PIONEER HI BRED INTERNATIONAL INC, 424B1, 1999-01-13

PIONEER HI BRED INTERNATIONAL INC
424B1, 1999-01-13
AGRICULTURAL PRODUCTION-CROPS

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<PAGE> 1
Filed pursuant to Rule 424(b)(1)
File No. 333-69285

$200,000,000

LOGO

PIONEER HI-BRED INTERNATIONAL, INC.

5 3/4% SENIOR NOTES DUE JANUARY 15, 2009

The 5 3/4% Senior Notes due January 15, 2009 (the "Notes") of Pioneer
Hi-Bred International, Inc. will mature on January 15, 2009. Interest on the
Notes will accrue from January 15, 1999 and is payable semi-annually on January
15 and July 15 of each year, commencing July 15, 1999.

The indebtedness evidenced by the Notes will rank pari passu in right of
payment with all of our other senior, unsecured indebtedness, but will be
effectively subordinated to indebtedness of our subsidiaries. In addition, the
indebtedness evidenced by the Notes will be subordinated to any of our senior,
secured indebtedness to the extent of the value of the assets securing such
indebtedness.

We may redeem all or part of the Notes at any time at a redemption price
equal to the greater of (i) 100% of their principal amount or (ii) the sum of
the present values of the remaining scheduled payments of principal and interest
on the Notes discounted to the redemption date on a semiannual basis (assuming a
360-day year consisting of twelve 30-day months) at the Treasury Rate plus 15
basis points, plus, in each case, accrued but unpaid interest on the Notes to
the Redemption Date.

The Notes have been approved for listing on the New York Stock Exchange
under the symbol "PHB 09", subject to official notice of issuance.

------------------------

<TABLE>
<CAPTION>
PER NOTE TOTAL
-------- ------------
<S> <C> <C>
Public Offering Price....................................... 99.849% $199,698,000
Underwriting Discount....................................... 0.650% 1,300,000
Proceeds, before expenses, to Pioneer Hi-Bred International,
Inc....................................................... 99.199% 198,398,000
</TABLE>

Neither the Securities and Exchange Commission nor any state commission has
approved or disapproved of these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.

We expect the Notes will be ready for delivery in book-entry form only
through the facilities of the Depository Trust Company against payment in New
York, New York on or about January 15, 1999.

------------------------

LAZARD FRERES & CO. LLC CHASE SECURITIES INC.
------------------------
The date of this prospectus is January 12, 1999
<PAGE> 2

NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE ANY
INFORMATION OR TO REPRESENT ANYTHING NOT CONTAINED IN THIS PROSPECTUS. YOU MUST
NOT RELY ON ANY UNAUTHORIZED INFORMATION OR REPRESENTATIONS. THIS PROSPECTUS IS
AN OFFER TO SELL ONLY THE NOTES OFFERED HEREBY, BUT ONLY UNDER CIRCUMSTANCES AND
IN JURISDICTIONS WHERE IT IS LAWFUL TO DO SO. THE INFORMATION CONTAINED IN THIS
PROSPECTUS, INCLUDING ANY INFORMATION INCORPORATED BY REFERENCE, IS CURRENT ONLY
AS OF ITS DATE.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 3
Use of Proceeds............................................. 5
Capitalization.............................................. 5
Selected Consolidated Financial Data........................ 6
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 7
Business.................................................... 21
Description of the Notes.................................... 24
Underwriting................................................ 36
Experts..................................................... 36
Legal Matters............................................... 37
Available Information....................................... 37
Incorporation of Certain Documents by Reference............. 37
Index to Financial Statements............................... F-1
</TABLE>

FORWARD-LOOKING STATEMENTS. This prospectus contains forward-looking
statements relating to the Company's operations that are based on management's
current expectations, estimates, and projections. Words such as "expects",
"anticipates", "plans", "intends", "projects", and similar expressions are used
to identify such forward-looking statements. These statements are not guarantees
of future performance and involve certain risks, uncertainties, and assumptions
that are difficult to predict. In addition to other factors discussed in this
report, some of the important factors that could cause actual results to vary
significantly from management's expectations noted in forward-looking statements
include the weather, government programs and approvals, commodity prices,
changes in corn acreage, intellectual property positions, product performance,
product returns, customer preferences, currency fluctuations, costs, the Year
2000 issue, and industry consolidations.
2
<PAGE> 3

PROSPECTUS SUMMARY

This summary is qualified in its entirety by the more detailed information
and consolidated financial statements appearing herein and in the Company's
Annual Report on Form 10-K for the fiscal year ended August 31, 1998, and its
quarterly report on Form 10-Q for the quarter ended November 30, 1998, which we
incorporate by reference.

THE COMPANY

Pioneer Hi-Bred International, Inc. ("Pioneer" or the "Company") is a
leading plant science company and supplier of agricultural seed genetics. During
fiscal year 1998, we recorded sales of $1.8 billion and net income of $270
million.

Our two principal products are hybrid seed corn and soybeans. These two
products accounted for 89% of our world sales and substantially all of our
worldwide operating income in the last five years. In addition, we develop,
produce and market hybrids of sorghum, sunflowers and canola, varieties of
alfalfa and wheat, and microorganisms that are useful in crop and livestock
production. We have sales in nearly 100 countries, but the primary markets for
our products are the United States and Canada (the North America region) and
Europe. Sales in North America accounted for approximately 71% of 1998 sales,
and sales in Europe accounted for approximately 20% of 1998 sales. Pioneer also
has operations in Latin America, Mexico, Africa, Asia, the Middle East and the
Pacific region.

Our market share in the North American hybrid seed corn market in 1998 was
approximately 42%. The next seven competitors in the market had a combined share
of approximately 34%, with the largest at approximately 11%. We also hold a
leading share in most of the countries in which we operate outside of North
America. The principal market for soybean seed is North America, where our share
of the market was approximately 16% in 1998.

Demand for improved seed genetics is expected to continue to rise as world
food demand grows and the availability of prime agricultural land declines in
most areas. Improved genetics offer the most efficient way to produce more food
products on the same or a reduced amount of land. In addition, improved genetics
allow farmers to meet rising food demand without opening fragile land for
production.

Our strategy is to deliver products that consistently outperform those of
our competitors and are able to command a premium price. We are the industry
leader in research and product development and own what we believe is the
industry's finest collection of crop genetics ("germplasm"). Our germplasm has
provided the base for our growth. Our researchers, many of whom are
well-established experts in the science of crop genetics, focus on continually
improving our germplasm using the latest technologies to perform research and
testing around the world. Our research skill is used to develop superior
products that deliver outstanding yields and have defensive characteristics that
help plants resist damage from insects, disease and other factors. We also have
several key research collaborations that allow us to leverage our research
investments.

In addition to delivering higher yields to our customers, we are
increasingly delivering value by incorporating into our seed products quality
genetic traits that make our products more valuable to livestock feeders, grain
processors and other end-users of grain. Our efforts in this area have been
strengthened through a research alliance with DuPont, initiated in early fiscal
1998. The alliance, in part, is designed to facilitate the development of corn,
soybeans and other oilseeds that contain quality traits to make them more
valuable to these end-users. In addition, Pioneer and DuPont formed a joint
venture called Optimum Quality Grains L.L.C., which will seek to create,
maximize and capture value for quality traits in seed, grain, grain products and
plant materials delivered through corn, soybeans and other selected oil seeds. A
key component of this joint venture is a preferred seed support agreement
between the joint venture and us. The joint venture is not in the seed business
and will look to us to be its preferred worldwide provider and preferred
marketer of quality trait seeds.

Pioneer, an Iowa corporation founded in 1926, maintains its principal
executive offices at 800 Capital Square, 400 Locust Street, Des Moines, Iowa
50309, and its telephone number is (515) 248-4800. Our common stock is traded on
the New York Stock Exchange under the symbol PHB.

3
<PAGE> 4

THE OFFERING

Securities Offered............ $200,000,000 aggregate principal amount of
5 3/4% Senior Notes due January 15, 2009.

Maturity Date................. January 15, 2009.

Interest Payment Dates........ January 15 and July 15 of each year, commencing
July 15, 1999.

Ranking....................... The indebtedness evidenced by the Notes will
rank pari passu in right of payment with all of
our other senior, unsecured indebtedness, but
will be effectively subordinated to
indebtedness of our subsidiaries. In addition,
the indebtedness evidenced by the Notes will be
effectively subordinated to any of our senior,
secured indebtedness to the extent of the value
of the assets securing such indebtedness.

Redemption.................... We may redeem all or part of the Notes at any
time at a redemption price equal to the greater
of (i) 100% of their principal amount or (ii)
the sum of the present values of the remaining
scheduled payments of principal and interest on
the Notes discounted to the redemption date on
a semiannual basis (assuming a 360-day year
consisting of twelve 30-day months) at the
Treasury Rate plus 15 basis points, plus, in
each case, accrued but unpaid interest on the
Notes to the Redemption Date.

Certain Covenants............. The Indenture under which the Notes will be
issued (the "Indenture") will limit our ability
and the ability of our restricted subsidiaries
to: (i) create liens, (ii) enter into sale and
leaseback transactions and (iii) consolidate,
merge or transfer all or substantially all of
our assets or the assets of our subsidiaries.
However, these limitations are subject to a
number of important qualifications and
exceptions. See "Description of the
Notes -- Certain Covenants" commencing on page
27.

Use of Proceeds............... The net proceeds received from the sale of the
Notes will be used by Pioneer for general
corporate purposes, which may include capital
expenditures, working capital requirements
(inventory and receivables), reduction of
outstanding indebtedness, repurchase of shares
and acquisitions. The precise amount and timing
of the application of such proceeds will depend
upon the funding requirements of the Company
and the availability and cost of other funds.
Pending such application, the net proceeds will
be invested in short-term investment grade
securities.

4
<PAGE> 5

USE OF PROCEEDS

The net proceeds received from the sale of the Notes will be used by
Pioneer for general corporate purposes, which may include capital expenditures,
working capital requirements (inventory and receivables), reduction of
outstanding indebtedness, repurchase of shares and acquisitions. The precise
amount and timing of the application of such proceeds will depend upon the
funding requirements of the Company and the availability and cost of other
funds. Pending such application, the net proceeds will be invested in short-term
investment grade securities.

CAPITALIZATION

The following table sets forth the consolidated capitalization of the
Company as of November 30, 1998, and on a pro forma, as adjusted basis giving
effect to the sale of the Notes. See "Use of Proceeds." This table should be
read in conjunction with, and is qualified by reference to, the Company's
consolidated financial statements and related notes contained herein.

<TABLE>
<CAPTION>
NOVEMBER 30, 1998
---------------------
ACTUAL AS ADJUSTED
------ -----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
CASH AND CASH EQUIVALENTS:.................................. $ 77 $ 77
====== ======
SHORT-TERM DEBT:
Short-term borrowings(a).................................. $ 289 $ 91
Current maturities of long-term debt...................... 11 11
------ ------
Total Short-Term Debt................................ $ 300 $ 102
------ ------
LONG-TERM DEBT (EXCLUDING CURRENT MATURITIES):
5 3/4% Senior Notes....................................... $ -- $ 200
Credit facility........................................... 5 5
------ ------
Total Long-Term Debt................................. $ 5 $ 205
------ ------
SHAREHOLDERS' EQUITY:
Capital Stock:
Preferred -- Authorized 10,000,000 shares;
issued -- none........................................ $ -- $ --
Common stock -- par value $1.00 per
share -- Authorized -- 600,000,000 shares;
issued -- 229,965,014 shares.......................... 230 230
Class B common -- stated value $1.00 per
share -- Authorized -- 120,000,000 shares;
issued -- 49,333,758 shares........................... 49 49
Additional paid-in capital................................ 246 246
Retained earnings......................................... 1,329 1,329
Accumulated other comprehensive loss, net................. (36) (36)
------ ------
$1,818 $1,818
Less treasury stock at cost............................... (647) (647)
Less unearned compensation................................ (26) (26)
------ ------
Total Shareholders' Equity................................ $1,145 $1,145
------ ------
TOTAL CAPITALIZATION........................................ $1,450 $1,452
====== ======
</TABLE>

- ---------------

(a) Net of offering expenses estimated to be $2 million.

5
<PAGE> 6

SELECTED CONSOLIDATED FINANCIAL DATA

The selected historical consolidated financial data presented below for
each of the five years in the period ended August 31, 1998, and for the three
months ended November 30, 1998 and 1997, have been derived from the Company's
audited consolidated financial statements for such years, and its unaudited
financial statements for such months, and are qualified by reference to, and
should be read in conjunction with, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the Company's consolidated
financial statements and notes thereto and the other financial information
included in this Prospectus. The unaudited financial statements of the Company
have been prepared on the same basis as the audited financial statements and, in
the opinion of the Company, contain all adjustments (consisting of only normal
recurring accruals) necessary to fairly present the financial position as of
November 30, 1998 and 1997, and the results of operations and cash flows for the
three months ended November 30, 1998 and 1997. The results of operations for the
three months ended November 30, 1998, may not be indicative of the results to be
expected for the full year.

<TABLE>
<CAPTION>
THREE MONTHS
ENDED
NOVEMBER 30, YEARS ENDED AUGUST 31,
---------------- ----------------------------------------------
1998 1997 1998 1997 1996 1995 1994
------ ------ ------ ------ ------ ------ ------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AND STATISTICAL AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Net Sales...................................... $ 76 $ 79 $1,835 $1,784 $1,721 $1,532 $1,479
Operating costs and expenses
Costs of goods sold.......................... (56) (51) (789) (771) (727) (642) (606)
Research and product development............. (40) (34) (155) (146) (136) (130) (114)
Selling...................................... (54) (55) (395) (374) (382) (354) (335)
General and administrative................... (35) (28) (137) (130) (129) (126) (123)
Restructuring and settlements................ -- -- -- -- -- -- 45
------ ------ ------ ------ ------ ------ ------
Operating income (loss)...................... (109) (89) 359 363 347 280 346
Investment income.............................. 5 18 45 22 22 23 19
Interest expense............................... (5) (2) (13) (8) (11) (13) (11)
Net exchange and other gains (losses).......... (5) (5) 16 (4) (4) 1 (5)
------ ------ ------ ------ ------ ------ ------
Income (loss) before items below............. (114) (78) 407 373 354 291 349
Provision for income taxes..................... 39 27 (134) (127) (127) (106) (134)
Minority interest and other.................... -- -- (3) (3) (4) (2) (2)
------ ------ ------ ------ ------ ------ ------
Net income (loss).......................... (75) (51) 270 243 223 183 213
Preferred stock dividend....................... -- (4) (9) -- -- -- --
------ ------ ------ ------ ------ ------ ------
Net income available to common shareholders.... $ (75) $ (55) $ 261 $ 243 $ 223 $ 183 $ 213
====== ====== ====== ====== ====== ====== ======
Net income (loss) per common share
Basic........................................ $(0.31) $(0.24) $ 1.13 $ 0.98 $ 0.89 $ 0.72 $ 0.80
Diluted...................................... $(0.31) $(0.24) $ 1.08 $ 0.98 $ 0.89 $ 0.72 $ 0.80
Average shares outstanding
Basic........................................ 240 226 232 247 250 254 266
Diluted...................................... 240 226 250 248 250 254 266
SELECTED BALANCE SHEET DATA
Cash and cash equivalents...................... $ 77 $ 76 $ 86 $ 97 $ 99 $ 84 $ 135
Working capital(a)............................. $ 558 $ 675 $ 694 $ 572 $ 496 $ 490 $ 510
Total assets................................... $1,990 $1,897 $1,717 $1,603 $1,422 $1,293 $1,253
Total debt..................................... $ 305 $ 110 $ 95 $ 116 $ 50 $ 129 $ 81
Shareholders' equity........................... $1,145 $1,245 $1,247 $1,148 $1,018 $ 913 $ 881
OTHER FINANCIAL DATA
Ratio of earnings to fixed charges(b).......... -- -- 23.4 29.2 23.0 17.9 25.3
EBITDA(c)...................................... $ (82) $ (67) $ 449 $ 452 $ 424 $ 354 $ 421
Capital expenditures........................... $ 37 $ 30 $ 119 $ 127 $ 116 $ 86 $ 79
Depreciation and amortization.................. $ 27 $ 22 $ 90 $ 89 $ 77 $ 74 $ 75
Dividends declared per share................... $ 0.10 $0.087 $ 0.37 $ 0.32 $ 0.28 $ 0.24 $ 0.20
</TABLE>

- ---------------

(a) Working capital represents the excess of current assets over current
liabilities for the periods presented.

(b) For purposes of this computation, earnings consist of income before income
taxes less minority interest in income plus fixed charges. Fixed charges
consist of (i) interest whether expensed or capitalized, (ii) amortization
of deferred financing costs whether expensed or capitalized and (iii) that
portion of rental expense considered to represent interest (assumed to be
one-third). For the three months ended November 30, 1998 and November 30,
1997, earnings were insufficient to cover fixed charges. The deficiency for
the three months ended November 30, 1998 was $114 million.

(c) For purposes of this computation, EBITDA consists of operating income plus
depreciation and amortization. EBITDA does not represent cash flows as
defined by generally accepted accounting principles (GAAP) and does not
necessarily indicate that cash flows are sufficient to fund all of the
Company's cash needs. EBITDA is presented because the Company believes it is
a widely accepted financial indicator of a company's ability to incur and
service debt. However, EBITDA should not be considered in isolation or as a
substitute for net income or cash flow data prepared in accordance with GAAP
or as a measure of a company's profitability or liquidity. EBITDA as defined
here may differ from EBITDA as defined in other similar registration
statements and as such may not be comparable.

6
<PAGE> 7

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements and notes thereto for the three
months ended November 30, 1998, and with the Company's audited financial
statements and notes thereto for the fiscal year ended August 31, 1998.

OVERVIEW

The Company continued record-setting financial results in 1998. Current
year net income after tax totaled $270 million, or $1.08 per-diluted share, on
sales of $1.8 billion. After-tax income in 1997 totaled $243 million, or $0.98
per-diluted share, on sales of $1.8 billion. The result was a per-diluted share
earnings growth of 10.2% for 1998. Current year earnings produced a Return on
Ending Equity (ROE) of 21.7%, the fifth consecutive year above the targeted
level of 20%. This performance enabled the Company to exceed its primary
financial goals: double-digit earnings growth over time and maintaining an ROE
of 20% or higher.

