-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AZNabTvTlFwobKXEA7QQEu1imTzARgjKnn6pPA+teApfKkKNf7roZ97wVFu2gs9Q o9GMy613pv/c2e6wq3wehQ== 0001110783-04-000125.txt : 20040714 0001110783-04-000125.hdr.sgml : 20040714 20040714111552 ACCESSION NUMBER: 0001110783-04-000125 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20040531 FILED AS OF DATE: 20040714 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MONSANTO CO /NEW/ CENTRAL INDEX KEY: 0001110783 STANDARD INDUSTRIAL CLASSIFICATION: AGRICULTURE CHEMICALS [2870] IRS NUMBER: 431878297 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-16167 FILM NUMBER: 04913220 BUSINESS ADDRESS: STREET 1: 800 N LINDBERGH BLVD CITY: ST LOUIS STATE: MO ZIP: 63167 BUSINESS PHONE: 3146944296 MAIL ADDRESS: STREET 1: 800 NORTH LINDBERGH BLVD CITY: ST LOUIS STATE: MO ZIP: 63167 10-Q 1 c10q2004final.txt 3RD QUARTER 2004 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended May 31, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-16167 MONSANTO COMPANY (Exact name of registrant as specified in its charter) DELAWARE 43-1878297 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 800 NORTH LINDBERGH BLVD., ST. LOUIS, MO 63167 (Address of principal executive offices) (Zip Code) (314) 694-1000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ------ ------ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES X NO ------- ------ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding at Class July 8, 2004 ----- -------------- Common Stock, $0.01 par value 267,026,979 shares ================================================================================
MONSANTO COMPANY FORM 10-Q TABLE OF CONTENTS Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements 1 Statement of Consolidated Operations 2 Condensed Statement of Consolidated Financial Position 3 Statement of Consolidated Cash Flows 4 Notes to Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 25 Background 25 Change in Fiscal Year End 25 Financial Measures 25 Results of Operations - Third Quarter Fiscal Year 2004 26 Results of Operations - First Nine Months of Fiscal Year 2004 31 Restructuring 37 Financial Condition, Liquidity, and Capital Resources 39 Contingent Liabilities Relating to Solutia Inc. (Off-Balance Sheet Arrangement) 42 Outlook - Update 43 Critical Accounting Policies and Estimates 47 New Accounting Standards 47 Cautionary Statements: Risk Factors Regarding Forward-Looking Statements 49 Item 3. Quantitative and Qualitative Disclosures About Market Risk 52 Item 4. Controls and Procedures 52 PART II. OTHER INFORMATION Item 1. Legal Proceedings 53 Item 2. Securities, Use of Proceeds and Issuer Purchases of Equity Securities 58 Item 5. Other Information 58 Item 6. Exhibits and Reports on Form 8-K 60 SIGNATURE 61 EXHIBIT INDEX 62
PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS The Statement of Consolidated Operations of Monsanto Company and subsidiaries for the three months and nine months ended May 31, 2004, and May 31, 2003, the Condensed Statement of Consolidated Financial Position as of May 31, 2004, and Aug. 31, 2003, the Statement of Consolidated Cash Flows for the nine months ended May 31, 2004, and May 31, 2003, and related Notes to Consolidated Financial Statements follow. Unless otherwise indicated, "Monsanto" and "the company," and "we," "our," and "us," are used interchangeably to refer to Monsanto Company or to Monsanto Company and consolidated subsidiaries, as appropriate to the context. Monsanto comprises the operations, assets and liabilities that were previously the agricultural business of Pharmacia Corporation (Pharmacia), which is now a subsidiary of Pfizer Inc. Monsanto was incorporated as a subsidiary of Pharmacia in February 2000. On Sept. 1, 2000, the assets and liabilities of the agricultural business were transferred from Pharmacia to Monsanto, pursuant to the terms of a separation agreement dated as of that date. With respect to the time period prior to Sept. 1, 2000, these terms also refer to the agricultural business of Pharmacia. Unless otherwise indicated, "earnings (loss) per share" and "per share" mean diluted earnings (loss) per share. In tables, all dollars are expressed in millions, except per share amounts. Trademarks owned or licensed by Monsanto or its subsidiaries are shown in all capital letters. Unless otherwise indicated, references to "ROUNDUP herbicides" mean ROUNDUP branded and other branded glyphosate-based herbicides, excluding all lawn-and-garden herbicides; references to "ROUNDUP and other glyphosate-based herbicides" mean both branded and nonbranded glyphosate-based herbicides, excluding all lawn-and-garden herbicide products. 1
