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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(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, 1999
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, 1999
----- ------------------
COMMON STOCK, $2 PAR VALUE 634,608,378 SHARES
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<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,
1999 and the three months and nine months ended September 30, 1998, the
Statement of Consolidated Financial Position as of September 30, 1999
and December 31, 1998, the Statement of Consolidated Cash Flow for the
nine months ended September 30, 1999 and nine months ended September 30,
1998, 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/A should be read in conjunction with
Monsanto's 1998 amended Annual Report on Form 10-K/A and Quarterly
Reports on Form 10-Q/A for the periods ended March 31, 1999 and June 30,
1999.
Unless otherwise indicated, "Monsanto" and "the company" are used
interchangeably to refer to Monsanto Company or to Monsanto Company and
consolidated subsidiaries, as appropriate to the context. Unless
otherwise indicated, "earnings per share" and "per share" mean diluted
earnings per share. In tables, all dollars are in millions, except per
share data.
Throughout this quarterly filing, "EBITDA (excluding unusual items)" is
net earnings (loss) before income taxes, interest expense, depreciation
expense, amortization expense, and excludes the effects of unusual
items. Net income and income from continuing operations for both the
third quarter and first nine months of 1999 included unusual items
after-tax of $9 million, or $0.01 per share, and $25 million or $0.04
per share, respectively. These unusual items included an after-tax
charge of $49 million principally associated with the accelerated
integration of the agricultural chemical and seed operations offset by a
net after-tax gain of $40 million from the reversal of restructuring
reserves established in 1998, partially offset by the cost to exit the
alginates business. Net income and income from continuing operations for
the third quarter of 1998 included an after-tax 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"). This charge in third
quarter of 1998 was subsequently revised in fourth quarter of 1998, as a
result of clarified guidance on in-process R&D from the United States
Securities and Exchange Commission. Net income and income from
continuing operations for the first nine months of 1998 included an
after-tax charge of $13 million, or $0.02 per share, for the net cost of
exiting the Company's optical products business and an after-tax charge
of $187 million, or $0.30 per share, for the write-off of in-process
R&D, partially offset by a restructuring reserve reversal.
EBITDA (excluding unusual items) may not be directly comparable to
EBITDA performance measures reported by other companies because it
excludes unusual items. Although EBITDA (excluding unusual items) is a
financial performance measure commonly used in the financial community,
it is not a measure of financial performance under accounting principles
generally accepted in the United States. The presentation of EBITDA
(excluding unusual items) in this quarterly report is intended to
supplement investors' understanding of Monsanto's operating performance
and not to replace net income, cash flows, financial position nor
comprehensive income as determined in accordance with accounting
principles generally accepted in the United States. EBITDA (excluding
unusual items) excludes the effects of intangible amortization and
interest expense. For this reason, the increases in these two elements
of the financial statements resulting from the 1998 acquisitions will
not be reflected in EBITDA (excluding unusual items), but will impact
net income in future periods. Investors and other users of the financial
statements should refer to management's discussion and analysis for a
description of events that have impacted EBITDA (excluding unusual
items) and net income during the three months and nine months ended
September 30, 1999 and the three months and nine months ended September
30, 1998.
1
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<PAGE>
<TABLE>
MONSANTO COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME
(Dollars in millions, except per share)
Unaudited
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $1,922 $1,706 $6,804 $5,504
Costs and Expenses:
Cost of Goods Sold 729 623 2,450 2,115
Selling, General and Administrative Expenses 714 517 2,107 1,528
Technological Expenses 339 346 1,008 931
Acquired In-Process Research and Development 189 189
Amortization of Intangible Assets 92 51 259 167
Restructuring Expense (Income) 10 10 (35)
Interest Expense 83 49 287 144
Interest Income (16) (15) (30) (35)
Other Expense - Net 14 24 13 6
------ ------ ------ ------
Income (Loss) from Continuing Operations Before
Income Taxes (43) (78) 700 494
Income Tax Expense (Benefit) (53) 33 243 215
------ ------ ------ ------
Net Income (Loss) from Continuing Operations 10 (111) 457 279
Before Change in Accounting Principle
Income from Discontinued Operations, Net of taxes of
$15, $3, $30, and $35 million, respectively 27 11 57 74
Gain on Sale of Discontinued Operations, Net of taxes of
$4 million 12 12
------ ------ ------ ------
Income (Loss) before Cumulative Effect of Accounting Change 49 (100) 526 353
Cumulative Effect of a Change in Accounting Principle,
Net of taxes of $12 million (20)
------ ------ ------ ------
Net Income (Loss) $ 49 $ (100) $ 506 $ 353
====== ====== ====== ======
Basic Earnings (Loss) per Share:
Continuing Operations $ 0.02 $(0.18) $ 0.72 $ 0.47
Discontinued Operations 0.04 0.01 0.09 0.12
Gain on Sale of Discontinued Operations 0.02 0.02
Cumulative Effect of Accounting Change (0.03)
------ ------ ------ ------
Net Income (Loss) $ 0.08 $(0.17) $ 0.80 $ 0.59
Diluted Earnings (Loss) per Share:
Continuing Operations $ 0.02 $(0.18) $ 0.70 $ 0.45
Discontinued Operations 0.04 0.01 0.09 0.11
Gain on Sale of Discontinued Operations 0.02 (0.02)
Cumulative effect of Accounting Change (0.03)
------ ------ ------ ------
Net Income (Loss) $ 0.08 $(0.17) $ 0.78 $ 0.56
------ ------ ------ ------
Dividends per Share $ 0.03 $ 0.03 $ 0.09 $ 0.09
------ ------ ------ ------
The accompanying notes are an integral part of the financial statements.
</TABLE>
2
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<PAGE>
<TABLE>
MONSANTO COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(Dollars in millions, except per share)
Unaudited
<CAPTION>
September 30, December 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 84 $ 89
Receivables, net of allowances of $150 in 1999 and $87 in 1998 2,791 2,119
Miscellaneous receivables and prepaid expenses 659 777
Deferred income tax benefit 515 488
Inventories 1,598 1,722
------- -------
Total Current Assets 5,647 5,195
------- -------
Property, Plant and Equipment 5,438 5,185
Less Accumulated Depreciation 2,388 2,320
------- -------
Net Property, Plant and Equipment 3,050 2,865
------- -------
Intangible Assets, net of accumulated amortization 4,645 5,281
Other Assets 1,055 1,120
Net Assets of Discontinued Operations 1,586 1,924
------- -------
Total Assets $15,983 $16,385
======= =======
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities:
Accounts payable $ 472 $ 823
Accrued liabilities 2,168 1,888
Short-term debt 915 1,069
------- -------
Total Current Liabilities 3,555 3,780
------- -------
Long-Term Debt 5,961 6,259
Postretirement Liabilities 858 848
Other Liabilities 366 512
Shareowners' Equity:
Common stock (authorized: 1,000,000,000 shares, par value $2)
Issued: 846,927,220 shares in 1999 and 1998 1,694 1,694
Additional contributed capital 1,467 1,389
Treasury stock, at cost (212,318,842 shares in 1999
and 217,632,240 shares in 1998) (2,449) (2,508)
Reinvested earnings 5,101 4,652
Reserve for ESOP debt retirement (91) (106)
Accumulated other comprehensive loss (479) (135)
------- -------
Total Shareowners' Equity 5,243 4,986
------- -------
Total Liabilities and Shareowners' Equity $15,983 $16,385
======= =======
The accompanying notes are an integral part of the financial statements.
</TABLE>
3
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<PAGE>
<TABLE>
MONSANTO COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOW
(Dollars in millions)
Unaudited
<CAPTION>
Nine Months Ended
September 30,
-----------------
1999 1998
---- ----
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Operating Activities:
Income from continuing operations $ 457 $ 279
Add income taxes - continuing operations 243 215
----- -------
Income from continuing operations before income taxes 700 494
Adjustments to reconcile to Cash Provided (Used) in Continuing Operations:
Income tax refunds (payments) (57) 135
Items that did not use (provide) cash:
Depreciation and amortization 521 365
Restructuring expense (income) 10 (35)
Acquired in-process research and development expense 189
Bad debt expense and other 53 67
Working capital changes that provided (used) cash:
Accounts receivable (670) (975)
Inventories 39 (78)
Accounts payable and accrued liabilities (146) (41)
Other 37 (312)
Pharmaceutical licensing and product rights sales 225
Other items 22 27
----- -------
Cash Provided by Continuing Operations 509 61
Cash Provided by (Used in) Discontinued Operations (144) 155
----- -------
Total Cash Provided by Operations 365 216
----- -------
Investing Activities:
Property, plant and equipment purchases (626) (538)
Acquisition and investment payments (78) (768)
Investment disposal and other proceeds 452 130
Discontinued operations proceeds (payments) 301 (28)
----- -------
Cash Provided by (Used in) Investing Activities 49 (1,204)
----- -------
Financing Activities:
Net change in short-term financing (154) 818
Long-term debt proceeds 25 224
Long-term debt reductions (323) (68)
Dividend payments (57) (54)
Common stock issued under employee stock plans 90 149
----- -------
Cash Provided by (Used in) Financing Activities (419) 1,069
----- -------
Increase in Cash and Cash Equivalents (5) 81
Cash and cash equivalents beginning of year 89 134
----- -------
Cash and cash equivalents at end of period $ 84 $ 215
----- -------
</TABLE>
The effect of exchange rate changes on cash and cash equivalents was not
material. Cash payments for interest (net of amounts capitalized) were
$224 million as of September 30, 1999, and $162 million as of September
30, 1998.
The accompanying notes are an integral part of the financial statements.
4
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<PAGE>
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
UNAUDITED
1. In 1998, Monsanto announced that it had entered into a definitive
agreement with Delta and Pine Land Company ("D&PL") to merge it
with Monsanto. Under terms of the agreement, D&PL shareowners
would be entitled to receive 0.8625 shares of Monsanto's common
stock in exchange for each share of D&PL they hold. Approximately
33 million shares of Monsanto common stock would be issued to D&PL
shareowners. Based on Monsanto's closing stock price of $53 1/2
per common share on May 8, 1998, the date of the merger agreement,
this would result in a purchase price for purchase accounting
purposes of approximately $1.8 billion. The merger, already
approved by D&PL shareowners, is subject to regulatory approvals
and other customary conditions. This transaction would be
accounted for as a purchase.
Also during 1998, Monsanto completed its acquisition of DEKALB
Genetics Corporation. ("DEKALB") and acquired Plant Breeding
International Cambridge Limited ("PBIC") and certain international
seed operations of Cargill, Incorporated ("Cargill"). Monsanto
accounted for these acquisitions as purchases. The preliminary
purchase price allocations are based on assumptions that are
subject to revision during 1999, pending final valuation studies.
Significant components of the current preliminary purchase price
allocation for the principal acquisitions made during 1998 are to
goodwill, $2,835 million; germplasm and core technology, $324
million; trademarks, $206 million; in-process research and
development, $402 million; exit costs and employee termination
liabilities, ($58) million; inventories and other individually
insignificant tangible assets and liabilities, $259 million. The
company is continuing to obtain additional information related to
intangible assets (primarily germplasm and trademarks),
litigation, costs to complete the exit plan for certain activities
of the acquired businesses, and inventories. The information
necessary to complete the allocation of purchase price is expected
to be obtained during the fourth quarter of 1999.
On October 20, 1999, Monsanto and Cargill announced that they had
reached an agreement that resolves outstanding issues related to
Monsanto's purchase of certain international seed operations of
Cargill. Under terms of the agreement, Cargill made a cash payment
to Monsanto for the lost use of certain germplasm and for damages
caused by the delay in integrating certain international seed
operations. Additionally, Monsanto and Pioneer Hi-Bred
International, Inc. ("Pioneer") announced a resolution of the
litigation between them stemming from Monsanto's purchase of these
Cargill international seed operations. Under terms of this
agreement, Monsanto is required to destroy genetic material
derived from Pioneer's seed lines and pay damages to Pioneer. As a
result, the purchase price for certain international seed
operations of Cargill has been reduced by $261 million and final
estimates related to the purchase price allocation to goodwill,
inventories, and other individually insignificant tangible assets
are expected to be completed and adjusted during the fourth
quarter of 1999. Any other adjustment to the purchase price
allocation for the businesses acquired is not expected to
materially impact Monsanto's financial position, results of
operations, or cash flows.