Historically, the Company's growth has primarily been driven by North
American seed corn operations. The Company achieved record operating income in
1998 from its North American corn operations, in spite of an unprecedented level
of discounting and promotions by competitors. The Company also maintained its
42% share of the North American corn market and improved profit margins in this
aggressive environment. In addition, record sales and profits from the Company's
soybean business and improved profitability from the Company's other product
lines were positive factors affecting 1998 income. Foreign currency
devaluations, on a worldwide basis, reduced current year operating income
approximately $32 million.

YEAR ENDED AUGUST 31, 1998, COMPARED TO YEAR ENDED AUGUST 31, 1997

HYBRID SEED CORN

The strong operating performance in North America was offset by a decrease
in regions outside North America, which were impacted by local currency
devaluation, acreage reduction, and weather. Current year seed corn operating
income decreased $6 million, or 1.5%, from prior year results. North America
corn continues to dominate the mix of revenue and contribution margins,
generating approximately 70% of company-wide revenue and 73% of operating
income.

CORN NET SALES AND PRODUCT LINE OPERATING INCOME

<TABLE>
<CAPTION>
INCREASE INCREASE
1998 (DECREASE) 1997 (DECREASE) 1996
------ -------------- ------ ------------- ------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
NET SALES:
North America.......................... $ 970 $ 63 6.9% $ 907 $ (1) (0.1)% $ 908
Europe................................. 300 (27) (8.3)% 327 (1) (0.3)% 328
Other regions.......................... 123 (28) (18.5)% 151 10 7.1% 141
------ ----- ------ ---- ------
Total net sales................... $1,393 $ 8 0.6% $1,385 $ 8 0.6% $1,377
====== ===== ===== ====== ==== ===== ======
OPERATING INCOME:
North America.......................... $ 290 $ 24 9.0% $ 266 $(10) (3.6)% $ 276
Europe................................. 98 (15) (13.3)% 113 13 13.0% 100
Other regions.......................... 8 (15) (65.2)% 23 (11) (32.4)% 34
------ ----- ------ ---- ------
Total operating income............ $ 396 $ (6) (1.5)% $ 402 $ (8) (2.0)% $ 410
====== ===== ===== ====== ==== ===== ======
UNIT SALES:
(80,000-kernel units)
North America.......................... 12.0 0.5 4.3% 11.5 (0.6) (4.6)% 12.1
Europe................................. 2.8 (0.1) (3.4)% 2.9 0.1 3.6% 2.8
Other regions.......................... 2.2 (0.3) (12.0)% 2.5 -- --% 2.5
------ ----- ------ ---- ------
Total unit sales.................. 17.0 0.1 0.6% 16.9 (0.5) (3.0)% 17.4
====== ===== ===== ====== ==== ===== ======
ACRES:
North America.......................... 84.1 0.8 1.0% 83.3 0.6 0.7% 82.7
====== ===== ===== ====== ==== ===== ======
</TABLE>

7
<PAGE> 8

The primary drivers affecting North American operations are per-unit price
and cost, market share, and market size. Seed corn operating income in North
America improved $24 million, or 9%, over 1997 results. The improved results
were primarily due to increased revenue. Revenue increased $63 million, or 6.9%,
over 1997 as a result of two factors: (i) an increase in the average per-unit
selling price, which accounted for $25.1 million of the total increase, and (ii)
additional units sold of 500,000, which accounted for $37.7 million of the total
increase. Higher investments in research and product development and product
promotion also impacted current year results. In addition, the stronger U.S.
dollar reduced operating income from Canada by approximately $2.3 million.

Despite the competitive environment in North America, the average per-unit
net seed corn selling price increased approximately 3%. During 1998, this
increase would have been higher had the Company not implemented changes to its
replant program. In previous years, the price of seed sold for replant was
discounted 50%, while in 1998 replant seed was provided free of charge. In
addition to the program change, adverse weather conditions resulted in
significantly higher replanting in 1998. Excluding these two factors, the net
selling price of seed in North America increased approximately 5% as a result of
the introduction of several new premium-priced elite products and a continued
shift in the sales mix to higher-priced premium products.

Current year per-unit seed corn cost of sales decreased $0.30, largely due
to lower inventory reserves and lower commodity costs. When combined with the
sales price effect, net seed corn margins increased approximately $2.40 per
unit. Provisions for inventory reserves in 1998 were $1.75 per unit compared to
$1.98 per unit in 1997. The Company's policy is to provide adequate reserves for
inventory obsolescence. Approximately 8% of North American unit sales were
reserved in 1998 compared to 9% in 1997.

An increase in North American market size impacted current year operating
results. Based on information to date, North American market size was estimated
at 84.1 million acres, an increase of approximately 1% from 1997. Based on
current year unit sales, the Company maintained its 42% share of the North
American seed corn market.

North American Seed Corn Unit Sales (in millions)

North American Corn Acreage (in millions)

Estimated North American Seed Corn Market Share

Increased investments in research and product development and higher
selling costs associated with the launch of an unprecedented number of new
products reduced operating income approximately $18 million. New genetics
accounted for more than 40% of current year unit sales, including 2.4 million
units of the Company's hybrids with the YieldGard(1) gene for European Corn
Borer (ECB) resistance.

Operating income in Europe, on a constant dollar basis, increased 2% over
1997. In Europe, seed corn operations were challenged in 1998 by reduced
acreage. In addition, results reported in U.S. dollars were negatively impacted
by the strengthening of the U.S. dollar against European currencies, reducing
1998 operating income by $17 million compared to 1997. Excluding this effect,
the region achieved a new record in operating

- ---------------

1 Registered trademark of, and used under license from, Monsanto Company.
8
<PAGE> 9

income. Seed corn market share gains in Italy and Spain and higher per-unit
prices in Central Europe contributed to the increase. These factors more than
offset the effect of a 6 to 8% reduction in hectares planted to corn.

The Company achieved record operating income in several countries within
the Africa, Middle East, Asia, and Pacific region. Seed corn operations in South
Africa, Turkey, and Pakistan all reported record results in 1998 driven by
increases in market share and per unit prices. However, overall results of
operations for the region were hampered by reduced market size and by
significant devaluation in the local currencies in Southeast Asia. The currency
devaluation in Southeast Asia negatively impacted 1998 corn operating income by
$5 million. Key markets in Asia and Africa experienced a 10 to 15% reduction in
market size due to adverse weather conditions.

The Company's corn operations in Latin America experienced an operating
loss of $11 million compared to a $2 million loss in 1997. The Company's
operations in Brazil continued to be affected by the decrease in market size
reported last year. In Argentina, performance issues with key hybrids noted last
year continued to impact 1998 operations. As a result, unit sales and price per
unit were lower than 1997. To address these performance issues, new products
were introduced in 1998 in Brazil and Argentina and additional new products will
be introduced in upcoming years.

Operating income in Mexico decreased $3 million from 1997. This was due to
drought and currency devaluation. The drought conditions resulted in fewer acres
planted to corn and decreased unit sales in 1998. The stronger U.S. dollar
compared to the Mexican peso reduced reported results in 1998 by $2 million.

SOYBEAN SEED

Soybean seed is the Company's second largest product in terms of revenue
and operating income. The primary drivers for operating income are premium
product sales, market size, market share, and price. Current year soybean
operating income in North America improved $7 million, or 26%, over 1997 results
to a record $33.7 million. Record North American soybean revenues and profits in
1998 were primarily driven by the increased demand for premium-priced
glyphosate-resistant soybeans with the Roundup Ready(1) gene. Unit sales of
these soybeans more than doubled in the current year.

North American Soybean Unit Sales (in millions)

North American Soybean Acreage (in millions)

Estimated North American Soybean Market Share

North America unit sales account for approximately 97% of worldwide soybean
unit sales. Unit sales included over 5 million units of glyphosate-resistant
products, compared to 2.3 million units in 1997. The Company's current year unit
sales of these products totaled approximately 39% of total soybean unit sales
compared to 17% in 1997. The strong demand for and available supply of
glyphosate-resistant products limited the Company's market share.

Higher commodity prices and additional acres available for planting due to
acres coming out of conservation programs resulted in additional acres planted
to soybeans in the current year. Net margins improved from a year ago despite
higher commodity costs. An increase in list prices for the current year,
combined with the sales

9
<PAGE> 10

price effect of glyphosate-resistant products, which are sold at a premium, more
than offset the increase in unit costs.

OTHER PRODUCTS

Other products' current year operating results improved $4 million over
those recorded in 1997. Wheat, sunflower, and canola accounted for most of the
change. Wheat operating income increased $4 million over 1997 results. Sunflower
operations provided a positive impact to the current year mainly due to
operations in North America and Europe. An increase in sunflower operating
income of $4 million is the result of a $10 million increase in sales over 1997.
Operating income for canola products in 1998 improved $2.5 million from 1997
results primarily due to the increased sales of herbicide resistant products.
Operating results decreased $6 million due to the Company's equity ownership in
Optimum Quality Grains, L.L.C., which began operations in 1998.

OTHER PRODUCTS NET SALES AND COMBINED PRODUCT LINE OPERATING INCOME (LOSS)

<TABLE>
<CAPTION>
INCREASE 1997 INCREASE 1996
1998 (DECREASE) ---- (DECREASE) ----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
NET SALES
Alfalfa.............................. $ 46 $ 1 2.2% $ 45 $13 40.6% $ 32
Sorghum.............................. 36 -- --% 36 5 16.1% 31
Wheat................................ 24 4 20.0% 20 (5) (20.0)% 25
Sunflower............................ 34 10 41.7% 24 2 9.0% 22
Microbial products................... 29 (1) (3.3)% 30 2 7.1% 28
Other products....................... 41 5 13.9% 36 (6) (14.3)% 42
---- --- ---- --- ----
Total net sales.............. $210 $19 9.9% $191 $11 6.1% $180
==== === ==== ==== === ===== ====
Total combined operating
income (loss).............. $ 15 $ 4 $ 11 $14 $ (3)
==== === ==== === ====
</TABLE>

These products provide the sales organization a full line of seed products,
significantly aiding in the sale of higher-margin products. In addition, the
opportunity for some of these product lines to generate greater levels of
operating income in the future is promising.

CORPORATE AND OTHER ITEMS

Current year indirect general and administrative expenses increased $11
million, or 14%, over 1997 levels. Increased employee compensation costs and
higher training and development costs resulting from investments in information
systems within North America and Europe were a significant part of the current
year increase. The protection of research technology through the filing of
patents and the cost of litigation associated with the ownership of technology
also contributed to this increase. The Company filed 187 patent applications in
the United States through September of calendar year 1998 compared to 121 and
109 in calendar years 1997 and 1996, respectively.

Net financial income for fiscal 1998 increased $38 million from 1997. Net
exchange and other gains and losses in the current year were impacted by a $20
million gain on the sale of two million shares of Mycogen Corporation stock in
1998 compared to a $7 million gain on the sale of one million shares in 1997.
The Mycogen transactions, net of expenses, increased diluted earnings per share
$0.04 and $0.01 in 1998 and 1997, respectively. In addition, net financial
income was impacted by interest earned on the proceeds from equity transactions
with DuPont.

The decrease in the effective tax rate from 34% in 1997 to 33% in 1998 was
primarily attributable to the Company's operations outside the United States and
an increase in research tax incentives. The decrease in the effective tax rate
between years increased earnings per share by $0.02. The Company's effective tax
rate will vary based on the mix of earnings and tax rates from the various
countries in which it operates.

10
<PAGE> 11

ALLIANCE WITH DUPONT

In September 1997, the Company and DuPont finalized an agreement that
created one of the world's largest private agricultural research and development
collaborations. The companies also formed a joint venture, Optimum Quality
Grains, L.L.C., that markets improved quality traits to increase the value of
crops for livestock feeders, grain processors, and other end users. The joint
venture does not sell seed. The Company is the preferred worldwide provider and
marketer of quality trait seed for the joint venture.

In connection with the above agreements, DuPont also acquired an equity
interest in the Company through the purchase of 164,446 shares of preferred
voting stock for $1.7 billion. Effective January 30, 1998, each preferred share
was converted into 100 shares of Class B common stock with a stated value of
$1.00 per share. As required by the agreement, the Company used approximately
$1.5 billion of the proceeds from the DuPont investment to purchase
approximately 16.4 million shares of the Company's outstanding common stock
through a Dutch auction self-tender. The common shares reacquired by the Company
were retired, but remain authorized and unissued. The net effect of these equity
transactions, including associated transaction costs, was an increase in Class B
common stock of $16.4 million, a decrease in common stock of $16.4 million, and
an increase in additional paid-in capital of approximately $170 million, the use
of which is unrestricted. Immediately following the completion of the Dutch
auction self-tender, DuPont's equity interest in the Company was approximately
20%.

The agreements include, among other things, a standstill provision that
prohibits DuPont from increasing its ownership interest in the Company for 16
years from the date of the agreement without the consent of the Company. DuPont
also gained two seats on the Company's Board of Directors.

These agreements with DuPont will bring additional opportunities to compete
for corn acres in 1999 and the potential to become a significant supplier in the
rapidly growing market for high-oil corn. Financial results for the year ended
August 31, 1998 were affected by the completion of the agreement with DuPont.
Without the DuPont equity transactions less cash would have been available for
investment, short-term borrowings would have been higher, and the Company would
not have paid preferred stock dividends. Current year results, excluding the
impact from the above equity transactions, were income of $257.9 million, or
$1.05 per diluted share. The following table summarizes the components of income
per share as reported and excludes the impact from the equity transactions with
DuPont:

11
<PAGE> 12

<TABLE>
<CAPTION>
PRO FORMA
AS REPORTED EXCLUDING EQUITY TRANSACTIONS
--------------------------------- ---------------------------------
SHARES SHARES
INCOME (DENOM- PER-SHARE INCOME (DENOM- PER-SHARE
YEAR ENDED AUGUST 31, 1998 (NUMERATOR) INATOR) AMOUNT (NUMERATOR) INATOR) AMOUNT
-------------------------- ----------- ------- --------- ----------- ------- ---------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Net income...................... $270 $270
Items resulting from the DuPont
equity transactions
Preferred stock dividends..... (9) --
Interest benefit from DuPont
proceeds*.................. -- (12)
---- ----
Basic earnings per share
Net income attributable to
common shareholders........ $261 231.5 $1.13 $258 244.4 $1.06
===== =====
Effect of dilutive securities
Convertible preferred stock... 9 17.7 -- --
Stock options................. -- 1.1 -- 1.1
---- ----- ---- -----
Diluted earnings per share
Net income attributable to
common shareholders........ $270 250.3 $1.08 $258 245.5 $1.05
==== ===== ===== ==== ===== =====
</TABLE>

- ---------------

* Based on the assumption that the proceeds generated by DuPont equity
transactions earned an investment return during the period on the excess funds
and reduced borrowing costs at the Company's after-tax investment and
borrowing rates.

YEAR ENDED AUGUST 31, 1997, COMPARED TO YEAR ENDED AUGUST 31, 1996

HYBRID SEED CORN

August 31, 1997 seed corn operating income decreased $8 million, or 2% from
1996 results. Operations in North America played a significant role in the
decrease, primarily the result of fewer unit sales, increased per-unit net
margins, and higher investments in research and product development. Seed corn
operations outside North America provided increased operating income from 1996
on higher unit sales; however, this was tempered by the stronger U.S. dollar in
1997.

Seed corn market share in North America declined approximately two points
in 1997, bringing the Company's estimated leading share of the North American
market to approximately 42%. The Company introduced a number of new products in
limited volumes in 1997 which were targeted to replace hybrids that had been
leading sellers in recent years. Lower unit sales of these older hybrids were
largely responsible for the estimated 1997 market share decrease.

Delayed regulatory approval for the Company's ECB resistant corn products
also contributed to the 1997 market share decline. Despite regulatory approval
for these products coming late in the selling season, the Company sales
representatives were able to place the Company seed in more than 20% of the
estimated North American acres planted to ECB resistant corn in 1997. However,
due to the late start, the Company was unable to attain its normal market
presence for these products.

The sale of two key hybrids, 3394 and 3489, accounted for approximately 23%
and 28% of the Company's 1997 and 1996 North American hybrid seed corn unit
sales, respectively.

Corn acreage in North America during 1997 rose modestly above 1996 levels
which positively affected operating income. Although operating results in North
America were affected by higher per-unit seed corn costs, the average seed corn
selling price also increased.

12
<PAGE> 13

In 1997, the average net seed corn selling price per unit to customers in
North America increased 7% resulting from the introduction of several new elite
products, which were priced at a premium, and an increase in list prices across
the entire product line. However, during 1997 a change was made to the Company's
commission program, which eliminated some ties between the commission and
quantity savings discount programs. Reported quantity savings discounts
increased and reported net commission expense decreased accordingly. As a
result, reported net price for 1997 based on reported net sales only reflects an
increase of approximately 5%. Net selling price per unit to customers, North
American seed corn net margin per unit, and net compensation to sales
representatives were essentially unaffected by this program change.

Per-unit seed cost of sales increased approximately $2.50 in 1997,
principally due to the prior year cost of sales mix. Fiscal 1996 cost of sales
included large quantities of lower-priced carryover seed from the 1994 crop
year. When combined with the sales price effect, net seed corn margins increased
approximately $2.25 per unit. Provisions for inventory reserves in 1997 were
$1.98 per unit, compared to $2.22 per unit in 1996. Approximately 9% of North
American unit sales were reserved in 1997.

North American research and product development costs for seed corn
increased $11 million in 1997, or 15%, to $86 million. The increase was the
result of additional spending on classical plant genetic activities and
investments to access technology that will help expand and improve the Company's
germplasm base.

As a result of investments in research and product development, the
Company's research program turned out 27 new corn hybrids in limited volumes for
the North American market in 1997. First-year sales of these new hybrids reached
nearly 600,000 units, four times more than any previous group of new product
introductions.

Seed corn operating results outside North America increased $2 million
compared to the prior year. European operations (Europe, CIS, and Japan)
provided the largest impact, accounting for $13 million in additional operating
income. Strengthening of the U.S. dollar against European currencies had a
significant negative impact on 1997 reported results for European operations.
Excluding this impact, the region reflected an improvement of $32 million over
1996 results. Additional unit sales in Italy, Southern Europe, and Central
Europe were significant factors in the current year increase in operating
income. Market size and market share increases, individually or in concert,
played roles in these improvements.

