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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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-2516
MONSANTO COMPANY
----------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 43-0420020
-------- ----------
(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 X NO
----- -----
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 SEPTEMBER 30, 1998
----- ------------------
COMMON STOCK, $2 PAR VALUE 604,046,370 SHARES
-------------------------- ------------------
<PAGE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The Statement of Consolidated Income of Monsanto Company and
subsidiaries for the three months and nine months ended September 30,
1998 and 1997, the Statement of Consolidated Financial Position as of
September 30, 1998 and December 31, 1997, the Statement of Consolidated
Cash Flow for the nine months ended September 30, 1998 and 1997 and
related Notes to Financial Statements follow. 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
Monsanto's 1997 Annual Report on Form 10-K, Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1998, and Quarterly Report
on Form 10-Q for the quarterly period ended June 30, 1998. Unless
otherwise indicated by the context, "Monsanto" means Monsanto Company
and consolidated subsidiaries, and "the Company" means Monsanto Company
only. Unless otherwise indicated, "earnings per share" and "per share"
refers to diluted earnings per share.
<TABLE>
MONSANTO COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME
(Dollars in millions, except per share)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $1,986 $1,724 $6,500 $5,694
Costs and Expenses:
Cost of Goods Sold 768 685 2,622 2,342
Selling, General and Administrative Expenses 585 512 1,746 1,466
Technological Expenses 359 264 967 718
Acquired In-Process Research and Development 189 436 189 609
Amortization of Intangible Assets 64 43 206 114
Restructuring Expense (Income) (35)
------ ------ ------ ------
Operating Income (Loss) 21 (216) 805 445
Interest Expense (72) (42) (214) (111)
Interest Income 17 13 39 36
Other Income (Expense) - Net (29) (28) (27) (1)
------ ------ ------ ------
Income (Loss) from Continuing Operations
Before Income Taxes (63) (273) 603 369
Income Taxes 37 (106) 250 80
------ ------ ------ ------
Income (Loss) from Continuing Operations (100) (167) 353 289
Income from Discontinued Operations 34 176
------ ------ ------ ------
Net Income (Loss) $ (100) $ (133) $ 353 $ 465
------ ------ ------ ------
Basic Earnings (Loss) per Share:
Continuing Operations $(0.17) $(0.29) $ 0.59 $ 0.49
Discontinued Operations 0.06 0.30
------ ------ ------ ------
Net Income (Loss) $(0.17) $(0.23) $ 0.59 $ 0.79
------ ------ ------ ------
Diluted Earnings (Loss) per Share:
Continuing Operations $(0.17) $(0.28) $ 0.56 $ 0.47
Discontinued Operations 0.05 0.29
------ ------ ------ ------
Net Income (Loss) $(0.17) $(0.23) $ 0.56 $ 0.76
------ ------ ------ ------
Dividends per Share $ 0.03 $ 0.16 $ 0.09 $ 0.47
------ ------ ------ ------
</TABLE>
1
<PAGE>
<PAGE>
<TABLE>
MONSANTO COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(Dollars in millions, except per share)
<CAPTION>
September 30, December 31,
1998 1997
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 215 $ 134
Receivables, net of allowances of $64 in 1998 and $63 in 1997 2,845 1,823
Miscellaneous receivables and prepaid expenses 731 692
Deferred income tax benefit 302 243
Inventories 1,505 1,374
------- -------
Total Current Assets 5,598 4,266
------- -------
Property, Plant and Equipment 5,206 4,701
Less Accumulated Depreciation 2,477 2,301
------- -------
Net Property, Plant and Equipment 2,729 2,400
------- -------
Investments in Affiliates 359 329
Intangible Assets, net of accumulated amortization 3,127 2,837
Other Assets 1,053 942
------- -------
Total Assets $12,866 $10,774
------- -------
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities:
Accounts payable $ 452 $ 480
Accrued liabilities 1,819 1,333
Short-term debt 2,169 1,726
------- -------
Total Current Liabilities 4,440 3,539
------- -------
Long-Term Debt 2,506 1,979
Deferred Income Taxes 100 97
Postretirement Liabilities 838 735
Other Liabilities 296 320
Shareowners' Equity:
Common stock (authorized: 1,000,000,000 shares, par value $2)
Issued: 821,970,970 shares in 1998 and 1997 1,644 1,644
Additional contributed capital 518 321
Treasury stock, at cost (217,749,028 shares in 1998
and 226,686,302 shares in 1997) (2,500) (2,570)
Reinvested earnings 5,272 4,973
Reserve for ESOP debt retirement (111) (123)
Accumulated other comprehensive loss (137) (141)
------- -------
Total Shareowners' Equity 4,686 4,104
------- -------
Total Liabilities and Shareowners' Equity $12,866 $10,774
------- -------
</TABLE>
2
<PAGE>
<PAGE>
<TABLE>
MONSANTO COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOW
(Dollars in millions)
<CAPTION>
Nine Months Ended
September 30,
----------------------
1998 1997
---- ----
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Operating Activities:
Income from continuing operations $ 353 $ 289
Add income taxes - continuing operations 250 80
------- -------
Income from continuing operations before income taxes 603 369
Adjustments to reconcile to Cash Provided by Continuing Operations:
Income tax refunds (payments) 49 (109)
Items that did not use (provide) cash:
Depreciation and amortization 450 350
Restructuring expense (income) (35)
Acquired in-process research and development expense 189 609
Other 67 (24)
Working capital changes that provided (used) cash:
Accounts receivable (987) (662)
Inventories (111) 50
Accounts payable and accrued liabilities 62 (166)
Other (312) (143)
Pharmaceutical licensing and product rights sales 225
Other items 16 (173)
------- -------
Cash Provided by Continuing Operations 216 101
Cash Used in Discontinued Operations (109)
------- -------
Total Cash Provided by (Used in) Operations 216 (8)
------- -------
Investing Activities:
Property, plant and equipment purchases (566) (458)
Acquisitions of seed companies (603) (1,237)
Other acquisitions and investments (165) (358)
Investment and property disposal proceeds 130 16
Discontinued Operations (44)
------- -------
Cash Used in Investing Activities (1,204) (2,081)
------- -------
Financing Activities:
Net change in short-term financing 818 2,406
Long-term debt proceeds 224 13
Long-term debt reductions (68) (97)
Dividend payments (54) (276)
Common stock issued under employee stock plans 149 136
Cash transferred to Solutia Inc. (75)
------- -------
Cash Provided by Financing Activities 1,069 2,107
------- -------
Increase in Cash and Cash Equivalents 81 18
Cash and Cash Equivalents:
Beginning of year 134 166
------- -------
End of period $ 215 $ 184
------- -------
</TABLE>
The effect of exchange rate changes on cash and cash equivalents was not
material.
3
<PAGE>
<PAGE>
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. On July 16, 1998, Monsanto acquired Plant Breeding International
Cambridge Limited ("PBIC") for a purchase price of approximately
$525 million. The acquisition was accounted for as a purchase,
and accordingly, the results of operations for this company were
included in the Statement of Consolidated Income from the date of
acquisition. The purchase price allocations are based upon
preliminary assumptions and are subject to revision. Monsanto
recorded a pretax charge of $189 million ($0.30 per share aftertax)
in the third quarter of 1998 for the write-off of
acquired in-process research and development ("R&D") primarily
related to this acquisition. The amount of this write-off was
determined by an independent valuation. Management believes that
the technological feasibility of the acquired in-process technology
has not been established and that it has no alternative future uses.
Accordingly, the amounts allocated to in-process research and
technology are required to be expensed immediately under generally
accepted accounting principles. Monsanto financed this acquisition
through the issuance of short-term debt.
In October 1998, Monsanto announced the acquisition of the
international seed operations of Cargill Incorporated ("Cargill")
in Central and Latin America, Europe (excluding certain operations
in the United Kingdom), Asia and Africa for a purchase price of
approximately $1.4 billion. Monsanto financed this acquisition
through the issuance of short-term debt.
On May 11, 1998, Monsanto announced a definitive merger agreement
(the "Merger Agreement") to acquire the approximate 60 percent
remaining shares of DEKALB Genetics Corporation ("DEKALB") that
Monsanto did not already own. Under terms of the Merger
Agreement, a subsidiary of Monsanto will make a tender offer (the
"Offer") to acquire all of the common stock of DEKALB not owned by
Monsanto for $100 per share in cash. This Offer will be followed
by a merger in which any remaining common stock of DEKALB will be
exchanged for cash at the same price per share paid in the Offer.
If the shares are not accepted for purchase pursuant to the Offer
by May 9, 1999, the Offer price will be increased by 50 cents per
share on the 10th day of each month, starting on May 10, 1999,
unless the Offer is earlier terminated in accordance with its
terms. If shares are accepted for purchase pursuant to the Offer
on or prior to May 9, 1999, approximately $2.3 billion will be
paid to the shareowners of DEKALB, and the total cost to Monsanto
of the acquisition of all shares of DEKALB (including the
acquisition in 1996 of the shares Monsanto currently owns) will
be approximately $2.5 billion. The Merger Agreement has been
filed as an Exhibit to Schedule 13D filed by Monsanto with regard
to the DEKALB common stock. This transaction is subject to
regulatory approvals and other customary conditions.
On May 11, 1998, Monsanto announced that it had entered into a
definitive agreement with Delta and Pine Land Company ("Delta
Pine") to merge Delta Pine with Monsanto. Under terms of the
agreement, Delta Pine shareowners would be entitled to receive
0.8625 shares of Monsanto's common stock in exchange for each
share of Delta Pine they hold. Approximately 33 million shares of
Monsanto common stock are expected to be issued to Delta Pine
shareowners, and, based on Monsanto's closing stock price on
November 4, 1998 of $38 per common share, result in a purchase
price of approximately $1.3 billion. The merger is subject to
regulatory approvals, shareowner consent and other customary
conditions.
The Cargill transaction was accounted for under the purchase
method of accounting, and the DEKALB and Delta Pine transactions
are expected to be accounted for under the purchase method of
accounting. Monsanto expects to recognize pretax charges,
currently estimated to be between $700 million and $1 billion,
for the write-off of acquired in-process R&D associated with these
acquisitions. These charges will be recognized in the periods in
which the transactions close.
In connection with the PBIC, Cargill, DEKALB and Delta Pine
transactions, Monsanto expects to recognize incremental
amortization expense, currently estimated to average between $175
million and $250 million aftertax annually, from goodwill and
other acquired intangible assets. The goodwill and other
intangible assets
4
<PAGE>
<PAGE>
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
are expected to be amortized over periods ranging from 7 to 20
years. These purchase price allocations and amortization amounts
are estimated based upon preliminary assumptions and could change.
On September 25, 1998, Monsanto signed an agreement with Cargill
to form a worldwide joint venture to create and market new
products enhanced through biotechnology for the grain processing
and animal feed markets.
2. On June 1, 1998, Monsanto announced that it had entered into a
definitive agreement with American Home Products Corporation
("AHP") to combine the two companies in a merger of equals
transaction. On October 13, 1998, Monsanto and AHP announced that
they had terminated the merger agreement by mutual consent. The
boards of directors of each of the two companies determined that
the transaction was not in the best interest of their respective
shareowners.
3. Effective January 1, 1998, Monsanto adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income"
("FAS 130"). FAS 130 establishes standards for reporting and
display of comprehensive income and its components in financial
statements. Comprehensive income includes all non-shareowner
changes in equity and consists of net income, foreign currency
translation adjustments, unrealized gains and losses on available-
for-sale securities, and minimum pension liability adjustments.
Total comprehensive income for the three months and nine months
ended September 30, 1998 and 1997 was:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------- --------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $(100) $(133) $353 $ 465
Other comprehensive income (loss) 48 (73) 4 (178)
----- ----- ---- -----
Total comprehensive income (loss) $ (52) $(206) $357 $ 287
----- ----- ---- -----
</TABLE>
4. Effective January 1, 1998, Monsanto adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("FAS 131"). FAS 131
establishes standards for defining operating segments and
reporting information about operating segments in financial
statements. It also establishes standards for related disclosures
about products, geographic areas and major customers. This
standard is not required to be applied to interim financial
statements in the year of adoption, but will be applied to
Monsanto's annual 1998 financial statements. Monsanto's current
reporting of segments and related information is essentially in
compliance with the provisions of FAS 131, and any additional
disclosure required by this statement is expected to be minimal.
Also effective January 1, 1998, Monsanto adopted the American
Institute of Certified Public Accountants' Statement of Position
98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides
guidance on when costs incurred for internal-use computer software
are and are not capitalized. Monsanto's previous accounting
policies were essentially in compliance with the provisions of
this statement, therefore adoption of SOP 98-1 did not have a
material effect on the Company's results of operations.
5. In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("FAS 133").
FAS 133 requires all derivatives to be recognized as assets
or liabilities on the balance sheet and measured at fair
value. Changes in the fair value of derivatives should be
recognized in either Net Income or Other Comprehensive Income,
5
<PAGE>
<PAGE>
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
depending on the designated purpose of the derivative. This
statement is effective for Monsanto January 1, 2000. Monsanto
does not expect FAS 133 to have a material effect on
results of operations or financial position in any one year.
6. Basic earnings per share (EPS) from continuing operations were
computed using the weighted average number of common shares
outstanding each period (600.4 million in 1998 and 588.7 million
in 1997). Diluted EPS from continuing operations were computed
taking into account the effect of dilutive potential common shares
(26.4 million in 1998 and 20.9 million in 1997). Dilutive
potential common shares consist of outstanding stock options. As
of September 30, 1998, options to purchase less than 1 million
shares of common stock were outstanding, but they were not
included in the computation of diluted EPS because the exercise
prices of the options were greater than the average market price
of the common shares. These options expire through 2008.
7. Components of inventories at September 30, 1998 and December 31,
1997 were as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
---- ----
<S> <C> <C>
Finished goods $ 727 $ 762
Goods in process 316 265
Raw materials and supplies 497 390
------ ------
Inventories, at FIFO cost 1,540 1,417
Excess of FIFO over LIFO cost (35) (43)
------ ------
Total $1,505 $1,374
------ ------
</TABLE>
8. On March 20, 1998, a jury verdict was returned against Monsanto in
a lawsuit filed in the California Superior Court. The lawsuit was
brought by Mycogen Corp., Agrigenetics Inc. and Mycogen Plant
Sciences Inc. claiming that Monsanto delayed providing access to
certain gene technology under a 1989 agreement with Lubrizol
Genetics Inc., a company which Mycogen Corp. subsequently
purchased. The jury awarded $174.9 million in future damages.
