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FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 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 June 30, 1998
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Commons Stock, $2 par value 600,894,731 shares
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<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
The Statement of Consolidated Income of Monsanto Company and subsidiaries for
the three months and six months ended June 30, 1998 and 1997, the Statement of
Consolidated Financial Position as of June 30, 1998 and December 31, 1997, the
Statement of Consolidated Cash Flow for the six months ended June 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 and Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 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" means diluted earnings
per share.
<TABLE>
MONSANTO COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME
(Dollars in millions, except per share)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- -----------------------
1998 1997 1998 1997
------- ------ ---- ----
<S> <C> <C> <C> <C>
Net Sales $2,470 $2,095 $4,514 $3,970
Costs and Expenses:
Cost of Goods Sold 1,035 866 1,854 1,657
Selling, General and Administrative Expenses 626 507 1,161 954
Technological Expenses 329 252 608 454
Acquired In-Process Research and Development 72 173
Amortization of Intangible Assets 83 35 142 71
Restructuring Expense (Income) (35) (35)
-------- ---------- --------- -----
Operating Income 432 363 784 661
Interest Expense (76) (40) (142) (69)
Interest Income 13 13 22 23
Other Income (Expense) - Net 1 17 2 27
--------- -------- --------- --------
Income from Continuing Operations Before Income Taxes 370 353 666 642
Income Taxes 113 103 213 186
------- -------- ------- -------
Income from Continuing Operations 257 250 453 456
Income from Discontinued Operations 74 142
---------- -------- ---------- -------
Net Income $ 257 $ 324 $ 453 $ 598
------ ------ ------ ------
Basic Earnings per Share:
Continuing Operations $ 0.43 $ 0.43 $ 0.76 $ 0.78
Discontinued Operations 0.12 0.24
----------- ------- ----------- -------
Net Income $ 0.43 $ 0.55 $ 0.76 $ 1.02
------ ------ ------ ------
Diluted Earnings per Share:
Continuing Operations $ 0.41 $ 0.41 $ 0.73 $ 0.75
Discontinued Operations 0.13 0.24
----------- ------- ----------- -------
Net Income $ 0.41 $ 0.54 $ 0.73 $ 0.99
------ ------ ------ ------
Dividends per Share $ 0.03 $ 0.16 $ 0.06 $ 0.31
------ ------ ------ ------
</TABLE>
1
<PAGE>
<TABLE>
MONSANTO COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(Dollars in millions, except per share)
<CAPTION>
June 30, December 31,
1998 1997
---- ----
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 122 $ 134
Receivables, net of allowances of $69 in 1998 and $63 in 1997 3,143 1,823
Miscellaneous receivables and prepaid expenses 634 692
Deferred income tax benefit 331 243
Inventories 1,356 1,374
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Total Current Assets 5,586 4,266
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Property, Plant and Equipment 4,959 4,701
Less Accumulated Depreciation 2,397 2,301
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Net Property, Plant and Equipment 2,562 2,400
------- -------
Investments in Affiliates 376 329
Intangible Assets, net of accumulated amortization 2,758 2,837
Other Assets 1,028 942
------- --------
Total Assets $ 12,310 $ 10,774
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LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities:
Accounts payable $ 434 $ 480
Accrued liabilities 1,764 1,333
Short-term debt 1,789 1,726
--------- --------
Total Current Liabilities 3,987 3,539
--------- --------
Long-Term Debt 2,510 1,979
Deferred Income Taxes 98 97
Postretirement Liabilities 793 735
Other Liabilities 298 320
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 416 321
Treasury stock, at cost (221,076,239 shares in 1998
and 226,686,302 shares in 1997) (2,527) (2,570)
Reinvested earnings 5,390 4,973
Reserve for ESOP debt retirement (114) (123)
Accumulated other comprehensive loss (185) (141)
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Total Shareowners' Equity 4,624 4,104
--------- --------
Total Liabilities and Shareowners' Equity $ 12,310 $ 10,774
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</TABLE>
2
<PAGE>
<TABLE>
MONSANTO COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOW
(Dollars in millions)
<CAPTION>
Six Months Ended
June 30,
----------------
1998 1997
---- ----
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Operating Activities:
Income from continuing operations $ 453 $ 456
Add income taxes - continuing operations 213 186
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Income from continuing operations before income taxes 666 642
Adjustments to reconcile to Cash Used in Continuing Operations:
Income tax refunds (payments) 55 (72)
Items that did not use (provide) cash:
Depreciation and amortization 288 227
Restructuring expense (income) (35)
Acquired in-process research and development expense 173
Other 68 4
Working capital changes that provided (used) cash:
Accounts receivable (1,337) (907)
Inventories 23 101
Accounts payable and accrued liabilities (18) (260)
Other (134) (155)
Pharmaceutical licensing and product rights sales 207
Other items (69) (68)
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Cash Used in Continuing Operations (286) (315)
Cash Used in Discontinued Operations (23)
---------- --------
Total Cash Used in Operations (286) (338)
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Investing Activities:
Property, plant and equipment purchases (377) (273)
Acquisition of seed companies (68) (245)
Acquisition and investment payments (60) (338)
Investment and property disposal proceeds 126 16
Discontinued Operations (33)
---------- -----------
Cash Used in Investing Activities (379) (873)
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Financing Activities:
Net change in short-term financing 438 1,367
Long-term debt proceeds 223 8
Long-term debt reductions (68) (61)
Dividend payments (36) (182)
Common stock issued under employee stock plans 96 89
-------- ---------
Cash Provided by Financing Activities 653 1,221
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Increase (Decrease) in Cash and Cash Equivalents (12) 10
Cash and Cash Equivalents:
Beginning of year 134 166
------- --------
End of period $ 122 $ 176
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</TABLE>
The effect of exchange rate changes on cash and cash equivalents was not
material.
3
<PAGE>
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. 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. In the
transaction, AHP shareowners will retain their shares and Monsanto
shareowners will receive 1.15 shares in the new combined company for
each share of Monsanto common stock that the Monsanto shareowners own
on the date the transaction is consummated. The transaction is subject
to, among other things, approval by both companies' shareowners, normal
governmental reviews and other customary conditions. The merger is
intended to qualify as a tax-free reorganization and to be accounted
for on a pooling of interests basis.
2. 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 June 29, 1998, Monsanto announced that it had signed a definitive
agreement to acquire 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. This transaction is
subject to regulatory approvals and other customary conditions.
4
<PAGE>
On July 16, 1998, Monsanto acquired Plant Breeding International
Cambridge Limited ("PBIC") for a purchase price of approximately $525
million.
The DEKALB, Cargill and PBIC acquisitions will be accounted for under
the purchase method of accounting. Monsanto expects to recognize pretax
charges, currently estimated to be between $800 million and $1 billion,
for the write-off of acquired in-process research and development
associated with these acquisitions. These charges will be recognized in
the periods the transactions close. In addition, Monsanto expects to
recognize incremental amortization expense, currently estimated to
average between $150 million and $200 million aftertax annually, from
goodwill and other intangible assets. The goodwill and other intangible
assets 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. Monsanto
currently plans to finance these acquisitions initially with a
combination of cash and debt.