Operating income in the Latin American region decreased $23 million
compared to 1996. Supply availability and decreased corn acreage reduced 1997
operating income in Brazil. Also affecting 1997 results was a performance issue
related to the previous year's top selling hybrids in Argentina. As a result,
operating income decreased due to reduced unit sales and higher cost of sales.

Operating income in Mexico improved $4 million from 1996 results as
favorable weather conditions and improved water supply resulted in increased
unit sales. Increased selling price per unit also favorably impacted 1997
results.

Volume and price increases in several countries within Asia, Africa, and
the Middle East improved this region's 1997 operating results $3 million.

SOYBEAN SEED

Soybean operating income improved $11 million, or 69%, over 1996 results.
The primary drivers for operating income -- market size, market share, and
price -- had positive impacts on soybean operations.

Unit sales in North America increased 19%, or approximately 2.2 million
units, over 1996 levels as a result of increased acreage and improved market
share. Favorable commodity prices drove an 11% increase in acres planted to
soybeans in 1997. Continued strong product performance and the demand for
glyphosate-resistant varieties contributed to market share gains.

Net margin in North America improved approximately $0.60 per unit from 1996
despite higher commodity costs. An increase in list prices for 1997, combined
with the sales price effect of glyphosate-resistant products that are sold at a
premium, more than offset the increase in unit costs.

13
<PAGE> 14

The demand for glyphosate-resistant products in North America was strong in
1997. The Company's 1997 unit sales of these products totaled 2.3 million units,
or approximately 17% of total soybean unit sales, compared to unit sales of less
than 100,000 in 1996.

OTHER PRODUCTS

Other products' 1997 operating results improved $14 million over those
recorded a year earlier. Comparisons in 1997 were affected by the elimination of
1996 losses from the sale of the Company's vegetable products line and
liquidation of the specialty oils inventory in 1996 not present in 1997, which
combined to improve 1997 operating results $7 million over 1996 levels.
Operating income for canola products in 1997 improved $3 million from results in
1996 due to increased acreage and higher market share. Microbial product results
improved $2 million for the year on strong performance of premium inoculant
products. Annual results for alfalfa, sorghum, and miscellaneous other seed
products in total improved $5 million from 1996. Decreased 1997 wheat sales in
North America, the result of reduced acreage, lowered operating income $3
million from 1996 levels.

CORPORATE AND OTHER ITEMS

Indirect general and administrative expenses in 1997, which totaled $77
million, were similar to those recorded in 1996. Increased general costs and
higher legal expenses, resulting from technology claims and disputes, were
offset by the one-time effect of adopting FAS116 "Accounting for Contributions
Made and Contributions Received" during 1996, not present in the 1997.

Net financial income increased $3 million from what was recorded in 1996.
The retirement of the medium-term note program in February 1996, combined with a
lower average level of short-term borrowing in 1997, reduced 1997 interest
expense $3 million. A gain in 1997 from the sale of one million shares of
Mycogen Corporation stock improved net financial income $7 million; however,
this was offset almost entirely by an increase in recorded net exchange losses,
principally due to the strengthening of the U.S. dollar against European
currencies.

The decrease in the effective tax rate from 36% in 1996 to 34% in 1997 was
primarily attributable to the Company's operations outside the United States.

THREE MONTHS ENDED NOVEMBER 30, 1998 COMPARED TO THE THREE MONTHS ENDED NOVEMBER
30, 1997

Net loss for the three months ended November 30, 1998, was $75 million, or
$0.31 per share, on sales of $76 million. In the first three months of the prior
fiscal year, the Company recorded a loss of $51 million on sales of $79 million.
After the payment of preferred dividends the net loss attributable to common
shareholders for November 30, 1997 totaled $55 million or $0.24 per share.

Due to the seasonality of the seed business, partial-year results and
quarter-to-quarter comparisons are not always meaningful. Accordingly, such
quarterly comparisons are not emphasized. Typically, most of the Company's
revenue and operating profit are generated in the third quarter. Revenues during
the Company's first quarter are generated mostly from Southern Hemisphere
operations, North American wheat sales, and worldwide microbial product sales
and generally represent less than 5% of the Company's annual sales.

The current operating loss increased $20 million to $109 million largely
due to decreased sales and increased fixed costs. Increased sales in seed corn
were more than offset by decreases in wheat and other products. The increase in
fixed costs of approximately 10% was expected due to planned expenditures in
research and product development, sales and marketing, information management
and other targeted areas. Increased investments in research and product
development of $6 million accounted for approximately 50% of the current year
increase in fixed costs.

14
<PAGE> 15

NET SALES AND OPERATING LOSS

<TABLE>
<CAPTION>
QUARTER ENDED
NOVEMBER 30,
-------------- INCREASE/
1998 1997 (DECREASE)
----- ----- ----------
(UNAUDITED, IN MILLIONS)
<S> <C> <C> <C>
NET SALES
Corn................................................... $ 33 $ 23 $ 10
Other.................................................. 43 56 (13)
----- ----- -----
Total Net Sales................................ $ 76 $ 79 $ (3)
===== ===== =====
OPERATING LOSS
Corn................................................... $ (76) $ (68) $ 8
Other.................................................. (10) (1) 9
----- ----- -----
Product line operating loss............................ $ (86) $ (69) $ 17
Indirect general and administrative expenses........... (23) (20) 3
----- ----- -----
Operating loss........................................... $(109) $ (89) $ 20
===== ===== =====
</TABLE>

North American operations had the greatest impact on the current period. An
increase in seed corn sales due to timing of deliveries was more than offset by
a decrease in wheat sales. Wheat sales were down $9 million due to reduced acres
and a decrease in sales price due to low commodity prices resulting in a
decrease in operating profit of $6 million from the prior year. North America
corn operating results decreased $3 million from prior year first quarter
results. Current year results were impacted by additional costs from the
expanded introduction of new corn hybrids and increased investments in corn
research and product development. Corn research expenses increased $4 million
primarily due to increases in compensation costs and expenses associated with
technology acquisitions. Compensation costs were higher due to the hiring of
additional research staff and increases in base compensation as a result of the
competitive environment.

Outside North America, operating results were $6 million lower in the
current period compared to a year earlier. The Latin America region accounted
for approximately $3 million of the decrease. Current period unit sales
increased approximately 100,000 units over the same period last year. However,
the operating profit from the increased sales was offset by inventory writedowns
of obsolete corn hybrids in Argentina. In addition, non-recurring cost savings
for the period ended November 30, 1997, contributed to the year-to-year change.

Current period net financial income decreased $16 million from previous
year results due to decreased investment income and increased interest expense.
Investment income decreased $13 million primarily due to fiscal 1998 results
including interest earned on proceeds from DuPont's investment in the Company.
The Company did not have excess cash to invest in the first quarter of the
current year. Typically the Company borrows money during its first quarter to
fund operations. The availability of the excess proceeds from the DuPont
transactions last year reduced borrowings, which reduced prior year interest
expense.

The estimated worldwide tax rate of 34% reflected in the first quarter of
fiscal 1999 is similar to the 33% effective tax rate reflected on an annual
basis for fiscal 1998. The worldwide effective tax rate for the first quarter of
fiscal 1998 was 35%. The lower current year first quarter effective tax rate
increased the current period loss by approximately $1 million compared to last
year's first quarter. The effective tax rate reflected for the first quarter is
based on all information available to date. The effective tax rate on an annual
basis may vary from what is reflected in the current period, in part as a result
of any changes in the mix of earnings between the Company's North American seed
business and other worldwide operations.

LIQUIDITY AND CAPITAL RESOURCES

Due to the seasonal nature of the agricultural seed business, the Company
generates most of its cash from operations during the second and third quarters
of the fiscal year. Cash generated during this time is used to repay commercial
paper borrowings and accounts payable, which are the Company's primary sources
of credit during the first and fourth quarters of the fiscal year. Any excess
funds available are invested, primarily in short-term commercial paper.
15
<PAGE> 16

Historically, the Company has financed growth through earnings. Cash
provided by operating activities was $240 million in 1998, compared to $176
million and $389 million in 1997 and 1996, respectively. The effect on cash
provided by operating activities of building inventory levels and inventory
liquidation have the greatest impact on the Company in any given year. Excluding
this effect, cash provided by operating activities was $302 million in 1998,
compared to $248 million and $346 million in 1997 and 1996, respectively.

Most of the Company's financing is done through the issuance of commercial
paper in the United States, backed by revolving and seasonal lines of credit. In
addition, foreign lines of credit and direct borrowing agreements are relied
upon to support overseas financing needs. Short-term debt at August 31, 1998
totaled $76 million, a $15 million decrease from 1997. In 1998, short-term
borrowings peaked at $128 million compared to $250 million in 1997. Short-term
borrowings were lower due to the net proceeds of approximately $170 million
resulting from the sale of preferred shares to DuPont and the subsequent Dutch
auction self-tender.

In 1998, including net proceeds available from equity transactions with
DuPont, short-term domestic investments peaked at $429 million compared to $242
million in 1997. The 1998 amount does not include $1.5 billion of the proceeds
from the DuPont equity transaction used in the Dutch auction self-tender due to
the nonrecurring nature of the transaction. Short-term investments are made
through a limited number of reputable institutions after evaluation of their
investment procedures and credit quality. The Company invests in only
high-quality, short-term securities, primarily commercial paper. Individual
securities must meet credit quality standards, and the portfolios are monitored
to ensure diversification among issuers.

The table below sets forth certain information about the domestic lines of
credit available to the Company for fiscal 1998 and fiscal 1999.

<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Revolving................................... $200 $200 $200 $200
Seasonal.................................... 100 100 -- --
---- ---- ---- ----
Total............................. $300 $300 $200 $200
==== ==== ==== ====
</TABLE>

The Company believes the domestic lines of credit available in 1999 are
sufficient to meet domestic borrowing needs. Revolving line of credit agreements
expire August, 2001. The Company also has a seasonal revolving credit facility
to meet peak borrowing needs, which expires August, 1999.

At year end, cash and cash equivalents totaled $86 million, down from $97
million at August 31, 1997. It is the Company's policy to repatriate excess
funds outside the United States not required for operating capital or to fund
asset purchases. The growth in trade receivables at August 31, 1998 was
primarily due to increased participation in the Company's credit programs.

Capital expenditures, including business and technology investments, were
$128 million in 1998 compared to $151 million in 1997 and $164 million in 1996.
The Company's capital expenditures primarily represent continued investment in
production capacity, technology acquisitions, and research collaborations.
Capital expenditures for 1999 are expected to be approximately $160 to $170
million and are expected to be funded through earnings.

The quarterly dividend paid in July of 1998 increased to $0.10 per share,
up 15% from the $0.087 per-share dividend paid the prior four quarters. The
Company's dividend policy is to annually pay out 40% of a four-year rolling
average of earnings.

During 1998, the Company repurchased 6,627,800 shares of its stock under a
Board authorized repurchase plan at a total cost of $234 million, excluding the
Dutch auction self-tender. At August 31, 1998, authorized shares remaining to be
purchased under the plan totaled 4.8 million. At August 31, 1998, there were 240
million shares of common stock and Class B common stock outstanding.

Short-term debt at November 30, 1998, consisted of $208 million in domestic
commercial paper and $81 million in direct short-term borrowings from foreign
banks.

16
<PAGE> 17

Current year short-term borrowings are not comparable to November 30, 1997
amounts due to the DuPont transactions which reduced the need for short-term
borrowing. However, current year short-term debt is comparable to historical
levels.

The growth in receivables at November 30, 1998, when compared to November
30, 1997, was primarily due to increased participation in the Company's credit
programs.

MARKET RISKS

The Company uses derivative instruments to manage risks associated with its
grower compensation costs and foreign-currency-based transactions.

The Company uses derivative instruments such as commodity futures and
options to hedge the commodity risk involved in compensating growers. The
Company contracts with independent growers to produce the Company's finished
seed inventory. Contracts with growers generally allow them to settle with the
Company for the market price of grain for a period of time following harvest. It
is the Company's policy to hedge commodity risk prior to setting the retail
price of seed. The hedge gains or losses are accounted for as inventory costs
and expensed as cost of goods sold when the associated crop inventory is sold.
At August 31, 1998 and 1997, net unrealized losses on these contracts for corn
and soybeans totaled $13 million and $4 million, respectively. A 10% change in
the market price of the commodity contracts would impact 1998 net unrealized
losses by approximately $1 million. The contract volumes at year end depend upon
the acreage contracted with growers, the crop yield, the percentage growers have
marketed to the Company, and the percentage of crop hedged by the Company. Since
these positions are a hedge to inventory costs, any change in the cost of these
positions is offset by an opposite change in inventory costs.

The Company uses derivative instruments such as forward exchange contracts,
purchased options, and cross currency swaps to hedge
foreign-currency-denominated transactions such as exports, contractual flows,
and royalty payments. While derivative hedge instruments are subject to price
fluctuations from exchange and interest rate movements, the Company expects
these price changes to generally be offset by changes in the U.S. dollar value
of foreign sales and cash flows. Therefore, hedging gains and losses are matched
with the costs of the underlying exposures and accounted for in inventory,
sales, or net financial costs. At August 31, 1998 and 1997, net unrealized
losses from foreign-currency hedge contracts totaled $1 million and $4 million,
respectively. A 10% change in exchange rates would impact 1998 net unrealized
losses by approximately $14 million.

The Company does not trade in commodity-based or financial instruments with
the objective of earning financial gain on rate or price fluctuations, nor does
it trade in these instruments when there are no underlying transaction related
exposures.

ACCOUNTING PRONOUNCEMENTS

The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings per Share" effective December 31, 1997. SFAS
No. 128 is retroactive to prior years; however, the adoption did not materially
affect prior years' earnings per share as previously reported under APB Opinion
No. 15.

The Financial Accounting Standards Board (FASB) issued SFAS No. 130,
"Reporting Comprehensive Income"; SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information"; and SFAS No. 132, "Employers'
Disclosures About Pensions and Other Postretirement Benefits." These statements
will require revised and/or additional disclosure requirements but will not have
an effect on the results of operations or financial position of the Company. The
Company will adopt the provisions of SFAS No. 130 in the first quarter of fiscal
1999 and the provisions of SFAS No. 131 and SFAS No. 132 for the fiscal year
ending August 31, 1999.

In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement is effective for fiscal
years beginning after December 15, 1998. Therefore, the Company will adopt this
statement for its fiscal year ending August 31, 2000. Due to the recent issuance
and the complexity of the statement, the Company is still in the process of
determining the effect of adopting the statement on the Company's operations and
financial position.
17
<PAGE> 18

EFFECTS OF INFLATION

Inflation typically is not a major factor in the Company's operations. The
cost of seed products is largely influenced by seed field yields and commodity
prices, which are not impacted by inflation. Costs normally impacted by
inflation -- wages, transportation, and energy -- are a relatively small part of
the total operations.

YEAR 2000

The Year 2000 issue refers to a flaw in software design that results in (a)
errors when systems process dates after December 31, 1999 or (b) a failure to
recognize 2000 as a leap year. The Year 2000 issue presents a unique challenge
to organizations, not because it is technically difficult to resolve, but rather
because it is so difficult to manage. The problem is pervasive, existing
throughout a wide variety of computing systems and hardware devices within
organizations and within their supply chains; and corrective actions must be
taken by a fixed point in time -- no later than January 1, 2000.

The Company is well into its Year 2000 remediation effort, having begun
this process in 1996. The Company expects to see little, if any, direct impact
on operations given the nature of the business and the Company's business
relationships, the corrective steps taken to date, and the contingency plans to
be put in place in 1999. Additionally, the Company has long had a policy of
aggressively investing in and adopting new technologies. As a result, many of
the Company's core and end-user systems were developed or delivered in Year 2000
compliant form, greatly reducing the number of non-compliant legacy systems
requiring corrective measures. For example, the Company recently implemented SAP
AG's R/3 enterprise application software in the United States, Canada, Italy,
and France.

Management has established a committee to direct the Company's compliance
activities. The committee meets on a regular basis and reports quarterly to the
Board of Directors. The committee has segregated the Company's work on the Year
2000 issue into four phases: 1) inventory, 2) assessment, 3) remediation, and 4)
testing. The Company's Year 2000 compliance program is on schedule. The
following key objectives were met during the first quarter of fiscal 1999: core
infrastructure and core application remediation efforts are estimated to be 95
to 97% complete, the inventory of building systems was completed, the Company
began evaluating responses to inquiries of Year 2000 compliance by third party
suppliers, the network testing structure was completed, and the plans for
testing the remaining systems were completed. Over the next six months, future
efforts will focus on developing and executing test plans, assessment of legacy
data, completion of equipment assessments to include remediation plans, and
completion of initial supplier assessments to include developing formal
contingency plans. The remaining work in these phases is expected to be
completed by February 1999. Integration testing of core applications and
infrastructure is scheduled to begin in February 1999 and is expected to be
completed by the end of September 1999.

At August 31, 1998, the Company had completed an inventory of personal
computer, office automation, laboratory, production, and telecommunication
equipment worldwide. Inventory of building systems was in progress. Assessments
had been completed for 40 to 50% of the components surveyed and assessments for
all remaining components should be completed by the end of 1998. At this point
in time, the Company estimates that a small percentage of the equipment
inventory will require remediation and that upgrades or replacements will be
completed by the end of June 1999.

The Company is also in the process of analyzing the Year 2000 readiness of
material third parties (suppliers). Replacement suppliers will be found in 1999
if the Company determines some suppliers are not likely to be compliant in time.

The Company has spent approximately $1 million to date in direct costs
associated with reaching Year 2000 compliance. Total costs to the Company to
address Year 2000 issues are currently estimated not to exceed $3 million to $5
million and consist primarily of consulting fees for software remediation
activities and expected costs to replace noncompliant hardware components. These
costs are expected to be funded through earnings.

