntary employee separation costs
for 215 employees worldwide and included charges of $12 million for positions in
research and development, and $8 million for positions in administration and $1
million for positions in manufacturing. The affected employees are entitled to
receive severance benefits pursuant to established severance policies or by
governmentally mandated labor regulations. During the third quarter of 2000, 48
employee terminations for this plan were completed at a cost of $3 million. Exit
costs associated with contract terminations of $1 million had been paid as of
September 30, 2000. We expect the employee reductions, asset dispositions and
other exit activities to be completed by March 31, 2001. Payments to complete
the remaining restructuring actions will be funded from operations and are not
expected to significantly impact our liquidity. We anticipate cash savings from
the third quarter 2000 action to be $4 million.
In the first nine months of 2000, we recorded net pretax charges of $183 million
to operating expenses in connection with the elimination of certain nutrition,
laureate oil and wheat quality research and development programs as part of our
plan to focus on key projects. Our plan encompassed a decision to more
stringently focus on our four key crops of corn, soybeans, wheat and cotton and
included the elimination of food and biotech research programs and the shutdown
of certain administrative and manufacturing facilities. In conjunction with the
elimination of these projects, inventories, fixed assets and intangible assets
(including goodwill, product rights and licensed technologies) were written off.
In total, the net charge of $183 million was comprised of asset impairments of
$132 million, workforce reduction costs of $52 million and other exit costs of
$3 million, net of prior restructuring reserve reversals of $4 million. The
costs were recorded in the Statement of Consolidated Income (Loss) as cost of
goods sold of $32 million, amortization and adjustment of goodwill of $84
million and restructuring expense of $67 million. The asset impairments
consisted of $32 million for laureate oil inventories, $87 million for
intangible assets, and $13 million for equipment write-offs.
The workforce reduction charge reflected the involuntary employee separation
costs for 590 employees worldwide and included charges of $26 million for
positions in administration, and $25 million for positions in research and
development and $1 million for positions in manufacturing. The affected
employees are entitled to receive severance benefits pursuant to established
severance policies or by governmentally mandated labor regulations. As of
September 30, 2000, 180 employee terminations (132 terminations related to
second quarter actions and 48 terminations related to third quarter actions)
were completed during the third quarter at a cost of $14 million. The other exit
costs included expenses associated with contract terminations and equipment
dismantling. As of September 30, 2000, $1 million of these exit costs had been
paid. The company expects the employee reductions, asset dispositions and other
exit activities to be completed by June 2001. Payments to complete the remaining
restructuring actions will be funded from operations and are not expected to
significantly impact our liquidity. We expect to implement these actions by the
end of 2001 and we anticipate they will yield annual cash savings of
approximately $100 million.
For the three and nine months ended September 30, 1999, we recorded a net pretax
charge of $67 million to operating expenses associated with the continuing focus
on improving operating efficiency through accelerated integration of our
agricultural and seed operations. These charges were net of a reversal of $1
million for restructuring liabilities established in 1998. The charge of $67
million was comprised of facility shutdown charges of $39 million, workforce
18
<PAGE>
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
reductions of $18 million related to 360 positions, and asset impairments of $10
million and was recorded in The Statement of Consolidated Income as cost of
goods sold of $20 million, amortization and adjustments of $8 million and
restructuring expense of $39 million. 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
improvements, and $2 million for property, plant and equipment write-offs. These
actions were substantially completed by September 2000 and we anticipate annual
cash savings of $24 million.