On May 11, 1998, Monsanto announced that it had entered into a
definitive agreement with Delta and Pine Land Company ("Delta and Pine
Land"), pursuant to which Delta and Pine Land would be merged with and
into Monsanto, with Monsanto surviving. Under terms of the agreement,
Delta and Pine Land shareowners would be entitled to receive 0.8625
shares of Monsanto's common stock in exchange for each share of Delta
and Pine Land they hold. Approximately 33 million shares of Monsanto
common stock are expected to be issued to Delta and Pine Land
shareowners. The merger is expected to be accounted for as a pooling of
interests, and is subject to regulatory approvals, shareowner consent
and other customary conditions.
On May 14, 1998, Monsanto announced that it had signed a letter of
intent with Cargill Inc. to form a worldwide joint venture to create
and market new products enhanced through biotechnology for the grain
processing and animal feed markets. As of the filing date of this Form
10-Q, the details of the agreement had not been finalized.
5
<PAGE>
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 six months ended June 30, 1998 and 1997 was:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 257 $ 324 $ 453 $ 598
Other comprehensive loss (41) (17) (44) (105)
--------- ------- -------- --------
Total comprehensive income $ 216 $ 307 $ 409 $ 493
----- ----- ----- -----
</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. Basic earnings per share (EPS) from continuing operations were computed
using the weighted average number of common shares outstanding each
period (599.0 million in 1998 and 587.0 million in 1997). Diluted EPS
from continuing operations were computed taking into account the effect
of dilutive potential common shares (25.3 million in 1998 and 19.5
million in 1997). Dilutive potential common shares consist of
outstanding stock options. As of June 30, 1998, options to purchase
approximately 25 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 from 2006 through
2008.
6
<PAGE>
6. Components of inventories at June 30, 1998 and December 31, 1997 were
as follows:
June 30, December 31,
1998 1997
---- ----
Finished goods $ 676 $ 762
Goods in process 282 265
Raw materials and supplies 439 390
-------- -------
Inventories, at FIFO cost 1,397 1,417
Excess of FIFO over LIFO cost (41) (43)
-------- -------
Total $1,356 $1,374
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7. 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.
8. Segment data for the three months and six months ended June 30, 1998
and 1997 were as follows:
<TABLE>
Three Months Ended June 30,
1998 1997
------------------- --------------------
Net Operating Net Operating
Sales Income (Loss) Sales Income (Loss)
----- ------------- ----- -------------
<S> <C> <C> <C> <C>
Segment:
Agricultural Products $ 1,333 $ 435 $ 1,063 $ 387
Nutrition and Consumer Products 448 84 409 9
Pharmaceuticals 592 30 513 14
Corporate and Other 97 (117) 110 (47)
----------- -------- ----------- -------
Total $ 2,470 $ 432 $ 2,095 $ 363
------- ----- ------- -----
<CAPTION>
Six Months Ended June 30,
1998 1997
------------------- --------------------
Net Operating Net Operating
Sales Income (Loss) Sales Income (Loss)
----- ------------- ----- -------------
<S> <C> <C> <C> <C>
Segment:
Agricultural Products $ 2,375 $ 726 $ 1,931 $ 563
Nutrition and Consumer Products 830 157 806 102
Pharmaceuticals 1,113 53 1,028 70
Corporate and Other 196 (152) 205 (74)
----------- -------- ----------- -------
Total $ 4,514 $ 784 $ 3,970 $ 661
------- ----- ------- -----
</TABLE>
7
<PAGE>
Financial information for the first six months of 1998 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.
9. 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 June 30, 1999. At June 30, 1998, commercial paper of $1,000
million was classified as long-term debt.
10. 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 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 and other unusual items were recorded in
the Statement of Consolidated Income in the following categories:
Three and Six Months Ended
June 30, 1998
-------------
Cost of Goods Sold $ 44
Amortization of Intangible Assets 24
Restructuring Expense (Income) (35)
-------
Decrease in Operating Income 33
Other (Income) - Net (20)
-------
Total decrease in Income from
Continuing Operations Before Taxes $ 13
-----
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Note 8 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 Notes 1 and 2 of the Notes to Financial Statements for a discussion of major
transactions that were entered into or were completed during the six months
ended June 30, 1998.
Results of Operations--Second Quarter 1998 Compared with Second Quarter 1997
Net income and income from continuing operations totaled $257 million, or $0.41
per share, in the second quarter of 1998 compared with net income of $324
million, or $0.54 per share, and income from continuing operations of $250
million, or $0.41 per share, for the second quarter of 1997. However, results
8
<PAGE>
for both years included unusual items. Net income and income from continuing
operations for the second quarter 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. Prior-year income from
continuing operations included an aftertax charge of $72 million, or $0.11 per
share, for the write-off of in-process research and development ("R&D") related
to the acquisition of the remaining shares of Calgene Inc. ("Calgene") that
Monsanto did not already own. Excluding the unusual items in 1998 and 1997,
income from continuing operations would have totaled $270 million, or $0.43 per
share, in 1998, versus $322 million, or $0.52 per share, in 1997, a decrease of
$52 million, or $0.09 per share. The decrease was primarily attributable to
increases in operating expenses and interest costs, partially offset by the
effect of higher sales. Quarterly sales grew $375 million, or 18 percent, with
increases in all three key segments. Selling, general and administrative
("SG&A") and technological expenses rose in the second 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 write-off of goodwill related
to the company's exit from the optical products business. The increase in
interest expense in quarter-to-quarter comparisons was caused by a greater
amount of debt outstanding during the second quarter of 1998 versus the
comparable prior-year quarter. The decrease in other income was principally
caused by an increase in exchange losses primarily stemming from southeast Asia
and a decline in income from equity affiliates, partially offset by the gain on
the sale of the Orcolite(R) business.
Net sales for the Agricultural Products segment totaled $1,333 million in the
second quarter of 1998, surpassing sales in the second quarter of last year by
$270 million, or 25 percent. The increase in net sales was fueled by higher
worldwide sales volumes for the family of Roundup(R) herbicides, especially in
the United States, Latin America, Europe and Australia/New Zealand, and
reflected increased use of Roundup(R) herbicide in conservation tillage
applications and with Roundup Ready(R) crops. Weather, particularly in the
United States, contributed to the quarterly increase in Roundup(R) sales volumes
by causing a shift in a portion of sales from the first quarter to the second
quarter. Lower sales volumes in southeast Asia due to adverse economic and
weather conditions slightly offset the sales volume increases in other world
areas. Operating income for the Agricultural Products segment increased $48
million, or 12 percent, in the second quarter of 1998. However, operating income
for the second quarter of 1997 included $21 million of pretax charges for the
write-off of in-process R&D related to the acquisition of Calgene. If these
charges were excluded, operating income would have increased $27 million, or 7
percent, in quarter-to-quarter comparisons, as the effect of higher sales was
partially 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 due to
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.