On the basis of research to date, the Company believes that the greatest
potential for disruption lies not in the Company's internal systems but rather
in the external systems of the Company's service providers. The Company
believes, however, that in North America and Europe, where the Company does most
of its business,
18
<PAGE> 19

disruptions in these external systems will be short-lived, and that through
contingency planning the Company can minimize the impact on seed production and
selling activities in the Northern Hemisphere. Analysis to date also indicates
that the vast majority of the Company's supplier and customer base will likewise
not be materially impacted by internal system problems. The Company believes,
however, given the number of supplier options available, that the Year 2000
challenge will not materially impact the Company's ability to produce seed
products or the ability to sell and distribute these products to customers for
planting in the spring of 2000.

Some of the unique factors of the Year 2000 issue which could impact the
Company's performance are inability of third parties to timely provide
remediation measures, impacts of the failure of businesses other than the
Company or its immediate suppliers that would ultimately have an impact on the
Company, failure of governmental agencies to properly address their own Year
2000 compliance, or misrepresentations of readiness by suppliers or vendors.

EURO CONVERSION

The Company believes the euro conversion will not have a material impact on
the Company's ability to execute transactions during the transition period,
which began January 1, 1999, and ends December 31, 2001. The significant
requirement of companies during this period is the ability to invoice and accept
payment in euro at a customer's request. The Company has systems and processes
in place to manage euro-denominated transactions if a customer makes this
request.

The Company continues to evaluate the impact the euro conversion will have
on its business, although the Company believes it will not have a material
impact on its results of operations or financial condition.

The Company has performed an analysis of the readiness of applicable
computer systems for the euro conversion. Plans are in place to upgrade existing
systems prior to 2001 to meet the needs of full euro conversion. The cost of
these upgrades is not expected to be material to the Company. In addition, the
Company has analyzed changing its hedging of foreign-currency-denominated
transactions in participating countries from their legacy currency to the euro.
Management expects hedging in the euro to reduce the number of hedging contracts
and associated administrative costs.

OUTLOOK FOR 1999 AND BEYOND

The Company's prospects for 1999 and beyond are encouraging. The Company
plans to introduce over 50 new seed corn hybrids in North America in 1999,
including high-oil products and several with the Bt gene for resistance to
European Corn Borer (ECB). Approximately 70% of the units sold in 1999 are
expected to be from hybrids introduced in 1997 or later. List prices of the
Company's hybrid corn seed in North America will not be increased in 1999.
However, the trend of customers to purchase new higher-priced, higher-value
products is expected to increase North America's average per-unit seed corn
selling price and per-unit margin. With the increased introduction of new
products, the Company anticipates more rapid obsolescence of older products.

Low commodity prices create financial stress for farmers in the United
States and around the world. One potential consequence of low corn prices is a
reduction in acres planted to corn, as farmers consider switching to other
crops. A reduction in corn acreage would hinder the Company's ability to grow
earnings. However, the Company anticipates that the 1998 fall harvest in North
America will substantiate continued strong product performance, thereby
positioning the Company for market share growth in 1999 and beyond.

During 1998, there was an unprecedented level of discounting and promotions
of hybrid seed corn by competitors. New alliances, combined with a consolidation
of industry players, have increased the level of uncertainty in the industry.
However, the Company is well positioned against its competitors. The Company
plans to continue to aggressively demonstrate to customers the financial
benefits of the yield advantage of its products.

The Company continues to validate the yield advantage of Pioneer products.
Pioneer has collected over 270,000 side-by-side corn performance comparisons
across its North America market area. The Company's corn hybrids expected to be
the top ten sellers for 1999 on average posted a yield advantage of nearly 8
bushels an acre over the average of the top ten competitor hybrids in
side-by-side comparisons conducted by Pioneer. The program to hold the price of
most of our corn hybrids steady for the 1999 sales season and offer enhanced
credit
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for qualified customers has been positively received. This program, along with
high returns per acre from our strong product performance will be key in the
Company's effort to gain share in the North American market for 1999.

The same results were present with Pioneer brand soybeans. Based on 28,000
variety comparisons, Pioneer leader soybeans with the Roundup Ready(1) gene on
average held a 2 bushel-per-acre yield advantage over competitive Roundup Ready
products. With the addition of 20 new soybean varieties, management believes
that 1998's strong North American soybean operations should continue into 1999
as the Company's soybean products are performing well against the competition.
The demand for glyphosate-resistant products is expected to increase, and the
Company has adequate supplies of these products available for sale in 1999. As a
result, sales of glyphosate-resistant products are expected to represent a
larger percentage of overall soybean sales in 1999, and margins are expected to
improve because of their premium sales price over elite varieties.

The Company anticipates continued growth in local currency sales and
operating profits outside of North America. Therefore, declines in the value of
foreign currencies against the U.S. dollar could adversely affect operating
income from these operations.

In 1999, the Company plans to introduce ECB resistant corn hybrids in
limited volumes in several countries outside of North America. This should help
position the Company for continued growth in sales and margins within these
countries in the years to come.

The Company expects growth in fixed costs to be led by increased
investments in research and product development, information management, and
sales and marketing, as well as an increase in legal costs. The Company expects
that its worldwide research and product development investments as a percentage
of sales will continue to climb, as it enhances its position as the world's
leading supplier of agricultural genetics and as a leading integrator of
technology. Sales and marketing expenses are also expected to increase as the
Company introduces an unprecedented number of new products. Legal costs will
likely climb as the Company continues to protect and defend its intellectual
property positions.

Salary and benefits are another factor that influences fixed costs.
Pioneer's commitment to the work force and responsiveness to the competitive
environment is expected to raise base compensation levels faster than inflation
in the next fiscal year.

In addition, a change in the mix of earnings between the Company's North
American seed business and other worldwide operations may put upward pressure on
the effective tax rate in the future.

- ---------------

1 Registered trademark of, and used under license from, Monsanto Company.
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BUSINESS

GENERAL

The business of the Company is the broad application of the science of
genetics. Founded in 1926 to apply then newly-discovered genetic techniques to
hybridize corn, the Company has been the industry leader in research and product
development for more than 70 years. The Company owns what it believes to be the
industry's finest collection of crop genetics (germplasm), which has been the
key to the Company's success in the past and is expected to be the key to its
success in the future. The Company's research and development is focused on
improving the germplasm base by integrating new technology essential to crop
genetic improvements. The Company was the first commercial seed company to
undertake collaborations on a wide scale with other organizations and scientists
throughout the world to improve core germplasm and better understand crop
genetics. The Company believes that its research collaborations improve its
ability to deliver improved products. The Company emphasizes research for
improving the profitability of farmers through both agronomic and end-use grain
improvements. Agronomic traits increase crop yield or reduce growers' costs. The
Company delivers such improvements as increased bushels per acre and increased
resistance to insects, diseases and herbicides. End-use grain improvement is an
area of increasing importance. The Company expects to experience increasing
demand from end users such as livestock feeders, grain processors, food
processors, and others for specific qualities in the crops they use as an input
in developing other products.

PRODUCTS

The Company develops, produces, and markets hybrids of corn, sorghum, and
sunflowers; varieties of soybeans, alfalfa, wheat, and canola; and
microorganisms useful in crop and livestock production. Hybrids, such as corn
and sorghum, are crosses of two or more unrelated inbred lines that can be
reproduced only by crossing the original parent lines. As a result, it is not
beneficial for customers to plant saved seed, because the seed produced will not
have the same genetic attributes as the seed planted. Varietal crops, such as
soybeans and wheat, will reproduce themselves with little or no genetic
variation. Customers frequently plant saved seed from these products, although
they are becoming increasingly aware of the advantages of purchasing new seed
every year.

The Company's principal products are hybrid seed corn and varietal soybean
seed, which together accounted for approximately 89% of net sales and almost all
operating income over the last five fiscal years. These products are expected to
maintain a dominant role in the Company's operations for the foreseeable future.

Seed corn, in terms of both sales and profitability, is the Company's most
significant product. In fiscal 1998, sales of seed corn represented
approximately 76% of total net sales. Approximately 40% of the Company's 1998
North American seed corn volume was from hybrids introduced in 1997, or those
released in 1998. Seed corn net sales were $1.4 billion and seed corn operating
income was $396 million in fiscal 1998.

Soybean seed is the Company's second largest product in terms of sales and
profitability. Soybean seed accounted for approximately 13% of total net sales
in fiscal 1998. A new variety of soybean seed resistant to specific herbicides
accounted for approximately 39% of fiscal 1998 soybean net sales. Soybean net
sales were $232 million and soybean operating income was $36 million in fiscal
1998.

The Company also develops, produces and markets other products such as
wheat, canola, alfalfa, sorghum, sunflower, and microorganisms useful in crop
and livestock production. These products provide the Company's sales
organization with a full line of seed products, significantly aiding in the sale
of higher-margin products. Other product net sales were $210 million and other
product operating income was $15 million in fiscal 1998.

The Company has seed production facilities located throughout the world and
engages in seed production year-round. In the production of its parent and
commercial seed, the Company generally provides the seed stock, detasseling and
roguing labor, and certain other production inputs. The balance of the labor,
equipment, and inputs are supplied by independent growers. The Company is the
first major agricultural seed company in the world to attain ISO 9000
certification, which allows it to move products more easily from country to
country.

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<PAGE> 22

MARKETS

The primary markets for the Company's products are the United States,
Canada and Europe. Approximately 71% of fiscal 1998 net sales were made in North
America and approximately 20% of such sales were made in Europe. The Company
also has operations in Latin America, Mexico, Africa, Asia, the Middle East, and
the Pacific region.

The Company is the industry leader in North American seed corn sales. The
Company estimates that its share of this market in fiscal 1998 was approximately
42%. The next seven competitors held an estimated combined market share of
approximately 34%, with the closest competitor holding approximately 11%. The
remainder of the market was divided among more than 275 companies selling
regionally.

The Company has a leading seed corn market share in most of the countries
outside North America in which it operates. The Company's market shares in
France, Italy, Germany, Hungary, Austria, Mexico, and Brazil ranged from
approximately 10% to more than 60% in fiscal 1998.

The principal market for the Company's soybean seed is North America. The
Company estimates that its share of the soybean seed market in North America in
fiscal 1998 totaled approximately 16%.

In North America, the majority of seed is marketed through independent
sales representatives. In areas outside the traditional corn belt, seed products
are often marketed through dealers and distributors who handle other
agricultural supplies. The Company's products are marketed outside North America
through a network of subsidiaries, joint ventures, and independent
producer-distributors.

DUPONT ALLIANCE

On August 6, 1997, the Company and DuPont agreed to three integrated
transactions involving (1) a research alliance between the two companies; (2)
the formation of a joint venture to exploit business opportunities in quality
grain traits; and (3) an investment by DuPont in the Company under which DuPont
acquired a 20% equity interest in the Company. Pursuant to the research
alliance, the Company and DuPont have agreed to a research alliance and
collaboration to take advantage of the two companies' respective expertise and
technology and know-how concerning quality grain traits, agronomic traits,
industrial use traits, genomics and enabling technology for developing seed,
grain, grain products, plant materials and other crop improvement products. The
Company and DuPont also have established a commercial joint venture called
Optimum Quality Grains, L.L.C. (the "Joint Venture"), in which each party owns a
50% interest, which will seek to create, maximize and capture value for quality
traits in seed, grain, grain products and plant materials delivered through
corn, soybeans and other selected oil seeds. A key component of the Joint
Venture is the Preferred Seed Support Agreement between the Joint Venture and
the Company. The Joint Venture is not in the seed business and will look to the
Company to be the Joint Venture's preferred worldwide provider and preferred
marketer of quality trait seeds pursuant to the Preferred Seed Support
Agreement.

RESEARCH AND PRODUCT DEVELOPMENT

The Company's research and product development activities are directed at
products with significant market potential. The Company believes it possesses
the largest proprietary pool of germplasm in the world from which to develop new
seed products. The Company's seed research is done through classical plant
breeding and biotechnology techniques. Prior to commercial sale, each potential
product passes through four- to five-year testing cycles during which it is
tested in a range of soil types, stresses and climatic conditions.

During the three fiscal years ended August 31, 1998, the Company expended
the following amounts on research and product development:

<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31, 1998 1997 1996
---------------------- ---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Corn.................................................. $110 $101 $ 90
Soybean............................................... 14 14 12
Other Products........................................ 31 31 34
---- ---- ----
$155 $146 $136
==== ==== ====
</TABLE>

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Integrating new technology is essential to crop genetic improvements.
Currently, the Company manages more than 2,000 research agreements, over 200 of
which are collaborations with entities specializing in technology that the
Company believes help improve its core germplasm base. Existing agreements,
together with a growing number of new associations and collaborations, have
enabled the Company to be a leader in understanding the functions of important
genes in crops such as corn and soybeans. The Company's objective is to continue
to develop that understanding while improving its ability to incorporate these
genes more efficiently into commercial products.

PATENTS, TRADEMARKS, AND TECHNOLOGY

The Company owns and controls its inbreds and varieties by means of
intellectual property rights, including, but not limited to, patents,
trademarks, licenses, trade secrets, and plant variety protection certificates.
Within the United States, these rights essentially prohibit other parties from
making, using, selling, importing, or exporting seed produced from the Company's
inbreds and varieties until such protection expires, usually well after the
useful life of the inbred or variety. Outside the United States, the level of
protection afforded varies from country to country according to local laws and
international agreements. As of August 31, 1998, the Company held over 250
domestic and 300 foreign patents and had over 900 patent applications pending on
new technologies and products moving toward commercialization.

RISK FACTORS IN THE BUSINESS

The annual volume of seed sold and related profit can be significantly
affected by forces beyond the Company's control. Some of these factors are
government programs/approvals, weather, and commodity prices. Government
programs can affect, among other things, crop acreage and commodity prices.
Government regulatory approvals can affect the timing of bringing new products
to market. Weather and other factors can affect commodity prices, product
performance, the Company's seed field yields, and planting decisions by
customers which ultimately can impact acreage. Commodity prices impact the
Company's pricing opportunities, selling strategies, and collection practices.

Intellectual property positions are becoming increasingly important within
the agricultural seed industry as genetically engineered products become a
larger part of the product landscape. It is likely that no one company will own
all patent rights within the industry for certain recent technology
advancements.

The competitive landscape in the seed genetics business continues to change
as many chemical companies work to transform themselves into higher-value life
sciences companies. The Company is unable to predict what effect the
consolidations in the industry will have on pricing opportunities, selling
strategies, intellectual property, or earnings.

Operating as a global company exposes the Company to the risks resulting
from currency fluctuations. The Company has policies in place to help manage
this risk. Product performance against the competition will continue to be the
key driver of long-term success for the Company. While the Company has been able
to develop products that consistently out-perform the competition, rapid change
in technology and customer preference may result in short product life cycles.
Speed to market with new, higher-value, products will be increasingly important.

EMPLOYEES

As of August 31, 1998, the Company employed approximately 5,000 people
worldwide, of which approximately 1,000 were engaged in research and
development. The Company believes relations with its employees to be good.

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<PAGE> 24

DESCRIPTION OF THE NOTES

The Notes will be issued under an Indenture to be dated as of January 15,
1999 (the "Indenture"), between the Company and Chase Manhattan Trust Company,
National Association, as trustee for the Notes (the "Trustee"). The Indenture is
subject to and is governed by the Trust Indenture Act of 1939, as amended (the
"TIA"), and the terms of the Notes include those made part of the Indenture by
reference to the TIA as in effect on the date of the Indenture. The following is
a summary of certain provisions of the Notes and the Indenture. The following
description does not purport to be complete and is subject to, and qualified in
its entirety by, reference to the TIA and all the provisions of the Notes and
the Indenture, including the definitions stated therein. Definitions relating to
certain capitalized terms are set forth under "Certain Definitions" and
throughout this description. Terms that are used but not otherwise defined
herein have the meanings assigned to them in the Indenture and such definitions
are incorporated herein by reference.

GENERAL

The Notes will be senior, unsecured obligations of the Company, will be
limited to $200 million aggregate principal amount and, unless previously
redeemed or repurchased, will mature on January 15, 2009. The Notes will bear
interest at the rate per annum shown on the front cover of this prospectus from
January 15, 1999 or from the most recent interest payment date to which interest
has been paid or provided for, payable semi-annually on January 15 and July 15
of each year, commencing July 15, 1999, to the Person in whose name a Note (or
any predecessor Note) is registered at the close of business on the preceding
January 1 or July 1, as the case may be.

Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes will be transferable at the corporate trust office or agency of
the Trustee in The City of New York maintained for such purposes at 55 Water
Street, Room 234, North Building, New York, New York 10041. No service charge
will be made for the transfer, exchange or redemption of Notes, except in
certain circumstances for any tax or other governmental charge that may be
imposed in connection therewith.

The Notes will be issued in fully registered form without coupons, in
denominations of $1,000 or integral multiples thereof.

The Indenture does not provide for any debt covenants that would afford
Holders any protection in the event of a highly leveraged transaction involving,
or a change in control of, the Company.

RESTRICTED AND UNRESTRICTED SUBSIDIARIES

The various restrictive provisions of the Indenture applicable to the
Company and its Restricted Subsidiaries do not apply to Unrestricted
Subsidiaries. The assets and liabilities of Unrestricted Subsidiaries, and
investments by the Company in any Unrestricted Subsidiary, are not consolidated
with those of the Company and its Restricted Subsidiaries in calculating
Consolidated Net Tangible Assets under the Indenture. "Unrestricted
Subsidiaries" are those Subsidiaries which are designated as Unrestricted
Subsidiaries by the Board of Directors from time to time pursuant to the
Indenture and Subsidiaries of Unrestricted Subsidiaries. "Restricted Subsidiary"
means any Subsidiary which owns or leases a Principal Property and any other
Subsidiary which has not been designated an Unrestricted Subsidiary. "Principal
Property" means any real or personal property owned or leased by the Company or
any Subsidiary, the net book value of which on the date as of which the
determination is being made exceeds 2% of the Consolidated Net Tangible Assets
of the Company and its Restricted Subsidiaries, provided that Principal Property
shall not include any real or personal property owned or leased by the Company
or any Subsidiary which the Company's Board of Directors has in good faith
determined pursuant to a written resolution is not material, either singly or
together with all other real and personal property owned or leased by all
Unrestricted Subsidiaries, to the Company and its Subsidiaries, taken as a
whole.