The costs were recorded in the Statement of Consolidated Income (Loss)
in the following line items:
<TABLE>
<S> <C> <C> <C> <C>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
---- ---- ----- ----
Cost of Goods Sold $ - $20 $32 $20
Amortization and Adjustments of Goodwill 8 84 8
Restructuring and Other Special Items 26 39 67 39
--- --- --- ---
Total before Tax 26 67 183 67
Income Tax Expense (Benefit) (5) (23) (39) (23)
--- --- --- ---
Net (Income) Loss $21 $44 $144 $44
=== === ==== ===
</TABLE>
The pretax (income)/expense components of the restructuring and other
special items were as follows:
<TABLE>
<S> <C> <C> <C> <C>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
Restructuring charges $26 $ - $ 71 $ -
Accelerated integration costs 60 60
Reversal of restructuring reserves (1) (4) (1)
Write-off of obsolete inventories 32
Write-off of goodwill - 8 84 8
--- --- --- ---
Total pretax restructuring and special items $26 $67 $183 $ 67
=== === ==== ====
</TABLE>
Changes in Financial Condition - September 30, 2000 Compared with Dec. 31, 1999
--------------------------------------------------------------------------------
Our working capital decreased by $758 million to $1.6 billion from $2.3 billion
at year-end 1999, primarily because of an increase in short-term debt due to the
separation of our businesses from those of Pharmacia on September 1, 2000 and
due to seasonal working capital funding requirements. Short-term debt increased
$1.9 billion primarily from the commercial paper we assumed from Pharmacia as
part of the Separation Agreement. Cash and cash equivalents increased $192
million to $218 million due to the timing of when cash collections were used to
reduce commercial paper borrowings. Trade account receivables increased $966
million primarily due to the seasonality of our business and the fact that the
month of September historically represents our peak account receivables level.
Days sales outstanding increased 14 days to 154 days largely due to competitive
market conditions in the United States and Latin America. Inventories decreased
$84 million due to tighter inventory management initiatives and higher sales
levels in the first nine months of 2000 compared to the prior year. Accounts
payable and miscellaneous short-term accruals decreased slightly by $47 million
to $1.6 billion. Our operations used cash of $271 million in the first nine
18
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MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
months of 2000 compared with a use of $78 million in the first nine months of
1999. Long-term debt decreased $3.3 billion to $994 million primarily as a
result of the transfer of $2.1 billion of debt to Pharmacia as part of the
Separation Agreement between us and a reclassification of $1.2 billion of
long-term debt to short-term debt.
Investing activities for the first nine months of 2000 used $557 million of cash
primarily related to property, plant and equipment purchases. Capital
expenditures in the first nine months of 2000 were largely used for capacity
expansions and improvements of manufacturing facilities in the United States and
Latin America. Acquisition and investing activities $110 million were related
primarily to equity investments in plant biotechnology and the purchase of
additional ownership interest in an equity affiliate. Investing activities in
the prior year includes a $325 million refund of a portion of the original
purchase price for certain international seed operations of Cargill,
Incorporated acquired in 1998.
Outlook for Agricultural Products - Update
------------------------------------------
Our family of Roundup herbicides continues to face competition from generic
producers in certain markets outside the United States. Patents protecting
Roundup expired in various countries in 1991. As our patent protection on
Roundup has expired in countries outside the United States, we have implemented,
and expect to continue to follow, a pricing strategy in which we have
selectively reduced prices to encourage new usage. Compound per se patent
protection for the active ingredient in Roundup herbicide expired in the United
States on September 20, 2000. Consistent with our global pricing strategy, we
reduced our prices on the family of Roundup products in the United States by 16%
to 22% in September 1998 in anticipation of patent expiration. The effect of the
volume growth in 1999 more than offset the effect of the price decrease in the
United States. As other agricultural chemical suppliers have access to
glyphosate in the U.S., often through supply agreements with us, their pricing
policies may cause downward pressure on prices. In the post-patent environment,
we expect to continue our pricing strategy of selectively reducing selling
prices to encourage new uses and to increase our sales volumes.
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 aim to increase our sales and income from 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; introducing additional proprietary
formulations of Roundup; selectively reducing prices to encourage new uses for
Roundup; maintaining our position as a low-cost, high-quality glyphosate
producer; and building on our relationships with our distribution partners.