Monsanto has filed an appeal of the verdict with the California
Court of Appeal for the Fourth Judicial District. No provision
has been made in Monsanto's consolidated financial statements with
respect to this verdict. The Company intends to vigorously pursue
all available means to have this verdict set aside.
Monsanto is a party to a number of lawsuits and claims, which it
is vigorously defending. Such matters arise out of the normal
course of business and relate to a variety of issues. Certain of
the lawsuits and claims seek damages in very large amounts, or
seek to restrict the Company's business activities. Although the
results of litigation cannot be predicted with certainty,
management believes that the final outcome of such litigation will
not have a material adverse effect on Monsanto's consolidated
financial position, profitability or liquidity in any one year, as
applicable.
6<PAGE>
<PAGE>
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
9. Segment data for the three months and nine months ended September
30, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30,
1998 1997
------------------------ ------------------------
Net Operating Net Operating
Sales Income (Loss) Sales Income (Loss)
----- ------------- ----- ------------
<S> <C> <C> <C> <C>
Segment:
Agricultural Products $ 794 $ (129) $ 672 $ (295)
Nutrition and Consumer Products 332 46 342 37
Pharmaceuticals 790 133 605 77
Corporate and Other 70 (29) 105 (35)
------- ------- ------- ------
Total $ 1,986 $ 21 $ 1,724 $ (216)
------- ------- ------- ------
<CAPTION>
Nine Months Ended September 30,
1998 1997
------------------------ ------------------------
Net Operating Net Operating
Sales Income (Loss) Sales Income (Loss)
----- ------------- ----- ------------
<S> <C> <C> <C> <C>
Segment:
Agricultural Products $ 3,169 $ 597 $ 2,603 $ 268
Nutrition and Consumer Products 1,162 203 1,148 139
Pharmaceuticals 1,903 186 1,633 147
Corporate and Other 266 (181) 310 (109)
------- ------ ------- ------
Total $ 6,500 $ 805 $ 5,694 $ 445
------- ------ ------- ------
</TABLE>
Financial information for the first nine months of 1998 and
1997 should not be annualized. Monsanto's sales and operating
income are historically higher during the first half of the
year, primarily because of the concentration of generally more
profitable sales from the Agricultural Products segment in the
first half of the year.
10. During the second quarter of 1998, Monsanto reclassified $475
million of outstanding commercial paper from short-term to
long-term debt because Monsanto has the ability and intent to
renew these obligations beyond September 30, 1999. At
September 30, 1998, commercial paper of $1,000 million was
classified as long-term debt.
In October 1998, Monsanto mandated Citibank, N.A. and Salomon Smith
Barney Inc. to arrange an additional $2 billion 364-day revolving
credit facility. The facility will be used to support the issuance of
commercial paper. Interest on amounts borrowed under this agreement
is expected to be at money market rates. Covenants under this
credit facility will restrict maximum borrowings. Monsanto
does not anticipate that future borrowings will be limited by
the terms of this agreement.
11. In the second quarter of 1998, Monsanto recorded a net charge
of $13 million related to the exit from the Company's optical
products business and a gain from the reversal of past
restructuring reserves. As a part of Monsanto's efforts to
focus on life science businesses, in May 1998 the Board of
Directors approved a decision to exit Monsanto's optical
products business, which included the Orcolite(R) and
Diamonex(R) optical products businesses and the Diamonex(R)
performance products business. Monsanto recognized a $20
million pretax gain on the sale of the Orcolite(R) business and
recorded pretax charges of $68 million for the rationalization
of the Diamonex(R) businesses, primarily for severance costs
and the write-off of manufacturing facilities and intangible
assets. Also during the second quarter of 1998, Monsanto
recognized a gain of $35
7<PAGE>
<PAGE>
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
million from the reversal of a restructuring reserve that was
no longer needed due to a decision not to rationalize a
European pharmaceutical production facility. Due to recent
changes in the business and regulatory environment and
successes in the R&D pipeline, rationalization of the facility
was no longer economically beneficial. The restructuring
reserve for the closure of this facility was originally
recorded in December 1996. The pretax expenses (income)
related to the restructuring, write-off of acquired in-process
R&D, and other unusual items were recorded in the Statement of
Consolidated Income in the following categories:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1998
------------------
<S> <C>
Cost of Goods Sold $ 44
Acquired In-Process Research and Development 189
Amortization of Intangible Assets 24
Restructuring Expense (Income) (35)
------
Decrease in Operating Income 222
Other (Income) - Net (20)
------
Total decrease in Income from
Continuing Operations Before Taxes $ 202
------
</TABLE>
8<PAGE>
<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
Note 9 of the Notes to Financial Statements indicates operating
results by operating unit, including the concentration of the
generally more profitable sales of Agricultural Products in the first
half of the year.
RECENT EVENTS
See Note 1 of the Notes to Financial Statements for a discussion of
major transactions that were entered into or were completed during
the nine months ended September 30, 1998.
RESULTS OF OPERATIONS--THIRD QUARTER 1998 COMPARED WITH THIRD QUARTER 1997
Monsanto recorded a loss from continuing operations of $100 million,
or $0.17 cents per share, in the third quarter of 1998 compared with
a loss from continuing operations of $167 million, or $0.28 per
share, in the third quarter of 1997. However, results for both years
included unusual items. The loss from continuing operations for the
third quarter of 1998 included an aftertax charge of $187 million, or
$0.30 per share, for the write-off of in-process research and
development ("R&D") principally related to the acquisition of Plant
Breeding International Cambridge Limited ("PBIC"). The prior-year
loss from continuing operations included an aftertax charge of $270
million, or $0.45 per share, for the write-off of in-process R&D
related to the acquisitions of Holden's Foundation Seeds ("Holden's")
and Corn States Hybrid Service, Inc. ("Corn States"). If the unusual
charges were excluded in 1998 and 1997, income from continuing
operations would have been $87 million, or $0.13 per share, in 1998,
versus $103 million, or $0.17 per share, in 1997, a decrease of $16
million, or $0.04 per share. The decrease was primarily attributable
to increased operating expenses and interest costs, partially offset
by the effect of higher sales. Quarterly sales grew $262 million, or
15 percent, as a result of sales increases in the Agricultural
Products and Pharmaceuticals segments. Selling, general and
administrative ("SG&A") and technological expenses rose in the third
quarter of 1998 compared with expenses in the year-ago quarter,
principally because of increased expenses in the Agricultural
Products and Pharmaceuticals segments. Amortization of intangible
assets increased because of the increase in intangible assets related
to seed company acquisitions made in 1997 and the PBIC acquisition.
The increase in interest expense in quarter-to-quarter comparisons
was caused by a greater amount of debt outstanding during the third
quarter of 1998 versus the comparable prior-year quarter. The
effective tax rate increased in quarter-to-quarter comparisons
primarily because of the effect of the PBIC acquisition.
Net sales for Agricultural Products grew to $794 million in the third
quarter of 1998, compared with sales of $672 million in the third
quarter of last year. The $122 million, or 18 percent, net sales
increase was fueled primarily by higher worldwide sales volumes for
the family of Roundup(R) herbicides, reflecting increased use of
Roundup(R) herbicide in conservation tillage applications and with
Roundup Ready(R) crops. Quarterly volumes for Roundup(R) herbicide
continued above the trend-line growth of 20 percent annually, more
than offsetting lower average prices. In September 1998, Monsanto
reduced the prices of Roundup(R) herbicide in the United States. The
price reduction is expected to drive increased volumes, especially in
conservation tillage uses. Sales volumes for the third quarter of
1998 increased substantially in most world areas, led by gains in
Latin America and the United States. Sales decreased in southeast
Asia, where economic conditions depressed average prices. Quarterly
segment sales also benefited from the inclusion of sales of Sementes
Agroceres S.A. which was acquired in the fourth quarter of 1997, and
from higher sales volumes of Posilac(R) bovine somatotropin. The
segment reported an operating loss of $129 million for the third
quarter of 1998 compared with a loss of $295 million for the
comparable year-ago quarter. However, results for both years
included unusual charges. The operating loss for the third quarter
of 1998 included $189 million of pretax charges for the write-off of
in-process R&D primarily related to the PBIC acquisition, and the
operating loss for the third quarter of 1997 included $436 million of
pretax charges for the write-off of in-process R&D related to the
Holden's and Corn States acquisitions. If these charges were
excluded, segment operating income would have totaled $60 million in
the 1998 quarter versus $141 million in the 1997 quarter. This
decrease was attributable to increased technology, SG&A and
amortization expenses, partly offset by the effect of higher sales in
quarter-to-quarter comparisons. Technological expenses grew due to
higher spending on biotechnology and genomics research, primarily at
the seed companies.
9<PAGE>
<PAGE>
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SG&A expenses rose principally because of the inclusion in 1998 of
SG&A expenses from the acquired seed companies. Amortization expense
increased because of the increase in intangible assets related to
seed company acquisitions made during the fourth quarter of 1997 and
the acquisition of PBIC.
Quarterly net sales for the Nutrition and Consumer Products segment
declined $10 million, or 3 percent, from sales in the year-ago third
quarter primarily because of a drop in sales of bulk aspartame,
partially offset by payments for the marketing agreement related to
Roundup(R) herbicide. Third quarter 1998 sales volumes of bulk
aspartame were down because of higher shipments to several large
customers in the second quarter. Revenues for the segment included
$32 million in payments as part of the agency agreement with The
Scotts Company to market Roundup(R) herbicide for lawn and garden
uses. Operating income for the Nutrition and Consumer Products
segment rose $9 million, or 24 percent, in the third quarter of 1998
versus the comparable 1997 period primarily because of the payments
received for the Roundup(R) marketing agreement, partially offset by
increased operating expenses. The largest increase was in
technological expenses, which was driven by increased research
spending on nutrition programs.
Pharmaceutical net sales for the third quarter of 1998 totaled a
record $790 million and included $140 million in milestone payments
from Pfizer Inc. as part of the partnering agreement between Searle,
Monsanto's pharmaceutical subsidiary, and Pfizer for the development
and launch of Searle's celecoxib, a proposed member of a new class of
drugs known as specific COX-2 inhibitors. This agent is under
priority review by the U.S. Food and Drug Administration for acute or
chronic use in the treatment of the signs and symptoms for
osteoarthritis and rheumatoid arthritis and for the management of
pain. Searle changed the proposed brand name for this drug from
Celebra(TM) to Celebrex(TM), at the FDA's request. Even without the
partnering sales revenues, segment sales would have reached a new
quarterly high. Substantially higher sales of Arthrotec(R) arthritis
treatment, which was launched in the United States in 1998, also
contributed to the segment's sales growth. Operating income for the
Pharmaceuticals segment rose $56 million in the third quarter of 1998
compared with operating income in the prior-year quarter, as the
increase in quarterly revenues was partially offset by higher SG&A
and technological expenses. SG&A and technological expenses rose
because of the Arthrotec(R) launch and the continued development of
and launch preparation for the new product pipeline.
Net sales for the Corporate and Other segment decreased $35 million,
or 33 percent, in quarter-to-quarter comparisons. The sales decrease
primarily resulted from lower sales at Enviro-Chem and the absence of
sales from the optical products business which was divested in the
second quarter of 1998.
RESULTS OF OPERATIONS--FIRST NINE MONTHS OF 1998 COMPARED WITH FIRST
NINE MONTHS OF 1997
Net income and income from continuing operations totaled $353
million, or $0.56 per share, for the first nine months of 1998
compared with net income of $465 million, or $0.76 per share, and
income from continuing operations of $289 million, or $0.47 per
share, for the first nine months of 1997. However, results for both
years included unusual items. Net income and income from continuing
operations for the first nine months of 1998 included an aftertax net
charge of $13 million, or $0.02 per share, for the net cost of
exiting the Company's optical products business and a restructuring
reserve reversal, and an aftertax charge of $187 million, or $0.30
per share, for the write-off of in-process R&D primarily related to
the acquisition of PBIC. Prior-year income from continuing
operations included aftertax charges totaling $405 million, or $0.67
per share, for the write-off of in-process R&D, principally related
to the acquisitions of Asgrow Agronomics ("Asgrow"), Calgene, Inc.
("Calgene"), Holden's and Corn States. Excluding the unusual items
in 1998 and 1997, income from continuing operations would have
totaled $553 million, or $0.88 per share, in 1998, versus $694
million, or $1.14 per share, in 1997, a decrease of $141 million, or
$0.26 per share. The decrease in income from continuing operations,
excluding unusual items, was primarily attributable to increased
operating expenses and interest costs, which more than offset the
effect of higher sales. Year-to-date sales grew $806 million, or 14
percent, led by substantially higher sales in the Agricultural
Products segment. SG&A and technological expenses rose in the first
nine months of 1998 compared with expenses in the year-ago period,
driven by increased expenses in the Agricultural Products and
Pharmaceuticals segments. The increase in amortization of intangible
assets was caused by the increase in intangible assets related to
seed company acquisitions made in 1997 and the acquisition of PBIC,
and by the write-off of goodwill related to the Company's exit from
the optical products business. Year-to-date interest
10<PAGE>
<PAGE>
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
expense increased because of a greater amount of debt outstanding
during the first nine months of 1998 versus the prior-year nine-month
period. The decline in other income was principally caused by
decreased income from equity affiliates in the 1998 period and small
gains from asset sales that were included in the 1997 period. The
effective tax rate of 41.5 percent for the nine months ended
September 30, 1998 was higher than the effective tax rate of 21.7
percent for the year-ago period primarily because of the effect of
the PBIC acquisition and changes in the mix of pretax income outside
the United States.
