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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 JUNE 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 JUNE 30, 1999
----- -------------
COMMON STOCK, $2 PAR VALUE 633,709,156 SHARES
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The Statement of Consolidated Income of Monsanto Company and
subsidiaries for the three months and six months ended June 30, 1999
and the three months and six months ended June 30, 1998, the Statement
of Consolidated Financial Position as of June 30, 1999 and December 31,
1998, the Statement of Consolidated Cash Flow for the six months ended
June 30, 1999 and six months ended June 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 Annual Report on Form 10-K/A and Quarterly Report on
Form 10-Q/A for the quarterly period ended March 31, 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" means 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. There were no unusual items in 1999; however, net income and
income from continuing operations for the second quarter of 1998
included an aftertax net charge of $13 million for the cost of exiting
the company's optical products business, 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 six
months ended June 30, 1999 and the three months and six months ended
June 30, 1998.
EBITDA (excluding unusual items) excludes the effects of intangible
amortization and interest expense. For this reason, the anticipated
increase in these two elements of the financial statements resulting
from the recent acquisitions of DEKALB Genetics Corporation, Plant
Breeding International Cambridge, and the international seed businesses
of Cargill, 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 each of the three years
ended December 31, 1998.
1
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<TABLE>
MONSANTO COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME
(Dollars in millions, except per share)
Unaudited
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $2,572 $2,079 $4,882 $3,798
Costs and Expenses:
Cost of Goods Sold 850 842 1,721 1,492
Selling, General and Administrative Expenses 726 546 1,393 1,011
Technological Expenses 316 317 669 585
Amortization of Intangible Assets 84 70 167 116
Restructuring and Other Special Charges - Net (35) (35)
Interest Expense 108 51 204 95
Interest Income (7) (12) (14) (20)
Other Income - Net (38) (21) (1) (18)
------ ------ ------ ------
Income from Continuing Operations Before Income Taxes 533 321 743 572
Income Tax Expense 207 97 296 182
------ ------ ------ ------
Income from Continuing Operations Before Cumulative
Effect of Accounting Change 326 224 447 390
Income from Discontinued Operations, net of taxes of $8,
$17, $15, and $32 million, respectively 18 33 30 63
------ ------ ------ ------
Income before Cumulative Effect of Accounting Change 344 257 477 453
Cumulative Effect of a Change in Accounting Principle,
net of taxes of $12 million (20)
Net Income $ 344 $ 257 $ 457 $ 453
------ ------ ------ ------
Basic Earnings per Share:
Continuing Operations $ 0.51 $ 0.37 $ 0.70 $ 0.65
Discontinued Operations 0.03 0.06 0.05 0.11
Cumulative Effect of Accounting Change (0.03)
Net Income $ 0.54 $ 0.43 $ 0.72 $ 0.76
------ ------ ------ ------
Diluted Earnings per Share:
Continuing Operations $ 0.50 $ 0.36 $ 0.69 $ 0.63
Discontinued Operations 0.03 0.05 0.04 0.10
Cumulative Effect of Accounting Change -- -- (.03) --
------ ------ ------ ------
Net Income $ 0.53 $ 0.41 $ 0.70 $ 0.73
------ ------ ------ ------
Dividends per Share $ 0.03 $ 0.03 $ 0.06 $ 0.06
------ ------ ------ ------
The accompanying notes are an integral part of the financial statements.
</TABLE>
2
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<TABLE>
MONSANTO COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(Dollars in millions, except per share)
Unaudited
<CAPTION>
June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 99 $ 89
Receivables, net of allowances of $143 in 1999 and $87 in 1998 3,347 2,119
Miscellaneous receivables and prepaid expenses 738 777
Deferred income tax benefit 490 488
Inventories 1,474 1,722
------- -------
Total Current Assets 6,148 5,195
------- -------
Property, Plant and Equipment 5,298 5,185
Less Accumulated Depreciation 2,316 2,320
------- -------
Net Property, Plant and Equipment 2,982 2,865
------- -------
Intangible Assets, net of accumulated amortization 4,914 5,281
Other Assets 1,155 1,120
Net Assets of Discontinued Operations 1,690 1,924
------- -------
Total Assets $16,889 $16,385
------- -------
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities:
Accounts payable $ 453 $ 823
Accrued liabilities 2,054 1,888
Short-term debt 1,743 1,069
------- -------
Total Current Liabilities 4,250 3,780
------- -------
Long-Term Debt 6,130 6,259
Postretirement Liabilities 918 848
Other Liabilities 376 512
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 1,451 1,389
Treasury stock, at cost (213,218,064 shares in 1999
and 217,632,240 shares in 1998) (2,459) (2,508)
Reinvested earnings 5,070 4,652
Reserve for ESOP debt retirement (95) (106)
Accumulated other comprehensive loss (446) (135)
------- -------
Total Shareowners' Equity 5,215 4,986
------- -------
Total Liabilities and Shareowners' Equity $16,889 $16,385
------- -------
The accompanying notes are an integral part of the financial statements.
</TABLE>
3
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<TABLE>
MONSANTO COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOW
(Dollars in millions)
Unaudited
<CAPTION>
Six Months Ended
June 30,
----------------
1999 1998
---- ----
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Operating Activities:
Income from continuing operations $ 447 $ 390
Add income taxes - continuing operations 296 182
------- -------
Income from continuing operations before income taxes 743 572
Adjustments to reconcile to Cash Used in Continuing Operations:
Income tax refunds (payments) (45) (21)
Items that did not use (provide) cash:
Depreciation and amortization 342 231
Restructuring expense (income) (35)
Bad debt expense and other 77 89
Working capital changes that provided (used) cash:
Accounts receivable (1,347) (1,273)
Inventories 152 11
Accounts payable and accrued liabilities (352) 63
Other 31 (134)
Pharmaceutical licensing and product rights sales 207
Other items (44) 107
------- -------
Cash Used in Continuing Operations (443) (183)
Cash Used in Discontinued Operations (106) (121)
------- -------
Total Cash Used in Operations (549) (304)
------- -------
Investing Activities:
Property, plant and equipment purchases (392) (363)
Acquisition of seed companies (50) (68)
Acquisition and investment payments (9) (60)
Investment and property disposal proceeds 116 126
Discontinued Operations 314 (14)
------- -------
Cash Used in Investing Activities (21) (379)
------- -------
Financing Activities:
Net change in short-term financing 674 456
Long-term debt proceeds 22 223
Long-term debt reductions (150) (68)
Dividend payments (38) (36)
Common stock issued under employee stock plans 72 96
------- -------
Cash Provided by Financing Activities 580 671
------- -------
Increase (Decrease) in Cash and Cash Equivalents 10 (12)
Cash and cash equivalents beginning of year 89 134
------- -------
Cash and cash equivalents at end of period $ 99 $ 122
------- -------
</TABLE>
The effect of exchange rate changes on cash and cash equivalents was not
material. Cash payments for interest (net of amounts capitalized) were
$192 million as of June 30, 1999, and $114 million as of June 30, 1998.