9
<PAGE>
Quarterly net sales for the Nutrition and Consumer Products segment grew $39
million, or 10 percent, from sales in the comparable year-ago quarter primarily
because of higher sales of lawn-and-garden products and sweeteners. Sales of
lawn-and-garden products increased, led by higher sales of Roundup(R) herbicide
for residential use, primarily due to favorable weather, particularly in the
United States, and increased market share. Sales of bulk aspartame, which
includes NutraSweet(R) sweetener, rose primarily because of increased sales
volumes. Operating income for the Nutrition and Consumer Products segment in the
second quarter of 1998 rose significantly versus operating income in the
comparable 1997 period. However, operating income for the prior-year quarter
included $51 million of pretax charges for the write-off of in-process R&D
related to the acquisition of Calgene. Excluding these charges, operating income
would have increased $24 million, or 40 percent, in quarter-to-quarter
comparisons primarily because of the aforementioned increases in sales of higher
margin products.
Net sales for Pharmaceuticals totaled $592 million for the second quarter of
1998, a 15 percent increase over net sales in the comparable 1997 quarter. This
increase reflected strong sales growth for Arthrotec(R) arthritis treatment and
Ambien(R) short-term treatment for insomnia. Sales of Arthrotec(R), which was
launched in the United States in 1998, more than tripled compared with year-ago
sales. Ambien(R), with sales growth of 24 percent in quarter-to-quarter
comparisons, continued to be the leader in the U.S. sleep-aid market. Operating
income for the Pharmaceuticals segment totaled $30 million in the second quarter
of 1998 compared with operating income of $14 million in the prior-year second
quarter. However, operating income for the three months ended June 30, 1998
included a $35 million gain from the reversal of past restructuring reserves
(see Note 10 of the Notes to Financial Statements). Excluding this gain, the
segment would have had an operating loss of $5 million for the second quarter of
1998, as increased expenses more than offset the aforementioned increase in net
sales. Selling 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 in the second quarter of 1998 in anticipation of the
launch of new products from the strong pharmaceutical pipeline. Technological
expenses grew as six new product candidates continued to move through the final,
more expensive stages of the research and development approval process.
10
<PAGE>
The Corporate and Other segment recorded second-quarter operating losses of $117
million in 1998 and $47 million in 1997. The increased operating loss in
quarter-to-quarter comparisons primarily resulted from charges related to the
company's exit from the optical products business.
Results of Operations--First Six Months of 1998 Compared with First Six Months
of 1997
Net income and income from continuing operations totaled $453 million, or $0.73
per share, for the first six months of 1998 compared with net income of $598
million, or $0.99 per share, and income from continuing operations of $456
million, or $0.75 per share, for the first six months of 1997. However, results
for both years included unusual items. Net income and income from continuing
operations for the first half 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. Prior-year income from
continuing operations included an aftertax charge of $135 million, or $0.22 per
share, for the write-off of in-process R&D related to the acquisitions of Asgrow
Agronomics seed company ("Asgrow") and Calgene. Excluding the unusual items in
1998 and 1997, income from continuing operations would have totaled $466
million, or $0.75 per share, in 1998, versus $591 million, or $0.97 per share,
in 1997, a decrease of $125 million, or $0.22 per share. The decrease was
primarily attributable to increases in operating expenses and interest costs,
which more than offset the increase in sales. Year-to-date sales grew $544
million, or 14 percent, with increases in all three key segments. SG&A and
technological expenses rose in the first six months of 1998 compared with
expenses in the year-ago period, 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 write-off of goodwill related
to the company's exit from the optical products business. The increase in
year-to-date interest expense was caused by a greater amount of debt outstanding
during the first half of 1998 versus the comparable prior-year period. The
decline in other income was principally caused by decreased income from equity
affiliates and higher exchange losses primarily stemming from southeast Asia,
particularly Indonesia. These decreases were partially offset by the gain on the
sale of the Orcolite(R) business.
Net sales for the Agricultural Products segment increased $444 million, or 23
percent, in the first six months of 1998 versus the comparable prior-year
period, primarily because of very strong sales for the family of Roundup(R)
herbicides. The significant increase in sales volumes in the first six months of
1998 was primarily driven by increased use of Roundup(R) herbicide in
conservation tillage applications and with Roundup Ready(R) crops. Sales volumes
rose in most world areas, especially North America, Latin America, Australia/New
Zealand, Europe and China. These sales volume increases were slightly offset by
lower overall average prices of Roundup(R) herbicide and lower sales of
Roundup(R) herbicide in southeast Asia. Sales volumes and prices were lower in
Southeast Asia due to the decline in certain southeast Asia economies and
adverse weather conditions in those areas. Higher licensing revenues from crops
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developed through biotechnology, principally Roundup Ready(R) soybeans, also
contributed to the increase in sales for the Agricultural Products segment. In
addition, segment sales benefited from the inclusion of sales from seed
companies Monsanto acquired during 1997. Operating income for the Agricultural
Products segment increased $163 million, or 29 percent, in the first half of
1998. However, operating income for the first six months of 1997 included $122
million of pretax charges for the write-off of in-process R&D related to the
acquisitions of Asgrow and Calgene. If these charges were excluded, operating
income would have increased $41 million, or 6 percent, in period-to-period
comparisons, as the effect of higher sales was partially 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 $24
million, or 3 percent, from sales in the first half of 1997 primarily because of
increased sweetener sales. Sales of bulk aspartame, which includes NutraSweet(R)
sweetener, rose due to higher sales volumes. Sales of tabletop sweeteners also
grew, led by higher sales of Equal(R) sweetener, due to increased sales volumes
and prices. Operating income for the Nutrition and Consumer Products segment in
the first half of 1998 increased $55 million compared with the first six months
of 1997. However, operating income for the first half of 1997 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 $4 million, or 3 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.
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Net sales for Pharmaceuticals grew $85 million, or 8 percent, in the first six
months of 1998 over sales in the first half of 1997. Net sales for the 1998
period included partnering revenues of $100 million related to an alliance for
the co-promotion of Celebra(TM), a new arthritis treatment currently under
development. In addition, year-to-date segment sales reflect a significant
increase in sales volumes of Arthrotec(R) arthritis treatment, primarily because
of January 1998 launches in the United States and France. The increases in
partnering revenues and in sales of Arthrotec(R) were partially offset by lower
sales volumes of other products, principally verapamil calcium channel blockers
and Cytotec(R) ulcer-preventive medication. Year-to-date operating income for
the Pharmaceuticals segment totaled $53 million compared with income of $70
million in the year-ago period. However, operating income for the six months
ended June 30, 1998 included a $35 million gain from the reversal of past
restructuring reserves (see Note 10 of the Notes to Financial Statements).