2. Comprehensive income (loss) 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 (loss) for the three months and nine months
ended September 30, 1999 and September 30, 1998, were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income (Loss) $ 49 $(100) $ 506 $353
---- ----- ----- ----
Other Comprehensive Income (Loss):
Foreign Currency Translation Adjustments (43) 39 (360) (13)
Unrealized Investment Gains 10 9 16 17
---- ----- ----- ----
Total Other Comprehensive Income (Loss) (33) 48 (344) 4
---- ----- ----- ----
Total Comprehensive Income (Loss) $ 16 $ (52) $ 162 $357
---- ----- ----- ----
</TABLE>
5
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<PAGE>
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED
3. 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, depending on the
designated purpose of the derivative. This statement is effective
for Monsanto on Jan. 1, 2001. Because of the effect of recent
acquisitions, Monsanto is reassessing its position and has not yet
determined the effect this statement will have on its consolidated
financial position or results of operations.
4. Basic earnings per share ("EPS") from continuing operations were
computed using the weighted average number of common shares
outstanding each period (632.6 million and 600.4 million for the
first nine months ended September 30, 1999 and 1998,
respectively). Diluted EPS from continuing operations were
computed taking into account the effect of dilutive potential
common shares (16.0 million in 1999 and 26.5 million in 1998).
Dilutive potential common shares consist of outstanding stock
options. Certain potential common share equivalents were not
included in the computation of diluted earnings per share, because
the effect of their exercise or conversion is not dilutive, when
based on the average market price of Monsanto common stock for the
period. These included approximately 61.7 million shares of
outstanding stock options, which expire through 2008, and 17.5
million of Adjustable Conversion-rate Equity Securities ("ACES")
that include stock purchase contracts exercisable in November
2001.
5. Monsanto's 1998 restructuring plan resulted in the recognition of
liabilities totaling $220 million (current and long-term) at
December 31, 1998. During the third quarter of 1999, 250 employees
were severed at a cost of approximately $23 million. Year-to-date
severance's for 1999 total 925 employees at a cost of $67 million.
Cash outflows associated with these separations were charged
against the restructuring liability. Monsanto completed a portion
of the facility closures in the first nine months of 1999,
reducing the restructuring liability by another $12 million. In
addition, in the third quarter of 1999, Monsanto reversed
restructuring liabilities of $36 million pretax, largely the
result of lower actual severance and facility shut-down expenses
than originally estimated. Monsanto expects to complete the
remaining restructuring actions within the originally planned time
frame.
<TABLE>
<CAPTION>
Work Force Facility
Reduction Closures Total
--------- -------- -----
<S> <C> <C> <C>
1998 restructuring reserve balance as of
December 31, 1998 $188 $ 32 $220
Costs charged against reserves (67) (12) (79)
Restructuring reserve reversals (25) (11) (36)
---- ---- ----
1998 restructuring reserve balance as of
September 30, 1999 $ 96 $ 9 $105
---- ---- ----
</TABLE>
6. Components of inventories as of September 30, 1999 and December
31, 1998 were as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Finished goods $ 698 $1,064
Goods in process 446 469
Raw materials and supplies 486 224
------ ------
Inventories, at FIFO cost 1,630 1,757
Excess of FIFO over LIFO cost (32) (35)
------ ------
Total $1,598 $1,722
------ ------
</TABLE>
6
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<PAGE>
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED
7. During 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 damages. Monsanto
has filed an appeal of the verdict, has meritorious defenses and
grounds to overturn the award, and intends to vigorously pursue
all available means to have this verdict set aside. No provision
has been made in Monsanto's consolidated financial statements with
respect to this verdict.
In April 1999, a jury verdict was returned against DEKALB Genetics
Corporation (which became a wholly-owned subsidiary of Monsanto
during December 1998), in a lawsuit filed in U.S. District Court
in North Carolina. The lawsuit was brought by Rhone Poulenc
Agrochimie S.A., claiming that a 1994 license agreement was
induced by fraud stemming from DEKALB's nondisclosure of relevant
information and that DEKALB did not have the right to license,
make or sell products using Rhone Poulenc's technology for
glyphosate resistance under this agreement. The jury awarded $15
million in actual damages for unjust enrichment and $50 million in
punitive damages. DEKALB has filed a motion to have the damage
award set aside and has filed a Motion for Judgment as a Matter of
Law to overturn the verdict. DEKALB has meritorious grounds to
overturn the verdict and intends to vigorously pursue all
available means to have the verdict overturned. No provision has
been made in Monsanto's consolidated financial statements with
respect to the award for punitive damages.
Monsanto is party to a number of lawsuits and claims, which it is
vigorously defending. Such matters arise in 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 Monsanto's business activities.
Although the results of litigation cannot be predicted with
certainty, management's belief is that the final outcome of such
litigation will not have a material adverse effect on Monsanto's
consolidated financial position, profitability or liquidity.
7
<PAGE>
<PAGE>
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED
8. In June, 1999, Monsanto management committed to a plan to sell its
artificial sweetener and biogum businesses. The results of
operations, financial position, and cash flows of these
businesses, and of the alginates and Ortho(R) lawn-and-garden
products businesses, the divestiture of which was approved by
Monsanto's Board of Directors in 1998, have been reclassified as
discontinued operations; and, for all periods presented, the
consolidated financial statements and notes have been reclassified
to conform to this presentation. The Company expects to sell these
businesses for a gain by July, 2000. In addition, Monsanto
transferred the Roundup(R) lawn-and-garden and nutrition research
operations of the former Nutrition and Consumer Products segment
to the Agricultural Products and Corporate and Other segments,
respectively (see Discontinued Operations disclosure for further
details).
Net sales, income and net assets from discontinued operations are
as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $243 $274 $712 $971
Income from Discontinued Operations, Net of tax
of $15, $3, $30 and $35, respectively 27 11 57 74
Gain on Sale of Discontinued Operations:
Operating Income From Discontinued
Operations, Net of Tax of $11 million 23 23
Loss on Disposal of Discontinued
Operations, Net of tax of $7 million (11) (11)
---- ---- ---- ----
Gain on Sale of Discontinued Operations, Net of
tax of $4 million 12 12
Net Income from Discontinued Operations $ 39 $ 11 $ 69 $ 74
---- ---- ---- ----
<CAPTION>
Net Assets of Discontinued Operations: As of September 30, As of December 31,
------------------- ------------------
1999 1998
---- ----
<S> <C> <C>
Current Assets $ 579 $ 994
Non-Current Assets 1,339 1,269
------ ------
Total Assets $1,918 $2,263
------ ------
Current Liabilities $ 182 $ 272
Non-Current Liabilities 150 67
------ ------
Total Liabilities $ 332 $ 339
------ ------
Net Assets of Discontinued Operations $1,586 $1,924
------ ------
</TABLE>
9. On August 6, 1999, Monsanto announced the signing of a definitive
agreement to sell Stoneville Pedigreed Seed Company to an
affiliate of Hicks, Muse, Tate & Furst, Inc. Closing of this
transaction is subject to customary closing conditions; and
Monsanto's obligation to close this transaction is subject to
satisfaction of all conditions precedent to its merger with D&PL.
10. On September 7, 1999, Monsanto announced the sale of the alginates
business to International Specialty Products ("ISP"). The closing
of this transaction occurred on October 15, 1999 and is recorded
in results from discontinued operations. Proceeds from the sale
were used to pay down debt.
8
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<PAGE>
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED
11. Business segment data for the three months and nine months ended
September 30, 1999 and September 30,1998 were as follows for net
sales, EBIT (earnings before interest expense and income taxes)
and EBITDA (earnings before interest expense, income taxes,
depreciation and amortization). Segment EBIT and EBITDA exclude
unusual items and are indicated as "EBIT (excluding unusual
items)" and "EBITDA (excluding unusual items)". Total Monsanto
consolidated EBIT includes the effects of unusual items.
Net income and income from continuing operations for the third
quarter and first nine months of 1999 included unusual items
after-tax of $9 million and $25 million, respectively. These
unusual items included an after-tax charge of $49 million
principally associated with the accelerated integration of the
agricultural chemical and seed operations offset by a net after-
tax gain of $40 million from the reversal of restructuring
reserves established in 1998, partially offset by the cost to exit
the alginates business. Net income and income from continuing
operations for the third quarter of 1998 included an after-tax
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"). This charge in third quarter of 1998 was subsequently
revised in fourth quarter of 1998, as a result of clarified
guidance on in-process R&D from the United States Securities and
Exchange Commission. Net income and income from continuing
operations for the first nine months of 1998 included an after-tax
charge of $13 million, or $0.02 per share, for the net cost of
exiting the Company's optical products business and an after-tax
charge of $187 million, or $0.30 per share, for the write-off of
in-process R&D, partially offset by a restructuring reserve
reversal.
<TABLE>
<CAPTION>
Net Sales
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Agricultural Products $ 951 $ 868 $4,020 $3,440
Pharmaceuticals 948 796 2,696 1,916
Corporate and Other 23 42 88 148
------ ------ ------ ------
Total Net Sales $1,922 $1,706 $6,804 $5,504
------ ------ ------ ------
<CAPTION>
EBIT
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Segment EBIT (excluding unusual items):
Agricultural Products $(25) $ 103 $ 779 $ 921
Pharmaceuticals 142 130 432 128
Corporate and Other (39) (73) (186) (209)
---- ----- ------ -----
Total segment EBIT (excluding unusual items) 78 160 1,025 840
---- ----- ------ -----
Restructuring and Other Unusual Items
from Continuing Operations - Net (38) (189) (38) (202)
---- ----- ------ -----
Total EBIT from Continuing Operations $ 40 $ (29) $ 987 $ 638
---- ----- ------ -----
</TABLE>
9
<PAGE>
<PAGE>
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED
<TABLE>
<CAPTION>
EBITDA (excluding unusual items)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Segment EBITDA (excluding unusual items):
Agricultural Products $ 91 $ 194 $1,122 $1,163
Pharmaceuticals 181 171 550 227
Corporate and Other (23) (70) (134) (208)
---- ----- ------ ------
Total Segment EBITDA (excluding unusual items) 249 295 1,538 1,182
---- ----- ------ ------
Interest Expense 83 49 287 144
Income Taxes (53) 33 243 215
Amortization Expense 92 51 259 167
Depreciation 87 84 262 198
Restructuring and Other Unusual Items - Net 30 189 30 179
---- ----- ------ ------
Income from Continuing Operations $ 10 $(111) $ 457 $ 279
---- ----- ------ ------
</TABLE>
Financial information for the third quarter or first nine months
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 sales from the
Agricultural Products segment in the first half of the year.
12. In the third quarter of 1999, Monsanto recorded an after-tax
charge of $49 million for unusual items principally associated
with the accelerated integration of Monsanto's agricultural
chemical and seed operations. Also during the third quarter of
1999, a net after-tax gain of $40 million was recorded from the
reversal of restructuring liabilities originally established in
1998, partially offset by $11 million of cost to exit the
alginates business. These restructuring liability reversals were
required as a result of lower actual severance and facility shut-
down expenses than originally estimated, primarily because of the
disposal of the alginates business. The following table represents
the expenses / (income) components of the net after-tax charge of
$9 million that was recorded in the Statement of Consolidated
Income as the result of these unusual items. In the third quarter
of 1998, Monsanto recorded unusual items of $189 million pretax
for the write-off of in-process research and development ("R&D")
related to the acquisition of Plant Breeding International
Cambridge Limited ("PBIC"). This charge in third quarter of 1998
was subsequently revised in fourth quarter of 1998, as a result of
clarified guidance on in-process R&D from the United States
Securities and Exchange Commission.