The accompanying notes are an integral part of the financial statements.
4
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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 of approximately $1.8
billion. The merger, already approved by D&PL shareowners, is
subject to regulatory approvals and other customary conditions.
This transaction will 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 purchase price
allocations were based on preliminary assumptions and are subject
to revision during 1999, pending final appraisal and valuation
studies. Significant components of the current purchase price
allocation for the principal acquisitions made during 1998 were 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, ($78) million; inventories and other individually
insignificant tangible assets and liabilities, $374 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 by the end of the third quarter of 1999.
Near the end of the second quarter of 1999, Monsanto and Cargill
reached an agreement that resolves outstanding issues related to
Monsanto's purchase of certain international seed operations of
Cargill. As a result, final estimates related to the purchase
price allocation to goodwill, inventories and other individually
insignificant tangible assets are expected to be completed and
adjusted in the third quarter 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 six months
ended June 30, 1999 and June 30, 1998, were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Income $344 $257 $ 457 $453
---- ---- ----- ----
Other Comprehensive Income (Loss):
Foreign Currency Translation Adjustments (41) (27) (317) (52)
Unrealized Investment Gains (Losses) 9 (14) 6 7
---- ---- ----- ----
Total Other Comprehensive (Loss) (32) (41) (311) (45)
---- ---- ----- ----
Total Comprehensive Income $312 $216 $ 146 $408
---- ---- ----- ----
</TABLE>
5
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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 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 million in 1999 and 599 million in
1998). Diluted EPS from continuing operations were computed
taking into account the effect of dilutive potential common shares
(16.4 million in 1999 and 25.3 million in 1998). Dilutive
potential common shares consist of outstanding stock options.
Certain 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 55.3 million of outstanding stock
options, which expire through 2008, and 17.5 million 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
a reserve liability totaling $220 million (current and long-term)
at December 31, 1998. During the second quarter of 1999, 230
employees were severed at a cost of approximately $11 million.
Year-to-date severances for 1999 total 675 employees at a cost of
$45 million. Cash outflows associated with these separations were
charged against the restructuring liability. In addition,
Monsanto completed a portion of the facility closures in the first
six months of 1999, reducing the restructuring liability by
another $12 million.
Work force reductions and facility closures were behind
expectations as of June 30, 1999; however, 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 (45) (12) (57)
---- --- ----
1998 restructuring reserve balance as of
June 30, 1999 $143 $20 $163
---- --- ----
</TABLE>
6. Components of inventories as of June 30, 1999 and Dec. 31, 1998
were as follows:
<TABLE>
<CAPTION>
June 30, Dec. 31,
1999 1998
---- ----
<S> <C> <C>
Finished goods $ 673 $1,064
Goods in process 336 469
Raw materials and supplies 498 224
------ ------
Inventories, at FIFO cost 1,507 1,757
Excess of FIFO over LIFO cost (33) (35)
------ ------
Total $1,474 $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 verdict
included an award of $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 in any
one year.
7
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<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 Six Months Ended
June 30, June 30,
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $234 $372 $469 $697
Income from Discontinued Operations, Before Tax 26 50 45 95
Discontinued Operations Income Tax 8 17 15 32
---- ---- ---- ----
Income from Discontinued Operations $ 18 $ 33 $ 30 $ 63
---- ---- ---- ----
<CAPTION>
Net Assets of Discontinued Operations: As of June 30, 1999 As of December 31, 1998
------------------- -----------------------
<S> <C> <C>
Current Assets $ 654 $ 994
Non-Current Assets 1,290 1,269
------ ------
Total Assets $1,944 $2,263
------ ------
Current Liabilities $ 189 $ 272
Non-Current Liabilities 65 67
------ ------
Total Liabilities $ 254 $ 339
------ ------
Net Assets of Discontinued Operations $1,690 $1,934
------ ------
</TABLE>
9. On August 6, 1999, Monsanto announced the signing of a definitive
agreement to sell Stoneville Pedigree Seed Company to an affiliate
of Hicks, Muse, Tate & Furst, Inc.
8
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<PAGE>
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED
10. Business segment data for the three months and six months ended
June 30, 1999 and the three months and six months ended June 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. There have been no unusual items in 1999; however, net
income and income from continuing operations for the second
quarter of 1998 included an aftertax net charge of $13 million for
the cost of exiting the company's optical products business,
partially offset by a restructuring reserve reversal.
<TABLE>
<CAPTION>
Net Sales
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Agricultural Products $1,612 $1,439 $3,069 $2,572
Pharmaceuticals 923 588 1,748 1,120
Corporate and Other 37 52 65 106
------ ------ ------ ------
Total Net Sales $2,572 $2,079 $4,882 $3,798
------ ------ ------ ------
<CAPTION>
EBIT
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Segment EBIT (excluding unusual items)
from Continuing Operations:
Agricultural Products $505 $483 $ 804 $ 818
Pharmaceuticals 212 (15) 290 (2)
Corporate and Other (76) (83) (147) (136)
---- ---- ----- -----
Total segment EBIT (excluding unusual items) 641 385 947 680
---- ---- ----- -----
Restructuring and Other Unusual Items - Net -- (13) -- (13)
---- ---- ----- -----
Total EBIT from Continuing Operations $641 $372 $ 947 $ 667
---- ---- ----- -----
</TABLE>
EBITDA (excluding unusual items) from Continuing Operations:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Agricultural Products $618 $555 $1,031 $ 969
Pharmaceuticals 256 15 369 56
Corporate and Other (57) (87) (111) (138)
---- ---- ------ -----
Total EBITDA from Continuing
Operations (excluding unusual items) 817 483 1,289 887
---- ---- ------ -----
Interest Expense 108 51 204 95
Income Taxes 207 97 296 182
Amortization Expense 84 46 167 92
Depreciation 92 52 175 115
Restructuring and Other Unusual Items - Net (13) (13)
---- ---- ------ -----
Income from Continuing Operations $326 $224 $ 44 $ 390
---- ---- ------ -----
</TABLE>
9
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<PAGE>
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
UNAUDITED
Financial information for the second quarter or first half 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.