The U.S. patent expiration and the continuation of our pricing strategy in the
U.S. will likely result in a near term modest reduction in our gross margin,
consistent with the last three years. We expect that increased glyphosate sales
volumes and growth in our other business lines will enable us to grow our total
gross profit in the future above 1999 levels. While there can be no assurance
that any increases in volumes will offset price reductions, this generally has
been our experience in glyphosate post-patent environments outside of the United
States.
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 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.
Recently, certain processed foods were subject to a voluntary recall when found
to contain biotechnology material from a competitor's biotech seed product which
had been approved for feed uses but has not been approved for food uses in the
United States. All of our biotechnology seed products have both food and feed
approval in the United States and in all countries in which they have been
approved. Separately, we have made a pledge not to launch new biotechnology seed
products until we have approvals in both the United States and Japan. We have
filed for new product approvals in both the United States and Japan. Although no
prediction can be made with regard to timing of approvals, the agricultural
biotechnology regulatory systems in both countries have been fully functioning.
19
<PAGE>
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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.), 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' technology for glyphosate
resistance under this agreement. The jury awarded $15 million in actual damages
for unjust enrichment and $50 million in punitive damages. DEKALB has appealed
this verdict and believes it 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 our combined financial statements with respect to
the award for punitive damages.
On March 20, 1998, a jury verdict was returned against Pharmacia in a lawsuit
filed in the California Superior Court. The lawsuit was brought by Mycogen
Corporation, Agrigenetics Inc. and Mycogen Plant Sciences Inc. claiming that
Pharmacia delayed providing access to certain gene technology under a 1989
agreement with Lubrizol Genetics Inc., a company which Mycogen subsequently
purchased. The jury awarded $174.9 million in future damages. This jury award
was overturned on appeal by the California Court of Appeals. The California
Supreme Court has granted Mycogen's petition requesting further review. Pursuant
to the Separation Agreement, we have assumed responsibility for this litigation
from Pharmacia. We will continue to vigorously pursue our position on appeal. No
provision had been made in our combined financial statements with respect to
this verdict.
Management expects intellectual property disputes with several parties regarding
biotechnology products will continue to occur as the agricultural biotechnology
industry evolves.
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 January 1, 2002,
both the national currencies and the euro will be legal currencies. Beginning
January 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 December
2001. We do not expect the euro conversion to have a material effect on our
competitive position, business operations, financial position or results of
operations.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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
currency risk management programs. We do not hold or issue derivative financial
instruments for trading purposes.
During the year-to-date period ended September 30, 2000, the company has reduced
its debt position by approximately $1.31 billion pursuant to the Separation
Agreement with Pharmacia Corporation. (See Note 1 - Basis of Presentation.) The
effect of this debt elimination will reduce the company's exposure to interest
rate fluctuations. Subsequently, on October 23, 2000, proceeds from our partial
initial public offering ($723 million) were used to reduce debt.
There are no other material changes related to market risk from the disclosures
in Monsanto Corporation's Amended Form S-1 filed on October 17, 2000 with the
Securities and Exchange Commission with respect to the year ended December 31,
1999.
20
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Pursuant to the Separation Agreement between us and Pharmacia Corporation
(Pharmacia), effective September 1, 2000, we assumed responsibility for legal
proceedings primarily related to the agricultural business. As a result,
although Pharmacia may remain the named defendant or plaintiff in these cases,
we will manage the litigation. In addition, in the proceedings where Pharmacia
is the defendant, we will indemnify Pharmacia for costs, expenses and any
judgments or settlements; and in the proceedings where Pharmacia is the
plaintiff, we will pay the fees and costs of, and receive any benefits from,
this litigation. While the results of litigation cannot be predicted with
certainty, we do not believe these matters or their ultimate disposition will
have a material adverse effect on our financial position, results of operation
or cash flows. The following describes certain proceedings to which Pharmacia or
we are a party and for which we are responsible. Other information with respect
to legal proceedings appears in our Registration Statement on Form S-1, as
amended.