<TABLE>
<CAPTION>
Total Unusual Items
Unusual Restructuring Nine Months Ended
Charges Reversals September 30, 1999
------- ------------- -------------------
<S> <C> <C> <C>
Cost of Goods Sold $ 20 $ - $ 20
Amortization of Intangible Assets 8 - 8
Restructuring Expense 47 (37) 10
---- ---- ----
(Income) Loss from Continuing
Operations Before Tax 75 (37) 38
Income Taxes (26) 13 (13)
---- ---- ----
(Income) Loss from Continuing Operations 49 (24) 25
Income from Discontinued Operations,
Net of tax of $15 - (27) (27)
Loss on Sale of Discontinued
Operations, Net of tax of $7 - 11 11
---- ---- ----
Net (Income) Loss $ 49 $(40) $ 9
---- ---- ----
</TABLE>
10
<PAGE>
<PAGE>
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED
13. In December 1999, the Securities and Exchange Commission (SEC)
issued Staff Accounting Bulletin 101, "Revenue Recognition in
Financial Statements" (SAB 101). SAB 101 provides guidance related
to revenue recognition issues based on interpretations and
practices followed by the SEC. SAB 101 requires companies to
report any changes in revenue recognition as an accounting change
in accordance with APB opinion No. 20, "Accounting Changes".
Monsanto recorded a cumulative effect of a change in accounting
principle, effective January 1, 1999, for revenue recognized in
1998 related to the sale of marketing rights to Scotts Company.
The impact to earnings in 1999 was an aftertax loss of $20
million, net of taxes of $12 million.
As a result of discussions with the staff of the SEC and
clarification of its interpretation regarding the classification
of certain transactions, Monsanto agreed to reclassify certain
revenues associated with the sales of pharmaceutical product
rights in the Statement of Consolidated Income. The effect of this
reclassification was to reduce "Net Sales" and increase other
income included in "Other Expense, Net" by $23 million and $6
million in the three months ended September 30, 1999 and 1998,
respectively; and $37 million and $25 million in the nine months
ended September 30, 1999 and 1998, respectively.
11
<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
Segment EBIT (earnings before interest expense and income taxes) and
EBITDA (earnings before interest expense, income taxes, depreciation and
amortization) exclude unusual items and are indicated as "EBIT
(excluding unusual items)" and "EBITDA (excluding unusual items)". Total
Monsanto consolidated EBIT includes the effects of unusual items.
RESULTS FROM OPERATIONS - THIRD QUARTER 1999 COMPARED WITH THIRD QUARTER
- ------------------------------------------------------------------------
1998
- ----
Net income for Monsanto totaled $49 million, or $0.08 per share, in the
third quarter of 1999 compared with a net loss of $100 million, or $0.17
per share, for the third quarter of 1998. Monsanto recorded income from
continuing operations in the third quarter of 1999 of $10 million, or
$0.02 per share, compared with a loss from continuing operations of $111
million, or $0.18 per share, for the prior year quarter. Net income and
income from continuing operations for the third quarter of 1999 included
unusual items of $9 million after-tax, or $0.01 per share, and $25
million, or $0.04 per share, respectively. Unusual items included an
after-tax charge of $49 million principally associated with the
accelerated integration of the agricultural chemical and seed
operations, offset by a net after-tax gain of $40 million from the
reversal of restructuring reserves established in 1998. This gain was
partially offset by the cost to exit the alginates business. The
restructuring reserve reversals were required as a result of lower
actual severance and facility shut-down expenses than originally
estimated, primarily for the disposal of the alginates business. Net
income and income from continuing operations for the third quarter of
1998 included an after-tax net 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"). If the unusual charges were excluded in 1999
and 1998, income from continuing operations would have been $35 million,
or $0.05 per share, in 1999, versus $76 million, or $0.12 per share, in
1998, a decrease of $41 million, or $0.07 per share. The third quarter
of 1998 included one-time pretax payments of $140 million from Pfizer
Inc. and $32 million from The Scotts Company (Updated information
available in Subsequent Event footnote).
Consolidated earnings before interest expense and taxes ("EBIT") from
continuing operations was $40 million in the third quarter of 1999,
compared with an EBIT loss from continuing operations of $29 million in
the third quarter of 1998. Net sales increased to $1,922 million in the
third quarter of 1999, compared with net sales of $1,706 million for the
same period a year ago. Selling, general and administrative ("SG&A")
expenses increased to $714 million in the third quarter of 1999 compared
with prior year quarter SG&A expenses of $517 million. The inclusion in
1999 of SG&A expenses from acquired seed companies and continued
marketing spending associated with Celebrex(R) arthritis treatment were
the primary reasons for the increase.
Amortization of intangible assets increased to $92 million in the third
quarter of 1999, compared with $51 million for the same period a year
ago, principally because of the increase in intangible assets related to
the seed company acquisitions made in 1998. Monsanto financed the 1998
seed company acquisitions primarily with long-term borrowings which
created a higher debt level in third quarter 1999 compared with the same
period in the prior year. As a result, interest expense increased to $83
million in the third quarter of 1999 versus $49 million in the third
quarter 1998. Other expense decreased slightly in the third quarter of
1999, to $14 million compared with $24 million in the prior year
quarter, primarily because of increased pharmaceutical product rights
sales partly offset by increases in minority interest expense and higher
foreign currency losses in the third quarter of 1999. A tax benefit of
$53 million was recorded for the third quarter of 1999 compared with a
tax expense of $33 million in the prior year quarter, primarily because
of a change in the cumulative effective tax rate for 1999. This benefit
was driven by the recognition of greater than anticipated foreign tax
credits.
12
<PAGE>
<PAGE>
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
In the first half of 1999, Monsanto management committed to a plan to
sell its artificial sweetener and biogum businesses. The results of
operations, financial position, and cash flows of these businesses, and
of the alginates and Ortho(R) lawn-and-garden products businesses, the
divestiture of which was approved by Monsanto's Board of Directors in
1998, have been reclassified as discontinued operations; and, for all
periods presented, the consolidated financial statements and notes have
been reclassified to conform to this presentation. The company expects
to sell these businesses for a gain by July, 2000. In addition, Monsanto
transferred the Roundup(R) lawn-and-garden and nutrition research
operations of the former Nutrition and Consumer Products segment to the
Agricultural Products and Corporate and Other segments, respectively.
Business segment data for the three months and nine months ended
September 30, 1999 and September 30, 1998, were as follows:
<TABLE>
<CAPTION>
Net Sales
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Agricultural Products $ 951 $ 868 $4,020 $3,440
Pharmaceuticals 948 796 2,696 1,916
Corporate and Other 23 42 88 148
------ ------ ------ ------
Total Net Sales $1,922 $1,706 $6,804 $5,504
------ ------ ------ ------
<CAPTION>
EBIT
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Segment EBIT (excluding unusual items):
Agricultural Products $(25) $ 103 $ 779 $ 921
Pharmaceuticals 142 130 432 128
Corporate and Other (39) (73) (186) (209)
---- ----- ------ -----
Total Segment EBIT (excluding unusual items) 78 160 1,025 840
---- ----- ------ -----
Restructuring and Other Unusual Items - Net (38) (189) (38) (202)
---- ----- ------ -----
Total EBIT from Continuing Operations $ 40 $ (29) $ 987 $ 638
---- ----- ------ -----
</TABLE>
Agricultural Products Segment
- -----------------------------
The Agricultural Products segment recorded an EBIT (excluding unusual
items) loss of $25 million in the third quarter of 1999 compared with
EBIT (excluding unusual items) income of $103 million in the third
quarter of 1998. The decrease in EBIT (excluding unusual items) of $128
million was primarily attributed to one-time events in the Roundup(R)
lawn and garden business, increased amortization expense, and timing of
biotechnology marketing expenses. Revenues from the Roundup(R) lawn and
garden business declined by $36 million when compared with revenues from
the prior year quarter primarily because of changes in the distribution
network. Additionally, Roundup(R) lawn and garden results for third
quarter 1998 included a one-time $32 million payment from The Scotts
Company for the right to sell and market Roundup(R) herbicide for lawn
and garden uses. (Updated information available in Note 13 to Notes to
Financial Statements.) Amortization of intangible assets increased $35
million in the third quarter of 1999 when compared with the prior year,
principally because of an increase in intangible assets related to seed
company acquisitions in 1998. SG&A expenses for the third quarter of
1999 increased over the prior year quarter primarily because of the
inclusion of seed companies and $22 million of biotechnology marketing
expenses, which historically have occurred in the fourth quarter.
Continued unfavorable economic conditions in certain Latin American and
eastern European countries caused an increase in bad debt expense in the
third quarter of 1999 compared with bad debt expense in the prior year
quarter.
13
<PAGE>
<PAGE>
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Net sales for the Agricultural Products segment were $951 million, in
the third quarter of 1999, compared with net sales of $868 million in
the third quarter of 1998, a 10 percent increase. The inclusion of sales
from seed companies acquired in 1998 accounted for the increase. Sales
volumes for the family of Roundup(R) herbicides in the third quarter of
1999 were higher when compared with sales volumes in the third quarter
of 1998. The higher sales volumes, led by increases in the United States
and strong recovery in Brazil, were primarily driven by lower prices of
Roundup(R) herbicides. These higher sales volumes were partially offset
by lower sales volumes in Argentina and eastern Europe because of
unfavorable economic conditions. Additionally, Asia and Australian sales
volumes were lower when compared with sales volumes in the prior year
quarter because of unfavorable weather conditions.
Pharmaceuticals Segment
- -----------------------
EBIT (excluding unusual items) for the Pharmaceuticals segment increased
to $142 million for the third quarter of 1999, compared with EBIT
(excluding unusual items) of $130 million in the third quarter of 1998.
EBIT (excluding unusual items) for third quarter 1998 included $140
million in milestone payments from Pfizer Inc. relating to Celebrex(R)
arthritis treatment. The continued strong product sales of Celebrex(R)
arthritis treatment and increased sales of Ambien(R) short-term
treatment for insomnia were the primary reasons for the increase. SG&A
expenses rose because of increased spending associated with the
marketing of Celebrex(R) for the third quarter of 1999.
The Pharmaceuticals segment recorded net sales of $948 million in the
third quarter of 1999, compared with net sales of $796 million during
the same period in 1998, a 19 percent increase. The strong product sales
of Celebrex(R) were primarily responsible for the increase. The increase
in net sales was partially offset by a decrease in sales of Arthrotec(R)
and Daypro(R) arthritis treatment in the United States as market share
shifted toward Celebrex(R). Sales of Ambien(R) short-term treatment for
insomnia increased $46 million, or 54 percent, in the third quarter of
1999, when compared to the prior year quarter, as new and refill
prescription rates continued to grow.
Corporate and Other Segment
- ---------------------------
Corporate and Other segment EBIT (excluding unusual items) increased 47
percent in the third quarter of 1999 when compared with EBIT (excluding
unusual items) in the third quarter of the prior year, primarily because
of lower SG&A expenses as a result of cost adjustments associated with
executive compensation programs combined with lower incentive accruals
in the current year quarter. Net sales were $19 million lower in the
third quarter of 1999 when compared with net sales in the same period
last year, primarily because of lower sales from the Envirochem
business. SG&A expenses were lower because of the absence of businesses
divested and lower incentive accruals.