Strong sales for the family of Roundup(R) herbicides led to a
substantial increase in year-to-date net sales for the Agricultural
Products segment. Segment sales grew $566 million, or 22 percent, in
the first nine months of 1998 versus sales in the comparable prior-
year period. The increase in sales of Roundup(R) was caused by
substantial growth in worldwide sales volumes, which more than offset
the year-to-date worldwide average price decline. The higher sales
volumes, led by increases in the United States, Latin America and
Canada, were primarily driven by increased use of Roundup(R)
herbicide in conservation tillage applications and with Roundup
Ready(R) crops. Economic conditions in Southeast Asia caused sales
volumes and prices of Roundup(R) to decline in that region. Net
sales for the Agricultural Products segment also benefited from the
inclusion of sales from seed companies Monsanto acquired during 1997;
from higher licensing revenues from crops developed through
biotechnology, principally Roundup Ready(R) soybeans and canola; and
from increased sales of Posilac(R) bovine somatotropin. Year-to-date
operating income for the Agricultural Products segment increased $329
million in 1998 versus 1997. However, results for both years
included unusual items. Operating income for the first nine months
of 1998 included a $189 million pretax charge for the write-off of
in-process R&D related to the PBIC acquisition, and operating income
for the first nine months of 1997 included $558 million of pretax
charges for the write-off of in-process R&D principally related to
the Asgrow, Calgene, Holden's and Corn States acquisitions. If these
unusual charges were excluded, operating income would have decreased
$40 million, or 5 percent, in period-to-period comparisons, as the
effect of higher sales was more than offset by increased SG&A,
technological and amortization expenses. SG&A expenses rose
primarily because of the inclusion in 1998 of SG&A expenses from the
acquired seed companies. Technological expenses grew primarily
because of higher spending on crop biotechnology initiatives,
including genomics, and the inclusion of technological expenses from
the acquired seed companies. Amortization of intangible assets
increased principally because of the increase in intangible assets
related to seed company acquisitions made in 1997.
Year-to-date net sales for the Nutrition and Consumer Products
segment rose slightly compared with sales in the comparable 1997
period. Segment sales reflected $32 million in payments received as
part of the agency agreement with The Scotts Company to market
Roundup(R) herbicide for residential uses. While sales volumes of
Equal(R) sweetener increased, the effect of the increase was more
than offset by decreased sales volumes of bulk aspartame. Operating
income for the Nutrition and Consumer Products segment increased $64
million in the first nine months of 1998 compared with operating
income in the first nine months of 1997. However, operating income
for the 1997 period included $51 million of pretax charges for the
write-off of in-process R&D related to the acquisition of Calgene.
Excluding these charges, year-to-date 1998 operating income would
have increased $13 million, or 7 percent, as the effect of higher
sales was partially offset by higher expenses, particularly
technological expenses which grew due to increased spending for
science-based nutrition programs.
Net sales for Pharmaceuticals totaled $1,903 million in the first
nine months of 1998 compared with sales of $1,633 million in the
prior-year period, an increase of $270 million, or 17 percent. Net
sales for the 1998 period included partnering revenues of $240
million related to an alliance for the co-promotion of Celebrex(TM),
Searle's new arthritis treatment currently under development, while
net sales for the 1997 period included the sale of certain product
rights totaling $49 million. In addition, the increase in sales in
period-to-period comparisons reflected a significant increase in
sales volumes of Arthrotec(R) arthritis treatment. Year-to-date
sales of Arthrotec(R) more than tripled, primarily because of
successful 1998 launches in the United States and France. Sales of
Ambien(R) short-term treatment for insomnia also increased.
Ambien(R) continued to be the leader in the U.S. sleep-aid market, as
its total market share increased to 51.4 percent and its share of new
prescriptions increased to 52.7 percent in August 1998. The
increases in partnering revenues and in sales of Arthrotec(R) and
Ambien(R) were partially offset by lower sales volumes of Cytotec(R)
ulcer-preventive medication and verapamil calcium channel blockers.
Sales for the family of Calan(R) calcium channel blockers continued
to decline, but were partially offset by higher sales of Covera-HS(R).
Year-to-date operating income
11<PAGE>
<PAGE>
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
for the Pharmaceuticals segment totaled $186 million compared with
operating income of $147 million in the year-ago period. However,
operating income for the nine months ended September 30, 1998
included a $35 million gain from the reversal of past restructuring
reserves (see Note 11 of the Notes to Financial Statements).
Excluding this unusual gain, year-to-date 1998 operating income would
have totaled $151 million, a 3 percent increase over the prior-year,
as the growth in sales was nearly offset by increased expenses. SG&A
expenses rose primarily because of increased spending associated with
the Arthrotec(R) launches and higher expenses related to the sales
force which continued to expand during 1998 in anticipation of the
launch of new products from the strong pharmaceutical pipeline.
Technological expenses grew as Searle continued to develop its six
new product candidates which continued to move through the final,
more expensive stages of the research and development approval
process.
Year-to-date net sales for the Corporate and Other segment declined
14 percent in year-over-year comparisons primarily because of the
absence of sales of divested businesses and a decrease in sales at
Enviro-Chem, primarily caused by economic conditions in Asia. The
year-to-date operating losses of $181 million in 1998 increased $72
million from the operating loss of $109 million in the comparable
1997 period. The increased operating loss primarily resulted from
charges related to the Company's exit from the optical products
business in the second quarter of 1998.
OUTLOOK FOR AGRICULTURAL PRODUCTS - UPDATE
Monsanto completed the acquisition of PBIC and announced several
other strategic transactions involving agricultural seed companies in
the first nine months of 1998. See Note 1 of the Notes to Financial
Statements for further discussion.
OUTLOOK FOR NUTRITION AND CONSUMER PRODUCTS - UPDATE
On June 25, 1998, Monsanto announced that it had signed a letter of
intent to sell its lawn-and-garden business exclusive of its
Roundup(R) herbicide products for residential use to The Scotts
Company for $300 million. Under a separate, long-term, exclusive
agreement, Monsanto will continue to make Roundup(R) herbicide for
residential use, and The Scotts Company will market the product.
OUTLOOK FOR PHARMACEUTICALS - UPDATE
Ambien(R), a short-term treatment for insomnia, is licensed to a
joint venture in which Searle, Monsanto's pharmaceutical subsidiary,
is a general partner. On May 26, Monsanto announced that it had
signed an agreement with the other joint venture partner to continue
the joint venture until April 16, 2002, at which time the other
partner will acquire Searle's 51 percent interest in the joint
venture. The buy-out price will be calculated on the basis of a
progressive percentage of the sales achieved by the joint venture in
the 12 months preceding the acquisition, and is not likely to exceed
three-fourths of the sales during that period. Searle's share of
profits will be reduced from 90 percent to 82 percent in 1999, 60
percent in 2000, 53 percent in 2001 and 51 percent from January 1 to
April 15, 2002.
On November 4, 1998, Searle announced that it ended further
enrollment into a Phase III clinical trial for orbofiban, after
preliminary data showed an unexpected excess of early (30 day)
mortality in one of two active treatment arms. Researchers were
unable to interpret the discrepancy between the two groups of
patients, and variables other than the study drug may explain this
unexpected finding. Orbofiban is one of Searle's antiplatelet drugs
currently under development, and the trial is designed to assess the
long-term safety and efficacy of orbofiban therapy. The trial will
continue with approximately 8000 patients who have been part of the
trial longer than 30 days.
CHANGES IN FINANCIAL CONDITION - SEPTEMBER 30, 1998 COMPARED WITH
DECEMBER 31, 1997
Working capital at September 30, 1998 increased to $1,158 million
from $727 million at December 31, 1997, primarily because of a
seasonal increase in Agricultural Products' trade receivables
partially offset by higher short-term debt primarily used to fund the
PBIC acquisition. The current ratio was 1.3 at September 30, 1998
and 1.2 at year-end 1997. The percent of total debt to total
capitalization was 50 percent at September 30, 1998 compared with 47
percent at December 31, 1997. The total amount of debt outstanding
at September 30, 1998 versus December 31, 1997 increased
12<PAGE>
<PAGE>
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
$970 million principally because of the acquisition of PBIC and the
seasonal increase in Agricultural Products' trade receivables.
During the second quarter of 1998, Monsanto reclassified $475 million
of outstanding commercial paper from short-term to long-term debt
because Monsanto has the ability and intent to renew these
obligations.
Cash provided by continuing operations totaled a net $216 million for
the nine months ended September 30, 1998, compared with $101 million
for the same period in 1997. The increase in cash provided by
continuing operations resulted primarily from the collection in 1998
of miscellaneous receivables related to 1997 Pharmaceutical licensing
and product rights sales. In addition, cash provided by continuing
operations for the prior-year nine-month period included higher
employee incentive payouts for the final payment of a three-year
incentive plan. These positive effects on cash provided by
continuing operations for the first nine months of 1998 compared with
the first nine months of 1997 were partially offset by an increase in
accounts receivable. Year-to-date 1998 investing activities used
$1,204 million compared with $2,081 million in the comparable prior-
year period. Major investing activities included the purchase of
PBIC in 1998 and the purchases of Asgrow, Calgene, Holden's and Corn
States in 1997. Financing activities provided $1,069 million in 1998
versus $2,107 in 1997. Financing activities in 1998 included the
issuance of $100 million of fixed-rate, medium-term notes with an
average interest rate of 6.2 percent, due from 2005 to 2018, and the
issuance of $100 million of variable-rate notes with an average
interest rate of 4.6 percent at September 30, 1998, due 2003.
On July 16, 1998, Monsanto acquired PBIC for a purchase price of
approximately $525 million. On October 1, 1998, Monsanto acquired
certain international seed operations of Cargill for a purchase price
of approximately $1.4 billion. Also, in May 1998, Monsanto entered
into an agreement to acquire the remaining shares of DEKALB for
approximately $2.3 billion and a merger agreement with Delta Pine.
Approximately 33 million shares of Monsanto common stock are expected
to be issued to Delta Pine shareowners which would result in an
increase in the number of Monsanto common shares outstanding. See
Note 1 of the Notes to Financial Statements for further discussion.
Monsanto initially financed the PBIC and Cargill acquisitions through
the issuance of short-term debt.
As announced on November 11, 1998, Monsanto is in the process of
implementing plans to fund these acquisitions over the longer term. The
plans include a series of financing transactions, a combination of
divestitures, and cost reductions. Monsanto plans to raise up to $4
billion through the issuance of approximately $1 billion of common
stock, approximately $500 million of adjustable conversion-rate equity
security units, and approximately $2.5 billion of long-term, unsecured
debt. The plans also include the divestitures of certain non-core
assets and businesses which are expected to generate approximately $1
billion pretax. These financing plans, together with the cash flow from
the Company's businesses, are expected to provide sufficient liquidity
for the Company's estimated financing needs for the next 12 months.
Additional divestitures also are under consideration. When a decision
to dispose of an asset or business is approved, that asset or business
would then be classified as held for sale. This could result in
impairment charges. In addition to the financing transactions and
divestitures, Monsanto is planning to simplify its management structure.
Monsanto expects this restructuring to eliminate between 700 and 1,000
positions beginning in the first quarter of 1999. In addition, the
Company expects an additional 1,300 to 1,500 position reductions in
entities to be divested. Monsanto expects to record pretax
restructuring and special charges ranging from $400 million to $600
million in the fourth quarter of 1998 for these actions. The cash
outlays associated with these charges are expected to be fully offset by
cost savings within 18 months.
Given current market conditions and financing requirements, in October
1998, Monsanto mandated Citibank, N.A. and Salomon Smith Barney Inc. to
arrange an additional $2 billion 364-day revolving credit facility. The
facility is expected to be used to support the issuance of commercial
paper.
On June 16, 1998, Monsanto announced that it had rescinded and
terminated its existing share repurchase program.
YEAR 2000 UPDATE
Beginning in 1996, Monsanto initiated the Global Year 2000 Program
(the "Y2K Program") to ensure that its business would not be
adversely affected by the inability of many existing computer systems
to distinguish between the year 1900 and the year 2000. The Y2K
Program covers more than 100 Company sites in 33 countries.
<PAGE>
Description and Status of the Y2K Program
- -----------------------------------------
Internal Systems
Monsanto's Y2K Program encompasses all areas of Monsanto's internal
systems including conventional information technology (IT) business
applications, IT infrastructure, and embedded systems. The remediation
process applied to each area consists of four-steps: identification
of the systems or components that need to be replaced or fixed;
assessment of the extent of the work required; prioritization of the
work; and successful completion of the required remediation activity.
13<PAGE>
<PAGE>
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Each of the approximately 1,260 applications in Monsanto's IT
applications portfolio has been assessed for Y2K compliance and this
portfolio is currently 42% compliant. An additional 13% of the
portfolio is believed to be compliant, but is awaiting testing for
confirmation. On-schedule replacement and upgrade initiatives will
remediate another 27% of this portfolio and 3% of the applications
in the portfolio will be retired. The remaining applications in this
portfolio are at various stages of renovation, redevelopment, or
testing. The IT applications portfolio is anticipated to be compliant
by the third quarter of 1999.
Almost 600 IT infrastructure products have been defined and are being
assessed for compliance. This process is approximately 44% complete.
The IT infrastructure assessment and remediation phases are expected
to be complete by the third quarter of 1999.
Embedded systems include process control/manufacturing and laboratory
automation systems and site-specific facility management systems. An
inventory of embedded systems has been completed and approximately
7,000 unique process control systems and attached devices from nearly
1,200 manufacturers and 4,250 laboratory automation products from
over 700 vendors have been identified. These systems are currently
under Y2K compliance review which is approximately 40% complete.
Compliance information is obtained from purchased commercial
databases and from manufacturers. If such information indicates that
an embedded system is not Y2K compliant, appropriate remediation
plans are implemented. Current findings, as well as industry
experience, indicate that a relatively small percentage of these
items are subject to Y2K problems. The embedded device research phase
of the Y2K Program is expected to be completed by December 1998, with
any necessary remediation of embedded devices expected to be
completed by the third quarter of 1999.
Suppliers
Monsanto has contacted its major suppliers to assess their preparations
for the Year 2000. Over 650 key corporate suppliers have been identified
and contacted in addition to thousands of suppliers critical to
individual locations. Approximately 56% of the Company's key corporate
suppliers have been identified as likely to be Y2K compliant. The
status of another 14% of these key suppliers is of concern and further
action is being taken by managers responsible for these suppliers or
supplier contracts. At present, approximately 30% of the key suppliers
have not informed the Company of their compliance status or plans.
Where appropriate, Monsanto representatives may conduct an in-depth
investigation of a particular supplier's ability to be compliant and
site visits may be made.
Contingency Plans
The Company's contingency plans are continuously evolving as it proceeds
with the Y2K Program. The Company will begin a major initiative to
finalize its contingency plans in the fourth quarter of 1998, with a
target of having all such plans in place no later than the third
quarter of 1999. Where a supplier's performance is in doubt, the
Company's contingency plans may include the stockpiling of raw materials
or a switch to a different supplier. The Company will increase testing
of pharmaceutical and nutrition products as the Year 2000 nears and may
also increase production of critical product inventory.