11. 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 $14 million for the
three and six months ended June 30, 1999, and $19 million for the
three and six months ended June 30, 1998.
10
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<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
RECENT EVENTS
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).
RESULTS FROM OPERATIONS - SECOND QUARTER 1999 COMPARED WITH SECOND
- ------------------------------------------------------------------
QUARTER 1998
- ------------
Net income for Monsanto totaled $344 million, or $0.53 per share, in the
second quarter of 1999 compared with net income of $257 million, or
$0.41 per share for the second quarter of 1998. Monsanto recorded
income from continuing operations for the second quarter of 1999 of $326
million, or $.50 per share compared with income from continuing
operations of $224 million, or $0.36 per share for the prior year
quarter. There have been no unusual items in 1999; however, net income
and income from continuing operations for the second quarter of 1998
included an aftertax net charge of $13 million, or $0.02 per share, for
the cost of exiting the company's optical products business, partially
offset by a restructuring reserve reversal. Excluding unusual items in
the second quarter of 1998, net income was $270 million, or $0.43 per
share, and income from continuing operations was $237 million, or $0.38
per share for the quarter.
Consolidated earnings before interest expense and taxes (EBIT) from
continuing operations increased 72 percent to $641 million in the second
quarter of 1999, compared with EBIT from continuing operations of $372
million in the second quarter of 1998. Net sales grew to a record
$2,572 million in the second quarter of 1999, compared with net sales of
$2,079 million for the same period a year ago. Gross profit increased
39% in the second quarter of 1999 compared with the second quarter 1998,
primarily because of the strong performance of the Pharmaceuticals
segment. Selling, general and administrative ("SG&A" ) expenses
increased to $726 million in the second quarter of 1999 compared with
prior year quarter SG&A expenses of $546 million. The inclusion in 1999
of SG&A expenses from acquired seed companies and profit sharing
expenses associated with the co-promotion alliance for Celebrex(R)
arthritis treatment were the primary reasons for the increase.
Technological expense in the second quarter of 1999 remained flat when
compared with technological expense in the second quarter of 1998
because of planned timing of 1999 technological expenditures.
Amortization of intangible assets increased in the second quarter of
1999 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 1999. As a result, interest expense
increased $57 million in the second quarter 1999 when compared to the
same period a year ago. Other income increased $17 million in the
second quarter of 1999 vs. the prior year second quarter primarily
because of a pretax gain of $40 million recorded on the sale of the NSC
Technologies, LLC business in the second quarter of 1999.
11
<PAGE>
<PAGE>
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Business segment data for the three months and six months ended June 30,
1999 and June 30, 1998, were as follows:
<TABLE>
<CAPTION>
Net Sales
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Agricultural Products $1,612 $1,439 $3,069 $2,572
Pharmaceuticals 923 588 1,748 1,120
Corporate and Other 37 52 65 106
------ ------ ------ ------
Total Net Sales $2,572 $2,079 $4,882 $3,798
------ ------ ------ ------
<CAPTION>
EBIT
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Segment EBIT (excluding unusual items)
from Continuing Operations:
Agricultural Products $505 $483 $ 804 $ 818
Pharmaceuticals 212 (15) 290 (2)
Corporate and Other (76) (83) (147) (136)
---- ---- ----- -----
Total segment EBIT (excluding unusual items) 641 385 947 680
Restructuring and Other Unusual Items - Net (13) (13)
---- ---- ----- -----
Total EBIT from Continuing Operations $641 $372 $ 947 $ 667
---- ---- ----- -----
</TABLE>
Agricultural Products Segment
- -----------------------------
Agricultural Products segment EBIT (excluding unusual items) increased
$22 million, or 5 percent, in the second quarter of 1999 to $505
million, compared with $483 million in the second quarter of 1998. The
impact of record sales was partially offset by increases in SG&A,
technological expenses and amortization costs. The inclusion in the
second quarter of 1999 of the acquired seed companies and increased
spending on crop biotechnology initiatives were primarily responsible
for the increase in SG&A and technological expenses when compared with
the second quarter of 1998. The continued unfavorable economic
conditions in certain Latin American and eastern European countries
caused an increase in bad debt expense in the second quarter of 1999.
An increase in amortization of intangible assets in the second quarter
of 1999 compared with the second quarter of 1998 was principally because
of the acquisition of seed companies.
Net sales for the Agricultural Products segment increased to $1,612
million in the second quarter of 1999 compared with net sales of $1,439
million in the second quarter of 1998, a 12 percent increase. The
inclusion of sales from seed companies acquired in 1998 accounted for
most of the increase. In addition, higher licensing revenues from crops
developed through biotechnology, and record sales for the quarter for
the family of Roundup(R) herbicides, partially offset by lower sales of
other herbicides including Harness(R) and Lasso(R), contributed to the
increase. Biotechnology licensing revenues increased 80 percent in the
second quarter of 1999 compared with licensing fees in the same period a
year ago, led by RoundupReady(R) seed traits in soybean, corn, cotton
and canola.