14
<PAGE>
<PAGE>
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
SEGMENT EBITDA (EXCLUDING UNUSUAL ITEMS)
- ----------------------------------------
Business segment earnings before interest expense, taxes, depreciation
and amortization (EBITDA) excluding unusual items for the three months
and nine months ended September 30, 1999 and September 30, 1998, were as
follows:
<TABLE>
<CAPTION>
EBITDA (excluding unusual items)
--------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
EBITDA (excluding unusual items):
Agricultural Products $ 91 $ 194 $1,122 $1,163
Pharmaceuticals 181 171 550 227
Corporate and Other (23) (70) (134) (208)
---- ----- ------ ------
Total EBITDA from Continuing
Operations (excluding unusual items) 249 295 1,538 1,182
---- ----- ------ ------
Interest Expense 83 49 287 144
Income Taxes (53) 33 243 215
Amortization Expense 92 51 259 167
Depreciation 87 84 262 198
Restructuring and Other Unusual Items - Net 30 189 30 179
---- ----- ------ ------
Income from Continuing Operations $ 10 $(111) $ 457 $ 279
---- ----- ------ ------
</TABLE>
Monsanto's EBITDA (excluding unusual items) in the third quarter of 1999
was $249 million, compared with EBITDA (excluding unusual items) of $295
million in the third quarter of 1998, a decrease of 16 percent. Results
in 1998 reflected one-time pretax payments from Pfizer Inc. of $140
million and from The Scotts Company of $32 million. The absence of such
transactions in the third quarter of 1999 was partially offset by the
inclusion of the results from seed companies acquired in 1998 and
increased sales from Celebrex(R) arthritis treatment. On a segment
basis, Monsanto's Agricultural Products segment EBITDA (excluding
unusual items) decreased to $91 million in the third quarter of 1999
compared with EBITDA (excluding unusual items) of $194 million in the
third quarter of 1998. This decrease was primarily a result of one-time
events in the Roundup(R) lawn and garden business, and change in the
timing of biotechnology marketing expenses. On a quarter-to-quarter
basis, Monsanto's Pharmaceuticals segment EBITDA (excluding unusual
items) improved to $181 million in the third quarter of 1999, from
EBITDA (excluding unusual items) of $171 million in the third quarter of
1998, because of the strong product sales of Celebrex(R) arthritis
treatment and Ambien(R) short-term treatment for insomnia.
Financial information for the third quarter or first nine months of 1999
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 sales from the Agricultural Products segment in
the first half of the year.
RESULTS FROM OPERATIONS - FIRST NINE MONTHS OF 1999 COMPARED WITH FIRST
- -----------------------------------------------------------------------
NINE MONTHS OF 1998
- -------------------
Net income for Monsanto totaled $506 million, or $0.78 per share, for
the first nine months of 1999, compared with net income of $353 million,
or $0.56 per share, for the first nine months of 1998. Monsanto earned
income from continuing operations for the first nine months of 1999 of
$457 million, or $0.70 per share, compared with income from continuing
operations of $279 million, or $0.45 per share, for the same period in
1998. However, results from both years included unusual items. Net
income and income from continuing operations for the first nine months
of 1999 included unusual items after-tax of $9 million, or $0.01 per
share, and $25 million, or $0.04 per share, respectively. Unusual items
included an after-tax charge of $49 million principally associated with
the accelerated integration of the agricultural chemical and seed
operations, which was offset by a net after-tax gain of $40 million from
the reversal of restructuring reserves established in 1998. This gain
was partially offset by an after-tax charge of $11 million for the cost
to exit the
15
<PAGE>
<PAGE>
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
alginates business. The restructuring reserve reversals were required as
a result of lower actual severance and facility shut-down expenses than
originally estimated, primarily for the disposal of the alginates
business. Prior-year net income and income from continuing operations
included an after-tax net charge of $13 million, or $0.02 per share, for
the net cost of exiting the company's optical products business offset
by a restructuring reserve reversal, and an after-tax net 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"). Excluding the unusual
items, income from continuing operations would have totaled $481
million, or $0.74 per share, in the first nine months of 1999, versus
$479 million, or $0.76 per share, in the same period of 1998.
Consolidated earnings before interest expense and taxes ("EBIT") from
continuing operations increased 55 percent to $987 million for the first
nine months of 1999, compared with EBIT from continuing operations of
$638 million for the first nine months of 1998. Sales for the first nine
months of 1999 grew to $6,804 million, primarily because of the
inclusion of seed companies acquired in 1998 and the strong performance
of the Pharmaceuticals segment. Selling, general and administrative
("SG&A") expenses increased to $2,107 million in the first nine months
of 1999 compared with SG&A expenses of $1,528 million in the same period
of 1998. Inclusion in the first nine months of 1999 of SG&A expenses
from acquired seed companies and continued marketing spending associated
with Celebrex(R) arthritis treatment were principally responsible for
the increase. Technological expenses rose 8 percent in the first nine
months of 1999, compared with technological expense in the first nine
months of 1998, primarily due to the inclusion in 1999 of acquired seed
companies and continued spending on crop biotechnology initiatives.
Amortization of intangible assets increased 55 percent for the first
nine months of 1999 compared with the first nine months of 1998,
principally because of the increase in intangible assets related to seed
companies acquired in 1998. Interest expense increased to $259 million
for the first nine months of 1999 compared with interest expense of $144
million in the prior year period, primarily due to higher debt levels.
The higher debt level in 1999 was required as Monsanto financed the 1998
seed company acquisitions primarily with long-term borrowings. The
increase in other expenses of $7 million in the first nine months of
1999 primarily reflects lower equity income and higher foreign currency
losses. Equity earnings decreased by $14 million for the first nine
months of 1999 compared with the first nine months of 1998 primarily
because of losses associated with the divestment of the Kiel
Partnership. Continued economic weakness in certain Latin American and
eastern European countries have driven foreign currency losses higher in
the first nine months of 1999 when compared to the prior year period.
Sales of pharmaceutical product rights increased in 1999 and partly
offset the aforementioned decreases.
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin 101, "Revenue Recognition in Financial
Statements" (SAB 101). SAB 101 provides guidance related to revenue
recognition issues based on interpretations and practices followed by
the SEC. SAB 101 requires companies to report any changes in revenue
recognition as an accounting change in accordance with APB opinion No.
20, "Accounting Changes". Monsanto recorded a cumulative effect of a
change in accounting principle, effective January 1, 1999, for revenue
recognized in 1998 related to the sale of marketing rights to Scotts
Company. The impact to earnings in 1999 was an aftertax loss of $20
million, net of taxes of $12 million.
Agricultural Products Segment
- -----------------------------
Agricultural Products segment EBIT (excluding unusual items) was $779
million in the first nine months of 1999, compared with EBIT (excluding
unusual items) of $921 million for the first nine months of 1998, a 15
percent decrease. The decrease in EBIT (excluding unusual items) in the
first nine months of 1999, compared with the first nine months of 1998,
was attributed to increases in SG&A, technological, and amortization
costs, as well as one-time events in the Roundup(R) lawn and garden
business, all of which more than offset increased sales. The inclusion
in 1999 of the acquired seed companies and spending on crop
biotechnology initiatives caused an increase in SG&A and technological
expenses in the first nine months of 1999. An increase in intangible
assets related to seed companies acquired in 1998 caused higher
amortization expense year-to-date compared with amortization expense in
the prior year period. Revenues from the Roundup(R) lawn and garden
business declined by $36 million when compared with revenue in the prior
year period because of changes in the distribution network.
Additionally, Roundup(R) lawn and garden results for third quarter 1998
included a one-time $32 million payment from The Scotts Company for the
right to sell and market Roundup(R) herbicide for lawn and garden uses
(Updated information available in Note 13 to Notes to Financial
16
<PAGE>
<PAGE>
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Statements). Continued unfavorable economic conditions in certain Latin
American and eastern European countries caused an increase in bad debt
expense in the first nine months of 1999 compared with bad debt expense
in the same period a year ago.
Year-to-date net sales for the Agricultural Products segment increased
$580 million, or 17 percent, compared to the prior year period,
primarily because of the inclusion of sales from seed companies acquired
in 1998. In addition, higher licensing revenues from crops developed
through biotechnology, and sales for the family of Roundup(R)
herbicides, which were partially offset by lower sales of other
herbicides, contributed to the increase. Biotechnology licensing
revenues increased 61 percent in the first nine months of 1999 compared
with the same period in 1998.
Sales volume for the family of Roundup(R) herbicides increased primarily
driven by increased usage in conservation tillage and over-the-top use
of RoundupReady(R) crop applications. Sales volumes rose in many world
areas, especially North America and Asia. Sales associated with these
volume increases were largely offset by lower overall prices of
Roundup(R) herbicides. Sales volumes were relatively flat and prices
were lower in Latin America due to the weakened economy. Unfavorable
weather conditions in Australia and Indonesia partially offset sales
volume increases of Roundup(R) herbicide in other world areas in the
first nine months of 1999.
Pharmaceuticals Segment
- -----------------------
EBIT (excluding unusual items) for the Pharmaceuticals segment increased
to $432 million for the first nine months of 1999, compared with EBIT
(excluding unusual items) of $128 million in the same period a year ago.
EBIT (excluding unusual items) in the first nine months of 1998 included
$240 million of milestone payments from Pfizer Inc. related to
Celebrex(R) arthritis treatment. The strong EBIT (excluding unusual
items) performance for the first nine months of 1999 can primarily be
attributed to the sales increase of Celebrex(R) arthritis treatment and
Ambien(R) short-term treatment for insomnia . SG&A expenses increased
$463 million, or 63 percent primarily because of increased spending
associated with Celebrex(R) arthritis treatment marketing programs.
Net sales for the Pharmaceuticals segment rose to $2,696 million in the
first nine months of 1999, compared with net sales of $1,916 million in
the same period of 1998, an increase of 41 percent. The successful
launch and continued strong sales of Celebrex(R) arthritis treatment is
the primary reason for the increase. In addition, segment sales for the
first nine months of 1999 reflect significant increases in sales volumes
of Arthrotec(R) arthritis treatments and Ambien(R) short-term treatment
for insomnia when compared with sales volumes in the same period in
1998.
Corporate and Other Segment
- ---------------------------
Corporate and Other segment EBIT (excluding unusual items) increased $23
million, or 11 percent, for the first nine months of 1999 when compared
with the same period a year ago, primarily because 1998 included
operating losses of businesses which were divested. Net sales were $60
million lower in the first nine months of 1999, primarily because of the
disposal of the Orcolite(R) and Diamonex(R) optical products businesses
in 1998. SG&A expenses were $72 million lower in the first nine months
of 1999 compared with the same period a year ago, primarily because of
divested businesses and lower incentive accruals.
Results from Discontinued Operations
- ------------------------------------
Net sales in the third quarter of 1999 were $243 million compared with
net sales of $274 million in the same period of 1998. The decline was
primarily because of the January 1999 divestiture of the Ortho(R) lawn-
and-garden products business. Income from discontinued operations was
$27 million in the third quarter of 1999 compared with the prior year of
$11 million. Income from discontinued operations for the third quarter
1999 and third quarter of 1998 is net of tax of $15 million and $3
million, respectively. Income from discontinued operations for the third
quarter of 1999 is associated with the partial reversal of restructuring
reserves established in 1998. The restructuring reserve reversals were
required as a result of lower actual severance and facility shut-down
expenses than originally estimated, primarily for the disposal of the
alginates business. The gain on sale of discontinued operations for the
third quarter of 1999, which is the results of the discontinued business
from June 30, 1999 through September 30, 1999, was $12 million, net of
taxes of $4 million, and included net after-tax costs of $11 million to
exit the alginates business.
17
<PAGE>
<PAGE>
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Net sales for the first nine months of 1999 were $712 million compared
with net sales of $971 million in the same period of the prior year,
primarily because of the divestiture of the Ortho(R) lawn-and-garden
products business. Income from discontinued operations was $57 million,
net of taxes of $30 million, for the first nine months of 1999, compared
with $74 million, net of taxes of $35 million, in the prior year.
CHANGES IN FINANCIAL CONDITION - SEPTEMBER 30, 1999 COMPARED WITH DEC.
- ----------------------------------------------------------------------
31, 1998
- --------
Working capital as of September 30, 1999 increased to $2,092 million
from $1,415 million as of December 31, 1998, primarily because of an
increase in the Agricultural Products segment's trade receivables. This
increase was partially offset by an inventory decrease of $124 million.