Costs
- -----
The Company continues to evaluate the estimated costs associated with
Y2K compliance based on actual experience. The current estimated
total cost is expected to be approximately $25 million, with $13
million expended through September 30, 1998. Such costs encompass
only the Company's Y2K remediation efforts and do not include
expenses such as overtime wages, additional warehouse space or
increased finance costs which may be incurred upon implementation of
the Company's contingency plans. Monsanto does not expect the costs
associated with its Year 2000 efforts to be materially adverse to the
Company's business operations, financial position, profitability or
liquidity.
Risks
- -----
Monsanto believes that its Y2K Program follows both prudent and best
demonstrated practices (including contingency planning) and makes use
of appropriate internal and external skills at the proper level and
in the proper amount to minimize the impact of any failures.
However, since the Year 2000 problem is unprecedented in scope or
complexity, no complete assurance of risk avoidance can be given. In
the Company's case, failure to correct a material Year 2000
14<PAGE>
<PAGE>
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
problem could result in lost profits or breach of contract claims in
the event Monsanto is unable to deliver its products pursuant to the
terms of its agreements or such products fail to meet contract
specifications as well as claims for personal injury or property
damage at its facilities. Monsanto may also experience lost revenues
in the event any of its customers experience Y2K problems which cause
them to order less product from Monsanto or which cause financial
difficulties resulting in a breach of their payment obligations to
Monsanto.
Readers are cautioned that forward-looking statements contained in
this section should be read in conjunction with the Company's
disclosures under the heading "Disclosure of Forward-Looking
Statements" on beginning on page 19 of this Form 10-Q.
EURO CONVERSION
On January 1, 1999, more than two-thirds of the member countries of
the European Union are scheduled to establish fixed conversion rates
between their existing sovereign currencies and the euro as common
legal currency. During the transition period from January 1, 1999
until June 30, 2002, both the existing sovereign currencies of the
participating countries and the euro will be legal currency.
Beginning July 1, 2002, the existing sovereign currencies of the
participating countries will no longer be legal tender for any
transactions.
In September 1997, Monsanto formed a cross-functional team and has
engaged a consultant to address issues associated with the euro
conversion. Monsanto expects to be able to engage in euro-
denominated transactions and to be legally compliant by January 1,
1999, and to have all affected information systems fully converted by
April 2001. Monsanto does not expect the euro conversion to have a
material effect on its competitive position, business operations,
financial position or results of operations.
15
<PAGE>
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Monsanto is exposed to market risk, including changes in interest rates,
currency exchange rates and commodity prices. To manage the volatility
relating to these exposures, the Company enters into various derivative
transactions. Monsanto does not hold or issue derivative financial
instruments for trading purposes. For more information about how
Monsanto manages specific risk exposures, see the currency translation
note, the inventory valuation note, and the long-term debt note in Notes
to Financial Statements in Monsanto's annual report for the year ended
December 31, 1997 ("1997 Annual Report"), incorporated by reference in
Monsanto's Annual Report on Form 10-K for the year ended December 31,
1997 ("1997 Form 10-K").
The tables under Market Risk Management in the Management's Discussion
and Analysis section of the 1997 Annual Report, incorporated by
reference in the 1997 Form 10-K, provide information about the Company's
derivative instruments and other financial instruments that are
sensitive to changes in interest rates, currency exchange rates and
commodity prices. There have been no material changes to the
information provided in the tables in the 1997 Annual Report and Form
10-K except as noted in the following paragraphs.
Interest rate risk sensitive financial instruments that appeared in the
1997 Annual Report and Form 10-K but were no longer outstanding at
September 30, 1998 included $1,208 million of short-term, variable-rate
debt (denominated in U.S. dollars) and $244 million of short-term,
fixed-rate debt (denominated in Brazilian real). Significant interest
rate risk instruments that were not outstanding at December 31, 1997,
but that were outstanding at September 30, 1998 included (all
denominated in U.S. dollars): $100 million of long-term, fixed-rate debt
with an average interest rate of 6.2 percent, due after 2002; $1,754
million of short-term, variable-rate debt with an average interest rate
of 5.6 percent due 1998 through 1999; $475 million of long-term,
variable-rate debt with an average interest rate of 5.6 percent, due
2001; and $196 million of short-term, fixed-rate debt with an average
interest rate of 7.75 percent, due 1998 through 1999. The fair value of
these instruments approximated their book values at September 30, 1998.
The total $1,100 million of long-term, variable-rate debt outstanding at
September 30, 1998 included $1,000 million of commercial paper that is
assumed to be renewed through 2001, when Monsanto's $1,000 million
credit facility expires.
The instruments in the table of significant currency exchange rate risk
sensitive instruments that appeared in the 1997 Annual Report and Form
10-K were no longer outstanding at September 30, 1998. At September 30,
1998, the following significant forward contracts were outstanding (all
expected to mature by September 30, 1999): sales of Brazilian real with
a notional amount of $108 million and an average exchange rate of 1.252
Brazilian real per U.S. dollar; sales of Canadian dollars with a
notional amount of $66 million and an average exchange rate of 1.509
Canadian dollars per U.S. dollar; purchases of British pounds with a
notional amount of $59 million and an average exchange rate of 0.594
British pounds per U.S. dollar; sales of Australian dollars with a
notional amount of $38 million and an average exchange rate of 1.718
Australian dollars per U.S. dollar; sales of Polish zlotys with a
notional amount of $26 million and an average exchange rate of 3.621
Polish zlotys per U.S. dollar; purchases of Japanese yen with a notional
amount of $15 million and an average exchange rate of 134.140 Japanese
yen per U.S. dollar; sales of South African rand with a notional amount
of $13 million and an average exchange rate of 6.710 South African rand
per U.S. dollar; sales of Czech koruny with a notional amount of $10
million and an average exchange rate of 30.890 Czech koruny per U.S.
dollar; sales of Mexican pesos with a notional amount of $10 million and
an average exchange rate of 10.670 Mexican pesos per U.S. dollar; sales
of Philippine pesos with a notional amount of $10 million and an average
exchange rate of 46.010 Philippine pesos per U.S. dollar; and sales of
Hong Kong dollars with a notional amount of $5 million and an average
exchange rate of 7.955 Hong Kong dollars per U.S. dollar. The fair
market values of these contracts approximated the notional amounts at
September 30, 1998.
The instruments in the table of significant commodity price risk
sensitive instruments that appeared in the 1997 Annual Report and Form
10-K were no longer outstanding at September 30, 1998. At September 30,
1998, the following significant commodity price risk sensitive
instruments were outstanding: contracts for soybean futures totaling $60
million (9.8 million bushels at a weighted average price per bushel of
$6.10) with a fair value of $51 million, and soybean put option
contracts originally purchased for $1 million (17.8 million bushels at a
weighted average strike price per bushel of $5.70) with a fair value of
$9 million.
16<PAGE>
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Because of the size and nature of its business, Monsanto is a party to
numerous legal proceedings. Most of these proceedings have arisen in
the ordinary course of business and involve claims for money damages or
seek to restrict the Company's business activities. While the results
of litigation cannot be predicted with certainty, Monsanto does not
believe these matters or their ultimate disposition will have a material
adverse effect on Monsanto's financial position, profitability or
liquidity in any one year, as applicable.
As described in the Company's Report on Form 10-K for the year ended
December 31, 1997, G. D. Searle & Co., a subsidiary of the Company
("Searle"), has been named, together with numerous other prescription
pharmaceutical manufacturers and in some cases wholesalers or
distributors, as a defendant in a large number of related actions
brought in federal and/or state court, based on the practice of
providing discounts or rebates to managed care organizations and certain
other large purchasers. The federal cases have been consolidated for
pre-trial proceedings in the Northern District of Illinois. The federal
suits include a certified class action on behalf of retail pharmacies
representing the majority of retail pharmacy sales in the United States.
The class plaintiffs allege an industry-wide agreement in violation of
the Sherman Act to deny favorable pricing on sales of brand-name
prescription pharmaceuticals to certain retail pharmacies in the United
States. The other federal suits, brought as individual claims by several
thousand pharmacies, allege price discrimination in violation of the
Robinson-Patman Act as well as Sherman Act claims. Several defendants,
not including Searle, have settled the federal class action case. Searle
has entered into an agreement that would significantly limit its
liability (based generally on its share of the relevant market) should
the federal class action result in an adverse judgment. Trial of the
federal class action case commenced on September 16, 1998, with jury
selection and is expected to last approximately two to three months. In
addition, consumers and a number of retail pharmacies have filed suit in
various state courts throughout the country alleging violations of state
antitrust and pricing laws. Searle believes it has meritorious defenses
and is vigorously defending each of these lawsuits.
As described in the Company's Reports on Form 10-Q for the quarters
ended March 31 and June 30, 1998, in June 1996, Mycogen Corporation
("Mycogen"), Agrigenetics Inc. and Mycogen Plant Sciences, Inc. ("MPS")
filed suit against Monsanto in California State Superior Court in San
Diego, alleging damage by an alleged failure of Monsanto to license,
under an option agreement, technology relating to corn containing the
Bacillus thuringiensis ("Bt") gene and to glyphosate resistant corn,
cotton and canola. Monsanto is currently appellant in Appeal No. D031336
before the California Court of Appeal for the Fourth Appellate District
in an appeal arising out of this litigation. Mycogen and Agrigenetics
Inc. have filed a cross appeal seeking to reinstate claims for damages
that were dismissed prior to trial. This cross appeal has been
consolidated for all purposes on appeal. The initial brief on appeal by
Monsanto is due December 28, 1998. The Company has numerous meritorious
defenses and grounds to overturn the award, including the speculative
nature of the damages which are exclusively for lost future profits,
improper splitting of the causes of action, lack of continuing breach,
and trial error in directing a verdict against the Company on this issue
of liability. In addition, on October 14, 1998, MPS filed a notice of
appeal specifying a nunc pro tunc order rendered August 20, 1998, with
regard to certain claims by MPS seeking access to germplasm of Monsanto
and to overturn an order imposing monetary sanctions on MPS. Monsanto
intends to file a motion to dismiss this appeal on the basis that it is
after the jurisdictional deadline for appeal. Monsanto will continue in
all of these matters to litigate vigorously its position on appeal.
As described in the Company's Annual Report on Form 10-K for the year
ended December 31, 1997, in 1997 the Company commercially introduced
corn containing a gene encoding for Bt endotoxin. Monsanto is a leader
in this scientific field and has engaged in Bt research and
biotechnology development over many years and owns a number of present
and pending patents which relate to this technology. On January 21,
1997, Novartis Seeds, Inc. ("Novartis") filed suit in U.S. District
Court in Delaware seeking damages and injunctive relief against the
Company, alleging infringement of Bt related U.S. Patent No. 5,595,733
issued to Ciba-Geigy Corporation (Seed Division) and now held
17<PAGE>
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by Novartis. Monsanto is now a co-defendant with DEKALB Genetics
Corporation ("DEKALB") in a consolidated jury trial under C.A. No. 97-39
(RRM) and 97-40 (RRM) pending in U.S. District Court in Delaware. Trial
ended on November 9, 1998, with a verdict in favor of both defendants
and a finding that the '733 patent was invalid for failure to meet the
written description and enablement requirements under the patent law. In
addition, the jury found that defendants had not directly infringed or
induced infringement of the patent. In the lawsuit Novartis sought
compensatory damages of $55 million, and equitable relief, including an
injunction. District Judge Roderick R. McKelvie severed for later trial
issues pertaining to legal issues, including Monsanto's defense of
license. The current Yieldgard(R) corn products of Monsanto and DEKALB
were alleged to have infringed the patent of Novartis. It is expected
that Novartis will appeal the adverse jury verdict.
As described in the Company's Report on Form 10-Q for the second quarter
of 1998, on July 30, 1998, Monsanto was served with a lawsuit filed in
U.S. District Court in Delaware by Zeneca Inc. ("Zeneca"). The complaint
alleges that Monsanto has violated Sections 3, 4 and 16 of the Clayton
Act and Sections 1 and 2 of the Sherman Act and Zeneca seeks treble
damages. In addition to the antitrust allegations, the complaint seeks
a declaration that certain United States patents assigned to Monsanto
(U.S. Patent Nos. 4,940,835; 5,352,605; 4,535,060) are invalid,
unenforceable or have not been infringed by Zeneca. The complaint also
asserts a claim for tortious acts of unfair competition with prospective
economic advantage. The allegations in the complaint center on
Monsanto's technology related to Roundup Ready(R) seed and marketing
activity associated with soybeans. On August 12, 1998, the complaint was
amended, adding Pioneer Hi-Bred International, Inc. ("Pioneer") as a
plaintiff. Pioneer seeks a declaratory judgment that it did not breach
its license agreement with Monsanto by providing Roundup Ready(R)
soybean seed to Zeneca for testing. The complaint was also amended to
add an additional claim for relief by Zeneca, seeking a declaratory
judgment that its obtaining the Roundup Ready(R) soybean seed from
Zeneca was not improper. Monsanto has moved to dismiss the litigation
for lack of jurisdiction. The motion to dismiss is set for hearing on
November 12, 1998, before Judge Roderick R. McKelvie. Monsanto believes
that its activities have been lawful and that the allegations are
without merit. Monsanto intends to vigorously defend itself against the
action.
As described in the Company's Report on Form 10-Q for the second quarter
of 1998, following the announcement of a merger agreement between
Monsanto and American Home Products Corporation ("AHP"), alleged holders
of Monsanto common stock filed suits in the Delaware Court of Chancery
in and for New Castle County (the "Delaware Action") against Monsanto,
members of the Monsanto Board of Directors (the "Monsanto Board") and
AHP alleging that the consideration to be received by holders of
Monsanto common stock in the merger was unfair and inadequate, that the
members of the Monsanto Board breached their fiduciary duties by
approving the merger, and that AHP aided and abetted such breaches; and
an additional action was filed against Monsanto and members of the
Monsanto Board in the Missouri Circuit Court for St. Louis County (the
"Missouri Action"). The actions taken by AHP and Monsanto to terminate
the merger have resulted in the initiation of action by the parties to
secure court approval to dismiss the Delaware Action. In addition, the
Missouri Action had previously been dismissed with leave to refile as
part of the Delaware Action. Monsanto and the Monsanto Board believe
that the Delaware Action is without merit, and now rendered moot, and
intend to take all necessary action to secure the prompt dismissal of
the Delaware Action.