Excluding this gain, year-to-date 1998 operating income would have totaled $18
million, a $52 million, or 74 percent, decline from year-to-date 1997 income, as
increased expenses more than offset the growth in sales. Selling 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 in the first half of 1998 in anticipation of the launch of new products
from the strong pharmaceutical pipeline. Technological expenses grew as six new
product candidates continued to move through the final, more expensive stages of
the research and development approval process.
The Corporate and Other segment recorded year-to-date operating losses of $152
million in 1998 and $74 million in 1997. The increased operating loss in
period-to-period comparisons primarily resulted from charges related to the
company's exit from the optical products business.
Changes in Financial Condition - June 30, 1998 Compared with December 31, 1997
Working capital at June 30, 1998 increased to $1,599 million from $727 million
at December 31, 1997, primarily because of a seasonal increase in Agricultural
Products' trade receivables. The current ratio was 1.4 at June 30, 1998 and 1.2
at year-end 1997. The percent of total debt to total capitalization was 48
percent at June 30, 1998 compared with 47 percent at December 31, 1997. 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 June 30, 1999.
Operating activities used a net $286 million of cash in the first six months of
1998, compared with $315 million of net cash used in continuing operations in
1997. The decrease in cash used in continuing operations resulted primarily from
the collection in the first half of 1998 of miscellaneous receivables related to
1997 Pharmaceutical licensing and product rights sales. In addition, cash used
in continuing operations for the prior-year six-month period included higher
employee incentive payouts for the final payment of a three-year incentive plan.
These positive effects on cash used in continuing operations for the first six
months of 1998 compared with the first six months of 1997 were partially offset
by an increase in accounts receivable and a net decrease in non-cash expenses
reflected in net income, primarily related to the acquired in-process research
and development write-offs in the first half of 1997. Year-to-date 1998
investing activities used $379 million compared with $873 million in the
comparable prior-year period. Investing activities for the 1997 period included
the purchases of Asgrow and Calgene. Financing activities 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 June 30,
1998, due 2003.
During the first six months of 1998, Monsanto entered into agreements to acquire
the remaining shares of DEKALB Genetics Corporation ("DEKALB") for approximately
$2.3 billion and certain international seed operations of Cargill Incorporated
("Cargill") for approximately $1.4 billion. Also, on July 16, 1998, Monsanto
acquired Plant Breeding International Cambridge Limited ("PBIC") for a purchase
price of approximately $525 million. See Note 2 of the Notes to Financial
Statements for further discussion. Monsanto currently plans to finance these
acquisitions initially with a combination of cash and debt. Therefore, the
amount of debt outstanding could increase if these acquisitions are consummated.
Also during the first half of 1998, Monsanto announced that it had entered into
a merger agreement with Delta and Pine Land Company ("Delta and Pine Land"). See
Note 2 of the Notes to Financial Statements for further discussion.
Approximately 33 million shares of Monsanto common stock are expected to be
issued to Delta and Pine Land shareowners which would result in an increase in
the number of Monsanto common shares outstanding.
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On June 16, 1998, Monsanto announced that it had rescinded and terminated its
existing share repurchase program as a result of the merger agreement with
American Home Products Corporation.
Outlook for Agricultural Products - Update
Monsanto announced several strategic transactions involving agricultural seed
companies in the first six months of 1998. See Note 2 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.
In the third quarter of 1998, Monsanto will record $60 million of revenues for a
mileston payment related to an alliance for the co-promotion of Celebra(TM), a
new arthritis treatment currently under development. If the U.S. Food and Drug
Administration accepts Monsanto's New Drug Application submission for
Celebra(TM), Monsanto will receive an additional milestone payment of $80
million.
Year 2000 Update
Beginning in late 1996, Monsanto initiated the Global Year 2000 program to
ensure its infrastructure and information systems comply with the systems
requirements for the year 2000. The program includes the following phases:
identifying systems that need to be replaced or fixed; assessing the extent of
the work required; prioritizing the work; and successfully completing the
associated action plans. In higher risk areas, the company also has developed
contingency action plans. Monsanto has essentially completed the first three
phases of the program and is now primarily in the implementation phase. Some
additional identification and assessment continues for recent acquisitions and
in the area of embedded systems. The majority of systems, including all business
critical systems, are expected to comply with year 2000 requirements by the
first quarter of 1999. The company continues to evaluate the estimated costs
associated with year 2000 compliance based on actual experience. While the year
2000 efforts involve additional costs, Monsanto believes, based on available
information, that it will be able to manage its year 2000 transition without any
material adverse effect on its business operations, financial position,
profitability or liquidity.
Monsanto also has contacted its major suppliers to assess their preparations for
the year 2000. Similar contacts also are planned for major customers. These
actions are taken to help mitigate the possible external impact of Year 2000
issues. Even so, it is impossible to fully assess the potential consequences if
service interruptions occur from suppliers or in such infrastructure areas as
utilities, communications, transportation, banking and government. Monsanto is
developing business continuity plans to minimize the impact of such external
events.
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").
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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 June 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 June 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;
$1,446 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 $129 million of
short-term, fixed-rate debt with an average interest rate of 8.0 percent, due
1998 through 1999. The fair value of these instruments approximated their book
values at June 30, 1998. The total $1,100 million of long-term, variable-rate
debt outstanding at June 30, 1998 included $1,000 million of commercial paper
that is assumed to be renewed through 2001, when Monsanto's credit facility
expires.
The table of significant currency exchange rate risk sensitive instruments that
appeared in the 1997 Annual Report and Form 10-K included the following forward
contracts with expected 1998 maturities: the purchase of Belgian francs with a
notional amount of $103 million, a fair value of $101 million, and an average
exchange rate of 36.09 Belgian franc per U.S. dollar; the purchase of British
pounds with a notional amount of $87 million, a fair value of $85 million, and
an average exchange rate of 0.589 British pound per U.S. dollar; the sale of
Brazilian real with a notional amount and fair value of $50 million and an
average exchange rate of 1.152 Brazilian real per U.S. dollar; the sale of
Canadian dollars with a notional amount of $27 million, a fair value of $26
million, and an average exchange rate of 1.402 Canadian dollars franc per U.S.
dollar; and the sale of Australian dollars with a notional amount of $19
million, a fair value of $18 million, and an average exchange rate of 1.460
Australian dollars per U.S. dollar. At June 30, 1998, the following significant
forward contracts were outstanding (all with 1998 maturities): the purchase of
German marks with a notional amount of $80 million and an average exchange rate
of 1.800 German marks per U.S. dollar; the purchase of British pounds with a
notional amount of $74 million and an average exchange rate of 0.606 British
pounds per U.S. dollar; the sale of Australian dollars with a notional amount of
$57 million and an average exchange rate of 1.667 Australian dollars per U.S.
dollar; the sale of Canadian dollars with a notional amount of $55 million and
an average exchange rate of 1.467 Canadian dollars per U.S. dollar; and the sale
of Brazilian real with a notional amount of $38 million and an average exchange
rate of 1.181 Brazilian real per U.S. dollar. At June 30, 1998, Monsanto also
had forward contracts maturing in 1999 for the sale of Brazilian real with a
notional amount of $39 million and an average exchange rate of 1.242 Brazilian
real per U.S. dollar. The fair market values of these contracts approximated the
notional amounts at June 30, 1998.