As described in our Registration Statement on Form S-1, as amended, in June
1996, Mycogen Corporation, Mycogen Plant Science, Inc. and Agrigenetics, Inc.
filed suit against Pharmacia 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. On June 28, 2000,
the California Court of Appeal for the Fourth Appellate District issued its
opinion reversing the jury verdict and related judgment of the trial court, and
directed that judgment should be entered in our favor. On October 25, 2000,
Mycogen's petition with the California Supreme Court requesting further review
was granted and their appeal of the reversal of judgment is continuing.
As described in our Registration Statement on Form S-1, as amended, on November
30, 1999, Pharmacia filed suit against Pioneer Hi-Bred International, Inc. 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, on the ground that Pioneer had improperly assigned the license in
connection with its merger with E. I. Du Pont De Nemours and Company. We allege
that the assignment resulted in unauthorized sales, and therefore infringed our
patents and violated our trademark rights. On June 27, 2000, the court held that
Pioneer had assigned our intellectual property license in connection with the
merger, and denied Pioneer's motion to dismiss the complaint. A jury trial is
set to commence in April 2001.
As described in our Registration Statement on Form S-1, as amended, DEKALB
Genetics Corporation, which Pharmacia acquired in December 1998, has filed legal
actions to enforce its patents. On April 30, 1996, DEKALB 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's patents involving herbicide-resistant and/or insect-resistant
fertile, transgenic corn. In particular, the DEKALB 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 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. The
judge has adopted the findings of the special master and appointed a settlement
mediator to conduct discussions among the parties. A trial against Pioneer is
set for February 12, 2001. A trial against Mycogen, involving a different
patent, is set for April 2001.
21
<PAGE>
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On October 23, 2000, we completed a partial initial public offering (IPO) in
which we sold 38,033,000 shares of our common stock at a price of $20 per share.
The shares were sold pursuant to a registration statement on Form S-1 (File No.
333-36956) that was declared effective by the Securities and Exchange Commission
on October 17, 2000, which was the day that the offering commenced. We
registered 40,250,000 shares under this registration statement, including up to
5,250,000 shares to be issued upon exercise of the underwriters' overallotment
option. The managing underwriters for the offering were 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.
The gross proceeds of the IPO were $760,660,000. Underwriting discounts and
commissions were $38,033,000, resulting in net proceeds to us of $722,627,000,
all of which was used to repay indebtedness. In addition, we incurred other
expenses estimated at approximately $8.5 million, all of which were paid by
Pharmacia.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 23, 2000, Pharmacia Corporation, as sole shareholder of Monsanto,
approved our Amended and Restated Certificate of Incorporation.
On August 29, 2000, Pharmacia Corporation, as sole shareholder of Monsanto,
approved matters relating to Monsanto's management compensation and employee
benefits, including approval of the Monsanto 2000 Management Incentive Plan and
the Monsanto Broad-Based Stock Option Plan.
On September 21, 2000, Pharmacia Corporation, as sole shareholder of Monsanto,
approved additional matters relating to Monsanto's director and management
compensation and employee benefits, including approval of: the Non-Employee
Director Equity Incentive Compensation Plan as described in Monsanto's
Registration Statement on Form S-1, as amended; an Employee Stock Purchase Plan
to be made available to Monsanto's employees; and amendments to the Monsanto
2000 Management Incentive Plan and the Monsanto Broad-Based Stock Option Plan,
both as described in Monsanto's Registration Statement on Form S-1, as amended.
Item 5. OTHER INFORMATION
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
Under the Private Securities Litigation Reform Act of 1995, companies are
provided with a "safe harbor" for making forward-looking statements about the
potential risks and rewards of their strategies. We believe it is in the best
interest of our shareowners to use these provisions in discussing future events.
Forward-looking statements include our business plans, the potential for the
development, regulatory approval, and public acceptance of new products; other
factors that could affect our future operations or financial position, and other
statements that are not statements of historical fact.. Such statements often
include the words "believes," "expects," "anticipates," "intends," "plans,"
"estimates," or similar expressions.
Our ability to achieve our goals depends on many known and unknown risks and
uncertainties, including changes in general economic and business conditions.