As described in the Company's Report on Form 10-Q for the second quarter
of 1998, following the announcement on May 11, 1998, of the merger
agreement between Monsanto and Delta and Pine Land Company ("Delta
Pine"), five alleged holders of Delta Pine common stock filed suits,
now consolidated (the "Delta Pine Suit"), in the Delaware Court of
Chancery in and for New Castle County against Monsanto, Delta Pine,
and members of the Delta Pine Board of Directors (the "Delta Pine
Board"). Seeking to represent a purported class of Delta Pine
shareowners, plaintiffs in the Delta Pine Suit allege that the
consideration to be received by holders of Delta Pine common stock in
the merger is unfair and inadequate, that the members of the Delta Pine
Board have breached their fiduciary duties by approving the transaction
and that Monsanto has aided and abetted such breaches. Plaintiffs in the
Delta Pine Suit seek judgment declaring that each Delaware action is
maintainable as a class action, preliminarily and permanently enjoining
consummation of the merger or rescinding the transaction in the event
that it is consummated, awarding unspecified compensatory damages
against defendants, and awarding plaintiffs their attorneys' fees and
expenses. Monsanto has been notified of the intention of counsel for
plaintiffs to file an amended complaint seeking to obtain a preliminary
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injunction to prevent completion of the transaction. Monsanto believes
that the Delta Pine Suit is without merit and intends to
vigorously defend against the action.
On October 28, 1998, Pioneer Hi-Bred International, Inc., filed suit
against Asgrow Seed Company, L.L.C. ("Asgrow"), a wholly-owned
subsidiary of Monsanto, in the United States District Court for the
Southern District of Iowa, Civil Action No. 4-98-CV-70577. The suit
alleges violations of the Lanham Act, misappropriation of trade secrets
under Iowa Code Section 550.2(4), common law misappropriation, breach of
contract and common law trade secret misappropriation. The suit alleges
that Asgrow is using Pioneer's proprietary germplasm and other
information in the development of seed corn. Plaintiff seeks
compensatory damages, exemplary damages, an accounting of gains and
profits, delivery of any materials allegedly containing Pioneer's trade
secrets, attorneys' fees, and a permanent injunction against the use or
dissemination of plaintiff's proprietary and trade secret information.
Pioneer has filed a similar suit against DEKALB Genetics Corporation, and
a similar suit with additional claims against Cargill Incorporated.
Other information with respect to legal proceedings appears in the
Company's Report on Form 10-K for the year ended December 31, 1997, and
the Company's Reports on Form 10-Q for the quarters ended March 31, 1998
and June 30, 1998.
ITEM 5. OTHER INFORMATION
DISCLOSURE REGARDING FORWARD LOOKING INFORMATION
Under the Private Securities Litigation Reform Act of 1995, companies
are provided a "safe harbor" for making forward-looking statements about
the potential risks and rewards of their strategies. Monsanto believes
it is in the best interest of its shareowners to use these provisions in
discussing future events, as it does in this quarterly report and other
communications. These forward-looking statements include Monsanto's
plans for growth, the potential for the development, regulatory approval
and public acceptance of new products from its pipelines, and other
factors that could affect Monsanto's future operations or financial
position and may be preceded by, followed by or include the words
"believes," "expects," "anticipates," "intends," "plans," "estimates" or
similar expressions.
Monsanto's ability to achieve its goals depends on many known and
unknown risks and uncertainties, as well as on changes in general
economic and business conditions. These factors could cause the
anticipated performance and results of the Company 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.
Factors Impacting the Agricultural Products Segment
- ---------------------------------------------------
Generic Competition. Roundup(R) and other glyphosate-based herbicides
are major products for Monsanto's agricultural products segment and are
likely to face increasing competition from generic products. Patents
protecting Roundup(R) in various countries expired in 1991, while
compound per se patent protection for the active ingredient in
Roundup(R) herbicide expires in the United States in September 2000.
Monsanto believes its pricing strategy will aid it in compensating for
increased generic competition in the United States. Monsanto recently
significantly reduced the price of Roundup(R) herbicide brands in the
United States based on its prior experience in numerous markets
worldwide that price reductions on Roundup(R) have stimulated volume
growth via price elasticity. This pricing strategy is expected to also
result in increased demand for Roundup(R) herbicide in the United States
because the lower prices will make Roundup(R) more economical,
encouraging both new uses of the product and growers to expand the
number of acres treated. If Monsanto's experience with price elasticity
in non-United States markets does not hold true in the United States,
and the increased demand for Roundup(R) products does not fully
compensate for the price decreases, Monsanto will experience an
associated loss of revenue.
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Monsanto also believes that increased volumes and technological
innovations will lead to improved manufacturing and cost efficiencies,
thus reducing the production cost of glyphosate. Such cost reductions
will be dependent on the realization of such increased volumes and
innovations and the Company's ability to secure the additional resources
required to expand its production of Roundup(R).
Governmental and Consumer Acceptance. The commercial success of
genetically engineered agricultural and food products will depend in
part on governmental and public acceptance of their cultivation,
distribution and consumption. Public attitudes may be influenced by
media and opponents' claims that genetically engineered plant products
are unsafe for consumption or pose unknown risks to the environment or
to social or economic practices. The Company has expended significant
efforts to foster governmental and consumer acceptance of nutritional
and agricultural biotechnology products, in the latter case particularly
in Europe where securing governmental approvals for, and achieving
consumer confidence of, such products is posing numerous challenges.
For instance, France has instituted a moratorium on the planting of
certain genetically modified seeds and similar bans exist in some other
member states. Many countries also have significant labeling
requirements. The market success of Monsanto's genetically altered
products may be delayed or impaired in certain geographical areas due to
such existing or future regulatory, legislative or public acceptance
issues or related litigation.
Technological Change and Competition. A number of companies are engaged
in research related to plant biotechnology. Technological advances by
others could render Monsanto's products less competitive. Monsanto
believes that competition will intensify, particularly from agricultural
biotechnology firms and major agrichemical, seed and food companies with
biotechnology laboratories. Some of Monsanto's agricultural competitors
have substantially greater financial, technical and marketing resources
than Monsanto.
Impact of, and Ability to Integrate, Transactions. Monsanto has
completed or entered into agreements for significant acquisitions,
mergers and joint ventures involving seed, agricultural biotechnology
and grain processing companies. These transactions are designed to
strengthen Monsanto's capability to bring important new life sciences
products to customers worldwide, and to contribute to Monsanto's long-term
growth. The DEKALB and Delta Pine transactions are each subject to
regulatory approvals and the Delta Pine transaction is also subject
to Delta Pine shareowner consent and other customary conditions.
It is anticipated that the pending DEKALB and Delta Pine transactions,
when consummated, and the recently consummated PBIC and Cargill
transactions will result in significant dilution to Monsanto's
results of operation for the next several years. Long term, Monsanto
must integrate these companies into its business, realize projected
synergies and fit such acquisitions, mergers and joint ventures into its
growth strategy in order to realize sufficient value to justify their
cost. Mergers, acquisitions and joint ventures also present integration
and implementation challenges including, among other things, the
necessity of coordinating geographically separated organizations,
integrating personnel with diverse business backgrounds and integrating
corporate cultures. The process of integrating operations could cause
an interruption of, or loss of momentum in, Monsanto's business and the
loss of key personnel. There can be no assurance that the diversion of
management's attention and any delays or difficulties encountered in
connection with completing and implementing these transactions and
integrating the acquired, merged or joint venture companies' operations
will not have an adverse effect on Monsanto's business, results of
operations or financial condition.
The Company plans to continue to frequently explore the potential
benefits of possible strategic alliances, joint ventures and
divestitures. However, despite its efforts, the Company may be unable
to divest assets at an acceptable price or to reach agreement with third
parties with whom it desires to enter into a joint venture or other
alliance.
Planting Decisions; Weather. The Company's agricultural products
business is highly seasonal and subject to weather conditions and
natural disasters, which affect commodity prices, seed yields and
decisions by farmers regarding planting and herbicides. Commodity
prices also affect farmers' decisions on the types and amounts of crops
to plant. The results of these factors will influence sales of
Monsanto's herbicide and seed products.
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Factors Impacting the Pharmaceuticals Segment
- ---------------------------------------------
Ability to Realize Potential of Existing Pharmaceutical Pipeline
Products. Pharmaceutical research and development is subject to inherent
uncertainty, difficulties and delays including, but not limited to,
successful completion of clinical trials and the ability to obtain and
maintain regulatory approval for the compounds in the United States as
well as other countries. Failure to timely receive and to maintain
government approvals could preclude or substantially delay
commercialization of products in the Company's research and development
programs.
Development and Commercialization of New Pharmaceutical Products. The
Pharmaceuticals Segment's long-term success will depend in great part on
its ability to develop and commercialize new products. Such efforts
require substantial funding of R&D and launch expenses. If Monsanto is
unable to generate sufficient revenues or otherwise acquire sufficient
resources to fund such expenses, its ability to develop new products
will suffer. Further, the results of the research and development of new
pharmaceutical products is inherently difficult to predict. Anticipated
research results may never materialize or may be insufficiently
promising. Even if new pharmaceutical products are developed, there can
be no guarantees of their commercial success because of consumer demand
and competitive factors (including the availability of treatment
alternatives and the indications, adverse event and other information
contained on the labels for such products). In addition, the timing of
completion and the results of research and development of new
pharmaceutical products are difficult to forecast and to coordinate with
the marshaling and deployment of the commercialization resources
necessary to realize the full value of the products successfully
completing development.
Product Liability and Consumer Acceptance. The development, manufacture
and sale of pharmaceutical products involves a risk of product liability
claims and associated adverse publicity. Substantial damage awards have
been made against certain pharmaceutical companies in past years based
upon claims for injuries allegedly caused by the use of their products.
In addition, unexpected safety or efficacy concerns arising with respect
to marketed products, whether or not scientifically justified, could
lead to product recalls, withdrawals or declining sales.
Competition. Research in the field of pharmaceuticals is intense, highly
competitive and characterized by rapid technological change. Depending
on the product involved, various types of competition are encountered,
including price, delivery, service, performance, innovation, recognition
and quality. Many of Monsanto's pharmaceuticals competitors have
greater research, financial, marketing and other resources than the
Company. Further, some of Monsanto's trademarked pharmaceuticals
products face increasing pressures from producers of lower-priced
generic products and from new products entering the marketplace.
Pricing Ability. Managed care groups, institutions and government
agencies, both within the United States and abroad, actively seek price
discounts or to otherwise lower prices. Monsanto's challenge is to
negotiate prices with such institutions which allow it to profit at
acceptable levels.
Factors Impacting the Nutrition and Consumer Products Segment
- -------------------------------------------------------------
Monsanto's Nutrition and Consumer Products Segment faces many challenges
which are similar to those faced by the Agricultural Products and
Pharmaceuticals Segments. These challenges include, among others,
increased competition from generic substitutes for its aspartame-based
tabletop and ingredient sweeteners, the need to keep pace with rapid
technological change, realize the potential of its pipeline products,
develop new products and negotiate favorable pricing terms with its
major customers. Each of these challenges is subject to comparable
risks and uncertainties to those described above.
Factors Impacting Each of the Company's Segments
- ------------------------------------------------
Financial Requirements. Monsanto's recent and planned acquisitions will
require a significant commitment of the Company's financial resources
and will also require the Company to seek financing from outside
sources. In addition, new technological innovations generally require a
significant investment for research and development and product launch.
Insufficient funds available for investment in these areas could hinder
the Company's ability to make technological innovations and introduce
and distribute new products. Monsanto anticipates generating required
capital
21<PAGE>
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by maintaining revenues of its core businesses, seeking sufficient
outside financing and containing costs. Its ability to do so will
depend on the result of the factors listed elsewhere in this section and
capital market conditions generally.
Intellectual Property. Monsanto has devoted significant resources to
its efforts to obtain and maintain patent protection, both in the United
States and in other countries, for its products, to preserve its trade
secrets and to operate without infringing the proprietary rights of
third parties. Monsanto's patents and trademarks are of material
importance in the operation of its business, particularly in the
Agricultural Products and Pharmaceuticals segments. Intellectual
property positions will become increasingly important within the
agricultural biotechnology and pharmaceutical industries as genetically
engineered products become a larger part of the product landscape.
The Company generally relies upon patent and trademark laws in the
United States and other countries to establish and maintain its
proprietary rights in its technology and products, although there is
some uncertainty about the value of available patent protection in some
countries outside the United States. Moreover, the patent positions of
biotechnology and pharmaceuticals companies involve complex legal and
factual questions and, because of rapid technological advances and the
number of companies performing research in these areas, involve an
uncertain environment. Patent applications in the United States are
maintained in secret and outside the United States such applications are
published 18 months after filing. Accordingly, patents belonging to
competitors may issue from time-to-time without any prior warning to
Monsanto which may decrease the value of similar technologies currently
being developed by Monsanto. Also because of this rapid pace of change,
some of the Company's products may unknowingly rely on key technologies
developed by others. In such event, the Company may be required to
obtain licenses to such technologies in order to continue to use them.
Certain of Monsanto's germplasm and other genetic material, patents and
licenses are currently the subject of litigation as disclosed in this
quarterly report and additional future litigation can be anticipated.
While the outcome of such litigation cannot be predicted with certainty,
Monsanto will continue to vigorously defend and litigate its positions
and believes it has meritorious defenses and claims in the pending
suits.
Foreign Markets. Monsanto intends to continue to actively explore sales
opportunities outside of the United States which made up approximately
44% of the Company's 1997 revenues. Challenges the Company 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. In
particular, the decline in the value of the southeast Asia and Brazilian
currencies may, if not reversed, adversely affect future income. Also,
future sales may decrease because the decline in the southeast Asia and
Brazilian economies could cause customers to purchase fewer goods in
general, and also because Monsanto products may become more expensive
for customers to purchase in their local currency.
Year 2000 Readiness. The dates on which Monsanto believes the Y2K
Program will be completed are based on management's best estimates,
which were derived utilizing numerous assumptions of future events.
There can be no guarantee that these estimates will be achieved, or that
there will not be a delay in, or increased costs associated with, the
implementation of the Y2K Program. Factors which may cause delays in the
Y2K Program or increased costs in connection therewith include, but are
not limited to, the continued availability and cost of personnel and
consultants trained in these areas, the ability to locate and correct
all relevant computer code and embedded systems and the success of
similar programs conducted by suppliers and other third parties.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - See the Exhibit Index.