The table of significant commodity price risk sensitive instruments that
appeared in the 1997 Annual Report and Form 10-K included contracts for corn
futures totaling $6 million (2.1 million bushels at a weighted average price per
bushel of $2.90) and contracts for soybean futures totaling $62 million (8.9
million bushels at a weighted average price per bushel of $6.96). At June 30,
1998, the amount of corn futures contracts outstanding was not material. At June
30, 1998, the amount of soybean futures contracts totaled $124 million (20.0
million bushels at a weighted average price per bushel of $6.20); the fair
market value of the soybean futures contracts approximated the contract amount.
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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.
Following the announcement of the merger agreement between Monsanto and American
Home Products Corporation ("AHP"), six alleged holders of Monsanto common stock
filed suits in the Delaware Court of Chancery in and for New Castle County (the
"Delaware Actions") against Monsanto, members of the Monsanto Board of Directors
(the "Monsanto Board") and AHP. Seeking to represent a purported class of
Monsanto shareowners, plaintiffs in each of the Delaware Actions allege that the
consideration to be received by holders of Monsanto common stock in the merger
is unfair and inadequate, that the members of the Monsanto Board have breached
their fiduciary duties by approving the merger, and that AHP has aided and
abetted such breaches. Plaintiffs in each of the Delaware Actions seek judgment
declaring that each Delaware Action is maintainable as a class action,
preliminarily and permanently enjoining consummation of the merger or rescinding
the merger in the event that it is consummated, awarding unspecified
compensatory damages against defendants, and awarding plaintiffs their
attorneys' fees and expenses. On July 10, 1998, the Delaware Court of Chancery
signed an order consolidating the Delaware Actions for all purposes and
directing that defendants need only respond to the first-filed Delaware Action.
Monsanto and the members of the Monsanto Board answered the complaint in such
Delaware Action on July 10, 1998, denying all allegations of wrongdoing and
asserting various affirmative defenses. A seventh alleged holder of Monsanto
common stock has filed a purported class action against Monsanto and members of
the Monsanto Board in the Missouri Circuit Court for St. Louis County (the
"Missouri Action"). Both the claims pleaded and the relief sought in the
Missouri Action are substantially similar to the claims and relief sought in
each of the Delaware Actions. On July 13, 1998, Monsanto and the members of the
Monsanto Board answered the plaintiff's petition in the Missouri Action by
denying all allegations of wrongdoing and asserting various affirmative
defenses. In addition, Monsanto and the Monsanto Board have moved to dismiss the
Missouri Action on the grounds of forum non conveniens or, in the alternative,
to stay the Missouri Action pending final resolution of the Delaware Actions.
Monsanto and the Monsanto Board believe that the Delaware Actions and the
Missouri Action are without merit and intend to vigorously defend against such
actions.
Following the announcement on May 11, 1998, of the merger agreement between
Monsanto and Delta and Pine Land Company ("Delta and Pine Land"), five alleged
holders of Delta and Pine Land common stock filed suits, now consolidated (the
"Delta and Pine Land Suit"), in the Delaware Court of Chancery in and for New
Castle County against Monsanto, Delta and Pine Land, and members of the Delta
and Pine Land Board of Directors (the "Delta and Pine Land Board"). Seeking to
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represent a purported class of Delta and Pine Land shareowners, plaintiffs in
the Delta and Pine Land Suit allege that the consideration to be received by
holders of Delta and Pine Land common stock in the merger is unfair and
inadequate, that the members of the Delta and Pine Land Board have breached
their fiduciary duties by approving the transaction and that Monsanto has aided
and abetted such breaches. Plaintiffs in the Delta and Pine Land 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 believes that the Delta and Pine Land
Suit is without merit and intends to vigorously defend against the action.
On July 30, 1998, Monsanto was served with a lawsuit filed in United States
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 believes that its activities have been lawful
and that the allegations are without merit. Monsanto intends to vigorously
defend itself against the action and to oppose the requests for declaratory
judgment.
As described in the Company's Report on Form 10-Q for the quarter ended March
31, 1998, in June 1996, Mycogen Corporation, Agrigenetics Inc. and Mycogen
Plant Sciences, Inc. 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. A jury verdict against Monsanto on March 20, 1998, resulted in a
judgment award of $174.9 million. On June 3, 1998, Monsanto filed its notice of
appeal from the judgment. The matter is now pending before the California Court
of Appeal for the Fourth Appellate District. 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.
Monsanto will continue to litigate vigorously its position on appeal.
As described in the Company's Report on Form 10-K for the year ended December
31, 1997, and its Report on Form 10-Q for the quarter ended March 31, 1998, on
March 19, 1996, the Company was issued U.S. Patent No. 5,500,365, a narrow
invention pertaining to a region of the Bt gene useful to produce
insect-resistant plants. That same day, the Company filed suit in the U.S.
District Court in Delaware seeking damages and injunctive relief against Mycogen
Plant Science, Inc., Agrigenetics, Inc. and Ciba-Giegy Corporation (Seed
Division) (now Novartis Seeds Inc.) for infringement of that patent. Trial in
this case ended June 30, 1998, with a jury verdict that while the patent was
literally infringed by defendants the patent was not enforceable due to a
finding of prior invention (now owned by Monsanto) by another party, and not
infringed due to the defense of the reverse doctrine of equivalents. Monsanto
has filed a motion for judgment as a matter of law to overturn the jury verdict
and will continue to litigate vigorously its position in the matter.
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In 1997 the Company commercially introduced corn containing a gene providing
glyphosate resistance. Monsanto is a leader in this scientific field and has
engaged in such research and biotechnology development over many years and owns
a number of present and pending patents which relate to this technology. As
described in the Company's Report on Form 10-K for the year ended December 31,
1997, on November 20, 1997, Rhone Poulenc Agrochimie, S.A. ("RPA") filed suit in
U.S. District Court in North Carolina (Charlotte) against the Company and DEKALB
Genetics Corporation ("DEKALB")contending that they did not have a right to
license, make or sell corn products using RPA technology for glyphosate
resistance. DEKALB has sublicensed to Monsanto certain technology previously
licensed by RPA. Trial in this matter is set for April 4, 1999. The Company has
meritorious defenses to the allegations and is vigorously defending the
litigation.