These factors could cause our actual performance and results to differ
materially from those described or implied in forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed below.
ROUNDUP Competition: The family of ROUNDUP herbicides is a major product line.
Patents protecting ROUNDUP in several countries expired in 1991, and compound
per se patent protection for the active ingredient in ROUNDUP herbicide expired
in the United States in September 2000. These herbicides are likely to face
increasing competition in the future We believe that we can compensate for
22
<PAGE>
increased competition both within and outside the United States and continue to
increase revenues and profits from ROUNDUP through a combination of (1)
marketing strategy, (2) pricing strategy, and (3) decreased production costs.
Marketing Strategy: We expect to increase ROUNDUP sales by focusing on
brand premiums, providing unique formulations and services, offering
integrated seed and biotech solutions through cross selling and the
growth and introduction of ROUNDUP READY crops, and continuing to
encourage the practice of conservation tillage. The success of our
ROUNDUP marketing strategy will depend on the continued expansion of
conservation tillage practices and our ability to realize and promote
cost and production benefits of our product packages, and to introduce
new ROUNDUP READY crops.
Pricing Strategy: We have significantly reduced the sales price of
ROUNDUP in the United States and around the world. This price elasticity
strategy is designed to increase demand for ROUNDUP by making ROUNDUP
more economical, encouraging both new uses of the product and expansion
of the number of acres treated. Our experience in numerous markets
worldwide has been that price reductions have stimulated volume growth.
However, such volume increases also may have been influenced by a variety
of other factors, such as weather; launch of new products including
ROUNDUP READY crops; competitive products and practices; and an increase
in agricultural acres planted. Conditions, and therefore volume trends
experienced to date, may or may not continue.
Production Cost Decreases: We also believe that increased volumes and
technological innovations will lead to efficiencies that will reduce the
production cost of glyphosate. As part of this strategy, we have entered
into agreements to supply glyphosate to other herbicide producers. Such
cost reductions will depend on realizing such increased volumes and
innovations, and securing the resources required to expand production of
ROUNDUP.
Realization and Introduction of New Products: Our ability to develop and
introduce to market new products, particularly new agricultural biotechnology
products, will be dependent, among other things, upon the availability of
sufficient financial resources to fund research and development needs, the
success of our research efforts, our ability to gain consumer acceptance and
regulatory approvals, the demonstrated effectiveness of our products, our
ability to produce new products on a large scale and to market them
economically, our ability to develop, purchase or license required technology,
and the existence of sufficient distribution channels.
Governmental and Consumer Acceptance: The commercial success of agricultural and
food products developed through biotechnology will depend in part on government
and public acceptance of their cultivation, distribution and consumption. We
continue to work with consumers, customers and regulatory bodies to encourage
understanding of agricultural biotechnology products. Biotechnology has enjoyed
and continues to enjoy substantial support from the scientific community,
regulatory agencies and many governmental officials around the world. However,
public attitudes may be influenced by claims that genetically modified plant
products are unsafe for consumption or pose unknown risks to the environment or
to traditional social or economic practices. Securing governmental approvals
for, and consumer confidence in, such products poses numerous challenges,
particularly outside the United States. Some countries also have labeling
requirements. In some markets, because these crops are not yet approved for
import, growers in other countries may be restricted from introducing or selling
their grain. In these cases, the grower may have to arrange to sell the grain
only in the domestic market or to use the grain for feed on his or her farm. 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.
Regulatory Approvals: The field-testing, production and marketing of our
products are subject to extensive regulations and numerous government approvals,
which vary widely among jurisdictions. Obtaining necessary regulatory approvals
can be time-consuming and costly, and there is no guarantee of success.
Regulatory authorities can block the sale or import of our products, order
recalls, and prohibit planting of seeds containing our technology. In
particular, the regulation of agricultural biotechnology is evolving and new and
unanticipated restrictions may be imposed.