The current ratio was 1.6 at September 30, 1999 compared to 1.4 at year-
end 1998. Accounts payable balance remained relatively unchanged while
short-term debt decreased $154 million when compared to the 1998 year-
end balance. The restructuring liability of $220 million established in
1998 was reduced by $79 million in the first nine months of 1999 to
cover the cost for employees severed and facility closures. In addition,
Monsanto reversed restructuring reserves established in 1998 totaling
$36 million pretax in the third quarter of 1999. These restructuring
reserve reversals were required as a result of lower actual severance
and facility shut-down expenses than originally estimated. Monsanto
expects to complete the remaining restructuring actions within the
originally planned time frame. The percent of total debt to total
capitalization decreased to 57 percent as of September 30, 1999 compared
with 60 percent as of December 31, 1998 as collections of trade
receivables were used to pay down long-term debt by $298 million.
Operating activities from continuing operations provided a net $509
million of cash in the first nine months of 1999, compared with $61
million of cash provided from operations during the same period in 1998.
The increase in cash provided from operations resulted primarily from
increased income from continuing operations of $205 million and increase
in non-cash charges for amortization and depreciation of $156 million,
primarily associated with seed companies acquired in 1998. For
comparative purposes, cash provided from operations for the first nine
months of 1998 included the collection of $225 million of miscellaneous
receivables related to 1997 Pharmaceuticals licensing and product rights
sales. Investing activities in the first nine months of 1999 provided
$49 million of cash compared with a cash outflow of $1,204 million in
the first nine months of 1998. Investing activities for the 1999 period
included the proceeds from the divestment of the Ortho(R) lawn-and-
garden business for $340 million. Also, investing activities for the
first nine months of 1999 included $335 million representing a refund of
a portion of the original purchase price for certain international seed
operations of Cargill acquired in 1998. Financing activities for the
first nine months of 1999 used $419 million of cash compared with cash
provided of $1,069 million of in the first nine months of 1998.
Financing activities for the first nine months of 1999 include a net
decrease in long-term financing of $323 million, and a net decrease in
short-term borrowings of $154 million. Financing activities for the
first nine months of 1998 included borrowings related to the 1998 seed
company acquisitions.
On June 4, 1999, Monsanto announced that the interest rate on $2.5
billion of senior unsecured debt, issued in a private placement in late
1998, would increase 25 basis points beginning June 8, 1999. These debt
securities were to be registered with the Securities and Exchange
Commission ("SEC") by June 7, 1999. The registration statement relating
to these debt securities, which was filed in March 1999, is being
reviewed by the staff of the SEC and will not be declared effective
until the staff review is completed. This interest rate increase is
temporary, and will be discontinued after the registration statement is
declared effective and other conditions are met.
On October 20, 1999, Monsanto and Cargill announced that they had
reached an agreement that resolves outstanding issues related to
Monsanto's purchase of certain international seed operations of Cargill.
Under terms of the agreement, Cargill made a cash payment to Monsanto
for the lost use of certain germplasm and for damages caused by the
delay in integrating certain international seed operations.
Additionally, Monsanto and Pioneer Hi-Bred International, Inc.
("Pioneer") announced a resolution of the litigation between them
stemming from Monsanto's purchase of these Cargill international seed
operations. Under terms of this agreement, Monsanto is required to
destroy genetic material derived from Pioneer's seed lines and pay
damages to Pioneer. As a result, the purchase price for certain
international seed operations of Cargill has been reduced by $261
million and final estimates related to the purchase price allocation to
goodwill, inventories, and other individually insignificant tangible
assets are expected to be completed and adjusted
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MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
during the fourth quarter of 1999. Any other adjustment to the purchase
price allocation for the businesses acquired is not expected to
materially impact Monsanto's financial position, results of operations,
or cash flows.
In 1998, Monsanto announced that it had entered into a definitive
agreement with Delta and Pine Land Company ("D&PL") to merge it with
Monsanto. Under terms of the agreement, D&PL shareowners would be
entitled to receive 0.8625 shares of Monsanto's common stock in exchange
for each share of D&PL they hold. Approximately 33 million shares of
Monsanto common stock would be issued to D&PL shareowners. Based on
Monsanto's closing stock price of $53 1/2 per common share on May 8,
1998, the date of the merger agreement, this would result in a purchase
price for purchase accounting purposes of approximately $1.8 billion.
The merger, already approved by D&PL shareowners, is subject to
regulatory approvals and other customary conditions. This transaction
would be accounted for as a purchase.
On September 7, 1999, Monsanto announced the sale of the alginates
business to International Specialty Products. The proceeds from the sale
of the alginates business have been recorded as part of discontinued
operations and have been used to pay down debt.
Outlook for Agricultural Products - Update
- ------------------------------------------
Worldwide agricultural economic conditions continue to be challenging to
the industry. Monsanto is monitoring the effect on the business of low
commodity prices and reduced farmer margins.
Monsanto continues to address concerns of consumers, public interest
groups and government regulators regarding acceptance and approval of
agricultural and food products developed through biotechnology. The
European Union continues to delay approvals for planting of seeds with
agricultural biotechnology traits; and a court decision in Brazil has
delayed planting of RoundupReady(R) soybeans in that country. Although
seeds with Monsanto's agricultural biotechnology traits have been well-
accepted and successfully planted by farmers in the United States and
other countries, delays in import approvals and continuing public
acceptance issues may affect the market for these seeds in the United
States and in other countries where planting is permitted.
Outlook for Pharmaceuticals - Update
- ------------------------------------
On October 27, Monsanto announced that Searle, Monsanto's pharmaceutical
subsidiary, had acquired two cardiovascular products in a number of
European countries from AStraZeneca, which is divesting these products
to comply with European Commission merger conditions. Under terms of the
agreement, Searle has exclusive trademark rights to Beloc ZOC Comp(R)
throughout Europe and exclusive distribution rights to Tenormin(R) in
Scandinavia.
COMPANY PREPARES FOR YEAR 2000
- ------------------------------
State of Readiness
- ------------------
Monsanto's preparations for Year 2000 are fundamentally complete. The
company has remediated and tested the internal business application
systems, information technology ("IT") infrastructure components, and
embedded systems components vital to serving customer needs. During the
fourth quarter of 1999, the company will continue to test systems and
components; monitor the readiness of key suppliers; and exercise and
test business continuity plans. Monsanto is committed to making certain
that our systems and processes will continue to function into the Year
2000 as they do today in order to minimize the possibility of any
inconvenience for our customers.
Background
- ----------
Beginning in 1996, the company 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 all company sites in all world areas.
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The company's Y2K Program encompasses all areas of the company's
internal systems including conventional business applications, IT
infrastructure, and embedded systems. Embedded systems include process
control/manufacturing, laboratory automation systems, and site-specific
facility management systems such as elevators and heating and cooling
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
(internal investigation or research with vendor or manufacturer);
prioritization of the work; and successful completion of the required
remediation activity.
All material remediation work for all business sectors (Agriculture,
Pharmaceuticals), including all recent acquisitions, was completed by
September 30, 1999.
Contingency Planning
- --------------------
The company began a major contingency planning initiative in November
1998 with the establishment of the Y2K Business Continuity Team.
Continuity plans have been prepared in critical functional areas
throughout the company and have been consolidated into comprehensive
plans around key business sectors. These plans include risk assessment,
failure response, manual procedures, and emergency communications, among
other items.
Preparedness exercises are scheduled for the fourth quarter of 1999, and
the company will continue to adjust contingency plans as needed
throughout 1999. The plans include a multi-tiered Y2K communication
center structure (world area, business sector, and corporate)
encompassing all critical regional locations. The Y2K Communication
Centers will be staffed 24 hours a day from December 31, 1999 continuing
through January 3, 2000. The centers will monitor the transition to the
Year 2000 and will supplement existing problem resolution and emergency
communications processes. Although the company does not expect to
experience any significant Y2K problems, contingency plans will be ready
to deal with any emergency.
Costs
- -----
The company continues to evaluate the estimated costs associated with
Y2K compliance based on actual experience. The total cost is currently
projected at about $35 million, with approximately $32.6 million
expended through September 30, 1999. 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. The company 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
- -----
The company believes that the 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 problem could result in lost profits or
breach of contract claims in the event the company 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. The company may also
experience lost revenues in the event any of its customers experience
Y2K problems which cause them to order less product from the company or
which cause financial difficulties resulting in a breach of their
payment obligations to the company.
EURO CONVERSION
- ---------------
On Jan. 1, 1999, 11 of the 15 member countries of the European Union
established fixed conversion rates between their national currencies and
the euro. During the transition period from Jan. 1, 1999 until June 30,
2002, both the national currencies and the euro will be legal
currencies. Beginning July 1, 2002, the national currencies of the
participating countries no longer will be legal tender for any
transactions.
In Sept. 1997, Monsanto formed a cross-functional team and engaged a
consultant to prepare for the euro conversion. Since Jan. 1, 1999,
Monsanto engaged in euro-denominated transactions and is legally
compliant. Monsanto expects to
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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.
FORWARD LOOKING INFORMATION
- ---------------------------
Other important factors affecting Monsanto's business are discussed in
Item 5 of Part II of this Report, under the heading "Disclosure
Regarding Forward Looking Information", incorporated herein by
reference.
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, 1998 ("1998 Annual Report"), incorporated by reference in
Monsanto's Annual Report on Form 10-K for the year ended December 31,
1998 ("1998 Form 10-K").
The tables under Market Risk Management in the Management's Discussion
and Analysis section of the 1998 Annual Report, incorporated by
reference in the 1998 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 1998 Annual Report and Form 10-K except as
noted below.
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Significant interest rate risk sensitive instruments as of September 30,
1999 were:
<TABLE>
<CAPTION>
Expected Maturity Date
------------------------------------------------------------------
1999 2000 2001 2002 2003 Thereafter TOTAL
---- ---- ---- ---- ---- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Long-Term Debt:
Fixed Rate ($US)
Principal Amount $161 $ 533 $19 $738 $2,797 $4,248
Average Interest Rate 6.1% 5.6% 8.3% 6.1% 6.7% 6.5%
Fixed Rate (Japanese Yen) $ 96 $ 96
Average Interest Rate 5.6% 5.6%
Variable Rate ($US)
Principal Amount <F1> $ 60 $1,063 $72 $365 $ 208 $1,769
Average Interest Rate 5.1% 5.4% 5.0% 5.3% 4.1% 5.2%
Short-Term Debt:
Fixed Rate ($US)
Principal Amount $ 57 $ 57
Average Interest Rate 7.5% 7.5%
Variable Rate ($US)
Principal Amount <F2> $556 $ 556
Average Interest Rate 5.4% 5.4%
<FN>
<F1> Includes $1.0 billion of commercial paper that is assumed to be
renewed through 2001, when the company's $1.0 billion credit
facility expires.
<F2> Average variable rates are based on the variable rates on
September 30, 1999. Actual rates may be higher or lower.
</TABLE>
The instruments in the table of significant currency exchange rate risk
sensitive instruments that appeared in the 1998 Annual Report and Form
10-K were no longer outstanding at September 30, 1999. At September 30,
1999, the following significant forward contracts were outstanding (all
expected to mature by September 30, 2000): purchases of Brazilian real
with a notional amount of $10 million and an average exchange rate of
1.93 Brazilian real per U.S. dollar; sales of Canadian dollars with a
notional amount of $126 million and an average exchange rate of 1.4742
Canadian dollars per U.S. dollar; sales of British pounds with a
notional amount of $400 million and an average exchange rate of 0.6126
British pounds per U.S. dollar; sales of Australian dollars with a
notional amount of $39 million and an average exchange rate of 1.5330
Australian dollars per U.S. dollar; sales of Polish zlotys with a
notional amount of $47 million and an average exchange rate of 4.1667
Polish zlotys per U.S. dollar; purchases of Japanese yen with a notional
amount of $87 million and an average exchange rate of 106.86 Japanese
yen per U.S. dollar; sales of South African rand with a notional amount
of $33 million and an average exchange rate of 6.114 South African rand
per U.S. dollar; sales of Czech koruna with a notional amount of $8
million and an average exchange rate of 34.3680 Czech koruna per U.S.
dollar; sales of Hungarian forint with a notional amount of $8 million
and an average exchange rate of 244.5 Hungarian forint per U.S. dollar;
sales of Indonesian rupiahs with a notional amount of $25 million and an
average exchange rate of 8302 Indonesian rupiah per U.S. dollar; sales
of Philippines pesos with a notional amount of $10 million and an
average exchange rate of 40.05 Philippines pesos per U.S. dollar; sales
of Thailand baht with a notional amount of $5 million and an average
exchange rate of 39.76 Thailand baht per U.S. dollar; sales of Mexican
pesos with a notional amount of $8 million and an average exchange rate
of 9.4410 Mexican pesos per U.S. dollar; and sales of European euros
with a notional amount of $121 million and an average exchange rate of
0.9541 European euros per U.S. dollar. The fair market values of these
contracts approximated the notional amounts at September 30, 1999.