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
Report on Form 10-Q for the quarter ended March 31, 1998.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
At the Company's Annual Meeting of Shareowners on April 24, 1998, three matters
were submitted to a vote of shareowners.
l. The following directors were elected, each to hold office until the
Annual Meeting to be held in 2001 or until a successor is elected and has
qualified or until his or her earlier death, resignation or removal. Votes were
cast as follows:
Votes
Votes "Withhold
Name "For" Authority"
- ---- ----- ----------
Philip Leder 508,801,922 9,688,156
John E. Robson 501,289,506 17,200,572
William D. Ruckelshaus 508,348,278 10,141,800
The following directors are continuing current terms expiring at the 1999 Annual
Meeting: Robert B. Shapiro, Robert M. Heyssel, and Jacobus F. M. Peters. The
following directors are continuing current terms expiring at the 2000 Annual
Meeting: Michael Kantor, Gwendolyn S. King, and John S. Reed.
2. The appointment by the Board of Directors of Deloitte & Touche LLP
as principal independent auditors for the year 1998 was ratified by the
shareowners. A total of 514,481,569 votes were cast in favor of ratification,
2,034,956 votes were cast against it, and 1,973,553 votes were counted as
abstentions.
3. A proposal by a certain shareowner relating to cumulative voting was
submitted to a vote of shareowners. The Board recommended a vote against the
proposal. A total of 102,187,181 votes were cast in favor of this proposal, a
total of 349,215,320 votes were cast against it, 9,517,945 votes were counted as
abstentions, and 57,569,632 votes were counted as broker non-votes.
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Brokers were permitted to vote on the election of directors and ratification of
auditors in the absence of instructions from street-name holders; therefore
broker non-votes did not occur in those matters.
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's in the
best interests of our shareowners to use these provisions in discussing future
events, as we do in this Form 10-Q and other communications. These
forward-looking statements include our plans for growth; the potential for the
development, regulatory approval and public acceptance of new products from our
pipeline; and Other factors that could affect Monsanto's future operations or
financial position.
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 such
forward-looking statements.
Factors that could cause or contribute to such differences include, but aren't
limited to, Monsanto's ability to: generate cash flows or obtain financing to
fund its growth, including research and development; identify new technologies
and commercialize from that research innovative and competitive new products
worldwide; obtain regulatory approvals and gain consumer acceptance of new
products worldwide; secure and defend its intellectual property rights and, when
appropriate, license required technology; manufacture its products competitively
and cost effectively; manage its businesses in the face of adverse weather or
other environmental conditions; respond to challenges in international markets,
including changes in currency exchange rates, political or economic conditions,
and trade and regulatory matters; complete and integrate appropriate
acquisitions, strategic alliances and joint ventures; and manage other factors
as may be discussed in Monsanto's reports filed with the U.S. Securities and
Exchange Commission.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - See the Exhibit Index.
(b) Report on Form 8-K during the quarter ended June 30, 1998:
A Form 8-K as of June 1, 1998, was filed by the Company regarding the
merger of equals transaction between the Company and American Home Products
Corporation.
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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)
/s/ Michael R. Hogan
Date: August 14, 1998 ----------------------------------
Vice President and Controller
(On behalf of the Registrant and
as Principal Accounting Officer)
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EXHIBIT INDEX
Exhibit
Number Description
2 1. Agreement and Plan of Merger, dated as of May 31, 1998, among
American Home Products Corporation, MA Sub., and Monsanto Company
(incorporated herein by reference to Exhibit 2.1 of the Company's Form
8-K filed June 1, 1998)
3 Omitted - Inapplicable
4 First Amendment, dated as of May 31, 1998, to Rights Agreement, dated
as of January 26, 1990 between the Company and First Chicago Trust
Company of New York as successor to The First National Bank of Boston
(incorporated herein by reference to Form 8-A/A filed August 3, 1998)
10 1. First Amendment to the Monsanto Company Non-Employee Director
Deferred Compensation Plan, effective July 1, 1998
2. Form of Monsanto Company Non-Qualified Premium Stock Option
Certificate
11 Omitted - Inapplicable; see Note 5 of Notes to Financial Statements.
15 Omitted - Inapplicable
18 Omitted - Inapplicable
19 Omitted - Inapplicable
22 Omitted - Inapplicable
23 Omitted - Inapplicable
24 Omitted - Inapplicable
27 Financial Data Schedule
99 Computation of the Ratio of Earnings to Fixed Charges for Monsanto
Company and Subsidiaries
Exhibit 10.1
FIRST AMENDMENT TO
THE MONSANTO COMPANY
NON-EMPLOYEE DIRECTOR
DEFERRED COMPENSATION PLAN
The Monsanto Company Non-Employee Director Deferred Compensation Plan (the
"Plan") is hereby amended as set forth below, effective as of July 1, 1998.
(Capitalized terms used and not defined in this Amendment have the meanings
ascribed to them in the Plan.)
1. Notwithstanding any other provision of the Plan, with respect to a
"Change of Control" that occurs as a result of the consummation of the
transactions contemplated by the Agreement and Plan of Merger dated as
of May 31, 1998 among American Home Products Corporation, MA Sub, Inc.
and Monsanto Company, the provisions of Section 11(b) of the Plan
shall not apply with respect to any Electing Participant (as defined
in the next sentence), and if one or more Participants are Electing
Participants, the Plan shall not terminate as a result of such a
"Change of Control." An "Electing Participant" means a Participant who
delivers a written notice, electing to have the foregoing provision of
this Amendment apply to himself or herself, to the Committee no later
than 25 business days after the effective date of this Amendment.
2. Except as provided above in this Amendment, the Plan is in all other
respects ratified and confirmed without amendment.
Exhibit 10.2
FORM OF
MONSANTO COMPANY
NON-QUALIFIED PREMIUM STOCK OPTION CERTIFICATE
(NOT TRANSFERABLE)
MONSANTO COMPANY, a Delaware corporation (the "Company"), pursuant to action of
Monsanto Company's People Committee (the "Committee")
hereby grants to (the "Optionee")
(Employee ID )
as a separate inducement in connection with the Optionee's employment and not in
lieu of any salary or other compensation for the Optionee's services, a
Non-Qualified Premium Stock Option
to purchase from the Company shares of its common stock,
par value $2.00 per share (the "Optioned Shares"), at the prices set forth in
the table below, subject to the provisions of the Monsanto Management Incentive
Plan of 1996 (the "Plan") and to the Terms and Conditions set forth in this
Certificate, which constitute the entire understanding between the Company and
the Optionee with respect to this Option.
Premium Maximum Years to Attain
Percent of Grant Exercise Price* Premium Exercise Price
---------------- --------------- ----------------------
20% $ N/A
30% $ 4
30% $ 5
20% $ 6
Option granted on and this Certificate executed at St. Louis County, Missouri,
as of , 199_ (the "Option Grant Date").
MONSANTO COMPANY
By:_______________________
* A Premium Exercise Price may not be less than the fair market value (as
defined in the Plan) of a share of the Company's common stock on the
Option Grant Date.
<PAGE>
Terms and Conditions of Premium Stock Option
1. Definitions. The terms used herein and not otherwise defined shall have the
meanings set forth in the Plan, as may be amended from time to time.