RANKING

The indebtedness evidenced by the Notes will rank pari passu in right of
payment with all other senior, unsecured indebtedness of the Company, but will
be effectively subordinated to indebtedness of the Company's

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<PAGE> 25

subsidiaries. In addition, the indebtedness evidenced by the Notes will be
effectively subordinated to any senior, secured indebtedness of the Company to
the extent of the value of the assets securing such indebtedness.

OPTIONAL REDEMPTION

The Notes will be redeemable, as a whole or in part, at the option of the
Company at any time, at a redemption price (a "Redemption Price") equal to the
greater of (i) 100% of the principal amount of such Notes and (ii) the sum of
the present values of the remaining scheduled payments of principal and interest
thereon discounted to the redemption date (the "Redemption Date") on a
semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at
the Treasury Rate plus 15 basis points, plus, in each case, accrued interest
thereon to the Redemption Date.

"Treasury Rate" means, with respect to any Redemption Date, the rate per
annum equal to the semiannual equivalent yield to maturity of the Comparable
Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as
a percentage of its principal amount) equal to the Comparable Treasury Price for
such Redemption Date.

"Comparable Treasury Issue" means the United States Treasury security
selected by an Independent Investment Banker as having a maturity comparable to
the remaining term of the Notes to be redeemed that would be utilized, at the
time of selection and in accordance with customary financial practice, in
pricing new issues of corporate debt securities of a comparable maturity to the
remaining term of such Notes. "Independent Investment Banker" means one of the
Reference Treasury Dealers appointed by the Trustee after consultation with the
Company.

"Comparable Treasury Price" means, with respect to any Redemption Date, (A)
the average of the Reference Treasury Dealer Quotations for such Redemption
Date, after excluding the highest and lowest such Reference Treasury Dealer
Quotations, or (B) if the Trustee obtains fewer than four such Reference
Treasury Dealer Quotations, the average of all such quotations. "Reference
Treasury Dealer Quotations" means, with respect to each Reference Treasury
Dealer and any Redemption Date, the average, as determined by the Trustee, of
the bid and asked prices for the Comparable Treasury Issue (expressed in each
case as a percentage of its principal amount) quoted in writing to the Trustee
by such Reference Treasury Dealer at 3:30 p.m., New York time, on the third
Business Day preceding such Redemption Date.

"Reference Treasury Dealer" means each of Lazard Freres & Co. LLC, Chase
Securities Inc. and two other primary U.S. Government securities dealers in The
City of New York to be selected by the Company, and their respective successors.

Notice of any redemption will be mailed at least 30 days but not more than
60 days before the Redemption Date to each Holder of Notes to be redeemed.

Unless the Company defaults in payment of the Redemption Price on and after
the Redemption Date, interest will cease to accrue on the Notes or portions
thereof called for redemption.

If less than all of the Notes are to be redeemed, the Trustee will select
the Notes to be redeemed on a pro rata basis, by lot or by such other method as
the Trustee shall deem fair and appropriate. The Trustee may select for
redemption Notes and portions of Notes in amounts of whole multiples of $1,000.

BOOK-ENTRY DELIVERY AND FORM

GLOBAL NOTES

Except as set forth below, the Notes will initially be issued in the form
of one or more registered Notes in global form (the "Global Notes"). Each Global
Note will be deposited on the date of the closing of the sale of the Notes with,
or on behalf of, The Depository Trust Company ("DTC" or the "Depositary") and
registered in the name of Cede & Co., as nominee of DTC.

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<PAGE> 26

DTC is a limited-purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" with the meaning
of the New York Uniform Commercial Code and a "clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. DTC holds
securities that its participants ("Participants") deposit with DTC. DTC also
facilitates the settlement among Participants of securities transactions, such
as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in Participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct Participants
include securities brokers and dealers, banks, trust companies, clearing
corporations, and certain other organizations ("Direct Participants"). DTC is
owned by a number of its Direct Participants and by the New York Stock Exchange,
Inc., the American Stock Exchange, Inc. and the National Association of
Securities Dealers, Inc. Access to the DTC system is also available to others
such as securities brokers and dealers, banks and trust companies that clear
through or maintain a custodial relationship with a Direct Participant, either
directly or indirectly ("Indirect Participants"). The rules applicable to DTC
and its Participants are on file with the Commission.

The Company expects that pursuant to procedures established by the
Depositary (i) upon deposit of the Global Notes, the Depositary will credit the
accounts of Participants designated by the Underwriters with an interest in the
applicable Global Notes and (ii) ownership of the Notes evidenced by the Global
Notes will be shown on, and the transfer of that ownership will be effected only
through, records, maintained by the Depositary (with respect to Participants'
interests), the Participants and the Indirect Participants. The laws of some
states require that certain Persons take physical delivery in definitive form of
securities that they own and that security interests in negotiable instruments
can only be perfected by delivery of certificates representing the instruments.
Consequently, the ability to transfer Notes evidenced by the Global Notes will
be limited to such extent.

So long as the Depositary or it nominee is the registered owner of a Note,
the Depositary or such nominee, as the case may be, will be considered the sole
owner or holder of the Notes represented by the Global Notes for all purposes
under the Indenture. Except as provided below, owners of beneficial interests in
a Global Note will not be entitled to have Notes represented by such Global Note
registered in their names, will not receive or be entitled to receive physical
delivery of Notes in certificated form ("Certificated Notes"), and will not be
considered the owners or holders thereof under the Indenture for any purpose,
including with respect to the giving of any directions, instructions or
approvals to the Trustee thereunder. As a result, the ability of a Person having
a beneficial interest in Notes represented by a Global Note to pledge such
interest to Persons or entities that do not participate in the Depositary's
system, or to otherwise take actions with respect to such interest, may be
affected by the lack of a physical certificate evidencing such interest.

Neither the Company nor the Trustee will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of Notes by the Depositary, or for maintaining, supervising or reviewing any
records of the Depositary relating to such Notes.

Payments with respect to the principal of, premium, if any, and interest
on, any Note represented by a Global Note registered in the name of the
Depositary or its nominee, on the applicable record date will be payable by the
Trustee to, or at the direction of, the Depositary or it nominee in its capacity
as the registered holder of the Global Note representing such Notes under the
Indenture. Under the terms of the Indenture, the Company and the Trustee may
treat the Persons in whose names the Notes, including the Global Notes, are
registered as the owners thereof for the purpose of receiving such payments and
for any and all other purposes whatsoever. Consequently, neither the Company nor
the Trustee has or will have any responsibility or liability for the payment of
such amounts to beneficial owners of Notes (including principal, premium, if
any, or interest), or for immediately crediting the accounts of the relevant
Participants with such payment, in amount proportionate to their respective
holdings in principal amount of beneficial interests in the Global Note as shown
on the records of the Depositary. Payments by the Participants and the Indirect
Participants to the beneficial owners of Notes will be governed by standing
instructions and customary practice and will be the responsibility of the
Participants or the Indirect Participants.

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<PAGE> 27

CERTIFICATED NOTES

If (i) the Company notifies the Trustee in writing that the Depositary is
unwilling, unable or ineligible to act as a depositary and the Company is unable
to locate a qualified successor within 90 days, (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of Notes in
certificated form under the Indenture, or (iii) any Event of Default has
occurred or is continuing, then, upon surrender by the Depositary of the
applicable Global Notes, Certificated Notes will be issued to each Person that
the Depositary identifies as the beneficial owner of the Notes represented by
such Global Notes. Upon any such issuance, the Trustee is required to register
such Certificated Notes in the name of such Person or Persons (or the nominee of
any thereof), and cause the same to be delivered thereto.

Neither the Company nor the Trustee shall be liable for any delay by the
Depositary or any Direct Participant or Indirect Participant in identifying the
beneficial owners of the Notes, and the Company and the Trustee may conclusively
rely on, and shall be protected in relying on, instructions from the Depositary
for all purposes (including with respect to the registration and delivery, and
the respective principal amounts, of the Notes to be issued).

The information in this section concerning the Depositary and the
Depositary's book-entry system has been obtained from sources that the Company
believes to be reliable. The Company will have no responsibility for the
performance by the Depositary or its Participants of their respective
obligations as described hereunder or under the rules and procedures governing
their respective operations.

SAME-DAY FUNDS SETTLEMENT

Settlement for the Notes will be made by the Underwriters in immediately
available funds. Payments in respect of Notes represented by Global Notes
(including principal, premium, if any, and interest) will be made in immediately
available funds to the accounts specified by the Depositary. With respect to
Notes represented by Certificated Notes, the Company will make all payments of
principal, premium, if any, and interest, by mailing a check to the registered
address of each Holder. The Notes will trade in the Depositary's Same-Day Funds
Settlement System until maturity, or until the Notes are issued in certificated
form, and secondary market trading activity in the Notes will therefore be
required by the Depositary to settle in immediately available funds. No
assurance can be given as to the effect, if any, of settlement in immediately
available funds on trading activity in the Notes.

SINKING FUND

The Notes will not be entitled to the benefit of any sinking fund.

CERTAIN COVENANTS

LIMITATION ON LIENS

The Company will not, and will not permit any Restricted Subsidiary of the
Company to, incur any Lien upon property or assets of the Company or any
Restricted Subsidiary of the Company to secure Indebtedness without making, or
causing such Restricted Subsidiary to make, effective provision for securing the
Notes equally and ratably with (or prior to) such Indebtedness as to such
property for as long as such Indebtedness will be so secured unless such
Indebtedness is subordinate in right of payment to the Notes, in which case the
Notes will be secured prior to such Indebtedness as to such property for as long
as such Indebtedness will be so secured.

The foregoing restrictions will not apply to (a) Permitted Liens or (b)
Liens securing Indebtedness if, after giving pro forma effect to the Incurrence
of such Indebtedness (and the receipt and application of the proceeds therefrom)
or the securing of outstanding Indebtedness, the sum of (without duplication)
(A) all Indebtedness (valued at the lesser of the outstanding obligation of such
secured Indebtedness or the fair market value of the properties securing such
Indebtedness) of the Company and its Restricted Subsidiaries secured by Liens
(other than Permitted Liens) and (B) all Attributable Indebtedness (other than
Attributable Indebtedness secured by Liens that are Permitted Liens under clause
(i) of the definition thereof or permitted under clause (ii) below under
"Limitation on Sale and Leaseback Transactions") of the Company and its
Restricted Subsidiaries in respect of
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Sale and Leaseback Transactions, at the time of determination, does not exceed
15% of Consolidated Net Tangible Assets.

LIMITATION ON SALE AND LEASEBACK TRANSACTIONS

The Company will not, and will not permit any Restricted Subsidiary of the
Company to, enter into any Sale and Leaseback Transaction unless (i) the Company
or such Restricted Subsidiary would be entitled to create a Lien securing
Indebtedness in an amount equal to the Attributable Indebtedness with respect to
such Sale and Leaseback Transaction without securing the Notes or (ii) the
Company or such Restricted Subsidiary, within six months from the effective date
of such Sale and Leaseback Transaction, applies to the voluntary defeasance,
prepayment (in whole or in part) or retirement (excluding retirement of Notes
and other Indebtedness ranking pari passu with the Notes as a result of
conversion or pursuant to mandatory sinking fund or mandatory prepayment
provisions or by payment at maturity) of Notes or other Indebtedness ranking
senior to or pari passu with the Notes an amount equal to the Attributable
Indebtedness in respect of such Sale and Leaseback Transaction.

CONSOLIDATION, MERGER AND SALE OF ASSETS

The Company will not, in a single transaction or through a series of
transactions, consolidate, amalgamate or combine with or merge with or into or,
directly or indirectly, sell, assign, convey, lease, transfer or otherwise
dispose of all or substantially all of its properties and assets to any Person
or Persons, and the Company will not permit any of the Restricted Subsidiaries
to enter into any such transaction or series of transactions if such transaction
or series of transactions, in the aggregate, would result in the sale,
assignment, conveyance, lease, transfer or disposition of all or substantially
all of the properties and assets of the Company and its Restricted Subsidiaries
taken as a whole, to any Person or Persons, unless at the time and after giving
effect thereto (a) either (i) the Company shall be the continuing Person in the
case of a merger or consolidation or (ii) the resulting, surviving or transferee
Person, if other than the Company (the "Successor Company"), shall be a
corporation organized and existing under the laws of the United States, any
state thereof or the District of Columbia and shall expressly assume by a
supplemental indenture all of the obligations of the Company under the Notes and
the Indenture, and in each case, the Indenture shall remain in full force and
effect; (b) immediately after giving effect to such transaction or series of
transactions on a pro forma basis (including, without limitation, any
Indebtedness Incurred or anticipated to be Incurred in connection with or in
respect of such transaction or series of transactions), no Default or Event of
Default would occur or be continuing and the Company shall have delivered to the
Trustee an officer's certificate to that effect; and (c) the Company or the
Successor Company, as the case may be, shall have delivered to the Trustee an
officer's certificate and an opinion of counsel stating that such transaction or
series of transactions, and, if a supplemental indenture is required in
connection with such transaction or series of transactions to effectuate such
assumption, such supplemental indenture, complies with this covenant and that
all conditions precedent in the Indenture relating to the transaction or series
of transactions have been satisfied. Notwithstanding the foregoing, any
Restricted Subsidiary may consolidate, amalgamate or combine with or merge with
or into or, directly or indirectly, sell, assign, convey, lease, transfer or
otherwise dispose of all or substantially all of its properties and assets to
the Company or, subject to the condition set forth in clause (b) in the
preceding sentence, to any other Restricted Subsidiary.

EVENTS OF DEFAULT AND REMEDIES

The following events are "Events of Default" with respect to the Notes:

(a) Default in the payment of any installment of interest on any Note as
and when the same shall become due and payable and continuance of such
default for a period of 30 days;

(b) Default in the payment of all or any part of the principal or
premium, if any, with respect to any Note as and when the same shall become
due and payable, whether at maturity, upon redemption, by declaration, upon
required purchase or otherwise;

(c) Failure on the part of the Company to comply with the provisions of
the Indenture relating to consolidations, mergers or sales of all or
substantially all of its assets;
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(d) Failure on the part of the Company or any Restricted Subsidiary duly
to observe or perform any other of the covenants or agreements on the part
of the Company or any Restricted Subsidiary in the Indenture or the Notes
continuing for a period of 60 days after the date on which written notice
to the Company specifying such failure and requiring the Company or any
Restricted Subsidiary to remedy the same shall have been given to the
Company by the Trustee or to the Company and the Trustee by the Holders of
at least 25% in aggregate principal amount of the Notes at the time
outstanding;

(e) Indebtedness of the Company or any Restricted Subsidiary of the
Company is not paid within any applicable grace period after final maturity
or is accelerated by the holders thereof because of a default, the total
amount of such Indebtedness unpaid or accelerated exceeds $20 million at
the time and such default remains uncured or such acceleration is not
rescinded for 10 days;

(f) Certain voluntary or involuntary events of bankruptcy, insolvency or
reorganization of the Company or any of its "Significant Subsidiaries"
(defined as any subsidiary of the Company that would be a "significant
subsidiary" as defined in Rule 405 under the Securities Act as in effect on
the date of the Indenture); and

(g) Any final judgment or decree for the payment of money in excess of
$20 million at the time is entered against the Company or any Significant
Subsidiary of the Company by a court or courts of competent jurisdiction,
which judgment is not covered by insurance, and is not discharged and
either (A) an enforcement proceeding has been commenced by any creditor
upon such judgment or decree or (B) there is a period of 60 days following
the entry of such judgment or decree during which such judgment or decree
is not discharged, vacated, waived or the execution thereof stayed.

If an Event of Default described in clause (a), (b), (c), (d), (e) or (g)
above occurs and is continuing, unless the principal and interest with respect
to the Notes shall have already become due and payable, either the Trustee or
the Holders of not less than 25% in aggregate principal amount of the Notes then
outstanding may declare the principal amount of and interest on all the Notes
due and payable immediately. If an Event of Default described in clause (f)
above occurs, unless the principal and interest with respect to all the Notes
have become due and payable, the principal amount of and interest on the Notes
then outstanding shall become and be immediately due and payable without any
declaration or other act on the part of the Trustee or any Holder.

In the event of a declaration of acceleration because of an Event of
Default set forth in clause (e) above has occurred and is continuing, such
declaration of acceleration shall be automatically rescinded and annulled if the
event of default triggering such Event of Default pursuant to clause (e) above
shall be remedied or cured by the Company or the relevant Subsidiary or waived
by the holders of the relevant Indebtedness within 60 days after the declaration
of acceleration with respect thereto.

If an Event of Default occurs and is continuing, the Trustee shall be
entitled and empowered to institute any action or proceeding for the collection
of the sums so due and unpaid or to enforce the performance of any provision of
the Notes or the Indenture, to prosecute any such action or proceeding to
judgment or final decree, and to enforce any such judgment or final decree
against the Company or any other obligor on the Notes. In addition, if there
shall be pending proceedings for the bankruptcy or reorganization of the Company
or if a receiver, trustee, or similar official shall have been appointed for its
property, the Trustee shall be entitled and empowered to file and prove a claim
for the whole amount of principal, premium, if any, and interest owing and
unpaid with respect to the Notes. No Holder shall have any right to institute
any action or proceeding upon or under or with respect to the Indenture, for the
appointment of a receiver or trustee, or for any other remedy, unless (a) such
Holder previously shall have given to the Trustee written notice of an Event of
Default with respect to the Notes and of the continuance thereof, (b) the
Holders of not less than 25% in aggregate principal amount of the outstanding
Notes shall have made written request to the Trustee to institute such action or
proceeding with respect to such Event of Default and shall have offered to the
Trustee such reasonable indemnity as it may require against the costs, expenses,
and liabilities to be incurred therein or thereby, and (c) the Trustee, for 60
days after its receipt of such notice, request, and offer of indemnity shall
have failed to institute such action or proceeding and no direction inconsistent
with such written request shall have been given to the Trustee pursuant to the
provisions of the Indenture.

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Prior to the acceleration of the maturity of the Notes, the Holders of a
majority in aggregate principal amount of the Notes at the time outstanding may,
on behalf of the holders of all Notes, waive any past default or Event of
Default and its consequences for that series, except (a) a default in the
payment of the principal, premium, if any, interest with respect to the Notes or
(b) a default with respect to a provision of the Indenture that cannot be
amended without the consent of each Holder affected thereby. In case of any such
waiver, such default shall cease to exist, any Event of Default arising
therefrom shall be deemed to have been cured for all purposes, and the Company,
the Trustee, and the Holders shall be restored to their former positions and
rights under the Indenture.