Sales for the family of Roundup(R) herbicides in the second quarter of
1999 were higher when compared with sales in the second quarter of 1998,
fueled by higher sales volumes, primarily in North America,
Australia/New Zealand and China. Roundup(R) herbicide volumes increased
by 18 percent in the second quarter of 1999 compared with the second
quarter of 1998, as both conservation tillage and post-emergent markets
continued to grow. Sales associated with these volume increases were
largely offset by lower overall prices of Roundup(R) herbicides and
lower sales of Roundup(R) herbicides in Latin America. Favorable
weather conditions contributed to the quarterly increase in Roundup(R)
sales volumes, as sales that were expected to occur later in the year
occurred in the second quarter of 1999. The favorable weather is
12
<PAGE>
<PAGE>
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
expected to affect the timing of third and fourth quarter 1999 sales,
but not the overall volume for the year. The recovery in certain
southeast Asian economies also positively affected sales volumes of
Roundup(R) herbicides; however, this was offset by a decline in Latin
America because of weak economic conditions.
Pharmaceuticals Segment
- -----------------------
EBIT (excluding unusual items) for the Pharmaceuticals segment was $212
million in the second quarter of 1999, compared with a loss of $15
million in EBIT (excluding unusual items) in the second quarter of 1998.
The strong product sales of Celebrex(R) arthritis treatment were the
primary reason for the increase. SG&A expenses rose because of increased
spending associated with the marketing of Celebrex(R), which included
co-promotion payments for the second quarter of 1999. Technological
expenses were lower when compared to the year-ago quarter primarily
because of planned timing of second quarter 1999 technological
expenditures.
The Pharmaceuticals segment recorded net sales of $923 million in the
second quarter of 1999, compared with net sales of $588 million during
the same period in 1998, a 57 percent increase. The strong product
sales of Celebrex(R) were primarily responsible for the increase. Sales
of Arthrotec(R) arthritis treatment also were higher in the second
quarter of 1999, despite market share shifts toward Celebrex(R). Sales
of Ambien(R) short-term treatment for insomnia slightly increased in the
second quarter of 1999, as new and refill prescription rates continued
to grow.
Corporate and Other Segment
- ---------------------------
Corporate and Other segment EBIT (excluding unusual items) increased 8
percent in the second quarter of 1999 when compared with the second
quarter of the prior year because 1998 included losses from business
divestitures. The disposal of the Orcolite(R) and Diamonex(R) optical
products businesses during the second quarter 1998 contributed to the
decreases in net sales and SG&A expenses of $15 million and $27 million,
respectively.
SEGMENT EBITDA (EXCLUDING UNUSUAL ITEMS)
- ----------------------------------------
Business segment earnings before interest expense, taxes, depreciation
and amortization (EBITDA) excluding unusual items for the three months
and six months ended June 30, 1999 and June 30, 1998, were as follows:
EBITDA (excluding unusual items) from Continuing Operations:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Agricultural Products $618 $555 $1,031 $ 969
Pharmaceuticals 256 15 369 56
Corporate and Other (57) (87) (111) (138)
---- ---- ------ -----
Total EBITDA from Continuing
Operations (excluding unusual items) 817 483 1,289 887
---- ---- ------ -----
Interest Expense 108 51 204 95
Income Taxes 207 97 296 182
Amortization Expense 84 46 167 92
Depreciation 92 52 175 115
Restructuring and Other Unusual Items - Net (13) (13)
---- ---- ------ -----
Income from Continuing Operations $326 $224 $ 447 $ 390
---- ---- ------ -----
</TABLE>
Monsanto's EBITDA (excluding unusual items) in the second quarter of
1999 was $817 million, compared with EBITDA (excluding unusual items) of
$483 million in the second quarter of 1998, an increase of 69 percent.
The increase reflects increased net sales in the second quarter of 1999
compared with net sales in the second quarter of 1998,
13
<PAGE>
<PAGE>
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
partially offset by increased SG&A expenses and technological expenses.
On a segment basis, Monsanto's Agricultural Products segment EBITDA
(excluding unusual items) increased to $618 million in the second
quarter of 1999 compared with EBITDA (excluding unusual items) of $555
million in the second quarter of 1998, an 11 percent increase.
Inclusion of sales from the seed companies acquired in 1998 and higher
licensing revenues from crops developed through biotechnology drove the
growth in EBITDA (excluding unusual items). On a quarter-to-quarter
basis, Monsanto's Pharmaceuticals segment EBITDA (excluding unusual
items) improved to $256 million in the second quarter of 1999 from
EBITDA of $15 million in the second quarter of 1998 primarily because of
the strong product sales of Celebrex(R) arthritis treatment which was
launched in first quarter 1999.
Financial information for the second quarter or first half 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 SIX MONTHS OF 1999 COMPARED WITH FIRST
- ----------------------------------------------------------------------
SIX MONTHS OF 1998
- ------------------
Net income for Monsanto totaled $457 million, or $0.70 per share, for
the first six months of 1999 compared with net income of $453 million,
or $0.73 per share for the first six months of 1998. Monsanto earned
income from continuing operations for the first six months of 1999 of
$447 million, or $0.69 per share compared with income from continuing
operations of $390 million, or $0.63 per share for the same period in
1998. There have been no unusual items in 1999; however, results for
second quarter of 1998 included an aftertax net charge of $13 million,
or $0.02 per share, for the cost of exiting the company's optical
products business partially offset by a restructuring reserve reversal.
Excluding unusual items in 1998, net income was $466 million, or $0.75
per share and income from continuing operations was $403 million, or
$0.65 per share.
Consolidated earnings before interest expense and taxes (EBIT) from
continuing operations increased 42 percent to $947 million for the first
six months of 1999, compared with EBIT from continuing operations of
$667 million for the first six months of 1998. Sales for the first six
months of 1999 grew to a record $4,882 million while gross profit
increased 37 percent, primarily because of the strong performance of the
Pharmaceuticals segment. Selling, general and administrative (SG&A )
expenses increased to $1,393 million in the first half of 1999 compared
with SG&A expenses of $1,011 million in the first-half of 1998.
Inclusion in the first half of 1999 of SG&A expenses from acquired seed
companies and continued spending associated with the launch of
Celebrex(R) arthritis treatment were principally responsible for the
increase. Technological expenses rose 14 percent in the first half of
1999 compared with the first half of 1998, driven by higher expenses in
the Agricultural Products segment and the Pharmaceuticals segment.