Intellectual Property: We have devoted significant resources to obtaining and
maintaining our intellectual property rights, which are material to our
business. We rely on a combination of patents, copyrights, trademarks and trade
secrets, confidentiality provisions, Plant Variety Protection Act registrations
23
<PAGE>
and licensing arrangements to establish and protect our intellectual property.
We seek to preserve our intellectual property rights and to operate without
infringing the proprietary rights of third parties. Intellectual property
positions are becoming increasingly important within the agricultural
biotechnology industry.
There is some uncertainty about the value of available patent protection in
certain countries outside the United States. Moreover, the patent positions of
biotechnology companies involve complex legal and factual questions. Rapid
technological advances and the number of companies performing such research can
create an uncertain environment. Patent applications in the United States are
kept secret, and outside the United States, patent applications are published 18
months after filing. Accordingly, competitors may be issued patents from time to
time without any prior warning to us. That could decrease the value of similar
technologies that we are developing. Because of this rapid pace of change, some
of our products may unknowingly rely on key technologies developed by others. If
that occurs, we must obtain licenses to such technologies in order to continue
to use them.
Certain of our seed germplasm and other genetic material, patents, and licenses
are currently the subject of litigation and additional future litigation is
anticipated. Although the outcome of such litigation cannot be predicted with
certainty, we will continue to defend and litigate our positions vigorously. We
believe that we have meritorious defenses and claims in the pending suits.
Technological Change and Competition: A number of companies are engaged in plant
biotechnology research. Technological advances by others could render our
products less competitive. In addition, the ability to be first to market a new
product can result in a significant competitive advantage. We believe that
competition will intensify, not only from agricultural biotechnology firms but
from major agrichemical, seed and food companies with biotechnology
laboratories. Some of our agricultural competitors have substantially greater
financial, technical and marketing resources than we do.
Planting Decisions and Weather: Our business is highly seasonal. It is subject
to weather conditions and natural disasters that affect commodity prices, seed
yields, and decisions by growers regarding purchases of seeds, traits and
herbicides. As they have for the last three years, crop commodity prices
continue to be at historically low levels. There can be no assurance that this
trend will not continue. These lower commodity prices affect growers' decisions
about the types and amounts of crops to plant and may negatively influence sales
of our herbicide and seed products.
Need for Short-term Financing: 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. Our 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 and on our ability to collect customer receivables. Our need for
short-term financing typically peaks in the second quarter. Downgrades in our
credit rating or other limitations on our ability to access short-term
financing, including our ability to re-finance our short-term debt as it becomes
due, would increase our interest costs and adversely affect our sales and our
profitability.
Litigation: We are involved in numerous major lawsuits regarding contract
disputes, intellectual property issues, biotechnology, antitrust allegations and
other matters. Adverse outcomes could subject us to substantial damages or limit
our ability to sell our products.
Markets Outside the United States: Sales outside the United States make up a
substantial portion of our revenues and we intend to continue to actively
explore international sales opportunities. Challenges we may face in
international markets include changes in foreign currency exchange rates,
changes in a specific country's or region's political or economic conditions,
trade protection measures, import or export licensing requirements, and
unexpected changes in regulatory requirements. Weakened economies may cause
future sales to decrease because customers may purchase fewer goods in general,
and also because imported products could become more expensive for customers to
purchase in their local currency.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
None
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MONSANTO COMPANY
--------------------------------------------
(Registrant)
/s/ C. L. Tomlin
--------------------------------------------
CURTIS L. TOMLIN
Vice President and Controller
(On behalf of the Registrant and
as Principal Accounting Officer)
Date: November 30, 2000
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
2 Omitted - Inapplicable
3 Omitted - Inapplicable
4 Omitted - Inapplicable
10 Omitted - Inapplicable
11 Omitted - Inapplicable; see Note 5 of Notes to
Financial Statements
15 Omitted - Inapplicable
18 Omitted - Inapplicable
19 Omitted - Inapplicable
22 Omitted - Inapplicable
23 Omitted - Inapplicable
24 Omitted - Inapplicable
27 Financial Data Schedule
99 Omitted - Inapplicable