The Trustee shall, within 90 days after the occurrence of a default known
to it with respect to the Notes, give to the Holders notice of all uncured
defaults with respect to the Notes known to it, unless such defaults shall have
been cured or waived before the giving of such notice; provided, however, that
except in the case of default in the payment of principal, premium, if any, or
interest with respect to the Notes, the Trustee shall be protected in
withholding such notice if it in good faith determines that the withholding of
such notice is in the interest of the Holders.

MODIFICATION OF THE INDENTURE

The Company and the Trustee may enter into supplemental Indentures without
the consent of the Holders for one or more of the following purposes:

(a) To evidence the succession of another Person to the Company pursuant
to the provisions of the Indenture relating to consolidations,
amalgamations, combinations, mergers, and sales of assets and the
assumption by such successor of the covenants, agreements, and obligations
of the Company in the Indenture and in the Notes;

(b) To surrender any right or power conferred upon the Company by the
Indenture, to add to the covenants of the Company such further covenants,
restrictions, conditions, or provisions for the protection of the Holders
as the Board of Directors of the Company shall consider to be for the
protection of the Holders, and to make the occurrence, or the occurrence
and continuance, of a default in any of such additional covenants,
restrictions, conditions, or provisions a default or an Event of Default
under the Indenture (provided, however, that with respect to any such
additional covenant, restriction, condition, or provision, such
supplemental Indenture may provide for a period of grace after default,
which may be shorter or longer than that allowed in the case of other
defaults, may provide for an immediate enforcement upon such default, may
limit the remedies available to the Trustee upon such default, or may limit
the right of Holders of a majority in aggregate principal amount of the
Notes to waive such default);

(c) To cure any ambiguity or to correct or supplement any provision
contained in the Indenture, in any supplemental Indenture, or in the Notes
that may be defective or inconsistent with any other provision contained
therein, to convey, transfer, assign, mortgage, or pledge any property to
or with the Trustee, or to make such other provisions in regard to matters
or questions arising under the Indenture as shall not adversely affect the
interests of any Holders;

(d) To modify or amend the Indenture in such a manner as to permit the
qualification of the Indenture or any supplemental Indenture under the
Trust Indenture Act as then in effect;

(e) To comply with the provisions of the Indenture relating to
consolidations, amalgamations, combinations, mergers, and sales of assets;

(f) To add guarantees with respect to the Notes or to secure the Notes;

(g) To make any change that does not adversely affect the rights of any
Holder; and

(h) To evidence and provide for the acceptance of appointment by a
successor or separate Trustee with respect to the Notes and to add to or
change any of the provisions of the Indenture as shall be necessary to
provide for or facilitate the administration of the Indenture by more than
one Trustee.

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With the consent of the Holders of a majority in aggregate principal amount
of the outstanding Notes, the Company and the Trustee may from time to time and
at any time enter into a supplemental Indenture for the purpose of adding any
provisions to, changing in any manner, or eliminating any of the provisions of
the Indenture or of any supplemental Indenture or modifying in any manner the
rights of the Holders; provided, however, that without the consent of the
Holders of each Note so affected, no such supplemental Indenture shall (a)
reduce the percentage in principal amount of Notes whose Holders must consent to
an amendment, (b) reduce the rate of or extend the time for payment of interest
on the Notes or reduce the amount of any payment of interest on the Notes, (c)
reduce the principal of or extend the Stated Maturity of the Notes, (d) reduce
the premium payable upon the redemption of the Notes or change the time at which
the Notes may or shall be redeemed, (e) make the Notes payable in a currency
other than U.S. dollars, (f) release any security that may have been granted
with respect to the Notes, or (g) make any change in the provisions of the
Indenture relating to waivers of defaults or amendments that require unanimous
consent.

SATISFACTION AND DISCHARGE OF THE INDENTURE; DEFEASANCE

The Indenture shall generally cease to be of any further effect with
respect to the Notes if (a) the Company has delivered to the Trustee for
cancellation all the Notes (with certain limited exceptions) or (b) all Notes
not theretofore delivered to the Trustee for cancellation shall have become due
and payable, or are by their terms to become due and payable within one year or
are to be called for redemption within one year, and the Company shall have
deposited with the Trustee as trust funds the entire amount sufficient (in the
opinion of a nationally recognized firm of independent public accountants
expressed in a written certification thereof delivered to the Trustee) without
consideration of any reinvestment and after payment of all taxes or other
charges and assessments in respect thereof payable by the Trustee, to pay at
maturity or upon redemption all such Notes and any interest thereon, no default
with respect to the Notes has occurred and is continuing on the date of such
deposit, such deposit does not result in a breach or violation of, or constitute
a default under, the Indenture or any other agreement or instrument to which the
Company is a party and the Company delivers to the Trustee an officers'
certificate and opinion of counsel each stating that such conditions have been
complied with (and if, in either case, the Company shall also pay or cause to be
paid all other sums payable under the Indenture by the Company).

In addition, the Company shall have a "legal defeasance option" (pursuant
to which it may terminate, with respect to the Notes, all of its obligations
under the Notes and the Indenture) and a "covenant defeasance option" (pursuant
to which it may terminate, with respect to the Notes, its obligations with
respect to the Notes under certain specified covenants contained in the
Indenture). If the Company exercises its legal defeasance option with respect to
the Notes, payment of the Notes may not be accelerated because of an Event of
Default. If the Company exercises its covenant defeasance option with respect to
the Notes, payment of the Notes may not be accelerated because of an Event of
Default related to the specified covenants.

The Company may exercise its legal defeasance option or its covenant
defeasance option with respect to the Notes if (a) the Company irrevocably
deposits in trust with the Trustee cash or U.S. Government Obligations (as
defined in the Indenture) for the payment of principal, premium, if any, and
interest with respect to the Notes to maturity or redemption, as the case may
be, (b) the Company delivers to the Trustee a certificate from a nationally
recognized firm of independent accountants expressing their opinion that the
payments of principal, premium, if any, and interest when due and without
reinvestment on the deposited U.S. Government Obligations plus any deposited
money without investment will provide cash at such times and in such amounts as
will be sufficient to pay the principal, premium, if any, and interest when due
with respect to all the Notes to maturity or redemption, as the case may be, (c)
91 days pass after the deposit is made and during the 91-day period no default
described in clause (f) under " -- Events of Default and Remedies" with respect
to the Company occurs that is continuing at the end of such period, (d) no
Default or Event of Default has occurred and is continuing on the date of such
deposit and after giving effect thereto, (e) the deposit does not constitute a
default under the Indenture or any other agreement binding on the Company, (f)
the Company delivers to the Trustee an opinion of counsel to the effect that the
trust resulting from the deposit does not constitute, or is qualified or exempt
as, a regulated investment company under the Investment Company Act of 1940, as
amended, (g) the Company delivers to the Trustee an opinion of counsel
addressing certain Federal income tax matters relating to the

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defeasance, and (h) the Company delivers to the Trustee an officers' certificate
and an opinion of counsel, each stating that all conditions precedent to the
defeasance and discharge of the Notes as contemplated by the Indenture have been
complied with.

The Trustee shall hold in trust cash or U.S. Government Obligations
deposited with it as described above and shall apply the deposited cash and the
proceeds from deposited U.S. Government Obligations to the payment of principal,
premium, if any, and interest with respect to the Notes.

THE TRUSTEE

The Indenture provides that, except during the continuance of an Event of
Default, the Trustee thereunder will perform only such duties as are
specifically set forth in the Indenture. If an Event of Default has occurred and
is continuing, the Trustee will exercise such rights and powers vested in it
under the Indenture and use the same degree of care and skill in its exercise as
a prudent person would exercise under the circumstances in the conduct of such
person's own affairs.

The Indenture and the provisions of the TIA incorporated by reference
therein contain limitations on the rights of the Trustee thereunder, should it
become a creditor of the Company, to obtain payment of claims in certain cases
or to realize on certain property received by it in respect of any such claims,
as security or otherwise. The Trustee is permitted to engage in other
transactions; provided however, that if it acquires any conflicting interest (as
defined in the Indenture) it must eliminate such conflict or resign.

GOVERNING LAW

The Indenture and the Notes will be governed by the laws of the State of
New York, without regard to the principles of conflicts of law.

CERTAIN DEFINITIONS

Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indenture. Reference is made to the
Indenture for a full definition of all such terms as well as any other
capitalized terms used herein for which no definition is provided.

"Attributable Indebtedness" is defined to mean, when used in connection
with a Sale and Leaseback Transaction referred to in the "Limitation on Sale and
Leaseback Transactions" covenant described above, at any date of determination,
the present value (discounted according to GAAP at the cost of indebtedness
implied in the lease) of the total obligations of the lessee for rental payments
during the remaining term of the lease included in such Sale and Leaseback
Transaction (including any period for which such lease has been extended).

"Board of Directors" is defined to mean either the Board of Directors of
the Company or any duly authorized committee or subcommittee of such Board,
except as the context may otherwise require.

"Business Day" is defined to mean any day that is not a Saturday, a Sunday
or a day on which banking institutions or trust companies in New York City are
authorized or obligated by law to close.

"Capital Stock" is defined to mean, with respect to any Person, any and all
shares, interests, rights to purchase, warrants, options, participations or
other equivalents of or interests (including partnership interests) in (however
designated) the equity of such Person, including any Preferred Stock, but
excluding any debt securities convertible into such equity.

"Capitalized Lease Obligation" is defined to mean, as applied to any
Person, any obligation that is required to be classified and accounted for as a
capitalized lease for financial reporting purposes in accordance with GAAP; and
the amount of Indebtedness represented by such obligation shall be the
capitalized amount of such obligation determined in accordance with GAAP; and
the Stated Maturity thereof shall be the date of the last payment of rent or any
other amount due under such lease prior to the first date upon which such lease
may be terminated by the lessee without payment of a penalty.

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"Common Stock" of any Person is defined to mean capital stock of such
Person that does not rank prior, as to the payment of dividends or as to the
distribution of assets upon any voluntary or involuntary liquidation,
dissolution or winding up of such Person, to shares of Capital Stock of any
other class of such Person.

"Consolidated Net Tangible Assets" is defined to mean, as of any date, the
total amount of assets of the Company and its Restricted Subsidiaries on a
consolidated basis at the end of the fiscal quarter immediately preceding such
date, as determined in accordance with GAAP, less (i) Intangible Assets and (ii)
appropriate adjustments on account of minority interests of other Persons
holding equity investments in Restricted Subsidiaries, in the case of each of
clauses (i) and (ii) above as reflected on the consolidated balance sheet of the
Company and its Restricted Subsidiaries as of the end of the fiscal quarter
immediately preceding such date.

"Exchange Act" is defined to mean the United States Securities Exchange Act
of 1934, as amended.

"GAAP" is defined to mean generally accepted accounting principles in the
United States of America as in effect on the Issue Date.

"Hedging Obligations" of any Person is defined to mean the obligations of
such Person pursuant to any interest rate protection agreement, currency
exchange protection agreement, commodity price protection agreement or other
similar agreement.

"Holder" is deemed to mean the registered holder of any Note.

"Incur" is defined to mean, issue, assume, guarantee, incur or otherwise
become liable for; provided, however, that any Indebtedness or Capital Stock of
a Person existing at the time such Person becomes a Restricted Subsidiary
(whether by merger, consolidation, acquisition or otherwise) shall be deemed to
be incurred by such Restricted Subsidiary at the time it becomes a Restricted
Subsidiary. The terms "Incurred," "Incurrence" and "Incurring" shall each have a
correlative meaning.

"Indebtedness" is defined to mean, with respect to any Person at any date
of determination (without duplication), indebtedness for borrowed money or
indebtedness evidenced by bonds, notes, debentures or other similar instruments
given to finance the acquisition of any businesses, properties or assets of any
kind (including, without limitation, capital stock or other equity interests in
any Person).

"Intangible Assets" is defined to mean all unamortized debt discount and
expense, unamortized deferred charges, goodwill, patents, trademarks, service
marks, trade names, copyrights, write-ups of assets over their carrying value at
the end of the last fiscal quarter ended prior to the Issue Date or the date of
acquisition, if acquired subsequent thereto, and all other items which would be
treated as intangibles on the consolidated balance sheet of the Company and its
Restricted Subsidiaries prepared in accordance with GAAP.

"Issue Date" is defined to mean the date on which the Notes are originally
issued under the Indenture.

"Lien," with respect to any property or assets, is defined to mean any
mortgage or deed of trust, pledge, hypothecation, assignment, deposit
arrangement, security interest, lien, charge, easement (other than any easement
not materially impairing usefulness or marketability), encumbrance, preference,
priority or other security agreement or preferential arrangement of any kind or
nature whatsoever on or with respect to such property or assets (including,
without limitation, any conditional sale or other title retention agreement
having substantially the same economic effect as any of the foregoing), but not
including the interest of a lessor under a lease that is an operating lease
under GAAP.

"Permitted Liens" is defined to mean, with respect to any Person, (a) Liens
existing on or provided for under the terms of agreements existing on the Issue
Date; (b) Liens on property at the time the Company or any of its Restricted
Subsidiaries acquired the property or the entity owning such property, including
any acquisition by means of a merger, amalgamation, combination or consolidation
with or into the Company; provided, however, that any such Lien may not extend
to any other property owned by the Company or any of its Restricted
Subsidiaries; (c) Liens on accounts receivable, inventory or containers,
returnable packaging cases to secure

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working capital or revolving credit indebtedness incurred in the ordinary course
of business; (d) Purchase Money Liens and Liens arising in connection with
Capitalized Lease Obligations that do not arise in connection with Sale and
Leaseback Transactions; (e) Liens securing only Indebtedness of a Wholly-Owned
Restricted Subsidiary of the Company to the Company or one or more Wholly-Owned
Restricted Subsidiaries of the Company; (f) Liens resulting from the deposit of
funds or evidences of Indebtedness in trust for the purpose of defeasing
Indebtedness of the Company or any of its Restricted Subsidiaries; (g) legal or
equitable encumbrances deemed to exist by reason of negative pledges; (h) Liens
on property or shares of stock of another Person at the time such other Person
becomes a Restricted Subsidiary of such Person; provided, however, that such
Liens are not created, incurred or assumed in connection with, or in
contemplation of, such other Person becoming such a Restricted Subsidiary of
such Person; provided further, however, that such Lien may not extend to any
other property owned by such Person or any of its Restricted Subsidiaries; (i)
Liens arising in connection with Capitalized Lease Obligations in Sale and
Leaseback Transactions with respect to which the Attributable Indebtedness
outstanding at any time shall not exceed $25 million in the aggregate; and (j)
Liens to secure any refinancing, refunding, extension, substitution, renewal or
replacement (or successive refinancings, refundings, extensions, substitutions,
renewals or replacements), as a whole, or in part, of any Indebtedness secured
by any Lien referred to in the foregoing clauses (a) through (h); provided,
however, that (i) such new Lien shall be limited to all or part of the same
property that secured the original Lien (plus improvements on or to such
property) and (ii) the Indebtedness secured by such Lien at such time is not
increased to any amount greater than the sum of (A) the outstanding principal
amount or, if greater, committed amount of the Indebtedness described under
clauses (a) through (h) at the time the original Lien became a Permitted Lien
under this Indenture and (B) any amount necessary to pay any fees and expenses,
including premiums, related to such refinancing, refunding, extension, removal
or replacement.

"Person" is defined to mean any individual, corporation, partnership, joint
venture, trust, unincorporated organization, government or any agency or
political subdivision thereof.

"Preferred Stock" is defined to mean, with respect to any Person, any and
all shares, interests, participations or other equivalents (however designated,
whether voting or nonvoting) of such Person's preferred or preference stock,
whether now outstanding or issued after the date of the Indenture, including,
without limitation, all series and classes of such preferred or preference
stock.

"Purchase Money Lien" is defined to mean a Lien on property securing
Indebtedness Incurred by the Company or any of its Restricted Subsidiaries to
provide funds for all or any portion of the cost of acquiring, constructing,
altering, expanding, improving or repairing such property or assets used in
connection with such property.

"Related Person" of any Person is defined to mean any other Person that
owns, or any controlling Affiliate of any other Person that owns, (a) 5% or more
of the outstanding Common Stock of such Person or (b) 5% or more of the Voting
Stock of such Person.

"Sale and Leaseback Transaction" of any Person is defined to mean an
arrangement with any lender or investor or to which such lender or investor is a
party providing for the leasing by such Person of any property or asset of such
Person which has been or is being sold or transferred by such Person more than
180 days after the acquisition thereof or the completion of construction or
commencement of operation thereof to such lender or investor or to any Person to
whom funds have been or are to be advanced by such lender or investor on the
security of such property or asset. The Stated Maturity of such arrangement will
be the date of the last payment of rent or any other amount due under such
arrangement prior to the first date on which such arrangement may be terminated
by the lessee without payment of a penalty. Notwithstanding the foregoing,
neither (a) a transaction involving a lease with a term of less than three years
or (b) a transaction between the Company and a Restricted Subsidiary of the
Company or between Restricted Subsidiaries of the Company shall be deemed a Sale
and Leaseback Transaction.

"Securities Act" is defined to mean the Securities Act of 1933, as amended.

"Stated Maturity" is defined to mean, when used with respect to any
security, the date specified in such security as the fixed date on which the
payment of principal of such security is due and payable, including
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pursuant to any mandatory redemption provision (but excluding any provision
providing for the repurchase of such security at the option of the holder
thereof upon the happening of any contingency beyond the control of the issuer
unless such contingency has occurred).

"Subsidiary" is defined to mean, with respect to any Person, any
corporation, association, partnership or other business entity of which more
than 50% of the total voting power of the Capital Stock entitled (without regard
to the occurrence of any contingency) to vote in the election of directors,
managers or trustees thereof is at the time owned or controlled, directly or
indirectly, by (i) such Person, (ii) such Person and one or more Subsidiaries of
such Person, or (iii) one or more Subsidiaries of such Person.

"Voting Stock" is defined to mean Capital Stock of any class or kind
ordinarily having the power to vote for the election of directors of the
Company.