2. Exercise Rights. The Option shall be exercisable with respect to each
percentage of the Optioned Shares, during the Option term set forth in paragraph
4 and subject to the other terms and conditions hereof, on and after the first
business day next following a period of ten consecutive trading days during
which the Fair Market Value of the Optioned Shares equals or exceeds the Premium
Exercise Price applicable to that percentage of Shares set forth in the table on
the front page of this Certificate; provided, however, that if on the Option
Grant Date the Fair Market Value of the Shares equals or exceeds the Premium
Exercise Price applicable to a percentage of Optioned Shares, then such Optioned
Shares shall be immediately exercisable (without regard to the required ten day
period set forth above) subject to the other terms and conditions hereof.
Notwithstanding the foregoing, in no event shall any Optioned Shares be
exercisable prior to the first anniversary of the Option Grant Date. The Option
may be exercised in full Share lots only as to any and all Optioned Shares which
have become exercisable under the terms of the Option.
3. Premium Exercise Price. The purchase price of the Shares subject to the
Option shall be, with respect to each percentage of the Shares, the Premium
Exercise Price set forth in the table on the front page of this Certificate
applicable to that percentage of the Shares, subject to adjustment as provided
in paragraph 8 hereof and as otherwise provided herein.
4. Option Term. Subject to the provisions of paragraph 5 hereof, the Option term
will expire at the end of the day next preceding ten years from the Option Grant
Date (the "Fixed Termination Date"), or on Termination of Employment of the
Optionee, whichever shall first occur, provided that, if Termination of
Employment occurs on or after the first anniversary of the Option Grant Date,
the provisions regarding exercisability set forth in paragraph 2 hereof shall
continue to apply and the Optionee (or in the event of death as set forth in
paragraph (b) below, the Optionee's legal representative, beneficiary or
transferee pursuant to paragraph 13 hereof) may exercise the Option, to the
extent such Option is exercisable:
(a) within twelve months after Termination of Employment (but no later
than the Fixed Termination Date) if employment shall have been terminated by the
Company and its Subsidiaries, except for cause (as determined by the Committee
in the sole but not unreasonable exercise of its judgment); and
(b) at any time after Termination of Employment (but no later than the
Fixed Termination Date) if employment shall have been terminated by (i) total
and permanent disability (as determined by the Committee in the sole but not
unreasonable exercise of its judgment); (ii) retirement (as determined by the
Committee in the sole but not unreasonable exercise of its judgment); or (iii)
death of the Optionee while employed by the Company and its Subsidiaries; and
(c) within three months after Termination of Employment (but no later
than the Fixed Termination Date) if employment shall have voluntarily been
terminated by the Optionee but only to the extent the Option is exercisable at
Termination of Employment.
<PAGE>
5. Expiration of Option. Notwithstanding the other provisions of the Option, the
Option term will expire in accordance with the following provisions:
(a) if Termination of Employment is for cause, the Option term will in
all cases automatically expire upon Termination of Employment with respect to
all outstanding Optioned Shares; and
(b) if the Fair Market Value of the Shares does not exceed the
applicable Premium Exercise Price for a period of ten consecutive trading days
prior to the expiration of the maximum number of years from the Option Grant
Date to attain the Premium Exercise Price set forth in the table on the front
page of this Certificate, the Option term with respect to the percentage of
Shares to which such unattained Premium Exercise Price applies will in all cases
automatically expire on the anniversary of the Option Grant Date coincident with
the end of the maximum number of years to attain such Premium Exercise Price.
6. Method of Exercise. The Option shall be exercised by (a) written notice given
to the Company, or its designee (at the address specified by the Company from
time to time), signed by the Optionee (or in the event of the Optionee's death,
by the Optionee's legal representative or transferee pursuant to paragraph 13
hereof), specifying the Option Grant Date and the number of Shares as to which
the Option is being exercised, plus (b) payment to the Company in full for the
Shares so specified. Within a reasonable time after exercise of the Option, the
Company shall issue or cause to be issued a stock certificate or certificates to
the Optionee (or in the event of the Optionee's death, to the Optionee's legal
representative or transferee pursuant to paragraph 13 hereof) representing the
Shares in respect of which the Option shall have been exercised and shall pay
all stamp taxes in respect thereof, provided that upon or prior to the issuance
of such certificate or certificates, provision (as specified by the Company from
time to time) shall be made by the Optionee for the payment to the employer of
any and all taxes which it shall be required to withhold, in connection with the
exercise of the Option, by any law or regulation of any government, whether
federal, state or local and whether domestic or foreign. Payment may be made by
delivery of Shares (or other evidence of ownership of Shares satisfactory to the
Company) with a Fair Market Value equal to the Option price as payment.
7. Stockholder Status. The Optionee shall have no rights as a stockholder with
respect to any Optioned Shares unless and until the Optionee shall have become
the holder of record of such Shares and, subject to the provisions of paragraph
8 hereof, no adjustment shall be made for dividends, ordinary or extraordinary
(whether in cash or securities or other property), or other distributions, or
other rights in respect of such Shares as to which the record date is prior to
the date upon which the Optionee shall have become the holder of record thereof.
8. Share and Price Adjustment. In the event of any Share adjustments provided
for in Section 4 of Article 1 of the Plan, the number and class of Shares
subject to the Option (and not theretofore issued or transferred in respect
thereof) and the price per Share shall be adjusted in such manner as the
Committee may in its discretion deem equitable. The Company shall notify the
Optionee of any such adjustment and any such adjustment, or failure to adjust
(whether or not such notice is given), shall be final and binding upon the
Company and the Optionee for all purposes of the Plan.