(b) No reports on Form 8-K were filed by the Company during the
quarter ended September 30, 1998.
22
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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)
MICHAEL R. HOGAN
--------------------------------
Vice President and Controller
(On behalf of the Registrant and
as Principal Accounting Officer)
Date: November 12, 1998
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EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
2 Omitted - Inapplicable
3 Omitted - Inapplicable
4 Omitted - Inapplicable
10 1. Monsanto Management Incentive Plan of 1996 as
amended April 25, 1997, July 25, 1997, August 18,
1997, February 26, 1998 and September 25, 1998
11 Omitted - Inapplicable; see Note 6 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 Computation of the Ratio of Earnings to Fixed
Charges for Monsanto Company and Subsidiaries
24
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Exhibit 10.1
------------
MONSANTO MANAGEMENT INCENTIVE PLAN OF 1996
As Amended April 25, 1997, July 25, 1997, August 18, 1997,
February 26, 1998 and September 25, 1998 and
As Adjusted to Reflect Stock Split as of May 15, 1996
and Spin-off as of September 1, 1997
I. GENERAL PROVISIONS
1. PURPOSES
The Monsanto Management Incentive Plan of 1996 is designed to:
* focus management on business performance that creates stockholder
value,
* encourage innovative approaches to the business of the Company,
* reward for results,
* encourage ownership of Monsanto common stock by management, and
* encourage taking higher risks with an opportunity for higher reward.
This Incentive Plan shall be effective April 15, 1996 ("Effective
Date"), subject to the approval of this Incentive Plan by the
stockholders of the Company.
2. DEFINITIONS
Except where the context otherwise indicates, the following definitions
apply:
"Associated Company" means any corporation (or partnership, joint
venture, or other enterprise), of which the Company owns or controls,
directly or indirectly, 10% or more, but less than 50% of the
outstanding shares of stock normally entitled to vote for the election
of directors (or comparable equity participation and voting power).
"Award" means any Stock Option, Stock Appreciation Right, Restricted
Share, unrestricted Share, dividend equivalent unit or other award
granted under this Incentive Plan.
"Board" means Board of Directors of the Company.
"Committee" means the ECDC, or its permitted delegate.
"Compensation Committee" means one or more committees appointed by the
ECDC composed of one or more senior managers of the Company or a
Subsidiary to whom the ECDC may delegate its powers (or a portion
thereof) to administer this Incentive Plan pursuant to Section 3(a) of
this Article I.
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"ECDC" means the Executive Compensation and Development Committee or
such other committee consisting of two or more members of the Board as
may be appointed by the Board to administer this Incentive Plan pursuant
to Section 3(a) of this Article I.
"Company" means Monsanto Company, a Delaware corporation.
"Eligible Participant" means any officer or other salaried employee
(including a director who is a salaried employee) of the Company, a
Subsidiary, or an Associated Company.
"Incentive Plan" means the Monsanto Management Incentive Plan of 1996,
set forth herein.
"Fair Market Value" shall mean, with respect to any given day, the
average of the highest and lowest sales prices of the Shares reported as
the New York Stock Exchange-Composite Transactions for such day, or if
the Shares were not traded on the New York Stock Exchange on such day,
then on the next preceding day on which the Shares were traded, all as
reported by The Wall Street Journal, mid-west edition, under the heading
New York Stock Exchange-Composite Transactions or by such other source
as the Committee may select.
"Incentive Stock Option" or "Incentive Option" means an option meeting
the definition of that term as set forth in Section 3 of Article II of
this Incentive Plan.
"1984 Plan" means the Monsanto Management Incentive Plan of 1984, as
amended.
"1986 Plan" means the Searle Monsanto Stock Option Plan of 1986, as
amended.
"1988/I Plan" means the Monsanto Management Incentive Plan of 1988/I, as
amended.
"1988/II Plan" means the Monsanto Management Incentive Plan of 1988/II,
as amended.
"1991 Plan" means the NutraSweet/Monsanto Stock Plan of 1991, as
amended.
"1994 NutraSweet/Monsanto Plan" means the NutraSweet/Monsanto Stock Plan
of 1994, as amended.
"1994 Plan" means the Monsanto Management Incentive Plan of 1994, as
amended.
"1994 Searle/Monsanto Plan" means the Searle/Monsanto Stock Plan of
1994, as amended.
"Non-Qualified Stock Option" or "Non-Qualified Option" means an option
referred to in Section 4 of Article II of this Incentive Plan.
"Participant" means an Eligible Participant to whom a Stock Option or a
Stock Appreciation Right has been granted, a bonus commitment made or a
bonus awarded pursuant to this Incentive Plan.
"Reporting Person" means a person subject to the reporting requirements
of Section 16(a) of the Securities Exchange Act of 1934 (or any law,
rule, regulation or other provision that may replace such statute) with
respect to Shares.
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"Restricted Shares" means Shares that were made subject to restrictions
in accordance with Section 6 of Article II of this Incentive Plan.
"Shares" means shares of common stock of the Company and any shares of
stock or other securities received as a result of a Share adjustment as
set forth in Section 4 of this Article I.
"Stock Appreciation Right" means a right referred to in Section 5 of
Article II of this Incentive Plan.
"Stock Appreciation Right Fair Market Value" or "SAR Fair Market Value"
shall mean a value established by the Committee for the exercise of a
Stock Appreciation Right. If such exercise occurs during any quarterly
"window period" as specified by Rule 16b-3 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as amended from
time to time, or any law, rule, regulation or other provision that may
hereafter replace such Rule, the Committee may establish a common value
for exercises during such window period.
"Stock Option" or "Option" shall mean Incentive Stock Options and/or
Non-Qualified Stock Options.
"Subsidiary" means: (i) for the purpose of an Incentive Stock Option,
any corporation (other than the Company) in an unbroken chain of
corporations beginning with the Company if, at the time of the granting
of the Option, each of the corporations other than the last corporation
in the unbroken chain owns stock possessing 50% or more of the total
combined voting power of all classes of stock in one of the other
corporations in such chain; and (ii) for the purposes of a Non-Qualified
Stock Option, a Stock Appreciation Right or an Award of Shares
(restricted or not), any corporation (or partnership, joint venture, or
other enterprise) of which the Company owns or controls, directly or
indirectly, 50% or more of the outstanding shares of stock normally
entitled to vote for the election of directors (or comparable equity
participation and voting power).
"Termination of Employment" means the discontinuance of employment of a
Participant for any reason other than a Transfer.
"Transfer" means: (i) for the purpose of an Incentive Stock Option, a
change of employment of a Participant within the group consisting of the
Company and its Subsidiaries; and (ii) for the purpose of a Non-
Qualified Stock Option, a Stock Appreciation Right or an Award of Shares
(restricted or not), a change of employment of a Participant within the
group consisting of the Company and its Subsidiaries, or, if the
Committee so determines, a change of employment of a Participant within
the group consisting of the Company, its Subsidiaries and Associated
Companies.
3. ADMINISTRATION
(a) This Incentive Plan shall be administered by the ECDC, except to
the extent the ECDC delegates administration pursuant to this
paragraph. The ECDC may delegate all or a portion of the
administration of this Incentive Plan to one or more Compensation
Committees and may authorize further delegation by the
Compensation Committees to senior managers of the Company or its
Subsidiaries; provided that determinations regarding the timing,
pricing, amount and terms of any Award to a Reporting Person
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shall be made only by the ECDC. No person shall be eligible or
continue to serve as a member of the ECDC unless such person is
(i) a "disinterested person" within the meaning of Rule 16b-3 of
the General Rules and Regulations under the Securities Exchange
Act of 1934, as amended from time to time, or any law, rule,
regulation or other provision that may hereafter replace such Rule
and (ii) an "outside director" within the meaning of Section
162(m) of the Internal Revenue Code of 1986, as may be amended
from time to time, and no person shall be eligible for the grant
of an Award under this Incentive Plan while serving as a member of
the ECDC.
(b) The Committee shall have the exclusive right to interpret this
Incentive Plan, to select the persons who are to receive Awards,
and to act in all matters pertaining to the granting of Awards
under this Incentive Plan including, without limitation, the
timing, pricing, amount and terms of any Award and the amendment
thereof consistent with the provisions of this Incentive Plan. No
Eligible Participant shall have any right to be considered for or
to receive any Awards. All acts and decisions of the Committee
with respect to any questions arising in connection with the
administration and interpretation of this Incentive Plan,
including the severability of any and all of the provisions
thereof, shall be conclusive, final and binding upon all Eligible
Participants.
(c) The Committee may adopt and amend from time to time rules and
regulations of general application for the administration of this
Incentive Plan.
(d) Without limiting the foregoing Sections 3(a), (b) and (c) of this
Article I (and notwithstanding any other provisions of this
Incentive Plan), the Committee is authorized to take such action
as it determines to be necessary or advisable, and fair and
equitable to Participants, with respect to Awards in the event of:
a merger of the Company with, consolidation of the Company into,
or the acquisition of the Company by, another corporation; a sale
or transfer of all or substantially all of the assets of the
Company to another corporation or any other person or entity; a
separation from the Company, including any spin-off or other
distribution to stockholders other than an ordinary cash dividend;
a tender or exchange offer for Shares made by any corporation,
person or entity (other than the Company); or other reorganization
in which the Company will not survive as an independent, publicly-
owned corporation. Such action may include (but shall not be
limited to) establishing, amending or waiving the forms, terms,
conditions and duration of Stock Options, Stock Appreciation
Rights, Awards of Restricted Shares and other Awards so as to
provide for earlier, later, extended or additional times for
exercise or payments, differing methods for calculating payments,
alternate forms and amounts of payment, accelerated release of
restrictions or other modifications. The Committee may take such
actions pursuant to this Section 3(d) by adopting rules and
regulations of general applicability to all Participants or to
certain categories of Participants, by including, amending or
waiving terms and conditions in Awards (including, without
limitation, agreements with respect to Restricted Shares), or by
taking action with respect to individual Participants. The
Committee may take such actions as part of the Awards, or before
or after the public announcement of any such merger,
consolidation, acquisition, sale or transfer of assets,
separation, tender or exchange offer or other reorganization.
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4. SHARE ADJUSTMENTS
In the event that at any time or from time to time a stock dividend,
stock split, recapitalization, merger, consolidation, or other change in
capitalization, or a sale by the Company of all or part of its assets,
or a separation from the Company, including any spin-off or other
distribution to stockholders other than an ordinary cash dividend,
results in (a) the outstanding Shares, or any securities exchanged
therefor or received in their place, being exchanged for a different
number or class of shares of stock or other securities of the Company,
or for shares of stock or other securities of any other corporation; or
(b) new, different or additional shares or other securities of the
Company or of any other corporation being received by the holders of
outstanding Shares, then:
(i) the total number of Shares authorized for Awards under
this Incentive Plan;
(ii) the number and class of Shares (A) that may be subject to
Stock Options or Stock Appreciation Rights, (B) which
have not been issued or transferred under outstanding
Stock Options or Stock Appreciation Rights, and (C)
which have been awarded but are undelivered under this
Incentive Plan; and
(iii) the purchase price to be paid per Share under outstanding
Stock Options and the number of Shares to be
transferred in settlement of outstanding Stock
Appreciation Rights;
shall in each case be appropriately adjusted by the Committee in its
discretion; provided, however, that all adjustments made as the result
of the foregoing in respect of each Stock Option which is granted as an
Incentive Stock Option shall be made so that such Stock Option shall
continue to be an Incentive Stock Option as defined in Section 422 of
the Internal Revenue Code of 1986, as may be amended from time to time.
5. SHARES AUTHORIZED
The total number of Shares for which awards may be granted under this
Incentive Plan shall not exceed 71,605,350 Shares. Notwithstanding the
foregoing, the total number of Shares that shall be available for Awards
of Restricted or unrestricted Shares shall be 1/2 of 1% of the total
number of Shares outstanding. The limitations in this Section 5 are
subject to the adjustments provided for in Section 4 of this Article I;
the provisions of Section 1(b) of Article II of this Incentive Plan; and
the provisions of Section 3(d) of Article III of this Incentive Plan.
The total number of Shares for which Awards may be granted under this
Incentive Plan to any one Eligible Participant shall not exceed in any
three-year period 15% of the total number of Shares for which Awards may
be made under this Incentive Plan, subject to the adjustments provided
for in Section 4 of this Article I.
II. AWARDS
1. SHARES USED FOR AWARDS
(a) The Shares for which Options may be granted under this Option Plan
may be authorized but unissued Shares, or treasury Shares, or
both.
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(b) In the event that any unexercised Stock Option granted hereunder
lapses or ceases to be exercisable for any reason other than a
surrender of the Option pursuant to Section l(c) of this Article
II or the exercise of a Stock Appreciation Right under Section 5
of this Article II, the Shares subject to such Option shall again
be available for Option grants under this Option Plan without
again being charged against the authorized Shares set forth in
Section 5 of Article I if not prohibited by Rule 16b-3 under the
Securities Exchange Act of 1934 (or any successor rule or
provision). Any amendment of any Option or Stock Appreciation
Right by the Committee pursuant to Article I, Section 3 of this
Incentive Plan shall not be considered the grant of a new Option
for the purpose of Section 5 of Article I.
(c) In the event of death or total and permanent disability as
determined by the Committee, the Committee may, with the consent
of the Participant, his legal representative, or in the event of
death, a beneficiary designated in writing by the Participant
during his lifetime, authorize payment, in cash or in Shares, or
partly in cash and partly in Shares, as the Committee may direct,
of an amount equal to the difference at the time between the Fair
Market Value of the Shares subject to an Option and the Option
price in consideration of the surrender of the Option. In such an
event the Shares subject to the Option so surrendered shall be
charged against the limitations set forth in Section 5 of
Article I.
(d) In the event that any Award or installment thereof ceases to be
payable for any reason, the Shares subject to such Award shall
again be available for Award without again being charged against
the limitations on the number of Shares set forth in Section 5 of
Article I if not prohibited by Rule 16b-3 under the Securities
Exchange Act of 1934 (or any successor rule or provision).
2. INCIDENTS OF OPTIONS AND STOCK APPRECIATION RIGHTS
(a) An Award of Stock Options or Stock Appreciation Rights may be made
at such time or times determined by the Committee following the
Effective Date to any Eligible Participant, except that Incentive
Options may not be awarded to employees of Associated Companies.