"Wholly-Owned Restricted Subsidiary" is defined to mean, with respect to
any Person, any Restricted Subsidiary of such Person if all of the Common Stock
or other similar equity ownership interests (but not including Preferred Stock)
in such Restricted Subsidiary (other than any directors' qualifying shares or
shares issued to Persons to comply with local laws) is owned directly or
indirectly by such Person.

35
<PAGE> 36

UNDERWRITING

Under the terms and conditions of the Underwriting Agreement, the Company
has agreed to sell to each of the Underwriters named below, and each of such
Underwriters has severally agreed to purchase from the Company, the respective
principal amount of Notes set forth opposite its name below:

<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
UNDERWRITER OF NOTES
----------- ------------
<S> <C>
Lazard Freres & Co. LLC..................................... $100,000,000
Chase Securities Inc........................................ 100,000,000
------------
Total............................................. $200,000,000
============
</TABLE>

The Underwriting Agreement provides that the several obligations of the
Underwriters to pay for and accept delivery of the Notes offered hereby are
subject to the approval of certain legal matters by counsel and to certain other
conditions. The Underwriters are obligated to purchase all Notes if any are
purchased.

The Company has been advised by the Underwriters that the Underwriters
propose initially to offer the Notes offered hereby directly to the public at
the public offering price set forth on the cover page of this prospectus and to
certain dealers at such price less a concession not in excess of 0.400% of the
principal amount of the Notes. The Underwriters may allow, and such dealers may
reallow, a concession not in excess of 0.250% of the amount of the Notes to
other Underwriters or to certain other dealers. After this offering, the public
offering price and such concessions may be changed by the Underwriters.

The expenses of this offering (exclusive of Underwriters' discount) are
estimated at $400,000 and are payable by the Company.

The Notes are a new issue of securities with no established trading market.
The Notes have been approved for listing on the New York Stock Exchange under
the symbol "PHB 09", subject to official notice of issuance. In the event the
Notes are not so listed, the Underwriters have indicated that they intend to
make a market in the Notes, subject to applicable laws and regulations. However,
the Underwriters are not obligated to do so and any such market making may be
discontinued at any time, without notice, at their sole discretion. Accordingly,
no assurance can be given as to the liquidity of the trading market for the
Notes.

The Company has agreed that, subject to certain limited exceptions, during
the period beginning on the date of this prospectus and continuing to and
including the date 90 days after the date of this prospectus, it will not offer,
sell, contract to sell, or otherwise dispose of any securities of the Company
that are substantially similar to the Notes without the prior written consent of
the Underwriters.

The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.

In connection with this offering, the Underwriters may effect transactions
which stabilize or maintain the market prices of the Notes at levels above those
which might otherwise prevail in the open market. Such transactions may be
effected on the New York Stock Exchange or otherwise. Such stabilizing, if
commenced, may be discontinued at any time.

Lazard Freres & Co. LLC and Chase Securities Inc. and their affiliates have
engaged and may, in the future, engage in various general financing and banking
transactions with the Company and its affiliates.

EXPERTS

The consolidated financial statements and schedule of Pioneer Hi-Bred
International, Inc. and subsidiaries as of August 31, 1998 and 1997, and for
each of the years in the three-year period ended August 31, 1998, have been
included herein and/or incorporated by reference herein and in the registration
statement in reliance upon

36
<PAGE> 37

the reports of KPMG Peat Marwick LLP, independent certified public accountants,
included herein and/or incorporated by reference herein, and upon the authority
of said firm as experts in accounting and auditing.

LEGAL MATTERS

Baker & Hostetler LLP, Cincinnati, Ohio, will pass upon the legality of the
Notes offered hereby for the Company. Fried, Frank, Harris, Shriver & Jacobson
(a partnership including professional corporations), New York, New York, will
pass upon certain legal matters for the Underwriters. Fried, Frank, Harris,
Shriver & Jacobson from time to time performs legal services for the Company.
Baker & Hostetler LLP may rely as to matters of New York law upon the opinion of
Fried, Frank, Harris, Shriver & Jacobson. Fried, Frank, Harris, Shriver &
Jacobson may rely as to matters of Iowa law upon the opinion of Leon R. Shearer,
Vice President and General Counsel for the Company.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. Reports, proxy statements and other information filed by the Company
may be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's Regional Offices located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite
1300, New York, New York 10048. Copies of such materials can be obtained by mail
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. Information regarding the operation
of the Public Reference Section of the Commission may be obtained by calling the
Commission at 1 (800) SEC-6330. The Commission maintains a World Wide Web site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants, such as the Company, that submit
electronic filings to the Commission. Such material may also be inspected and
copied at the offices of the New York Stock Exchange, on which the Common Stock
of the Company is listed, at 20 Broad Street, New York, New York 10005.

The Company has filed with the Commission a registration statement on Form
S-3 (herein, together with all amendments and exhibits thereto, referred to as
the "Registration Statement") under the Act, with respect to the Notes offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission. For further information with
respect to the Company and the Notes offered by this Prospectus, reference is
made to the Registration Statement. Statements made in this Prospectus as to the
contents of any contract, agreement or other document referred to are not
necessarily complete; and with respect to each such contract, agreement or other
document filed, or incorporated by reference, as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved and each such statement shall be deemed qualified in its
entirety by such reference.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents filed by the Company with the Commission pursuant
to the Exchange Act are incorporated herein by reference:

1. The Company's Annual Report on Form 10-K for the fiscal year ended
August 31, 1998, as amended by Form 10-K/A dated December 18, 1998; and

2. The Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
November 30, 1998, dated January 7, 1999.

All documents filed by the Company pursuant to Sections 13 (a), 13 (c), 14
or 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of the offering of the Notes shall be deemed to be
incorporated by reference into this Prospectus and to be a part hereof from the
date of filing of such
37
<PAGE> 38

documents. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of the Registration Statement or this Prospectus to the extent that
a statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of the
Registration Statement or this Prospectus.

The Company will provide without charge to each person to whom this
Prospectus is delivered, upon written or oral request of such person, a copy of
any or all documents which have been incorporated by reference herein, other
than exhibits to such documents which are not specifically incorporated by
reference therein. Requests should be directed to Pioneer Hi-Bred International,
Inc., Attn: William J. DeMeulenaere, 800 Capital Square, 400 Locust Street, Des
Moines, Iowa 50309 (Telephone: (515) 248-4800).

38
<PAGE> 39

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of August 31, 1998 and
1997...................................................... F-3
Consolidated Statements of Income for the years ended August
31, 1998, 1997 and 1996................................... F-4
Consolidated Statements of Cash Flows for the years ended
August 31, 1998, 1997 and 1996............................ F-5
Consolidated Statements of Shareholders' Equity for the
years ended August 31, 1998, 1997 and 1996................ F-6
Notes to Consolidated Financial Statements.................. F-8
Consolidated Condensed Balance Sheets -- November 30, 1998,
August 31, 1998 and November 30, 1997..................... F-21
Consolidated Condensed Statements of Operations -- Three
Months Ended November 30, 1998 and 1997................... F-22
Consolidated Condensed Statements of Cash Flows -- Three
Months Ended November 30, 1998 and 1997................... F-23
Notes to Consolidated Condensed Financial Statements........ F-24
</TABLE>

F-1
<PAGE> 40

INDEPENDENT AUDITORS' REPORT

To the Shareholders
Pioneer Hi-Bred International, Inc.:

We have audited the accompanying consolidated balance sheets of Pioneer
Hi-Bred International, Inc. and subsidiaries as of August 31, 1998 and 1997, and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the years in the three-year period ended August 31, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Pioneer
Hi-Bred International, Inc. and subsidiaries as of August 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the years in
the three-year period ended August 31, 1998, in conformity with generally
accepted accounting principles.

KPMG PEAT MARWICK LLP

Des Moines, Iowa
September 18, 1998

F-2
<PAGE> 41

PIONEER HI-BRED INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
AUGUST 31,
------------------
1998 1997
------ ------
(IN MILLIONS)
<S> <C> <C>

ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 86 $ 97
Receivables
Trade................................................... 346 256
Other................................................... 54 45
Inventories............................................... 481 440
Deferred income taxes..................................... 69 57
Other current assets...................................... 3 6
------ ------
Total current assets............................... $1,039 $ 901
------ ------
LONG-TERM ASSETS............................................ $ 47 $ 93
------ ------
PROPERTY AND EQUIPMENT
Land and land improvements................................ $ 66 $ 64
Buildings................................................. 387 377
Machinery and equipment................................... 580 539
Construction in progress.................................. 63 60
------ ------
$1,096 $1,040
Less accumulated depreciation............................. 520 495
------ ------
$ 576 $ 545
------ ------
INTANGIBLES................................................. $ 55 $ 64
------ ------
$1,717 $1,603
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings..................................... $ 76 $ 91
Current maturities of long-term debt...................... 14 6
Accounts payable, trade................................... 81 85
Accrued compensation...................................... 61 60
Income taxes payable...................................... 46 26
Other..................................................... 67 61
------ ------
Total current liabilities.......................... $ 345 $ 329
------ ------
LONG-TERM DEBT.............................................. $ 5 $ 19
------ ------
DEFERRED ITEMS
Retirement benefits....................................... $ 94 $ 80
Income taxes.............................................. 19 20
------ ------
$ 113 $ 100
------ ------
CONTINGENCIES
MINORITY INTEREST IN SUBSIDIARIES........................... $ 7 $ 7
------ ------
SHAREHOLDERS' EQUITY
Capital stock
Preferred, authorized 10,000,000 shares; issued none.... $ -- $ --
Common, $1 par value; authorized 600,000,000 shares;
issued 1998 -- 229,945,014 shares; 1997 -- 278,846,889
shares................................................ 230 93
Class B common, $1 stated value; authorized 120,000,000
shares; issued 1998 -- 49,333,758 shares;
1997 -- none.......................................... 49 --
Additional paid-in capital................................ 246 43
Retained earnings......................................... 1,428 1,436
Unrealized (loss) gain on available-for-sale securities,
net..................................................... (2) 19
Cumulative translation adjustment......................... (44) (26)
------ ------
$1,907 $1,565
Less
Cost of common shares acquired for the treasury,
1998 -- 38,951,380 shares; 1997 -- 32,178,084
shares................................................ (631) (393)
Unearned compensation................................... (29) (24)
------ ------
$1,247 $1,148
------ ------
$1,717 $1,603
====== ======
</TABLE>

See Notes to Consolidated Financial Statements.
F-3
<PAGE> 42

PIONEER HI-BRED INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
---------------------------------------
1998 1997 1996
--------- --------- ---------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Net sales................................................... $1,835 $1,784 $1,721
------ ------ ------
Operating costs and expenses
Cost of goods sold........................................ $ 789 $ 771 $ 727
Research and product development.......................... 155 146 136
Selling................................................... 395 374 382
General and administrative................................ 137 130 129
------ ------ ------
$1,476 $1,421 $1,374
------ ------ ------
Operating income.......................................... $ 359 $ 363 $ 347
Investment income........................................... 45 22 22
Interest expense............................................ (13) (8) (11)
Net exchange and other gains (losses)....................... 16 (4) (4)
------ ------ ------
Income before items below................................. $ 407 $ 373 $ 354
Provision for income taxes.................................. (134) (127) (127)
Minority interest and other................................. (3) (3) (4)
------ ------ ------
Net income................................................ $ 270 $ 243 $ 223
====== ====== ======

Preferred stock dividend.................................... $ 9 $ -- $ --
Net income available to common shareholders................. $ 261 $ 243 $ 223
Net income per common share
Basic..................................................... $ 1.13 $ .98 $ .89
Diluted................................................... $ 1.08 $ .98 $ .89
Average shares outstanding
Basic..................................................... 231.5 246.9 249.5
Diluted................................................... 250.3 247.5 249.8
</TABLE>

See Notes to Consolidated Financial Statements.

F-4
<PAGE> 43

PIONEER HI-BRED INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
-----------------------------
1998 1997 1996
------- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $ 270 $ 243 $ 223
Noncash items included in net income
Depreciation and amortization.......................... 90 89 77
Provision for doubtful accounts........................ 6 6 5
Gain on disposal of assets............................. (24) (5) (4)
Other noncash items, net............................... (5) 7 1
Change in assets and liabilities, net
Receivables............................................ (108) (77) (46)
Inventories............................................ (62) (72) 43
Accounts payable and accrued expenses.................. 4 (4) 61
Income taxes payable................................... 20 (38) 40
Other assets and liabilities........................... 49 27 (11)
------- ----- -----
Net cash provided by operating activities.............. $ 240 $ 176 $ 389
------- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of assets.............................. $ 50 $ 29 $ 15
Capital expenditures...................................... (119) (127) (116)
Technology investments.................................... (9) (24) (48)
Other, net................................................ (12) (7) 5
------- ----- -----
Net cash used in investing activities.................. $ (90) $(129) $(144)
------- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Net short-term borrowings (payments)...................... $ (7) $ 81 $ (42)
Proceeds from long-term borrowings........................ 1 -- 1
Principal payments on long-term borrowings................ (6) (11) (55)
Purchase of common stock.................................. (1,756) (25) (62)
Issuance of common and convertible preferred stock........ 1,706 -- --
Cash dividends paid....................................... (92) (79) (69)
------- ----- -----
Net cash used in financing activities.................. $ (154) $ (34) $(227)
------- ----- -----
Effect of foreign currency exchange rate changes on cash and
cash equivalents.......................................... $ (7) $ (15) $ (3)
------- ----- -----
Net increase (decrease) in cash and cash equivalents... $ (11) $ (2) $ 15
Cash and cash equivalents, beginning........................ 97 99 84
------- ----- -----
CASH AND CASH EQUIVALENTS, ENDING........................... $ 86 $ 97 $ 99
======= ===== =====
SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments
Interest............................................... $ 12 $ 7 $ 14
Income taxes........................................... $ 129 $ 158 $ 93
Noncash investing and financing activities
Technology investments acquired by the issuance of
long-term debt and the assumption of liabilities..... $ -- $ 10 $ 20
</TABLE>

See Notes to Consolidated Financial Statements.

F-5
<PAGE> 44

PIONEER HI-BRED INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
------------------------------
1998 1997 1996
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
PREFERRED STOCK
Balance, beginning........................................ $ -- $ -- $ --
Issuance of 164,446 shares............................. 16 -- --
Conversion of 164,446 shares to Class B common stock... (16) -- --
------ ------ ------
Balance, ending........................................... $ -- $ -- $ --
------ ------ ------
COMMON STOCK
Balance, beginning........................................ $ 93 $ 93 $ 93
Issuance for restricted stock plan: (1998 -- 496,266
shares; 1997 -- 766,155 shares; 1996 -- none)........ -- -- --
Issuance of 153,296,674 shares in connection with a
three-for-one stock split effected in the form of a
200% stock dividend.................................. 153 -- --
Repurchase of common stock (1998 -- 49,398,135 shares;
1997 and 1996 -- none)............................... (16) -- --
------ ------ ------
Balance ending............................................ $ 230 $ 93 $ 93
------ ------ ------
CLASS B COMMON STOCK
Balance, beginning........................................ $ -- $ -- $ --
Conversion of preferred shares......................... 16 -- --
Issuance of 32,889,172 shares in connection with a
three-for-one stock split effected in the form of a
200% stock dividend.................................. 33 -- --
------ ------ ------
Balance, ending........................................... $ 49 $ -- $ --
------ ------ ------
ADDITIONAL PAID-IN CAPITAL
Balance, beginning........................................ $ 43 $ 23 $ 18
Common stock issued from treasury for restricted stock
plan................................................. -- 18 3
Common stock issued for restricted stock plan.......... 17 -- --
Issuance of common and preferred stock................. 1,690 -- --
Repurchase of common stock............................. (1,507) -- --
Tax benefits related to restricted stock plan.......... 3 2 2
------ ------ ------
Balance, ending........................................... $ 246 $ 43 $ 23
------ ------ ------
RETAINED EARNINGS
Balance, beginning........................................ $1,436 $1,272 $1,118
Net income............................................. 270 243 223
Cash dividends on common stock (1998 -- $.37 per share;
1997 -- $.32 per share; 1996 -- $.28 per share)...... (83) (79) (69)
Cash dividends on preferred stock (1998 -- $52.00 per
share; 1997 and 1996 -- none)........................ (9) -- --
Three-for-one stock split in the form of a 200% stock
dividend............................................. (186) -- --
------ ------ ------
Balance, ending........................................... $1,428 $1,436 $1,272
------ ------ ------
UNREALIZED (LOSS) GAIN ON AVAILABLE-FOR-SALE SECURITIES, NET
Balance, beginning........................................ $ 19 $ 11 $ --
Change in unrealized (loss) gain....................... (21) 8 11
------ ------ ------
Balance, ending........................................... $ (2) $ 19 $ 11
------ ------ ------
</TABLE>

F-6
<PAGE> 45

PIONEER HI-BRED INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)

<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
------------------------------
1998 1997 1996
------ ------ ------
(IN MILLIONS)
<S> <C> <C> <C>
CUMULATIVE TRANSLATION ADJUSTMENT
Balance, beginning........................................ $ (26) $ (3) $ 1
Current translation adjustment......................... (18) (23) (4)
------ ------ ------
Balance, ending........................................... $ (44) $ (26) $ (3)
------ ------ ------
TREASURY STOCK
Balance, beginning........................................ $ (393) $ (364) $ (303)
Purchase of common stock for the treasury
(1998 -- 6,627,800 shares; 1997 -- 1,107,000 shares;
1996 -- 3,446,700 shares)............................ (234) (25) (62)
Common stock issued from (acquired for) the treasury:
For restricted stock plan (1998 -- none;
1997 -- 52,566 shares; 1996 -- 391,077 shares).... -- -- 4
From restricted stock forfeitures and stock used to
satisfy withholding taxes (1998 -- 199,843 shares;
1997 -- 209,550 shares; 1996 -- 238,230 shares)... (4) (4) (3)
------ ------ ------
Balance, ending........................................... $ (631) $ (393) $ (364)
------ ------ ------
UNEARNED COMPENSATION
Balance, beginning........................................ $ (24) $ (14) $ (14)
Net additions of common stock to restricted stock
plan................................................. (17) (18) (6)
Amortization of unearned compensation.................. 12 8 6
------ ------ ------
Balance, ending........................................... $ (29) $ (24) $ (14)
------ ------ ------
TOTAL SHAREHOLDERS' EQUITY AT YEAR END...................... $1,247 $1,148 $1,018
====== ====== ======
</TABLE>

See Notes to Consolidated Financial Statements.