<PAGE>
9. Change in Control. For purposes of this Option, "Change in Control" means the
occurrence of any of the following events:
(a) The acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of
either (i) the then outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (ii) the combined voting power of the
then outstanding voting securities of the Company entitled to vote generally in
the election of directors (the "Outstanding Company Voting Securities");
provided, however, that, for purposes of this subsection (a), the following
acquisitions shall not constitute a Change of Control: (i) any acquisition
directly from the Company, (ii) any acquisition by the Company, (iii) any
acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the Company or (iv)
any acquisition by any corporation pursuant to a transaction which complies with
clauses (i), (ii) and (iii) of subsection (c) of this Section 9; or
(b) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a majority of the
Board; provided, however, that any individual becoming a director subsequent to
the date hereof whose election, or nomination for election by the Company's
shareholders, was approved by a vote of at least a majority of the directors
then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this
purpose, any such individual whose initial assumption of office occurs as a
result of an actual or threatened election contest with respect to the election
or removal of directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board; or
(c) Consummation by the Company of a reorganization, merger or
consolidation or sale or other disposition of all or substantially all of the
assets of the Company or the acquisition of assets or stock of another
corporation (a "Business Combination"), in each case, unless, following such
Business Combination, (i) all or substantially all of the individuals and
entities who were the beneficial owners, respectively, of the Outstanding
Company Common Stock and Outstanding Company Voting Securities immediately prior
to such Business Combination beneficially own, directly or indirectly, more than
60% of, respectively, the then outstanding shares of common stock and the
combined voting power of the then outstanding voting securities entitled to vote
generally in the election of directors, as the case may be, of the corporation
resulting from such Business Combination (including, without limitation, a
corporation which as a result of such transaction owns the Company or all or
substantially all of the Company's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their ownership,
immediately prior to such Business Combination of the Outstanding Company Common
Stock and Outstanding Company Voting Securities, as the case may be, (ii) no
Person (excluding any corporation resulting from such Business Combination or
any employee benefit plan (or related trust) of the Company or such corporation
resulting from such Business Combination) beneficially owns, directly or
indirectly, 20% or more of, respectively, the then outstanding shares of common
stock of the corporation resulting from such Business Combination or the
combined voting power of the then outstanding voting securities of such
corporation except to the extent that such ownership existed prior to the
Business Combination and (iii) at least a majority of the members of the board
of directors of the corporation resulting from such Business Combination were
members of the Incumbent Board at the time of the execution of the initial
agreement, or of the action of the Board, providing for such Business
Combination; or
<PAGE>
(d) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
Immediately following any Change in Control: (a) all outstanding Optioned Shares
shall immediately become fully exercisable by the Optionee and the purchase
price for such Optioned Shares shall be the Fair Market Value of the Shares on
the Option Grant Date; and (b) the applicable period for exercise as set forth
in subparagraphs (a) through (c) of paragraph 4 hereof shall apply whether or
not the Option has been held for one year from the Option Grant Date.
10. Employment and Termination. Neither the Option nor any provision hereof
shall confer any employment right on the Optionee or affect the right of the
Optionee's employer to terminate the employment of the Optionee at any time,
with or without cause or assigning a reason therefor, and grant of this Option
neither implies nor precludes the grant of a stock option in the future.
11. Option Subject to Law and Regulations. Each exercise of the Option shall be
subject to all requirements as to (a) the listing, registration or qualification
of the Optioned Shares upon any securities exchange on which Shares are listed
or under any applicable federal, state or other law, (b) the consent or approval
of any governmental body determined by the Company to be necessary or desirable
and (c) compliance with any economic stabilization or other government
regulation at the time in effect. Anything herein to the contrary
notwithstanding, the Option may not be exercised, in whole or in part, unless
and until the Company shall have been able to comply with all such requirements
and regulations free of any conditions not acceptable to the Company. As a
condition to the exercise of the Option, either in whole or in part, the
Optionee shall execute such documents and take such action as the Company in its
sole discretion deems necessary or advisable to assist the Company in compliance
with any such requirements, and the Optionee shall comply with all requirements
of any regulatory authority having control of supervision.
12. Fractional Shares. The Company shall not be required to issue any fractional
Shares pursuant to the Plan. The Committee may, at its discretion, provide for
the elimination of fractions or for the settlement thereof in cash.
13. Transferability of Option. The Option is not transferable by the Optionee
otherwise than by will, by the laws of descent and distribution or pursuant to a
written beneficiary designation and shall not be subject, in whole or in part,
to attachment, execution, levy or other similar process. Any attempted
assignment, transfer, pledge, hypothecation or other disposition of the Option
contrary to the provisions hereof, and the levy of any attachment or similar
process upon the Option, shall be null and void and without effect. The Option
shall be exercisable during the lifetime of the Optionee only by the Optionee or
by the guardian or legal representative of the Optionee acting in a fiduciary
capacity on behalf of the Optionee.
14. Amendment of Option for Accounting Changes. In the event the Company's
method of accounting for the Option changes in a manner that the Committee in
its discretion determines is detrimental to the Company, the Committee may
cancel the Option or amend it without the consent of the Optionee.
<PAGE>
15. Governing Law. The validity, interpretation, performance and enforcement of
this Option shall be governed by the laws of the State of Delaware, determined
without regard to its conflict of law provisions (except for the Nonprobate
Transfers Law of Missouri to the extent applicable as determined by the
Committee).
16. Administration. Each and every provision of the Option shall be
administered, construed and interpreted so that the Option shall in all respects
conform to the provisions of the Plan, a copy of which has been delivered to the
Optionee, and any provision that cannot be so administered shall be deemed
appropriately modified, or, if necessary, disregarded. In no event shall this
Option be deemed to be an Incentive Stock Option under Section 422 of the
Internal Revenue Code of 1986, as amended.
<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
SIX MONTHS ENDED JUNE 30, 1998, AND THE STATEMENT OF CONSOLIDATED FINANCIAL
POSITION AS OF JUNE 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 122
<SECURITIES> 0
<RECEIVABLES> 3,143
<ALLOWANCES> 0
<INVENTORY> 1,356
<CURRENT-ASSETS> 5,586
<PP&E> 4,959
<DEPRECIATION> 2,397
<TOTAL-ASSETS> 12,310
<CURRENT-LIABILITIES> 3,987
<BONDS> 2,510
0
0
<COMMON> 1,644
<OTHER-SE> 2,980
<TOTAL-LIABILITY-AND-EQUITY> 12,310
<SALES> 4,514
<TOTAL-REVENUES> 4,514
<CGS> 1,854
<TOTAL-COSTS> 1,854
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 142
<INCOME-PRETAX> 666
<INCOME-TAX> 213
<INCOME-CONTINUING> 453
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 453
<EPS-PRIMARY> 76
<EPS-DILUTED> 73
</TABLE>
EXHIBIT 99
<TABLE>
MONSANTO COMPANY AND SUBSIDIARIES
COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
---------------- ------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1998 1997 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ---- ----
Income from continuing operations
before provision for income taxes $666* $642* $366* $553* $645* $636 $427
Add
Fixed charges 173 103 236 172 178 140 141
Less capitalized interest (5) (8) (14) (9) (5) (4) (7)
Dividends from affiliated companies 1 1 4 6 3 2 5
Less equity income (add equity loss)
of affiliated companies (15) (28) (20) 42 (3) (4) (20)
------- ------- ------- ------ -------- -------- -------
Income as adjusted $820 $710 $572 $764 $818 $770 $546
==== ==== ==== ==== ==== ==== ====
Fixed charges
Interest expense $142 $ 69 $170 $119 $132 $100 $101
Capitalized interest 5 8 14 9 5 4 7
Portion of rents representative
of interest factor 26 26 52 44 41 36 33
----- ----- ------ ------ ------ ------ ------
Fixed charges $173 $103 $236 $172 $178 $140 $141
==== ==== ==== ==== ==== ==== ====
Ratio of earnings to fixed charges 4.74 6.89 2.42 4.44 4.60 5.50 3.87
==== ==== ==== ==== ==== ==== ====
<FN>
* Includes charges for restructuring, acquired in-process research and
development and other unusual items of $13 million and $135 million for the six
months ended June 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 4.82 and 8.20 for the six months ended June 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.
</FN>
</TABLE>