MONSANTO COMPANY AND SUBSIDIARIES STATEMENT OF CONSOLIDATED OPERATIONS (Dollars in millions, except per share amounts) Unaudited Three Months Nine Months Ended Ended May 31, May 31, -------------------- --------------------- 2004 2003 2004 2003 ---- ---- ---- ---- Net Sales $1,679 $1,468 $4,199 $3,607 Cost of Goods Sold 840 742 2,144 1,892 ------ ------ ------ ------ Gross Profit 839 726 2,055 1,715 Operating Expenses: Selling, general and administrative expenses 291 299 843 757 Bad-debt expense 35 5 75 39 Research and development expenses 128 117 370 360 Adjustments of goodwill -- -- 69 -- Restructuring charges - net 9 -- 66 39 ------ ------ ------ ------ Total Operating Expenses 463 421 1,423 1,195 Income From Operations 376 305 632 520 Interest Expense (24) (21) (68) (65) Interest Income 3 3 15 13 Other Expense - Net (52) (21) (114) (40) ------ ------ ------ ------ Income From Continuing Operations Before Income Taxes 303 266 465 428 Income Tax Expense 74 87 157 151 ------ ------ ------ ------ Income From Continuing Operations 229 179 308 277 Discontinued Operations (Note 17): Income (loss) from operations of discontinued businesses (including adjustment to reflect sales proceeds for the three and nine months ended May 31, 2004) 22 (8) (9) (15) Income tax benefit (1) (3) (10) (6) ------ ------ ------ ------ Income (Loss) on Discontinued Operations 23 (5) 1 (9) ------ ------ ------ ------ Income Before Cumulative Effect of Accounting Change 252 174 309 268 Cumulative Effect of a Change in Accounting Principle - Net of Tax Benefit of $7 -- -- -- (12) ------ ------ ------ ------ Net Income $ 252 $ 174 $ 309 $ 256 ====== ====== ====== ====== Basic Earnings per Share: Income from continuing operations $ 0.86 $ 0.69 $ 1.17 $ 1.06 Income (loss) on discontinued operations 0.09 (0.02) -- (0.03) Cumulative effect of a change in accounting principle -- -- -- (0.05) ------ ------ ------ ------ Net Income $ 0.95 $ 0.67 $ 1.17 $ 0.98 ====== ====== ====== ====== Diluted Earnings per Share: Income from continuing operations $ 0.85 $ 0.68 $ 1.15 $ 1.06 Income (loss) on discontinued operations 0.08 (0.02) -- (0.03) Cumulative effect of a change in accounting principle -- -- -- (0.05) ------ ------ ------ ------ Net Income $ 0.93 $ 0.66 $ 1.15 $ 0.98 ====== ====== ====== ====== Weighted Average Shares Outstanding: Basic 265.8 261.4 264.0 261.4 Diluted 270.7 261.7 268.7 261.5 Dividends per Share $ 0.28 $ 0.13 $ 0.54 $ 0.49
See the accompanying notes to consolidated financial statements. 2
MONSANTO COMPANY AND SUBSIDIARIES CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION (Dollars in millions, except share amounts) Unaudited As of May 31, As of Aug. 31, 2004 2003 ---- ---- ASSETS Current Assets: Cash and cash equivalents $ 327 $ 281 Short-term investments -- 230 Trade receivables, net of allowances of $266 and $254, respectively 2,737 2,296 Miscellaneous receivables 391 437 Deferred tax assets 239 430 Inventories 1,196 1,207 Assets of discontinued operations 42 -- Other current assets 68 58 ------- ------- Total Current Assets 5,000 4,939 Property, Plant and Equipment - Net 2,130 2,280 Goodwill - Net 718 768 Other Intangible Assets - Net 480 571 Other Assets 969 978 ------- ------- Total Assets $ 9,297 $ 9,536 ======= ======= LIABILITIES AND SHAREOWNERS' EQUITY Current Liabilities: Short-term debt $ 401 $ 269 Accounts payable 333 290 PCB litigation settlement liability -- 400 Liabilities of discontinued operations 5 -- Accrued marketing programs 473 396 Other accrued liabilities 609 664 ------- ------- Total Current Liabilities 1,821 2,019 Long-Term Debt 1,072 1,258 Postretirement Liabilities 718 837 Other Liabilities 260 266 Commitments and Contingencies (Note 14) Shareowners' Equity: Common stock (authorized: 1,500,000,000 shares, par value $0.01) Issued 270,784,061 and 262,681,253 shares, respectively; outstanding 266,179,713 and 262,678,753 shares, respectively 3 3 Treasury stock, 4,604,348 and 2,500 shares, respectively, at cost (133) -- Additional contributed capital 8,267 8,077 Retained deficit (1,565) (1,733) Accumulated other comprehensive loss (1,127) (1,168) Reserve for ESOP debt retirement (19) (23) ------- ------- Total Shareowners' Equity 5,426 5,156 ------- ------- Total Liabilities and Shareowners' Equity $ 9,297 $ 9,536 ======= =======
See the accompanying notes to consolidated financial statements. 3
MONSANTO COMPANY AND SUBSIDIARIES STATEMENT OF CONSOLIDATED CASH FLOWS (Dollars in millions) Unaudited Nine Months Ended May 31, ------------------------ 2004 2003 ---- ---- Operating Activities: Net Income $309 $256 Adjustments to reconcile cash provided (required) by operations: Items that did not require (provide) cash: Pretax cumulative effect of change in accounting principle -- 19 Depreciation and amortization expense 340 337 Adjustments of goodwill 69 -- Impairment of assets included in discontinued operations 4 -- Bad-debt expense 75 39 Noncash restructuring 35 19 Deferred income taxes 213 (48) Gain on disposal of investments and property - net (13) (3) Equity affiliate expense - net 26 32 Write-off of retired assets 5 16 Other items that