The instruments in the table of significant commodity price risk
sensitive instruments that appeared in the 1998 Annual Report and Form
10-K were no longer outstanding at September 30, 1999. At September 30,
1999, the following significant commodity price risk sensitive
instruments were outstanding: purchased soybean futures contracts
totaling $109.1 million (20.4 million bushels at a weighted average
price per bushel of $5.36) with a fair value of $100.2 million,
purchased corn futures contracts totaling $28.4 million (12.8 million
bushels at a weighted average price per
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bushel of $2.21) with a fair value of $26.6 million, and sold lean hogs
futures contracts totaling $6.6 million (0.1 million CWT with a weighted
average price per CWT of $53.07) with a fair value of $6.0 million.
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, as
applicable.
As described in the company's Annual Report on Form 10-K for the year
ended December 31, 1998, in 1974, Searle introduced in the United States
an intrauterine contraceptive product, commonly referred to as an
intrauterine device ("IUD"), under the name Cu-7. Following extensive
testing by Searle and review by the FDA, the Cu-7 was approved for sale
as a prescription drug in the United States. It was marketed
internationally as the Gravigard. Searle has been named as a defendant
in a number of product liability lawsuits alleging that this IUD caused
personal injury resulting from pelvic inflammatory disease, perforation,
pregnancy or ectopic pregnancy. As of October 28, 1999, there remains 1
case pending in the United States, and approximately 270 cases filed
outside the United States (the vast majority in Australia). On February
22, 1999, Searle received a defense verdict after a trial of the nine
lead Australian plaintiffs. Though not technically a class action, these
nine individuals are considered representative of the entire group of
Australian plaintiffs. Plaintiffs' are appealing that verdict. The
lawsuits seek damages in varying amounts, including compensatory and
punitive damages, with most suits seeking at least $50,000 in damages.
Searle believes it has meritorious defenses and is vigorously defending
each of these lawsuits. On January 31, 1986, Searle voluntarily
discontinued the sale of the Cu-7 in the United States, citing the cost
of defending such litigation. Ex-U.S. sales were discontinued in 1990.
As described in the company's Annual Report on Form 10-K for the year
ended December 31, 1998, and in its Reports on Form 10-Q for the
quarters ending March 31, 1999, and June 30, 1999, 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 alleged
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, settled
the federal class action case. Trial of the federal class action case
commenced on September 14, 1998. On November 30, 1998, Searle and its
co-defendants received a verdict for the defense and all claims were
dismissed. On January 4, 1999, the class plaintiffs filed a notice of
appeal with the U. S. Court of Appeals for the Seventh Circuit.
Following oral arguments in June 1999, the Seventh Circuit Court of
Appeals ruled on July 13, 1999. The opinion upheld most of the lower
court's decision to throw out price fixing charges against the
manufacturers as well as the wholesalers. The court reversed the trial
judge on one discrete issue involving the Consumer Price Index.
Petitions for a rehearing on that issue have been denied. Cases relating
to the chain pharmacies that had opted out of the class are in the final
stages of discovery. 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. While
many of these suits have been settled, suits remain pending in a number
of states including California, Alabama and North Dakota.
As described in the company's Annual Report on Form 10-K for the year
ended December 31, 1998, in 1996 the company was the first to
commercially introduce cotton containing a gene encoding for Bacillus
thuringiensis ("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 October 22, 1996, Mycogen Corporation ("Mycogen")
filed suit in U.S. District Court in Delaware seeking damages and
injunctive relief against the company, DEKALB Genetics Corporation
("DEKALB") (subsequently acquired by Monsanto) and
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Delta & Pine Land Company alleging infringement of Bt related U.S.
Patent Nos. 5,567,600 and 5,567,862 issued to Mycogen on that date. Jury
trial in this matter concluded on February 3, 1998 with a verdict in
favor of all defendants. The patents of Mycogen were found invalid on
the basis that Monsanto was a prior inventor. On September 8, 1999, the
District Court issued a revised order which upheld the jury verdict and
also ruled that Mycogen's patents were invalid due to their lack of
enablement. On September 17, 1999, Mycogen filed its notice of appeal in
this matter.
As described in the company's Annual Report on Form 10-K for the year
ended December 31, 1998, on May 19, 1995, Mycogen initiated suit in U.S.
District Court in California against the company alleging infringement
of U.S. Patent No. 5,380,831 involving synthetic Bt genes and seeking
damages and injunctive relief. The District Court has granted motions
dismissing virtually all of Mycogen's patent claims on the basis that
products containing Bt genes made prior to January 1995 do not infringe
the patent. The company has various meritorious defenses to the claims
of Mycogen including non-infringement, lack of validity, prior invention
and collateral estoppel as a result of the outcome in the jury trial in
which Mycogen's related patents were found invalid. Monsanto has made
application to dismiss the Mycogen patent claims on the basis that the
related Delaware litigation is now subject to a final judgment.
Monsanto's application is under advisement by the District Court. The
company is also a party in interference proceedings against Mycogen in
the U.S. Patent and Trademark Office to determine the first party to
invent certain inventions related to Bt technology. In all of the
foregoing actions the company is vigorously litigating its position and
is asserting that the final judgment in the Delaware litigation is
dispositive of Mycogen's claim for a valid patent.
As described in the company's Annual Report on Form 10-K for the year
ended December 31, 1998, 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 suits in U.S. District
Court in Delaware seeking damages and injunctive relief against the
company and DEKALB, alleging infringement of Bt related U.S. Patent No.
5,595,733 issued to Ciba-Geigy Corporation (Seed Division) and now held
by Novartis. The cases of Monsanto and DeKalb were consolidated and
tried to jury verdict in favor of defendants on November 9, 1998. The
jury determined that the Novartis patent was invalid and not enabled. As
part of a settlement of all pending litigation between the company and
Novartis, in November 1999 the parties stipulated to the entry of final
judgment on the jury verdict. Claims by or against Novartis or Novartis
entities in other lawsuits (USDC MN CA 97-2925; USDC MO 4:98CV00286CDP;
and the "Rockford Litigation" described herein) were also part of the
settlement. Under the settlement, various royalty-bearing licenses will
be extended to Novartis for Bt corn technology, genetic transformation
of corn and gluphosinate herbicide tolerance in addition to the other
consideration to be provided by Novartis, which will include licenses to
certain Novartis corn transformation technology and monetary payment for
prior infringement of patents owned by the company.
As described in the company's Annual Report on Form 10-K for the year
ended December. 31, 1998, and in its Report on Form 10-Q for the quarter
ended June 30, 1999, the company and/or DEKALB is the plaintiff in
various legal actions involving Bt technology, herbicide-resistant
and/or insect-resistant transgenic corn, or corn transformation patents.
(a) The DEKALB patents involved in the most significant DEKALB-initiated
transactions are: U.S. Patent No. 5,484,956 covering fertile, transgenic
corn plants expressing genes encoding Bacillus thuringiensis (Bt)
insecticidal proteins; U.S. Patent No. 5,489,520 covering the
microprojectile method for producing fertile, transgenic corn plants
covering a bar or pat gene, as well as the production and breeding of
progeny of such plants; U.S. Patent Nos. 5,538,880 and 5,538,877
directed to methods of producing either herbicide-resistant or insect-
resistant transgenic corn; and U.S. Patent No. 5,550,318 directed to
transgenic corn plants containing a bar or pat gene (all lawsuits
related to this patent have been stayed pending resolution of an
interference proceeding at the U.S. Patent and Trademark Office). In
each case DEKALB has asked the court to determine that infringement has
occurred, to enjoin further infringement and to award unspecified
compensatory and exemplary damages. Most of these actions have been
filed in U.S. District Court for the Northern District of Illinois (the
"Rockford Litigation"). By order dated June 30, 1999, a special master
appointed in the Rockford Litigation construed the patent claims in a
manner largely in accord with the position of DEKALB. The judge has
adopted the findings of the special master and appointed a settlement
mediator to conduct discussions among the parties. The actions in the
Rockford Litigation were initially filed on April 30, 1996, against
Pioneer Hi-Bred International, Inc. ("Pioneer"), Mycogen Corporation
(and two of its subsidiaries) and Ciba-Geigy Corporation (a Novartis
entity). Additional actions were filed in the Rockford Litigation
against: Northrup King Co. (a Novartis entity) on June 10, 1996 and
several Hoechst Schering AgrEvo GmbH entities on August 27, 1996. On
July 2, 1999, DEKALB sued Pioneer in a patent interference action to
declare that DEKALB was the first inventor of the microprojectile method
of producing fertile transgenic corn; on July 30, 1999, DEKALB moved to
consolidate the new suit with the remainder of the Rockford Litigation
for purposes of trial. In addition to the Rockford Litigation,
24
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DEKALB sued Beck's Hybrids, Inc. and Countrymark Cooperative, Inc. on
July 23, 1996, in U. S. District Court for the Northern District of
Indiana (Indianapolis Division); this action has been stayed awaiting
decision on the Rockford Litigation. (b) On March 19, 1996, Monsanto was
issued U.S. Patent No. 5,500,365 and filed suit in U.S. District Court
in Delaware seeking damages and injunctive relief against Mycogen Plant
Science, Inc., Agrigenetics, Inc. and Ciba-Geigy Corporation (Seed
Division) (now Novartis Seeds, Inc.) for infringement of that patent.
Trial of this matter 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. On September 8, 1999 the District Court
affirmed in part the jury's verdict on the issue of prior invention but
overturned the finding of non-infringment on the reverse doctrine of
equivalents. Notice of appeal was filed September 15, 1999 by Monsanto
which is continuing to litigate vigorously its position on appeal. In a
settlement entered into in November 1999, Monsanto, DEKALB and Novartis
agreed to dismiss all claims against Novartis entities in the above-
referenced lawsuits, in recognition of patent license agreements among
those parties.
As described in the company's Annual Report on Form 10-K for the year
ended December 31, 1998, and in its Reports on Form 10-Q for the
quarters ending March 31, 1999 and June 30, 1999, in 1997 the company
commercially introduced corn containing a gene providing glyphosate
resistance. On November 20, 1997, Rhone Poulenc Agrochimie S. A. ("Rhone
Poulenc") filed suit in the U. S. District Court in North Carolina
(Charlotte) against the company and DEKALB (now a subsidiary of the
company) alleging that a 1994 license agreement (the "1994 Agreement")
between DEKALB and Rhone Poulenc was induced by fraud stemming from
DEKALB's nondisclosure of a research report involving testing of plants
to determine glyphosate tolerance. Rhone Poulenc also alleged that
neither DEKALB nor Monsanto has a right to license, make or sell
products using Rhone Poulenc technology for glyphosate resistance under
the terms of the 1994 Agreement. On April 5, 1999, the trial court
rejected Rhone Poulenc's claim that the contract language did not convey
a license but found that a disputed issue of fact existed as to whether
the contract was obtained by fraud. Jury trial of the fraud claims ended
April 22, 1999, with a verdict for Rhone Poulenc and against DEKALB.