Continued spending on crop biotechnology initiatives was responsible for
the increase in the Agricultural Products segment. Technological
expenses for the Pharmaceuticals segment increased to support several
late-stage new product candidates combined with close-out expenses
associated with discontinuation of clinical trials for the fibans
research program.
Amortization of intangible assets increased 44 percent for the first six
months of 1999 compared with the first six months of 1998, principally
because of the increase in intangible assets related to seed company
acquisitions in 1998. Interest expense increased $109 million for the
first six months of 1999 primarily due to higher debt levels when
compared to the same period a year ago. The higher debt level in 1999
was required as Monsanto financed the 1998 seed company acquisitions
primarily with long-term borrowings. The decline in other income of $13
million was primarily because 1999 six months results no longer include
the equity income of DEKALB, which is now included in Monsanto's
consolidated results.
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.
14
<PAGE>
<PAGE>
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Agricultural Products Segment
- -----------------------------
Agricultural Products segment EBIT (excluding unusual items) was $804
million in the first six months of 1999 compared with EBIT (excluding
unusual items) of $818 million for the first six months of 1998, a 2
percent decrease. The impact of increased sales for the Agricultural
Products segment in the first half of 1999 compared with the first half
of 1998 was more than offset by increases in SG&A and technological
expenses, and amortization costs. 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 six months of
1999. Continued unfavorable economic conditions in certain Latin
American and eastern European countries caused an increase in bad debt
expense in the first six months of 1999 compared with the same period a
year ago. An increase in intangible assets related to seed company
acquisitions in 1998 caused higher amortization expense in the first
half of 1999 compared with the first half of 1998.
Net sales for the Agricultural Products segment increased $497 million,
or 19 percent, in the first six months of 1999, primarily because of the
inclusion of sales from seed companies acquired in 1998. In addition,
higher licensing revenues from crops developed through biotechnology,
and strong sales for the family of Roundup(R) herbicides, partially
offset by lower sales of other herbicides including Harness(R) and
Lasso(R), contributed to the increase. Biotechnology licensing revenues
increased 50 percent in the first six months of 1999 from licensing fees
in the same period in 1998.
The increase in sales volume for the family of Roundup(R) herbicides was
primarily driven by increased usage in conservation tillage and over the
top of RoundupReady(R) crop applications. Sales volumes rose in many
world areas, especially North America, Australia/New Zealand and China.
Sales associated with these volume increases were largely offset by
lower overall prices of Roundup(R) herbicides and lower sales of
Roundup(R) herbicides in Latin America. Sales volumes and prices were
lower in Latin America due to the weakened economy. Favorable weather
conditions contributed to the first six months of 1999 increase in
Roundup(R) sales volumes, as sales that would have been expected to
occur later in the year occurred earlier in the year. The favorable
weather is expected to affect the timing of third and fourth quarter
1999 sales, but not the overall volume for the year.
Pharmaceuticals Segment
- -----------------------
EBIT (excluding unusual items) for the Pharmaceuticals segment increased
to $290 million for the first six months of 1999 compared with a loss of
$2 million for the first six months of 1998, which included $100 million
of revenue related to the co-promotion of Celebrex(R) arthritis
treatment. The strong EBIT(excluding unusual items) performance for the
first six months of 1999 can primarily be attributed to the strong
product launch and continued sales of Celebrex(R) arthritis treatment.
SG&A expenses increased $279 million, or 42 percent primarily because of
increased spending associated with the Celebrex(R) product launch.
Technological expenses increased $33 million when compared to the same
period a year ago primarily to support several late stage new product
candidates, clinical studies for launched products, and close-out
expenses associated with the discontinuation of clinical trials for the
fibans research program.
Net sales for the Pharmaceuticals segment rose to $1,748 million in the
first six months of 1999 compared with net sales of $1,120 million in
the same period of 1998, an increase of 56 percent. The successful
launch and continued strong sales of Celebrex(R) arthritis treatment
drove the increase. In addition, segment sales for the first six months
of 1999 reflect significant increases in sales volumes of Arthrotec(R)
and Daypro(R) arthritis treatments when compared to sales volumes in the
same period in 1998, despite market share shifts towards Celebrex(R)
arthritis treatment.
15
<PAGE>
<PAGE>
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Corporate and Other Segment
- ---------------------------
Corporate and Other segment EBIT (excluding unusual items) decreased $11
million, or 8 percent, for the first six months of 1999 when compared
with the same period a year ago primarily because 1998 included losses
on business divestitures. The disposal of the Orcolite(R) and
Diamonex(R) optical products businesses during the second quarter of
1998 contributed to the decreased net sales and SG&A expenses of $41
million and $27 million, respectively.
Results from Discontinued Operations
- ------------------------------------
Net sales in the second quarter of 1999 were $234 million compared with
net sales of $372 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
$18 million in the second quarter of 1999 compared with income from
discontinued operations in the second quarter 1998 of $33 million.
Income from discontinued operations for the second quarter of 1999 and
the second quarter of 1998 is net of tax expense of $8 million and $17
million, respectively.
Net sales for the first six months of 1999 were $469 million, down 33
percent compared with $697 million in the prior year primarily because
of the divestiture of the Ortho(R) lawn-and-garden products business.
Income from discontinued operations for the first six months of 1999 was
$30 million compared with $63 million in the prior year. Income from
discontinued operations for the first six months of 1999 and first six
months of 1998 is net of tax expense of $15 million and $32 million,
respectively.
CHANGES IN FINANCIAL CONDITION -- JUNE 30, 1999 COMPARED WITH DEC. 31,
- ----------------------------------------------------------------------
1998
- ----
Working capital as of June 30, 1999 increased to $1,886 million from
$1,415 million as of December 31, 1998, primarily because of a seasonal
increase in the Agricultural Products segment's trade receivables
partially offset by inventory decrease of $248 million. The current
ratio was 1.4 at June 30, 1999 and year-end 1998. Accounts payable
decreased by $370 million, or 45 percent, primarily because of payments
made to seed growers in the first half of 1999. Short-term debt
increased $674 million when compared to the year-end balance. The
restructuring liability of $220 million established in 1998 was reduced
by $57 million in the first six months of 1999 to cover the cost for
employees severed and facility closures. Work force reductions and
facility closures were behind expectations as of June 30, 1999, however,
Monsanto expects to complete the remaining restructuring actions within
the originally planned time frame. The percent of total debt to total
capitalization increased to 60 percent as of June 30, 1999 compared with
59 percent as of December 31, 1998 because of the increase in short-term
debt to fund the seasonal needs of the Agricultural Products segment and
the Pharmaceutical segment's launch of Celebrex(R) arthritis treatment.