did not require (provide) cash 23 (23) Changes in assets and liabilities that provided (required) cash: Trade receivables (496) (183) Inventories 23 (25) Accounts payable and accrued liabilities 8 116 PCB litigation settlement liability (400) -- Pension contributions (150) (35) Related-party transactions -- 11 Other items 41 26 ---- ---- Net Cash Provided by Operations 112 554 ---- ---- Cash Flows Provided (Required) by Investing Activities: Purchases of short-term investments (250) (250) Maturities of short-term investments 480 250 Capital expenditures (148) (151) Technology and other investments (46) (52) Other investments and property disposal proceeds 24 8 ---- ---- Net Cash Provided (Required) by Investing Activities 60 (195) ---- ---- Cash Flows Provided (Required) by Financing Activities: Net change in short-term financing (51) (459) Long-term debt proceeds 113 266 Long-term debt reductions (111) (68) Debt issuance costs -- (2) Payments on other financing (4) (11) Treasury stock purchases (133) -- Stock option exercises 163 -- Dividend payments (103) (94) ---- ---- Net Cash Required by Financing Activities (126) (368) ---- ---- Net Increase (Decrease) in Cash and Cash Equivalents 46 (9) Cash and Cash Equivalents at Beginning of Period 281 137 ---- ---- Cash and Cash Equivalents at End of Period $327 $128 ==== ==== See Note 13 - Supplemental Cash Flow Information - for further details.
See the accompanying notes to consolidated financial statements. 4 MONSANTO COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED Note 1 - Background and Basis of Presentation Monsanto Company, together with its subsidiaries, is a leading global provider of agricultural products and integrated solutions for farmers. Monsanto produces leading seed brands, including DEKALB and ASGROW, and develops biotechnology traits that assist farmers in controlling insects and weeds. Monsanto provides other seed companies with genetic material and biotechnology traits for their seed brands. The company also makes ROUNDUP herbicide and other herbicides. Monsanto's seeds, related biotechnology trait products, and herbicides can be combined to provide growers with integrated solutions that improve productivity and reduce the costs of farming. Monsanto also provides lawn-and-garden herbicide products for the residential market and animal agricultural products focused on improving dairy cow productivity and swine genetics. Monsanto manages its business in two segments: Seeds and Genomics, and Agricultural Productivity. The Seeds and Genomics segment consists of the global seeds and related traits businesses, and genetic technology platforms. The Agricultural Productivity segment consists of the crop protection products, animal agriculture, lawn-and-garden herbicide products, and environmental technologies businesses. In October 2003, the company announced plans to exit the European breeding and seed business for wheat and barley and to discontinue the plant-made pharmaceuticals program. In third quarter 2004, Monsanto signed a definitive agreement for the sale of assets associated with the European wheat and barley business, and in fourth quarter 2004, this sale was finalized. Refer to Note 17 - Discontinued Operations - and Note 18 - Subsequent Events - for further details. As a result of the exit plans announced in October 2003, the European wheat and barley business and plant-made pharmaceuticals program have been presented as discontinued operations. Accordingly, for the three months and nine months ended May 31, 2004, and May 31, 2003, the Statement of Consolidated Operations has been conformed to this presentation. Also as of May 31, 2004, the Condensed Statement of Consolidated Financial Position has been conformed to this presentation. These businesses were previously reported as part of the Seeds and Genomics segment. Certain prior-period amounts have been reclassified to conform with the current-year presentation. In July 2003, Monsanto's board of directors approved a change to Monsanto's fiscal year end from December 31 to August 31. This change aligned the fiscal year more closely with the seasonal nature of Monsanto's business. Accordingly, unaudited consolidated financial statements as of and for the three months and nine months ended May 31, 2004 (also referred to as the third quarter and first nine months, respectively, of fiscal year 2004), and as of and for the three months and nine months ended May 31, 2003, are presented in this Form 10-Q. The accompanying consolidated financial statements have not been audited, but have been prepared in conformity with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, these unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position, results of operations and cash flows for the interim periods reported. This quarterly report on Form 10-Q should be read in conjunction with the audited consolidated