F-7
<PAGE> 46

PIONEER HI-BRED INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Nature of business -- The Company's business is the broad application of
the science of genetics. Pioneer was founded in 1926 to apply newly discovered
genetic techniques to hybridize corn. Today the Company develops, produces, and
markets hybrids of corn, sorghum, and sunflowers; varieties of soybeans,
alfalfa, wheat, and canola; and microorganisms useful in crop and livestock
production. Approximately 90 percent of the Company's total net sales are from
the sale of hybrid seed corn and soybean seed primarily within the regions of
North America and Europe.

Consolidation policy -- The consolidated financial statements include the
accounts of the Company and all of its subsidiaries. All material intercompany
balances and transactions have been eliminated in consolidation.

Use of estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements. Actual results could differ from those estimates.

Cash equivalents -- The Company considers all liquid investments with a
maturity at purchase of three months or less to be cash equivalents.

Receivables -- Receivables are stated net of an allowance for doubtful
accounts of $27 million and $23 million at August 31, 1998 and 1997,
respectively.

Inventories -- Inventories are valued at the lower of cost (first-in,
first-out method) or market. Independent growers are contracted to produce the
Company's finished seed inventory. In accordance with the contract, the Company
compensates growers with bushel equivalents that can be marketed to the Company
for the market price of grain for a period of time following harvest. The
Company uses derivative instruments such as commodity futures and options that
have a high correlation to the underlying commodity to hedge the commodity risk
involved in compensating growers. Commodity contracts the Company enters into
meet the criteria for hedge accounting and are accounted for on this basis. The
Company regularly monitors its exposures and ensures that commodity contract
amounts do not exceed the amounts of the underlying exposures. The Company does
not hold or issue commodity contracts for trading purposes.

It is the Company's policy to hedge commodity risk prior to setting the
retail price of seed. The hedge position gains or losses are accounted for as
inventory costs and expensed as cost of goods sold when the associated crop
inventory is sold. In the event of early settlement of hedge contracts, gains or
losses through that date continue to be deferred as a component of inventory. If
the contract ceases to meet the specific criteria for use of hedge accounting,
any deferred gains or losses through that date continue to be deferred; gains
and losses after that date are recognized in income. Cash flows arising in
respect to hedging transactions are recognized within the financial statements
under cash flows from operating activities.

Property and equipment -- Property and equipment is recorded at cost, net
of an allowance for loss on plant closings of $3 million and $4 million at
August 31, 1998 and 1997, respectively. Depreciation is computed primarily by
the straight-line method over estimated service lives of two to forty years.

Long-term assets -- Certain long-term assets were classified as
available-for-sale securities. Available-for-sale securities held at August 31,
1998, consisted of an equity security with a cost basis of $8 million and an
unrealized loss of $2 million. Available-for-sale securities held at August 31,
1997, consisted of an equity security with a cost basis of $20 million and an
unrealized gain of $30 million; this security was sold in 1998 for $40 million,
resulting in a gain on sale of $20 million.

The Company owns various other equity security investments which are not
publicly traded. Therefore, the fair value of these investments is not readily
available. The majority of these investments are due to collaborative

F-8
<PAGE> 47

agreements. As a result, it is not practicable to estimate the fair value of the
Company's other equity security investments. These investments are carried at
approximately $1 million, which is their original cost basis net of any
applicable valuation allowance.

Intangibles -- Intangible assets are stated at amortized cost and are
amortized by the straight-line method over one- to twenty-year periods, with the
weighted-average amortization period approximating eight years for the year
ended August 31, 1998. Accumulated amortization of $45 million and $38 million
at August 31, 1998 and 1997, respectively, has been netted against these assets.

Basis of accounting -- Subsidiary and asset acquisitions are accounted for
by the purchase method.

Translation of foreign currencies and foreign exchange hedging -- All
assets and liabilities in the balance sheets of foreign subsidiaries whose
functional currency is other than the U.S. dollar are translated at year-end
exchange rates. Translation gains and losses are not included in determining net
income but are accumulated as a separate component of shareholders' equity.
However, for subsidiaries considered to be operating in highly inflationary
countries and for certain other subsidiaries, the U.S. dollar is the functional
currency, and translation gains and losses are included in determining net
income. Foreign currency transaction gains and losses are included in
determining net income.

The Company uses a combination of derivative instruments such as forward
exchange contracts, purchased options, and cross currency swaps that have a high
correlation to the underlying currency to hedge future firm commitments such as
exports, contractual flows, and royalties. Foreign exchange contracts the
Company enters into meet the criteria for hedge accounting and are accounted for
on this basis. The Company regularly monitors its currency exposures and ensures
that currency contract amounts do not exceed the amounts of the underlying
exposures. The Company does not hold or issue foreign currency contracts for
trading purposes.

While derivative hedge instruments are subject to price fluctuations from
exchange and interest rate movements, these price changes would generally be
offset by changes in the U.S. dollar value of foreign sales and cash flows.
Therefore, hedging gains and losses on existing foreign-dominated payables or
receivables are included in other assets or liabilities and are recognized in
net exchange gain (loss) in conjunction with the revaluation of the
foreign-currency-dominated transaction. Unrealized gains and losses related to
qualifying hedges of firm sales and purchase commitments are deferred and
recognized in income when the future sales or purchases are recognized, or
immediately if the commitment is canceled. Option premiums paid are amortized to
income over the life of the contract.

Income taxes -- Income taxes are computed in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109. Deferred income taxes have been
provided on temporary differences in the financial statement and income tax
bases of certain assets and liabilities.

Deferred taxes have not been recorded on $124 million in undistributed
earnings from foreign subsidiaries that have not been subjected to taxation in
the United States. The Company intends to reinvest such undistributed earnings
indefinitely or to repatriate them only to the extent that no additional income
tax liability is created. It is not practicable to estimate the income tax
liability that would be incurred if such earnings were distributed in a manner
subjecting them to United States taxation. The Company files consolidated U.S.
Federal income tax returns with its domestic subsidiaries; therefore, no
deferred income taxes have been provided or are required for the undistributed
earnings of those subsidiaries.

Pension plans -- The Company's domestic and Canadian operations have
defined benefit pension plans covering substantially all their employees. The
plans provide benefits that are based on average monthly earnings of the
employees. The funding policy is to contribute annually an amount to fund
pension cost as actuarially determined by an independent pension consulting
firm.

Other postretirement benefits -- The Company sponsors a health care plan
and a life insurance plan which provide benefits to eligible retirees. The
Company's contribution is based on age and years of service at retirement. The
health insurance plan contains the cost-sharing features of coinsurance and/or
deductibles. The life insurance plan is paid for by the Company. Benefits under
both plans are based on eligibility status for

F-9
<PAGE> 48

pension and length of service. Substantially all of the Company's U.S. and
Canadian full-time employees may become eligible for these benefits upon
reaching age 55 and having worked for the Company at least five years.

Deferred executive compensation and supplemental retirement benefit
plans -- The estimated liability for the deferred executive compensation and
supplemental retirement benefit plans is being accrued over the expected
remaining years of active employment.

Restricted stock and stock option plans -- The Company has restricted stock
plans and a non-qualified stock option plan. The Company amortizes as
compensation expense the cost of stock acquired for the restricted stock plans
by the straight-line method over three- and five-year restriction periods. No
compensation expense is recorded under the non-qualified stock option plan.

In 1997 the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 123, "Accounting for Stock-Based Compensation," as required for
disclosure purposes only. The Company will continue applying the accounting
treatment prescribed by the provisions of APB Opinion No. 25, "Accounting for
Stock Issued to Employees." Pro forma disclosures have been provided as if SFAS
No. 123 were adopted for all stock-based compensation plans.

Earnings per share -- Basic earnings per share have been computed by
dividing net earnings by the weighted-average outstanding common stock and Class
B common stock during each of the years presented. Diluted earnings per share
have been calculated by also including in the computation the effect of employee
stock options granted to employees as potential common shares.

NOTE 2. ALLIANCE WITH DUPONT

In September 1997, the Company and E.I. du Pont de Nemours and Company
(DuPont) executed an agreement that created one of the world's largest private
agricultural research and development collaborations. A joint venture, Optimum
Quality Grains, L.L.C., was formed that markets improved quality traits to
increase the value of crops for livestock feeders, grain processors, and other
end users. The joint venture does not sell seed. Pioneer is the preferred
worldwide provider and marketer of quality trait seed for the joint venture. The
joint venture began operations January 1, 1998, and is being accounted for on
the equity method of accounting. The Company's 50% equity interest in the joint
venture's operations for the eight months ended August 31, 1998, was a loss of
$6 million. During fiscal 1998, the Company loaned the joint venture $8 million
at a variable interest rate with the principal and unpaid interest due at
December 31, 2001.

In connection with the above agreements, DuPont also acquired an equity
interest in Pioneer through the purchase of 164,446 shares of convertible
preferred voting stock for $1.71 billion. Effective January 30, 1998, each
preferred share was converted into 100 shares of Class B common stock with a
stated value of $1 per share, or $16.4 million. As required by the agreement,
Pioneer used approximately $1.52 billion of the proceeds from the DuPont
investment to purchase approximately 16.4 million shares of the Company's
outstanding common stock through a Dutch auction self-tender. Immediately
following the completion of the Dutch auction self-tender, DuPont's equity
interest in Pioneer was approximately 20%.

The agreement includes, among other things, a standstill provision that
prohibits DuPont from increasing its ownership interest in the Company for 16
years from the date of the agreement without the consent of the Company. DuPont
also gained two seats on the Company's Board of Directors.

F-10
<PAGE> 49

NOTE 3. INVENTORIES

The composition of inventories is as follows:

<TABLE>
<CAPTION>
AUGUST 31,
--------------
1998 1997
----- -----
(IN MILLIONS)
<S> <C> <C>
Finished seed.................................. $273 $245
Unfinished seed................................ 201 186
Supplies and other............................. 7 9
---- ----
$481 $440
==== ====
</TABLE>

Unfinished seed represents the cost of parent seed, detasseling and roguing
labor, and certain other production costs incurred by the Company to produce its
seed supply. Much of the balance of the labor, equipment, and production costs
associated with planting, growing, and harvesting the seed is supplied by
independent growers, who contract specific acreage for the production of seed
for the Company. The compensation of the independent growers is determined based
upon yield, contracted acreage, and commodity prices. The commitment for grower
compensation is accrued as seed is delivered to the Company. Accrued grower
compensation was $13 million at August 31, 1998 and 1997.

The Company uses derivative instruments such as commodity futures and
options to hedge grower compensation costs. At August 31, 1998 and 1997, the
Company had futures contracts with brokers on notional quantities amounting to
31 million bushels and 32 million bushels, respectively for corn, and 8 million
and 6 million bushels, respectively for soybeans. At August 31, 1998 and 1997,
inventories included $13 million and $4 million of unrealized losses on all open
contracts, respectively.

NOTE 4. CURRENT BORROWINGS, LINES OF CREDIT, LONG-TERM DEBT, AND GUARANTEES

At August 31, 1998, the Company had domestic lines of credit totaling $200
million available to be used as support for the issuance of the Company's
commercial paper. There was no commercial paper outstanding at August 31, 1998.
Commercial paper outstanding at August 31, 1997, was $63 million at a
weighted-average interest rate of 5.6%.

In addition, the Company's foreign subsidiaries have lines of credit and
direct borrowing agreements totaling $116 million, substantially all of which
are unsecured. At August 31, 1998, short-term borrowings of $76 million were
outstanding under foreign subsidiary agreements at a weighted-average interest
rate of 13.7%. At August 31, 1997, short-term borrowings of $28 million were
outstanding under these agreements at a weighted-average interest rate of 13.3%.

Long-term debt at August 31, 1998, bears interest at varying rates and
requires annual principal payments through fiscal 2011. The maturities of
long-term debt for the next five fiscal years, in millions, are as follows:
$14.4, $0.6, $1.6, $0.4, and $0.3.

The Company has guaranteed the repayment of principal and interest on
certain obligations of Village Court Associates, an affiliated real estate
venture. At August 31, 1998 and 1997, such guarantees totaled approximately $23
million.

F-11
<PAGE> 50

NOTE 5. INCOME TAXES

The provision for income taxes is based on income before income taxes as
follows:

<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
-----------------------
1998 1997 1996
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
United States............................................... $331 $308 $266
Foreign..................................................... 76 65 88
---- ---- ----
$407 $373 $354
==== ==== ====
</TABLE>

The provision for income taxes is composed of the following components:

<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
-----------------------
1998 1997 1996
----- ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
Current
Federal................................................ $ 88 $ 80 $ 83
State.................................................. 12 9 11
Foreign................................................ 32 31 44
---- ---- ----
$132 $120 $138
---- ---- ----
Deferred
Federal................................................ $ (2) $ 8 $ (9)
State.................................................. -- 1 (1)
Foreign................................................ 4 (2) (1)
---- ---- ----
$ 2 $ 7 $(11)
---- ---- ----
$134 $127 $127
==== ==== ====
</TABLE>

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at August 31,
1998 and 1997, are presented below:

<TABLE>
<CAPTION>
1998 1997
----- -----
(IN MILLIONS)
<S> <C> <C>
Deferred tax assets
Allowance for doubtful accounts........................... $ 7 $ 6
Inventories............................................... 22 29
Benefits/compensation..................................... 48 40
Deferred profit........................................... 12 9
Nondeductible reserves.................................... 7 9
Net operating loss carryforwards.......................... 8 6
Other..................................................... 11 11
---- ----
Total gross deferred tax asset.................... $115 $110
Less valuation allowance.......................... (4) (8)
---- ----
Total deferred tax asset.......................... $111 $102
---- ----
Deferred tax liabilities
Property and equipment.................................... $(61) $(55)
Unrealized gain on available-for-sale securities.......... -- (10)
---- ----
Total deferred tax liability...................... $(61) $(65)
---- ----
Net deferred tax asset............................ $ 50 $ 37
==== ====
</TABLE>

The net operating loss carryforwards result from various international
subsidiaries. The expiration of these net operating losses range from 1999 to
indefinite. Utilization of these losses is dependent upon earnings

F-12
<PAGE> 51

generated in the respective subsidiaries. A valuation allowance has been
established where appropriate for the losses and certain other items.

The net change in the total valuation allowance for the year ended August
31, 1998, was a decrease of $4 million. There was no change in the total
valuation allowance for the year ended August 31, 1997.

Following is a reconciliation of the statutory U.S. Federal income tax rate
to the Company's actual worldwide effective income tax rate:

<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
-----------------------
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Statutory U.S. Federal income tax rate...................... 35.0% 35.0% 35.0%
State income taxes, net of Federal income tax benefit....... 1.9 1.8 1.8
Effect of taxes on foreign earnings......................... (1.9) (1.5) --
Foreign Sales Corporation................................... (1.3) (1.4) (0.5)
Other....................................................... (0.7) 0.1 (0.3)
----- ----- -----
Actual effective income tax rate....................... 33.0% 34.0% 36.0%
===== ===== =====
</TABLE>

NOTE 6. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS

QUALIFIED PENSION PLANS:

The components of pension expense relating to qualified defined benefit
pension plans for the years ended August 31, 1998, 1997, and 1996, consisted of
the following:

<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Service cost................................................ $ 10 $ 8 $ 7
Interest cost on projected benefit obligation............... 15 12 11
Actual return on plan assets................................ (48) (16) (14)
Net amortization and deferral............................... 27 (1) (1)
---- ---- ----
Pension expense........................................ $ 4 $ 3 $ 3
==== ==== ====
</TABLE>

The following table sets forth the plans' funded status as of June 30, 1998
and 1997, respectively:

<TABLE>
<CAPTION>
1998 1997
---- ----
(IN MILLIONS)
<S> <C> <C>
Actuarial present value of benefit obligations
Vested benefit obligation................................. $151 $121
==== ====
Accumulated benefit obligation............................ $160 $129
==== ====
Plan assets at fair value, primarily stocks and bonds....... $254 $214
Projected benefit obligation................................ 221 187
---- ----
Plan assets in excess of projected benefit obligation....... $ 33 $ 27
Unrecognized net gain....................................... (26) (16)
Unrecognized prior service cost............................. 3 2
Unrecognized transition asset, net (recognized over 16
years).................................................... (5) (7)
---- ----
Pension asset.......................................... $ 5 $ 6
==== ====
</TABLE>

Plan assets include common stock of the Company totaling $32 million and
$21 million at June 30, 1998 and 1997, respectively.

F-13
<PAGE> 52

The following actuarial assumptions were used to determine the present
value of benefit obligations for 1998 and 1997 respectively: discount rate of 7%
and 8%, expected long-term rate of return on plan assets of 9.5% and 9%, and
rate of increase in compensation levels of 5.5% and 6.5%.

NON-QUALIFIED PENSION PLANS:

The components of pension expense relating to non-qualified pension plans
for the years ended August 31, 1998, 1997, and 1996, consisted of the following:

<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Service cost................................................ $2 $2 $1
Interest cost on projected benefit obligation............... 4 3 3
Net amortization and deferral............................... 1 1 1
-- -- --
Pension expense........................................ $7 $6 $5
== == ==
</TABLE>

The following table sets forth the plans' funded status as of August 31,
1998 and 1997, respectively:

<TABLE>
<CAPTION>
1998 1997
---- ----
(IN MILLIONS)
<S> <C> <C>
Actuarial present value of benefit obligations
Vested benefit obligation................................. $ 21 $ 17
==== ====
Accumulated benefit obligation............................ $ 21 $ 17
==== ====
Plans' assets at fair value................................. $ -- $ --
Projected benefit obligation................................ 61 50
---- ----
Plans' assets less than projected benefit obligation........ $(61) $(50)
Unrecognized net loss....................................... 19 13
Unrecognized prior service cost............................. 10 11
Unrecognized transition asset, net.......................... 1 1
---- ----
Accrued pension liabilities............................ $(31) $(25)
==== ====
</TABLE>

In determining the present value of benefit obligations, a discount rate of
7% and 8% was used in 1998 and 1997, respectively. The assumed rate of increase
in compensation levels used was 8% in both years.