Operating activities from continuing operations used a net $443 million
of cash in the first six months of 1999, compared with $183 million of
net cash used in operations during the same period in 1998. The
increase in cash used in operations resulted primarily from the seasonal
working capital requirements of the Agricultural Products segment and
the Pharmaceuticals segment product launch of Celebrex(R) arthritis
treatment. For comparative purposes, cash used in operations for the
first six months of 1998 included the collection of $207 million of
miscellaneous receivables related to 1997 Pharmaceuticals licensing and
product rights sales. Investing activities in the first six months of
1999 used $21 million of cash compared with a use of cash of $379
million in the first six 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. Financing activities for the
first six months of 1999 provided $580 million of cash compared with
$671 million in the first six months of 1998. Financing activities for
the first six months of 1999 include the net increase in short-term
financing of $674 million, which was primarily used to fund Agricultural
Product's higher seasonal working capital levels and Pharmaceuticals'
launch and marketing of Celebrex(R).
The company had previously announced its plan to divest certain
businesses that are no longer critical to its life sciences strategy.
These divestitures, including those recently completed or announced, are
currently expected to generate proceeds of at least $1.5 billion to $2
billion pretax.
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
16
<PAGE>
<PAGE>
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
registered with the Securities and Exchange Commission ("SEC") by June
7, 1999. As one of roughly 150 companies originally contacted by the
SEC regarding certain accounting issues, Monsanto is currently in
discussions with the SEC. The registration statement for these
securities, which was filed in March 1999, will not be declared
effective until the discussions are concluded. This interest rate
increase is temporary, and will be discontinued when the SEC declares
the company's registration statement effective and other conditions
are met.
Near the end of the second quarter of 1999, Monsanto and Cargill reached
an agreement that resolves outstanding issues related to Monsanto's
purchase of certain international seed operations of Cargill. As a
result, final estimates related to the purchase price allocation to
goodwill, inventories and other individually insignificant tangible
assets are expected to be completed and adjusted in the third quarter
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 of approximately $1.8 billion. The merger, already approved by
D&PL shareowners, is subject to regulatory approvals and other customary
conditions. This transaction will be accounted for as a purchase.
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.
On August 12, a Judge of the 6th Federal Court's Section, Brasilia,
issued a decision requiring Monsanto to submit an environmental impact
report in order to obtain approval for the commercial planting of
RoundupReady(R) soybeans in Brazil. The decision makes final the
injunction issued by the same Court on June 18, 1999, which is currently
on appeal by Monsanto. Monsanto had received approval for commercial
planting of RoundupReady(R) soybeans in Brazil on September 29, 1998
from CTNBio, the agency which oversees products developed through
biotechnology. CTNBio previously had waived the requirement for an
environmental impact report. The decision means that prior to
commercialization of RoundupReady(R) Soybeans in Brazil, either an
environmental impact report must be approved by the appropriate
environmental regulatory authorities in Brazil, or the decision of the
6th Federal Court's Section must be overturned or modified. Monsanto
intends to pursue all available legal procedures to overturn the
decision. In addition, Monsanto intends to continue, within the bounds
of the Court's decision, working with the regulatory authorities in
Brazil to obtain all approvals necessary for the commercial planting of
RoundupReady(R) soybeans.
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.
COMPANY PREPARES FOR YEAR 2000
- ------------------------------
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.
17
<PAGE>
<PAGE>
Description and Status of the Y2K Program
- -----------------------------------------
Internal Systems. The company's Y2K Program encompasses all areas of the
company's internal systems including conventional information technology
("IT") 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. As part of the
overall remediation activity still underway, two major initiatives
specifically address two significant remaining areas of compliance: IT
Infrastructure (specifically PC compliance); and overall Y2K readiness
in Monsanto's recently acquired seed businesses. Both initiatives have
aggressive milestones and are scheduled to complete by end of third
quarter, 1999. The company is on track to achieve the target date for
completion of all other material remediation work for internal systems
by the end of the third quarter of 1999.
The following summarizes the status of the Y2K Program with respect to
internal systems:
<TABLE>
<CAPTION>
IT Applications Portfolio:
At Jun. 30, 1999 At Mar. 31, 1999
---------------- ----------------
<S> <C> <C>
Number of applications identified 1,676 1,309
Applications assessed for Y2K compliance 100 percent 100 percent
Applications compliant 82 percent 66 percent
Applications to be remediated through replacements and upgrades 11 percent 17 percent
Anticipated retirements 1 percent 3 percent
Applications at various stages of renovation, redevelopment or testing 6 percent 14 percent
<CAPTION>
IT Infrastructure Products:
At Jun. 30, 1999 At Mar. 31, 1999
---------------- ----------------
<S> <C> <C>
Number of IT infrastructure products identified 531 531
Products successfully researched for compliance 100 percent 100 percent
Number of IT infrastructure items in use 38,919 N/A
Items compliant, remediated, or risk eliminated 38 percent N/A
<CAPTION>
Embedded Systems:
At Jun. 30, 1999 At Mar. 31, 1999
---------------- ----------------
<S> <C> <C>
Number of process control products identified 7,733 7,631
Products successfully researched for compliance 100 percent 99 percent
Number of process control items in use 16,529 16,209
Items compliant, remediated, or risk eliminated 93 percent 69 percent
Number of laboratory automation products identified 5,487 5,383
Products successfully researched for compliance 75 percent 74 percent
Number of laboratory automation items in use 14,378 14,250
Items compliant, remediated, or risk eliminated 81 percent 72 percent
Number of site facilities products identified 792 696
Products successfully researched for compliance 98 percent 100 percent
Number of site facilities items in use 1,213 1,086
Items compliant, remediated, or risk eliminated 78 percent 71 percent
Number of products in newly acquired businesses 5,856 3,489
Products successfully researched for compliance 56 percent 40 percent
Number of items in use 10,463 8,858
Items compliant, remediated, or risk eliminated 46 percent 37 percent
</TABLE>
Suppliers. The company has contacted its major suppliers to assess
their preparations for the Year 2000. More than 650 key corporate
suppliers have been identified and contacted in addition to numerous
suppliers critical to individual locations. Approximately 70 percent of
the company's key corporate suppliers have been identified as likely to
be Y2K compliant. The status of the remaining 30 percent of these key
suppliers is of concern and further action is being taken by managers
responsible for these suppliers or supplier contracts. Where
appropriate, company representatives may
18
<PAGE>
<PAGE>
conduct an in-depth investigation of a particular supplier's ability to
be compliant and site visits may be made.