Monsanto was dismissed from the trial prior to verdict since it was not
involved in the inducement allegation and was involved in the case only
due to the fact that in 1996, DEKALB sublicensed to Monsanto certain
technology previously licensed by Rhone Poulenc. The jury awarded $15
million in actual damages for "unjust enrichment" and $50 million in
punitive damages. DEKALB has filed motions with the trial court to set
aside the damage award. DEKALB has meritorious grounds to overturn the
jury verdict and has filed a Motion for Judgment as a Matter of Law to
overturn the jury verdict. The trial was bifurcated to allow claims
against DEKALB and Monsanto for patent infringement and misappropriation
of trade secrets to be tried before a different jury. On May 6, 1999,
the District Court dismissed Monsanto from all remaining claims and
granted Monsanto's motion for summary judgment holding that Monsanto was
a bona fide purchaser which retained all license rights to the Rhone
Poulenc technology notwithstanding the prior verdict against DEKALB. The
Court concurred that Monsanto was not liable for trade secret or patent
infringement claims since Monsanto obtained its license from DEKALB
without any knowledge of the claims that allegedly gave rise to the jury
verdict against DEKALB. Jury trial of the patent infringement and
misappropriation claims ended June 3, 1999, with a verdict for Rhone
Poulenc and against DEKALB. DEKALB is continuing to defend the
litigation and maintains that they remain licensed to use the Rhone
Poulenc technology notwithstanding the verdict or any subsequent action
that may occur to rescind the 1994 license between Rhone Poulenc and
DEKALB. In addition to the claim of license, DEKALB believes that they
have other meritorious defenses to the patent and trade secret
allegations, including patent invalidity and absence of trade secret
status due to Rhone Poulenc's own public disclosure of the alleged trade
secret. On July 16, 1999, a hearing occurred on all post-trial motions
including the request by Rhone Poulenc for injunctive relief against
future sales of DEKALB-brand RoundupReady(R) corn products if the
material was not currently in inventory or within the scope of the prior
damage verdict. No ruling has occurred on the post-trial motions.
Pursuant to an agreement between the company and Rhone Poulenc, certain
RoundupReady(R) corn products are being sold under a royalty bearing
arrangement. DEKALB will vigorously appeal the verdict to the Federal
Circuit and will assert its meritorious defenses to all remaining claims
in the litigation and will vigorously seek to avoid further claims of
liability, the possible entry of injunctive relief and will seek to
overturn by appeal any judgment entered in the lawsuit.
As described in the company's Annual Report on Form 10-K for the year
ended December 31, 1998, and in its Report on Form 10-Q for the quarter
ended June 30, 1999, on February 4, 1999, Pioneer Hi-Bred International,
Inc. ("Pioneer") filed suit against Monsanto Company (Civil Action No.
4-99-CV-90063, United States District Court, Southern District of Iowa).
The suit sought actual and compensatory damages and injunctive relief,
alleging that Monsanto misappropriated Pioneer trade secrets through its
acquisition of the international seed operations of Cargill,
Incorporated ("Cargill). Pioneer alleged that certain of Cargill's
employees misappropriated (via theft and otherwise) germplasm
25
<PAGE>
<PAGE>
belonging to Pioneer's corn seed business, bred the misappropriated
Pioneer germplasm into corn lines of Cargill's international businesses,
and sold the misappropriated materials to Monsanto. Pioneer filed a
related lawsuit directly against Cargill in October 1998 (Civil Action
No. 4-98-90576, United States District Court, Southern District of
Iowa).Under a confidential agreement between Monsanto and Cargill,
Monsanto returned to Cargill certain germplasm acquired from Cargill,
and Cargill made a substantial cash payment to Monsanto. On October 22,
1999 the United States District Court dismissed Pioneer's action against
Monsanto on the basis of a prior settlement between Monsanto and
Pioneer. Under that confidential settlement agreement, the companies
agreed to the destruction of a significant volume of germplasm
originally obtained via the Cargill transaction and to certain future
germplasm exchanges in addition to a cash payment by Monsanto to
Pioneer.
On October 28, 1998, two lawsuits were filed in U.S. District Court in
Iowa: one against Asgrow Seed company, L.L.C., a subsidiary of the
company (No. 4-98-CV-70577); and the other against DEKALB (since
acquired by the company) (No. 4-98-CV-90578). The lawsuits allege that
defendants misappropriated trade secrets of Pioneer in their corn
breeding programs. In addition to claims under Iowa state law for trade
secret misappropriation, Pioneer alleges violations of the Lanham Act.
Actual and exemplary damages and injunctive relief are sought. Pioneer
also asserts that defendants have violated an unspecified contractual
obligation not to breed with Pioneer germplasm. On October 8, 1999
Pioneer's motion to add additional parties was granted and expanded the
litigation to include Monsanto and other entities as predecessors or
successors in interest to the original defendants. Trial of the DEKALB
case is set for September 11, 2000. The defendants have numerous
meritorious defenses including preemption, laches, statute of
limitations, absence of trade secrets, ownership of the germplasm, bona
fide purchaser status, preemption by federal law and other defenses.
Defendants will vigorously defend against Pioneer's claims in the
litigation.
On April 15, 1996, one hundred ten (110) current and former employees of
Fisher Controls International, Inc. ("Fisher"), a former subsidiary of
Monsanto, filed suit against the company in the District Court of
Brazoria County, Texas, 149th Judicial District (Cause No. 96M0975),
alleging breach of contract, breach of a duty of good faith and fair
dealing, and fraud. Plaintiffs challenged Monsanto's decision, pursuant
to the terms of the stock option plans in effect, to curtail the
duration of plaintiffs' options to purchase common stock of Monsanto
following the divestiture of Fisher from the Monsanto corporate family
in 1992. On June 24, 1997, the trial court granted Monsanto's motion for
summary judgment and dismissed the case with prejudice. Plaintiffs
appealed the judgment to the Court of Appeals for the First District of
Texas (No. 01-97-01142-CV). On September 7, 1999, the Court of Appeals
issued an opinion reversing the summary judgment and remanding the case
to the trial court for further proceedings. On October 1, 1999, Monsanto
filed a motion for rehearing or, in the alternative, for rehearing en
banc. That motion remains pending. Monsanto believes that the decision
of the trial court was correct and that its actions regarding the Fisher
employees were in accordance with the terms of the stock option plans
and entitled to substantial deference under Delaware law. Monsanto
intends to pursue its efforts to overturn the decision of the Court of
Appeals and will continue to vigorously defend against all claims of
plaintiffs.
Other information with respect to legal proceedings appears in the
company's Report on Form 10-K for the year ended December 31, 1998, and
the company's Reports on Form 10-Q for the quarters ending March 31,
1999 and June 30, 1999.
ITEM 5. OTHER INFORMATION
DISCLOSURE REGARDING FORWARD LOOKING INFORMATION
Under the Private Securities Litigation Reform Act of 1995, companies
are provided with a "safe harbor" for making forward-looking statements
about the potential risks and rewards of their strategies. Monsanto
believes it's in the best interest of its shareowners to use these
provisions in discussing future events. Forward-looking statements
include Monsanto's plans for growth; the potential for the development,
regulatory approval, and public acceptance of new products; and other
factors that could affect Monsanto's future operations or financial
position. Such statements often 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, including 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.
26
<PAGE>
<PAGE>
FACTORS AFFECTING THE AGRICULTURAL PRODUCTS SEGMENT
Roundup Generic Competition: The family of Roundup(R) herbicides is a
- ---------------------------
major product line for Monsanto's Agricultural Products segment. These
herbicides are likely to face increasing competition from generic
products. Patents protecting Roundup(R) in several countries expired in
1991. Compound per se patent protection for the active ingredient in
Roundup(R) herbicide expires in the United States in Sept. 2000.
Monsanto believes that it can compensate for increased generic
competition both within and outside the United States and continue to
increase revenues and profits from Roundup(R) through a combination of
(1) marketing strategy, (2) pricing strategy, and (3) decreased
production costs.
Marketing Strategy. Monsanto expects to increase Roundup(R) sales
------------------
by focusing on brand premiums, providing unique formulations and
services, offering integrated seed and biotech solutions through
cross selling and the growth and introduction of RoundupReady(R)
crops, and continuing to encourage the practice of conservation
tillage. In addition, Monsanto will seek to enter into strategic
agreements to supply glyphosate to other herbicide producers. The
success of the company's Roundup(R) marketing strategy will depend
on the continued expansion of conservation tillage practices and
the company's ability to realize and promote cost and production
benefits of its product packages, introduce new RoundupReady(R)
crops and economically produce glyphosate in sufficient quantities
to allow it to market to such producers.
Pricing Strategy. Monsanto significantly reduced the sales price
----------------
of Roundup(R) in the United States. This price elasticity
strategy is designed to increase demand for Roundup(R) in the
United States by making Roundup(R) more economical, encouraging
both new uses of the product and expansion of the number of acres
treated. Monsanto's experience in numerous markets worldwide has
been that price reductions have stimulated volume growth. However,
the volume increases in the other countries also may have been
influenced by a variety of other factors, such as weather; the
increased use of conservation tillage practices; development of
other new markets or applications for Roundup(R); launch of new
products including Roundup Ready(R) crops; competitive products
and practices; and an increase in agricultural acres planted.
Conditions, and therefore volume trends in one country may or may
not be duplicated in other world areas. As a result, Monsanto's
experience with price elasticity in markets outside the United
States may or may not be replicated in the United States.
Production Cost Decreases. Monsanto also believes that increased
-------------------------
volumes and technological innovations will lead to efficiencies
that will reduce the production cost of glyphosate. Such cost
reductions will depend on realizing such increased volumes and
innovations, and securing the resources required to expand
production of Roundup(R).
Realization and Introduction of New Biotech Products: The company's
- ----------------------------------------------------
ability to develop and introduce to market new agricultural biotech
products, including new Roundup Ready(R) crops, will be dependent, among
other things, upon the availability of sufficient financial resources to
fund research and development needs, demonstrated product effectiveness,
the company's ability to develop, purchase or license required
technology, the existence of sufficient distribution channels and the
acceptance and competition factors discussed below.
Governmental and Consumer Acceptance: The commercial success of
- ------------------------------------
agricultural and food products developed through biotechnology will
depend in part on government and public acceptance of their cultivation,
distribution and consumption. Monsanto continues to work with consumers,
customers and regulatory bodies to encourage understanding of
nutritional and agricultural biotechnology products. However, public
attitudes may be influenced by claims that genetically modified plant
products are unsafe for consumption or pose unknown risks to the
environment or to traditional social or economic practices. For
instance, consumer groups have brought lawsuits in various countries
seeking to halt industry activities with respect to products developed
through biotechnology. Securing governmental approvals for, and consumer
confidence in, such products poses numerous challenges, particularly
outside the United States. Some countries also have labeling
requirements. In some markets, because these crops are not yet approved
for import, growers in other countries may be restricted from
introducing or selling their grain. In these cases, the grower may have
to arrange to sell the grain only in the domestic market or to use the
grain for feed on his or her farm. The market success of Monsanto's
products developed through biotechnology could be delayed or impaired in
certain geographical areas because of such factors.
Technological Change and Competition: A number of companies are engaged
- ------------------------------------
in plant biotechnology research. Technological advances by others could
render Monsanto's products less competitive. In addition, the ability to
be first
27
<PAGE>
to market a new product can result in a significant competitive
advantage. Monsanto believes that competition will intensify, not only
from agricultural biotechnology firms but from 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 does.
Successful Integration of Recent Transactions: Monsanto has made
- ---------------------------------------------
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 the company's long-term growth. The Delta and Pine Land
Co. (D&PL) transaction is subject to regulatory approval and other
customary conditions. It is anticipated that the pending D&PL
transaction, when final, and the recently completed acquisitions of
DEKALB Genetics Corp., Plant Breeding International Cambridge, and
certain international seed operations of Cargill Inc., will
significantly dilute Monsanto's financial results for the next several
years. Long term, Monsanto must integrate these companies into its
business to realize projected synergies and to provide the distribution
channels necessary to quickly and efficiently launch new products. It
must also fit such acquisitions, mergers and joint ventures into its
growth strategy to generate sufficient value to justify their cost.