Each Stock Option and Stock Appreciation Right shall be granted
subject to such terms and conditions, if any, not inconsistent
with this Incentive Plan, as shall be determined by the Committee,
including any provisions as to continued employment as
consideration for the grant or exercise of such Option or Stock
Appreciation Right, provisions as to performance conditions and
any provisions which may be advisable to comply with applicable
laws, regulations or rulings of any governmental authority.
(b) An Incentive Stock Option or Stock Appreciation Right shall not be
transferable by the Participant otherwise than by will, by the
laws of descent and distribution, or pursuant to a written
beneficiary designation, and shall be exercisable during the
lifetime of the Participant only by him or by his guardian or
legal representative. A Non-Qualified Stock Option or Stock
Appreciation Right shall not be transferable except by will, by
the laws of descent and distribution, pursuant to a written
beneficiary designation, pursuant to a qualified domestic
relations order as defined by the Internal Revenue Code of 1986,
as amended, or Title I of the Employee Retirement Income Security
Act or the rules thereunder, or in such circumstances as would not
result in the failure to comply with
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Rule 16b-3 under the Securities Exchange Act of 1934 (or any
successor rule or provision) if the transferor were a Reporting
Person.
(c) Shares purchased upon exercise of a Stock Option shall be paid for
in such amounts, at such times and upon such terms as shall be
determined by the Committee and specified in the grant of the
Option. Without limiting the foregoing, the Committee may
establish payment terms for the exercise of Stock Options which
permit the Participant to deliver Shares (or other evidence of
ownership of Shares satisfactory to the Company), including, at
the Committee's option, Restricted Shares, with a Fair Market
Value equal to the Option price as payment.
(d) The Option price per share shall be established by the grant and
shall not be decreased thereafter except pursuant to Section 4 of
Article I of this Incentive Plan.
(e) The Committee, in its discretion, may provide for the escalation
of the Option price per Share over all or part of the term of the
Option.
(f) The Committee, in its discretion, may offer Participants the
opportunity to elect to receive an Option grant in lieu of a
salary increase or a bonus or may offer Participants the
opportunity to purchase Options for cash or such other
consideration as the Committee in its discretion determines.
3. INCENTIVE OPTIONS
An Incentive Option shall be an "Incentive Stock Option" as that term is
defined in Section 422 of the Internal Revenue Code of 1986, as may be
amended from time to time, as in effect at the time of the grant of any
such Option, or any statutory provision that may be enacted to replace
such Section. Each provision of this Incentive Plan and of each
Incentive Stock Option granted hereunder shall be construed so that each
such Option shall be an Incentive Stock Option, and any provision
thereof that cannot be so construed shall be disregarded. Incentive
Stock Options shall be granted only to purchase unrestricted Shares and
only to Eligible Participants, each of whom may be granted one or more
such Options at such time or times determined by the Committee following
the Effective Date until April 14, 2006, subject to the following
conditions:
(a) The Option price per Share shall be set by the grant but shall not
be less than 100% of the Fair Market Value at the time of the
grant.
(b) The Option and its related Stock Appreciation Right, if any, may
be exercised in full or in part from time to time within ten (10)
years from the date of the grant, or such shorter period as may be
specified by the Committee in the grant, provided that in any
event each shall lapse and cease to be exercisable upon, or within
such period following, Termination of Employment as shall have
been determined by the Committee and as specified in the Option or
Stock Appreciation Right; provided, however, that such period
following Termination of Employment shall not exceed twelve months
unless employment shall have terminated:
(i) as a result of retirement as defined by the Committee or total and
permanent disability as determined by the Committee, in which
event such period shall not exceed--
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(A) in the case of an Option, the original term of the Option;
and
(B) in the case of a Stock Appreciation Right, one year after
such retirement or disability or after resignation as
an officer or director of the Company, whichever shall
last occur (unless earlier terminated pursuant to
Section 5(b) of this Article II);
or
(ii) as a result of death, or death shall have occurred following
Termination of Employment and while the Option or Stock
Appreciation Right was still exercisable; and
provided, further, that such period following Termination of
Employment shall in no event extend the original exercise period
of the Option or related Stock Appreciation Right, if any.
(c) The aggregate Fair Market Value (determined at the time the Option
is granted) of the Shares with respect to which Incentive Stock
Options are first exercisable during any calendar year by any
Eligible Participant shall not exceed $100,000; however, if the
Fair Market Value of Incentive Stock Option Shares (at date of
grant) exceeds $100,000 in the calendar year in which Incentive
Stock Options are first exercisable, Shares with a Fair Market
Value at date of grant exceeding $100,000 shall not be deemed to
be Incentive Stock Options.
(d) Incentive Stock Options shall be granted only to an Eligible
Participant who, at the time the Option is granted, does not own
stock possessing more than 10% of the total combined voting power
of all classes of stock of the Company.
(e) Any other terms and conditions which the Committee determines,
upon advice of counsel, should be imposed for the Option to
qualify as an Incentive Stock Option and any other terms and
conditions not inconsistent with this Incentive Plan as determined
by the Committee; including provisions making the Shares subject
to such Option Restricted Shares or provisions making vesting or
the ability to exercise subject to performance conditions.
4. NON-QUALIFIED OPTIONS
One or more Options may be granted as Non-Qualified Options to purchase
unrestricted Shares or Restricted Shares to an Eligible Participant at
such time or times determined by the Committee, following the Effective
Date, subject to the following terms and conditions:
(a) The Option price per Share shall be established by the grant but
shall not be less than 100% of the Fair Market Value at the time
of the grant (or such later date as the Committee shall determine
to be the grant date).
(b) The Option and its related Stock Appreciation Right, if any, may
be exercised in full or in part from time to time within ten (10)
years from the date of the grant, or such shorter period as may be
specified by the Committee in the grant, provided that in any
event each shall lapse and cease to be exercisable upon, or within
such period following
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Termination of Employment as shall have been determined by the
Committee and as specified in the Option or Stock Appreciation
Right; provided, however, that such period following Termination
of Employment shall not exceed twelve months unless employment
shall have terminated:
(i) as a result of retirement as defined by the Committee or
total and permanent disability as determined by the
Committee, in which event such period shall not exceed--
(A) in the case of an Option, the original term of the
Option; and
(B) in the case of a Stock Appreciation Right, one year
after such retirement or disability or after
resignation as an officer or director of the
Company, whichever shall last occur (unless earlier
terminated pursuant to Section 5(b) of this Article
II);
or
(ii) as a result of death, or death shall have occurred following
Termination of Employment and while the Option or Stock
Appreciation Right was still exercisable; and
provided, further, that such period following Termination of
Employment shall in no event extend the original exercise period
of the Option or related Stock Appreciation Right, if any.
(c) The Option grant may include any other terms and conditions not
inconsistent with this Incentive Plan as determined by the
Committee, including provisions making the Shares subject to such
Option Restricted Shares or provisions making vesting or the
ability to exercise subject to the satisfaction of performance
conditions.
5. STOCK APPRECIATION RIGHTS
A Stock Appreciation Right may be granted to an Eligible Participant in
connection with (and only in connection with) an Incentive Stock Option
or a Non-Qualified Option granted under this Incentive Plan, or under
any other incentive plan of the Company or its Subsidiaries which was
approved by the stockholders, subject to the following terms and
conditions:
(a) Such Stock Appreciation Right shall entitle a holder of an Option
within the period specified for the exercise of the Option in the
related Option grant to surrender the unexercised Option (or a
portion thereof) and to receive in exchange therefor a payment in
cash or Shares having an aggregate value equal to the product of
(i) the amount by which (A) the SAR Fair Market Value of each
Share exceeds (B) the Option price per Share, times (ii) the
number of Shares under the Option, or portion thereof, which is
surrendered.
(b) Except as expressly provided herein, each Stock Appreciation Right
granted hereunder shall be subject to the same terms and
conditions as the related Option. It shall be exercisable only to
the extent such Option is exercisable and shall terminate or lapse
and
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cease to be exercisable when the related Option terminates or
lapses. The Committee may grant Stock Appreciation Rights
concurrently with grants of Options or in connection with
previously granted Options under this Incentive Plan, or under any
other incentive plan of the Company or its Subsidiaries which was
approved by the stockholders, which are unexercised and have not
terminated or lapsed. With respect to Stock Appreciation Rights
granted in connection with such previously granted Options, the
Committee shall provide that such Stock Appreciation Rights shall
not be exercisable until the holder completes six (6) months (or
such longer period as the Committee shall determine) of service
with the Company, a Subsidiary, or an Associated Company
immediately following the date of the grant of such Stock
Appreciation Rights.
(c) The Committee shall have sole discretion to determine in each case
whether the payment will be in the form of all cash, all Shares
(which may, at the Committee's discretion, be Restricted Shares),
or any combination thereof. If payment is to be made in Shares,
the number of Shares shall be determined as follows: the amount
payable in Shares shall be divided by the SAR Fair Market Value of
Shares. The payments to be made, in whole or in part, in cash
upon the exercise of Stock Appreciation Rights by any officer of
the Company shall be made in accordance with the provisions
relating to the exercise of stock appreciation rights of Rule
16b-3 of the General Rules and Regulations under the Securities
Exchange Act of 1934, as in effect at the time of such exercise,
or any law, rule, regulation or other provision that may hereafter
replace such Rule.
(d) Upon exercise of a Stock Appreciation Right, the number of Shares
subject to exercise under the related Option shall automatically
be reduced by the number of Shares represented by the Option or
portion thereof which is surrendered. To the extent that a Stock
Appreciation Right shall be exercised, any Shares transferred upon
such exercise shall not be charged against the maximum limitations
upon the grant of Options set forth in this Incentive Plan under
which such Option shall have been granted but the Option in
connection with which a Stock Appreciation Right shall have been
granted shall be deemed to have been exercised for the purpose of
such maximum limitations.
(e) The Committee shall have sole discretion as to the timing of any
payment made in cash, Shares, or a combination thereof upon
exercise of Stock Appreciation Rights hereunder, whether in a lump
sum, in annual installments or otherwise deferred and the
Committee shall have sole discretion to determine whether such
payments may bear amounts equivalent to interest or cash
dividends.
(f) For purposes of this paragraph 5(f) of Article II:
(i) "Unrelated Party" means any party or group of parties acting
together other than (A) the Company, its directors and
officers, or (B) any nominee holder for any stock exchange;
(ii) "Offer" means any tender or exchange offer made by an
Unrelated Party for the Shares and shall be deemed to occur
upon the first purchase or exchange of such Shares;
(iii) "Change of Control" means any acquisition, beneficially or
otherwise, by any Unrelated Party of 25% or more of the
combined voting power of the common
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and preferred stock of the Company and shall be deemed to
occur upon the date that the Unrelated Party attains control
of said 25% or more of the combined voting power;
(iv) "Change of Control Market Value" of the Shares means the
higher of--
(A) the value for which such Shares may be exchanged or
offered under any Offer pursuant to which Shares are
actually exchanged or purchased; or
(B) the Fair Market Value of such Shares on the date of
exercise of a Stock Appreciation Right.
Notwithstanding the foregoing provisions of this Section 5 of
Article II and without limiting the provisions of Section 3 of
Article I of this Incentive Plan, in the event of an Offer or
Change of Control, a Participant holding an unexercised Stock
Appreciation Right may exercise such Stock Appreciation Right and
elect to be paid solely in cash in an amount equal to the
difference between the Option price and the Change of Control
Market Value of the Shares, unless within five (5) business days
after receipt of notification of such election by the Secretary of
the Company, the Committee acts to disapprove the cash election.
Unless it acts to disapprove, the Committee's consent shall be
deemed to be given at the close of business on the fifth business
day after the Secretary's receipt of notification of such election
and payment shall be made as soon as practicable after expiration
of such five (5) business day period. The election provided herein
shall apply only: (x) during the thirty (30) day period following
the first exchange or purchase of Shares pursuant to an Offer; or
(y) during the thirty (30) day period following the date on which
sufficient Shares are acquired to constitute a Change of Control.
(g) For purposes of this paragraph 5(g) of Article II:
(i) "Unrelated Party" means any party or group of parties
acting together other than (A) the Company, its directors
and officers, or (B) any nominee holder for any stock
exchange;
(ii) "Alternate Change of Control" means any acquisition,
beneficially or otherwise, by any Unrelated Party of a
percentage of the combined voting power of the common and
preferred stock of the Company specified by the Committee
(but not less than 10%) and shall be deemed to occur upon
the date that the Unrelated Party attains control of said
percentage of the combined voting power;
(iii) "Change of Control Termination of Employment" means the
termination of employment of a Participant by the
Company, the Subsidiaries or the Associated Companies
without cause (as defined by the Committee) or by the
Participant for good reason (as defined by the Committee)
within a period of time specified by the Committee
following an Alternate Change of Control;
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(iv) "Alternate Change of Control Market Value" of the Shares
means the Fair Market Value of such Shares on the date of
exercise of a Stock Appreciation Right.
Notwithstanding the foregoing provisions of this Section 5 of
Article II and without limiting the provisions of Section 3 of
Article I of this Incentive Plan, in the event of an Alternate
Change of Control and a Change of Control Termination of
Employment, a Participant holding an unexercised Stock
Appreciation Right who is selected by the Committee may exercise
such Stock Appreciation Right and elect to be paid solely in cash
in an amount equal to the difference between the Option price and
the Alternate Change of Control Market Value of the Shares, unless
within five (5) business days after receipt of notification of
such election by the Secretary of the Company, the Committee acts
to disapprove the cash election. Unless it acts to disapprove,
the Committee's consent shall be deemed to be given at the close
of business on the fifth business day after the Secretary's
receipt of notification of such election and payment shall be made
as soon as practicable after expiration of such five (5) business
day period. The election provided herein shall apply only during
the thirty (30) day period following a Change of Control
Termination of Employment.
6. BONUS SHARES AND RESTRICTED SHARES
(a) An Award of Shares or Restricted Shares may be made at such
time or times determined by the Committee following the Effective
Date to any person who is an Eligible Participant. The Committee
shall have full discretion to determine the terms and conditions
of payment of any Award, including without limitation, what part
of such Award shall be paid in unrestricted Shares or Restricted
Shares, the time or times of payment of any Award, and the time or
times of the lapse of the restrictions on Restricted Shares.