Contingency Plans. The company's contingency plans are continuously
evolving as it proceeds with the Y2K Program. The company began a major
initiative in November 1998 in this area 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 cost analysis, testing, failure response, safety,
procedures, communications, among other items. Senior management
periodically reviews these business-level continuity plans to ensure
Monsanto's supply chain has identified relevant risks and have planned
accordingly. Where a supplier's performance is in doubt, the company's
contingency plans include, when appropriate, the stockpiling of raw
materials or a switch to a different supplier. The company will
increase testing of pharmaceutical and nutrition products as the Year
2000 nears and may also increase production of critical product
inventory.
Costs
- -----
The company continues to evaluate the estimated costs associated with
Y2K compliance based on actual experience. The total cost is currently
projected at about $35 million, with approximately $27.4 million
expended through Jun. 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.
Readers are cautioned that forward-looking statements contained in this
section should be read in conjunction with the company's disclosures
under the heading "Disclosure of Forward-Looking Statements."
EURO CONVERSION
- ---------------
On Jan. 1, 1999, more than two-thirds of the member countries of the
European Union established fixed conversion rates between their existing
sovereign currencies and the euro as common legal currency. During the
transition period from Jan. 1, 1999 until June 30, 2002, both the
existing sovereign currencies of the participating countries and the
euro will be legal currency. Beginning July 1, 2002, the existing
sovereign currencies of the participating countries will no longer be
legal tender for any transactions.
In Sept. 1997, Monsanto formed a cross-functional team which has been
addressing issues associated with the euro conversion. Since Jan. 1,
1999, the company has been able to engage in euro-denominated
transactions and is legally compliant with respect to the euro.
Monsanto expects to have all affected information systems fully
converted by Apr. 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.
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
19
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<PAGE>
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.
Significant interest rate risk sensitive instruments as of June 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) $ 82 $ 82
Average Interest Rate 5.6% 5.6%
Variable Rate ($US)
Principal Amount <F1> $ 60 $1,063 $72 $365 $ 208 $1,769
Average Interest Rate 4.4% 4.9% 4.3% 4.5% 4.0% 4.7%
Short-Term Debt:
Fixed Rate ($US)
Principal Amount $ 148 $ 148
Average Interest Rate 7.7% 7.7%
Variable Rate ($US)
Principal Amount <F2> $1,429 $1,429
Average Interest Rate 5.0% 5.0%
<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 June 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 June 30, 1999. At June 30, 1999, the
following significant forward contracts were outstanding (all expected
to mature by June 30, 2000): sales of Brazilian real with a notional
amount of $15 million and an average exchange rate of 1.805 Brazilian
real per U.S. dollar; sales of Canadian dollars with a notional amount
of $97 million and an average exchange rate of 1.4663 Canadian dollars
per U.S. dollar; sales of British pounds with a notional amount of $385
million and an average exchange rate of 0.6256 British pounds per U.S.
dollar; sales of Australian dollars with a notional amount of $41
million and an average exchange rate of 1.5184 Australian dollars per
U.S. dollar; sales of Polish zlotys with a notional amount of $27
million and an average exchange rate of 3.9634 Polish zlotys per U.S.
dollar; purchases of Japanese yen with a notional amount of $30 million
and an average exchange rate of 120.85 Japanese yen per U.S. dollar;
sales of South African rand with a notional amount of $32 million and an
average exchange rate of 6.0960 South African rand per U.S. dollar;
sales of Czech koruna with a notional amount of $7 million and an
average exchange rate of 35.5652 Czech koruna per U.S. dollar; sales of
Mexican pesos with a notional amount of $11 million and an average
exchange rate of 9.6825 Mexican pesos per U.S. dollar; and sales of
European euros with a notional amount of $246 million and an average
exchange rate of 0.9594 European euros per U.S. dollar. The fair
market values of these contracts approximated the notional amounts at
June 30, 1999.
20
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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 June 30, 1999. At June 30, 1999,
the following significant commodity price risk sensitive instruments
were outstanding: purchased soybean futures contracts totaling $101.2
million (18.5 million bushels at a weighted average price per bushel of
$5.48) with a fair value of $85.4 million, purchased corn futures
contracts totaling $20.2 million (8.6 million bushels at a weighted
average price per bushel of $2.34) with a fair value of $19.6 million,
and sold lean hogs futures contracts totaling $13.0 million (0.2 million
CWT with a weighted average price per CWT of $54.92) with a fair value
of $10.5 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, and in its Report on Form 10-Q for the quarter
ended March 31, 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 and that is currently the subject of a petition for
a re-hearing by the appellate court. 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, and in its Report on Form 10-Q for the quarter
ended March 31, 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
21
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<PAGE>
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.
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 Dec. 31, 1998, 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, the special
master in the Rockford Litigation construed the patent claims in a
manner largely in accord with the position of DEKALB. No trial date has
been established in the Rockford Litigation. 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. Additional
actions were filed in the Rockford Litigation against: Northrup King
Co. 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, 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. Monsanto has filed a
motion for judgment as a matter of law to overturn the jury verdict and
will continue to litigate vigorously its position in the matter.
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 March 31, 1999, on February 4, 1999, Pioneer Hi-Bred International
Inc. ("Pioneer") filed suit against Monsanto company, (Civil Action No.
4-99-CV-90063) in U.S. District Court for the Southern District of Iowa.