Mergers, acquisitions, and joint ventures also present other challenges,
including geographical coordination, personnel integration, and the
reconciliation of corporate cultures. This integration could cause a
temporary interruption of or loss of momentum in Monsanto's business and
the loss of key personnel from the acquired company. There can be no
assurance that the diversion of management's attention to such matters
or the delays or difficulties encountered in connection with integrating
these operations will not have an adverse effect on Monsanto's business,
results of operations, or financial condition.
Planting Decisions and Weather: The company's agricultural products
- ------------------------------
business is highly seasonal. It is subject to weather conditions and
natural disasters that affect commodity prices, seed yields, and
decisions by growers regarding purchases of seed and herbicides. As they
have for all of 1999, crop commodity prices continue to be at
historically low levels. There can be no assurance that this trend will
not continue. These lower commodity prices affect growers' decisions
about the types and amounts of crops to plant and may negatively
influence sales of Monsanto's herbicide and seed products.
FACTORS AFFECTING THE PHARMACEUTICALS SEGMENT
Ability to Realize Potential of Existing Pipeline Products:
- ----------------------------------------------------------
Pharmaceutical research and development (R&D) is subject to inherent
uncertainty, difficulties and delays. These include, but are not limited
to, successful completion of clinical trials and the ability to obtain
regulatory approval for the compounds worldwide. Failure to receive
government approvals as anticipated could preclude or substantially
delay commercialization of products in the company's R&D programs.
Development and Commercialization of New Products and Expansion of
- ------------------------------------------------------------------
Existing Product Uses: The Pharmaceuticals Segment's long-term success
- ---------------------
will depend in great part on its ability to commercialize new products
(including second generation products) and to expand the use of its
existing products by developing new indications for such products. Such
efforts require substantial funding of R&D and, in the case of new
products, launch expenses. If Monsanto is unable to earn or borrow
sufficient resources to fund such expenses, its ability to develop new
products and expand uses of existing products will suffer. Further, the
outcome of R&D is inherently difficult to predict. Anticipated results
may never materialize, or they may not be promising enough. Even when
new pharmaceutical products are marketed, there can be no guarantees of
their commercial success. Consumer demand and competitive factors,
including the availability and price of treatment alternatives influence
sales. In addition, timing is crucial. The results of R&D of new
pharmaceutical products are difficult to forecast, and new products must
be carefully deployed, with resources sufficient to realize the full
value of the products.
Product Liability and Consumer Acceptance: The sale of pharmaceutical
- -----------------------------------------
products always involves a risk of product liability claims and
associated adverse publicity. Substantial damage awards for injuries
allegedly caused by the use of pharmaceuticals have been made against
certain companies in past years. In addition, unexpected safety or
efficacy concerns can arise with respect to marketed products. Whether
or not they are scientifically justified, such concerns could lead to
product recalls, withdrawals, or declining sales.
Competition: Pharmaceutical research is intense and highly competitive.
- -----------
It is characterized by rapid technological change. Depending on the
product involved, competition may be encountered in price, delivery,
service, performance,
28
<PAGE>
<PAGE>
innovation, brand recognition and quality. Many of Monsanto's
pharmaceutical competitors have greater research, financial, marketing
and other resources than Monsanto does. Some of Monsanto's trademarked
pharmaceutical products also face increasing pressures from producers of
lower-priced generic products and from new products entering the
marketplace. Finally, as the company introduces new products intended
for use in the treatment of the same conditions as existing Monsanto
products, sales of such existing products may suffer.
Pricing: Managed care groups, health care organizations and government
- -------
agencies worldwide actively seek discounts and lower prices on
pharmaceutical products. Monsanto's challenge is to provide overall
economic benefits to health care providers and negotiate prices for
specific products that will allow it to profit at acceptable levels.
FACTORS AFFECTING ALL SEGMENTS
Financial Requirements: Monsanto's recent acquisitions will require a
- ----------------------
significant commitment of the company's financial resources. In
addition, new technological innovations generally require a significant
investment for R&D and product launch. Lack of funds for investment in
these areas could hinder the company's ability to make technological
innovations and to introduce and distribute new products. Monsanto
expects to generate the required capital by increasing the revenues of
its core businesses, by seeking sufficient outside financing and by
containing costs. The company's ability to do so will depend upon a
variety of specific factors listed elsewhere in this report and upon
capital market conditions generally.
Intellectual Property: Monsanto has devoted significant resources to
- ---------------------
obtaining and maintaining patent protection worldwide for its products.
It seeks 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 are becoming increasingly important
within the agricultural biotechnology and pharmaceutical industries, as
products developed through biotechnology become a larger part of the
product landscape.
Monsanto generally relies upon patent and trademark laws worldwide to
establish and maintain its proprietary rights in its technology and
products. There is some uncertainty about the value of available patent
protection in certain countries outside the United States. Moreover, the
patent positions of biotechnology and pharmaceutical companies involve
complex legal and factual questions. Rapid technological advances and
the number of companies performing such research can create an uncertain
environment. Patent applications in the United States are kept secret:
outside the United States, patent applications are published 18 months
after filing. Accordingly, competitors may be issued patents from time
to time without any prior warning to the company. That could decrease
the value of similar technologies under development at Monsanto. Because
of this rapid pace of change, some of the company's products may
unknowingly rely on key technologies developed by others. If that
occurs, the company must 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 and additional future
litigation is anticipated. Although the outcome of such litigation
cannot be predicted with certainty, Monsanto will continue to defend and
litigate its positions vigorously. The company believes it has
meritorious defenses and claims in the pending suits.
Markets Outside the United States: Sales outside the United States made
- ---------------------------------
up approximately 45 percent of the company's 1998 revenues and Monsanto
intends to continue to actively explore international sales
opportunities. 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 certain Latin American economies may, if not reversed,
adversely affect future income. Also, future sales may decrease because
the decline in such economies could cause customers to purchase fewer
goods in general, and also because imported Monsanto products could
become more expensive for customers to purchase in their local currency.
Joint Ventures and Alliances: The company plans to continue to
- ----------------------------
frequently explore the potential benefits of possible strategic
alliances and joint ventures. Such arrangements can help speed the
development and commercialization of new products or assist in product
distribution and marketing. However, despite its efforts, the company
may be unable to reach agreement with third parties with whom it desires
to enter into a joint venture or other alliance.
Restructuring: Monsanto has announced an aggressive plan to restructure
- -------------
its business, including the elimination of a number of employment
positions and the divestiture of certain non-strategic assets. The
inherent uncertainty related to a
29
<PAGE>
restructuring, and the resulting increased demands on certain employees,
could cause a temporary interruption of or loss of momentum in
Monsanto's business. In addition, the success of the company's
divestiture plan will depend on its ability to negotiate acceptable
sales prices for such assets which is in turn largely dependent on the
long-term prospects and strategic value of the divested businesses and
the availability of a buyer with sufficient financial resources.
Year 2000 Readiness: The dates on which Monsanto believes the Year 2000
- -------------------
(Y2K) Program will be completed are based on management's best
estimates, which include numerous assumptions about 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 that may cause delays in the
Y2K Program or increased costs in connection with it include, but are
not limited to, the continued availability and cost of experts 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) Reports on Form 8-K during the quarter ended September 30, 1999
None
30
<PAGE>
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MONSANTO COMPANY
--------------------------------
(Registrant)
/s/ RICHARD B. CLARK
--------------------------------
RICHARD B. CLARK
Vice President and Controller
(On behalf of the Registrant and
as Principal Accounting Officer)
Date: January 21, 2000
31
<PAGE>
<PAGE>
<TABLE>
EXHIBIT INDEX
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
2 Omitted - Inapplicable
3 Omitted - Inapplicable
4 Omitted - Inapplicable
10<F*> 1. Monsanto Management Incentive Plan of 1996, as amended April 25, 1997, July 25,
1997, August 18, 1997, February 26, 1998, September 25, 1998, April 23, 1999 and
October 22, 1999 and as Adjusted to Reflect Stock Split as of May 15, 1996 and
Spin-off as of September 1, 1997
2. Monsanto Management Incentive Plan of 1988/I, as amended in 1988, 1989, 1991,
1992, April 1997, July 1997 and October 22, 1999
3. Monsanto Management Incentive Plan of 1988/II, as amended in 1989, 1991, 1992,
April 1997, July 1997 and October 22, 1999
4. Monsanto Management Incentive Plan of 1994, as amended in April 1997, July 1997
and October 22, 1999
5. Form of Monsanto Company 1999 Non-Qualified Premium Stock Option Certificate
11 Omitted - Inapplicable; see Note 4 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
<FN>
- --------------
<F*> Previously filed.
</TABLE>
32
<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
THREE MONTHS ENDED SEPTEMBER 30, 1999, AND THE STATEMENT OF CONSOLIDATED
FINANCIAL POSITION AS OF SEPTEMBER 30, 1999. 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-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 84
<SECURITIES> 0
<RECEIVABLES> 2,791
<ALLOWANCES> 0
<INVENTORY> 1,598
<CURRENT-ASSETS> 5,647
<PP&E> 5,438
<DEPRECIATION> 2,388
<TOTAL-ASSETS> 15,983
<CURRENT-LIABILITIES> 3,555
<BONDS> 5,961
<COMMON> 0
1,694
0
<OTHER-SE> 3,549
<TOTAL-LIABILITY-AND-EQUITY> 15,983
<SALES> 6,804
<TOTAL-REVENUES> 6,804
<CGS> 2,450
<TOTAL-COSTS> 2,450
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 287
<INCOME-PRETAX> 700
<INCOME-TAX> 243
<INCOME-CONTINUING> 457
<DISCONTINUED> 69
<EXTRAORDINARY> 0
<CHANGES> (20)
<NET-INCOME> 506
<EPS-BASIC> .80
<EPS-DILUTED> .78
</TABLE>
<PAGE>
EXHIBIT 99
<TABLE>
MONSANTO COMPANY AND SUBSIDIARIES
COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES
<CAPTION>
Nine Months Ended
Sept. 30, Year Ended Dec. 31,
----------------- ----------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Income from continuing operations
before provision for income taxes $ 700<F*> $494<F*> $(85)<F*> $127<F*> $356<F*> $533<F*> $478
Add
Fixed charges 340 180 269 188 131 133 123
Less capitalized interest (18) (6) (12) (13) (8) (4) (3)
Dividends from affiliated companies -- 1 1 1 3 1 0
Less equity income (add equity loss)
of affiliated companies 24 11 35 (6) 32 (12) (0)
------ ---- ---- ---- ---- ---- ----
Income as adjusted $1,046 $680 $208 $297 $514 $651 $598
====== ==== ==== ==== ==== ==== ====
Fixed charges
Interest expense $287 $144 $210 $135 $ 83 $ 92 $88
Capitalized interest 18 6 12 13 8 4 3
Portion of rents representative
of interest factor 35 30 47 40 40 37 32
------ ---- ---- ---- ---- ---- ----
Fixed charges $ 340 $180 $269 $188 $131 $133 $123
====== ==== ==== ==== ==== ==== ====
Ratio of earnings to fixed charges 3.08 3.78 0.77 1.58 3.92 4.89 4.86
==== ==== ==== ==== ==== ==== ====
<FN>
<F*> Includes charges for restructuring, acquired in-process research
and development, and other unusual items of $38 million and $202
million for the nine months ended September 30, 1999 and 1998,
respectively and $762 million, $663 million, $327 million, and $24
million for the years ended December 31, 1998, 1997, 1996, and
1995, respectively. Excluding these unusual items, the ratio of
earnings to fixed charges would have been 3.19 and 4.89 for the
nine months ended September 30,1999 and 1998, respectively and
3.61, 4.95, 6.42, and 5.08 for the years ended December 31, 1998,
l997, 1996, and 1995, respectively. The ratio was not materially
affected by the restructuring and other unusual items in 1994.
</TABLE>