(b) For the purpose of determining the number of Shares to be used in
payment of an Award, the amount of the Award payable in Shares
shall be divided by the Fair Market Value of the Shares on the
date of the determination of the amount of the Award by the
Committee, or if the Committee so directs, the date immediately
preceding the date the Award is paid.
(c) The portion of an Award payable in Restricted Shares shall be paid
at the time of the Award either by book-entry registration or by
delivering to the Participant, or a custodian or escrow designated
by the Committee and the Participant, a certificate or
certificates for such Restricted Shares, registered in the name of
such Participant. The Participant shall have all of the rights of
a stockholder with respect to such Shares, subject to such terms
and conditions, including withholding of dividends, forfeitures or
resale to the Company, if any, as may be determined by the
Committee. The Committee and the Participant may designate the
Company or one or more of its employees to act as custodian or
escrow for the certificates.
(d) Restricted Shares shall be subject to such terms and conditions,
including forfeiture, if any, and to such restrictions against
sale, transfer or other disposition as may be determined by the
Committee at the time a Non-Qualified Option for the purchase of
Restricted Shares is granted, at the time a Stock Appreciation
Right to be settled with
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Restricted Shares is granted or at the time of making a bonus
award of Restricted Shares. Any new or additional or different
Shares or other securities resulting from any adjustment of such
Shares of the type described in Section 4 of Article I shall be
subject to the same terms, conditions, and restrictions as the
Restricted Shares prior to such adjustment. The Committee may, in
its discretion, remove, modify or accelerate the release of
restrictions on any Restricted Shares in the event of hardship or
disability of the Participant while employed, in the event that
the Participant ceases to be an employee of the Company, a
Subsidiary or Associated Company, as the result of death or
otherwise, in the event of a relocation of a Participant to
another country or for such other reasons as the Committee may
deem appropriate. In the event of the death of a Participant
following the transfer of Restricted Shares to him, the legal
representative of the Participant, the beneficiary designated in
writing by the Participant during his lifetime, or the person
receiving such Shares under his will or under the laws of descent
and distribution shall take such Shares subject to the same
restrictions, conditions and provisions in effect at the time of
his death, to the extent applicable.
7. DIVIDENDS, DIVIDEND EQUIVALENTS AND INTEREST EQUIVALENTS
(a) No cash dividends shall be paid on Shares which have been awarded
but not registered or delivered. The Committee may provide,
however, that a Participant to whom an Option has been awarded
which is exercisable in whole or in part at a future time for
Shares or a Participant who has been awarded Shares payable in
whole or in part at a future time, shall be entitled to receive an
amount per Share, equal in value to the cash dividends, if any,
paid per Share on issued and outstanding Shares, as of the
dividend record dates occurring during the period between the date
of the award and the time each such Share is delivered. Such
amounts (herein called "dividend equivalents") may, in the
discretion of the Committee, be:
(i) paid in cash or Shares either from time to time prior
to or at the time of the delivery of such Shares or
upon expiration of the Option if it shall not have
been fully exercised (except that payment of the
dividend equivalents on Incentive Options may not be
made prior to exercise); or
(ii) converted into contingently credited Shares (with
respect to which dividend equivalents shall accrue) in
such manner, at such value, and deliverable at such
time or times, as may be determined by the Committee.
Such Shares (whether delivered or contingently credited)
shall be charged against the limitations set forth in
Section 5 of Article I.
(b) The Committee, in its discretion, may authorize payment of
interest equivalents on any portion of any Award payable at a
future time in cash, and interest equivalents on dividend
equivalents which are payable in cash at a future time.
(c) The Committee, in its discretion, may provide that dividends paid
on restricted Shares shall, during the applicable restricted
period, be held by the Company to be paid upon the lapse of
restrictions or to be forfeited upon forfeiture of the Shares.
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III. MISCELLANEOUS PROVISIONS
1. Neither a Stock Option nor a Stock Appreciation Right shall be
transferable except as provided for herein. If any Participant
makes such a transfer in violation hereof, any obligation of
the Company with respect to such Stock Option or Stock
Appreciation Right shall forthwith terminate.
2. Nothing in this Incentive Plan or any booklet or other document
describing or referring to this Incentive Plan shall be deemed
to confer on any employee or Participant the right to continue
in the employ of his employer or affect the right of his
employer to terminate the employment of any such person with or
without cause.
3. Nothing contained herein shall require the Company to segregate
any monies from its general funds, or to create any trusts, or
to make any special deposits for any immediate or deferred
amounts payable to any Participant.
4. This Incentive Plan and all actions taken hereunder shall be
governed by the laws of the State of Delaware.
5. The Company may make such provisions and take such steps as it
may deem necessary or appropriate for the withholding of any
taxes which the Company is required by any law or regulation of
any governmental authority, whether federal, state or local,
domestic or foreign, to withhold in connection with any Stock
Option or the exercise thereof, any Stock Appreciation Right or
the exercise thereof, or the payment of any bonus award,
including, but not limited to, the withholding of cash or
Shares which would be paid or delivered pursuant to such
exercise or award or another exercise or award under this
Incentive Plan until the Participant reimburses the Company for
the amount the Company is required to withhold with respect to
such taxes, or cancelling any portion of such award or another
award under this Incentive Plan in an amount sufficient to
reimburse itself for the amount it is required to so withhold,
or selling any property contingently credited by the Company
for the purpose of paying such award or another award under
this Incentive Plan, in order to withhold or reimburse itself
for the amount it is required to so withhold. The Committee may
permit a Participant (or any beneficiary or other person
authorized to act) to elect to pay a portion or all of any
amounts required or permitted to be withheld to satisfy
federal, state, local or foreign tax obligations by directing
the Company to withhold a number of whole Shares which would
otherwise be distributed and which have a fair market value
sufficient to cover the amount of such required or permitted
withholding taxes.
6. The Committee may grant Stock Options to Eligible Participants
who are foreign nationals or who are employed by the Company, a
Subsidiary, or an Associated Company outside of the United
States of America. In order to facilitate the granting of
Stock Options, the Committee may provide for special terms and
conditions for grants to employees who are foreign nationals or
who are employed by the Company, a Subsidiary, or an Associated
Company outside of the United States of America, as the
Committee may consider necessary or
<PAGE>
<PAGE>
appropriate to accommodate differences in local law, tax policy
or custom in other countries in which the Company, a
Subsidiary, or an Associated Company operates or has employees.
The Committee may also provide for such substitutes for the
Stock Options for employees who are foreign nationals or who
are employed by the Company, a Subsidiary, or an Associated
Company outside of the United States of America as may be
deemed necessary or appropriate by the Committee.
AVAILABLE INFORMATION: Each Malaysian Participant may request
copies of the Company's most recent audited financial
statements available.
7. Notwithstanding any other provision of this Incentive Plan, for
purposes of any Award that is outstanding as of the date that
the Company spins off the Company's chemical businesses into a
new publicly traded company ("Chemicals") and is held by a
Participant who in connection with such spinoff becomes an
employee of Chemicals (or a subsidiary or associated company of
Chemicals) rather than an employee of the Company (or a
Subsidiary or Associated Company of the Company), such change
of employment shall not constitute a Termination of Employment.
With respect to any such Award held by such a Participant,
Termination of Employment shall mean such Participant's
termination of employment with Chemicals other than a Transfer,
with Transfer defined as a change of employment of a
Participant within the group consisting of Chemicals and its
subsidiaries, or, if the Committee so determines, a change of
employment of a Participant within the group consisting of
Chemicals, its subsidiaries, and its associated companies. For
purposes of this section, a subsidiary of Chemicals means any
corporation (or partnership, joint venture, or other
enterprise) of which Chemicals owns or controls, directly or
indirectly, 50% or more of the outstanding shares of stock
normally entitled to vote for the election of directors (or
comparable equity participation and voting power) and an
associated company of Chemicals means any corporation (or
partnership, joint venture, or other enterprise), of which
Chemicals owns or controls, directly or indirectly, 10% or
more, but less than 50% of the outstanding shares of stock
normally entitled to vote for the election of directors (or
comparable equity participation and voting power).
IV. AMENDMENTS
1. The Board, upon recommendation of the Committee but not
otherwise, may from time to time amend or modify this Incentive
Plan, including, but not limited to, an amendment which would
authorize the Committee to make Awards payable in other
securities or other forms of property of a kind to be
determined by the Committee, and such other amendments as may
be necessary or desirable to implement such Awards, or
discontinue this Incentive Plan or any provision thereof,
provided that no amendments or modifications to this Incentive
Plan shall, without the prior approval of the stockholders
normally entitled to vote for the election of directors of the
Company:
(a) permit the Company to decrease the Option price on any
outstanding Option;
<PAGE>
<PAGE>
(b) permit any change which would require the approval of
stockholders under Section 16 of the Securities Exchange
Act of 1934 or the rules thereunder or under Section 422
of the Internal Revenue Code of 1986, or the rules
thereunder (or any law, rule, regulation or other
provision that may replace such statutes or rules); or
(c) change any of the provisions of this Article IV.
2. No amendment to or discontinuance of this Incentive Plan or any
provision thereof by the Board or the stockholders of the
Company shall, without the written consent of the Participant,
adversely affect any Stock Option or Stock Appreciation Right
theretofore granted or bonus commitment or bonus award
theretofore made to such Participant under this Incentive Plan.
V. INTERPRETATION
1. This Incentive Plan is not intended to and shall not affect any
option or stock appreciation right grant or bonus commitment or
award under the 1984 Plan, the 1986 Plan, the 1988/I Plan, the
1988/II Plan, the 1991 Plan, the 1994 Plan, the 1994
Searle/Monsanto Plan, or the 1994 NutraSweet/Monsanto Plan (or
any other incentive plan of the Company, its Subsidiaries, and
Associated Companies). No stock options or stock appreciation
rights or Awards of Restricted or unrestricted Shares shall be
granted under the 1994 Plan, the 1994 Searle/Monsanto Plan, or
the 1994 NutraSweet/Monsanto Plan after April 14, 1996.
2. This Incentive Plan is not intended to and shall not preclude
the establishment or operation by the Company or any Subsidiary
of (a) any thrift, savings and investment, achievement award,
stock purchase, employee recognition or other benefit plan or
arrangement for any group of employees, or (b) any other
incentive or bonus plan or arrangement for any employees
(hereinafter "Other Plan"), and any such Other Plan may be
authorized and payments made thereunder independently of this
Incentive Plan; provided, however, that no such Other Plan
shall provide for the granting of options or stock appreciation
rights to purchase or receive the appreciation on the shares of
any class of stock of the Company, or the making of bonus
commitments or bonus awards payable in any class of stock of
the Company, which in either form or substance are comparable
to those authorized under this Incentive Plan, unless (i) such
Other Plan is established or operated in connection with the
assumption by the Company or a Subsidiary of the plans,
options, stock appreciation rights, bonus commitments or bonus
awards of another corporation, or the substitution of an Other
Plan or options, stock appreciation rights, bonus commitments
or bonus awards under such Other Plan in lieu of the plans,
options, stock appreciation rights, bonus commitments or bonus
awards of such other corporation, arising out of a merger or
consolidation with, or the acquisition of assets or stock of,
such other corporation, or other transaction described in
Section 424(a) of the Internal Revenue Code of 1986, as may be
amended from time to time, as in effect at the time, or (ii)
such Other Plan provides for grants of options, stock
appreciation rights, bonus commitments or bonus awards to
employees substantially all of whom are not Participants.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENT OF CONSOLIDATED INCOME OF MONSANTO COMPANY AND SUBSIDIARIES FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1998, AND THE STATEMENT OF CONSOLIDATED
FINANCIAL POSITION AS OF SEPTEMBER 30, 1998. SUCH INFORMATION IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 215
<SECURITIES> 0
<RECEIVABLES> 2,845
<ALLOWANCES> 0
<INVENTORY> 1,505
<CURRENT-ASSETS> 5,598
<PP&E> 5,206
<DEPRECIATION> 2,477
<TOTAL-ASSETS> 12,866
<CURRENT-LIABILITIES> 4,440
<BONDS> 2,506
<COMMON> 1,644
0
0
<OTHER-SE> 3,042
<TOTAL-LIABILITY-AND-EQUITY> 12,866
<SALES> 6,500
<TOTAL-REVENUES> 6,500
<CGS> 2,622
<TOTAL-COSTS> 2,622
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 214
<INCOME-PRETAX> 603
<INCOME-TAX> 250
<INCOME-CONTINUING> 353
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 353
<EPS-PRIMARY> 59
<EPS-DILUTED> 56
</TABLE>
<PAGE>
<TABLE>
EXHIBIT 99
MONSANTO COMPANY AND SUBSIDIARIES
COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
----------------- ----------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Income from continuing operations
before provision for income taxes $603<F*> $369<F*> $366<F*> $553<F*> $645<F*> $636 $427
Add
Fixed charges 261 159 236 172 178 140 141
Less capitalized interest (8) (13) (14) (9) (5) (4) (7)
Dividends from affiliated companies 10 2 4 6 3 2 5
Less equity income (add equity loss)
of affiliated companies (1) (18) (20) 42 (3) (4) (20)
---- ---- ---- ---- ---- ---- ----
Income as adjusted $865 $499 $572 $764 $818 $770 $546
==== ==== ==== ==== ==== ==== ====
Fixed charges
Interest expense $214 $111 $170 $119 $132 $100 $101
Capitalized interest 8 13 14 9 5 4 7
Portion of rents representative
of interest factor 39 35 52 44 41 36 33
---- ---- ---- ---- ---- ---- ----
Fixed charges $261 $159 $236 $172 $178 $140 $141
==== ==== ==== ==== ==== ==== ====
Ratio of earnings to fixed charges 3.31 3.14 2.42 4.44 4.60 5.50 3.87
==== ==== ==== ==== ==== ==== ====
<FN>
<F*> Includes charges for restructuring, acquired in-process research and
development and other unusual items of $202 million and $609 million for
the nine months ended September 30, 1998 and 1997, respectively, and $684
million, $376 million and $90 million for the years ended December 31,
1997, 1996 and 1995, respectively. Excluding these unusual items, the
ratio of earnings to fixed charges would have been 4.09 and 6.97 for the
nine months ended September 30, 1998 and 1997, respectively, and 5.32, 6.60
and 5.10 for the years ended December 31, 1997, 1996 and 1995,
respectively. The ratio was not materially affected by the restructuring
and other unusual items in 1994 and 1993.
</TABLE>
25