The suit seeks equitable relief and jury trial, and alleges that
Monsanto misappropriated trade secrets through the acquisition and
purchase of certain international seed operations of Cargill
International ("Cargill"). Pioneer alleges that Cargill's employees
misappropriated (via theft) germplasm belonging to Pioneer's corn seed
business and then bred the Pioneer germplasm into the corn lines of
Cargill. A related lawsuit, Civil Action No. 4-98-CV-90576 has been
filed by Pioneer against Cargill. On February 2, 1999, a joint
statement issued by Pioneer and Cargill indicated that a former Cargill
employee may have misappropriated technology of Pioneer and that efforts
were
22
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underway between those companies to resolve this issue. Monsanto and
Cargill have resolved issues arising from the purchase of the Cargill
seed operations pursuant to the warranty and representation of Cargill's
parent that all intellectual property and seed lines were the property
of the business and not any third party. Monsanto has denied that it is
liable to Pioneer for damages from its unknowing acquisition of the
business and has numerous meritorious defenses against liability
including its status as a bona fide purchaser and will vigorously defend
this action. In the lawsuit, Pioneer seeks the return of its alleged
trade secrets, injunction against Monsanto's further use of the
material, an accounting and damages for any sales of the misappropriated
material and other relief. On October 28, 1998, two related 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 July 17, 1999, the court denied defendants' motions to
dismiss on the basis that the claims of Pioneer are preempted by federal
law (the Plant Variety Protection Act) which expressly permits the
activities of breeding and research with germplasm sold in commerce. The
defendants have other meritorious defenses including preemption, laches,
statute of limitations, lack of trade secrets, ownership of the
germplasm, bona fide purchaser status and other defenses. Trial of the
Asgrow and DEKALB cases is scheduled for April 2000.
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 Report on Form 10-Q for the quarter ended March 31, 1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
At the company's Annual Meeting of Shareowners on April 23, 1999, five
matters were submitted to a vote of shareowners.
1. The following directors were elected, each to hold office until
the Annual Meeting to be held in 2002 or until a successor is
elected and has qualified or until his or her earlier death,
resignation or removal. Votes were cast as follows:
<TABLE>
<CAPTION>
Votes Votes
Name "For" "Withhold Authority"
---- ----- --------------------
<S> <C> <C>
J. F. M. Peters 518,429,744 15,397,281
R. B. Shapiro 516,660,924 17,166,101
</TABLE>
The following directors are continuing current terms expiring at
the 2000 Annual Meeting: Michael Kantor, Gwendolyn S. King and
John S. Reed. The following directors are continuing current
terms expiring at the 2001 Annual Meeting: Philip Leder, John E.
Robson and William D. Ruckelshaus.
2. A proposal to amend the Management Incentive Plan to increase
shares available for grants to 87,605,350 was submitted to a vote
of shareowners. The Board recommended a vote for the proposal. A
total of 329,726,441 votes were cast in favor of this proposal, a
total of 198,767,675 votes were cast against it, 5,332,909 votes
were counted as abstentions.
3. The approval of the Annual Incentive Program was submitted to a
vote of shareowners. The Board recommended a vote for the
proposal. A total of 487,943,760 votes were cast in favor, a
total of 40,390,487 votes were cast against it and 5,492,778 were
counted as abstentions.
4. The appointment by the Board of Directors of Deloitte & Touche LLP
as principal independent auditors for the year 1999 was ratified
by the shareowners. A total of 527,392,757 votes were cast in
favor of ratification, 3,816,351 votes were cast against it, and
2,617,917 votes were counted as abstentions.
23
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<PAGE>
5. A proposal by a certain shareowner relating to cumulative voting
was submitted to a vote of shareowners. The Board recommended a
vote against the proposal. A total of 142,033,838 votes were cast
in favor of this proposal, a total of 272,826,300 votes were cast
against it, 22,304,517 votes were counted as abstentions, and
96,662,370 votes were counted as broker non-votes.
Brokers were permitted to vote on the following items in the absence of
instructions from street-name holders and, therefore, broker non-votes
did not occur in those matters: the election of directors; the
amendment of the Management Incentive Plan; the approval of the Annual
Incentive Plan; and the ratification of auditors.
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.
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
24
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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 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.
Commodity prices for several crops have decreased significantly in the
last several months and 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.
25
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<PAGE>
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, 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.
<PAGE>
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
26
<PAGE>
<PAGE>
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 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.
27
<PAGE>
<PAGE>
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 June 30, 1999:
A Form 8-K was filed May 4, 1999, in connection with a press
release announcing certain financial information presented
to financial analysts and investors.
28
<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
29
<PAGE>
<PAGE>
<TABLE>
EXHIBIT INDEX
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
2 Omitted - Inapplicable
3 By-Laws of the Company, as amended effective June 25, 1999 (incorporated
herein by reference to exhibit 3.2 of Amendment No. 2 to the Company's
Registration Statement on Form S-4 filed July 28, 1999)
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 and April 23,
1999 and as Adjusted to Reflect Stock Split as of May 15, 1996 and Spin-off as
of September 1, 1997
2. Letter Agreement between the Company and Richard U. De Schutter, dated
February 7, 1997
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
<FN>
- ------------
<F*> Previously filed.
</TABLE>
30
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 99
<SECURITIES> 0
<RECEIVABLES> 3,347
<ALLOWANCES> 0
<INVENTORY> 1,474
<CURRENT-ASSETS> 6,148
<PP&E> 5,298
<DEPRECIATION> 2,316
<TOTAL-ASSETS> 16,889
<CURRENT-LIABILITIES> 4,250
<BONDS> 6,130
<COMMON> 0
1,694
0
<OTHER-SE> 3,521
<TOTAL-LIABILITY-AND-EQUITY> 16,889
<SALES> 4,882
<TOTAL-REVENUES> 4,882
<CGS> 1,721
<TOTAL-COSTS> 1,721
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 204
<INCOME-PRETAX> 743
<INCOME-TAX> 296
<INCOME-CONTINUING> 447
<DISCONTINUED> 30
<EXTRAORDINARY> 0
<CHANGES> (20)
<NET-INCOME> 457
<EPS-BASIC> .72
<EPS-DILUTED> .70
</TABLE>