financial statements as presented in Monsanto's report on Form 10-K for the transition period ended Aug. 31, 2003, and Monsanto's quarterly reports on Form 10-Q for the periods ended Nov. 30, 2003, and Feb. 29, 2004. Financial information for the first nine months of fiscal year 2004 should not be annualized because of the seasonality of the company's business. Note 2 - New Accounting Standards In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46), and amended it by issuing FIN 46R in December 2003. FIN 46R addresses the consolidation of business enterprises to which the usual condition of consolidation (ownership of a majority voting interest) does not apply. This interpretation focuses on controlling financial interests that may be achieved through arrangements that do not involve voting interests. It concludes that, in the absence of clear control through voting interests, a company's exposure (variable interest) to the economic risks and potential rewards from the variable interest entity's assets and activities are the best evidence of control. If an enterprise holds a majority of the variable interests of an entity, it would be considered the 5 MONSANTO COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued) primary beneficiary. The primary beneficiary is required to include the assets, liabilities and results of operations of the variable interest entity in its financial statements. Monsanto adopted the provisions of FIN 46R for the quarter ended Feb. 29, 2004, for interests in variable interest entities that are considered to be special-purpose entities. Monsanto has an arrangement with a special-purpose entity to provide a financing program for selected Monsanto customers. See Note 4 - Customer Financing Program - for a description of this arrangement. This special-purpose entity is consolidated. As of May 31, 2004, the company adopted the provisions of FIN 46R for all other types of variable interest entities. The company has evaluated its relationships with two entities and has determined that, although the entities are variable interest entities and Monsanto holds variable interests in the entities, these investments are not required to be consolidated in the company's financial statements pursuant to FIN 46R as Monsanto is not the primary beneficiary. One entity is a biotechnology company focused on plant gene research, development and commercialization, in which the company had a nine percent equity investment as of May 31, 2004. Monsanto currently has an agreement in place under which Monsanto makes payments for research services and receives rights to intellectual property developed within funded research. The entity reported total assets of $31 million and total liabilities of $13 million as of Dec. 31, 2003, and revenues of $20 million for the year ended Dec. 31, 2003. The second entity is a joint venture in which the company has a 49 percent equity investment. This joint venture packages and sells seeds, with a focus in corn and sunflower seeds, and also sells and distributes agricultural chemical products. The joint venture reported total assets of $24 million and total liabilities of $17 million as of Dec. 31, 2003, and revenues of $18 million for the year ended Dec. 31, 2003. As of May 31, 2004, Monsanto's total estimate of maximum exposure to loss as a result of its relationships with these entities is approximately $23 million, which represents Monsanto's equity investments in these entities. In January 2004, the FASB issued FASB Staff Position No. 106-1 (FSP 106-1), Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. FSP 106-1 permits a sponsor of a postretirement health care plan that provides a prescription drug benefit to make a one-time election to defer accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act), which was signed into law on Dec. 8, 2003. The Act introduced a prescription drug benefit under Medicare, as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare. These provisions of the new law will affect accounting measurements of the company's postretirement benefit obligation and expense. As permitted by FSP 106-1, Monsanto made a one-time election to defer accounting for the effect of the Act, and as a result, the amounts included in the consolidated financial statements related to the company's postretirement benefit plans do not reflect the effects of the Act. In May 2004, the FASB issued FSP No. 106-2 (FSP 106-2), which superseded FSP 106-1. FSP 106-2 provides authoritative guidance on the accounting for the federal subsidy and specifies the disclosure requirements for employers who have adopted FSP 106-2. Detailed regulations necessary to implement the Act have not been issued, including those that would specify the manner in which actuarial equivalency must be determined, the evidence required to demonstrate actuarial equivalency, and the documentation requirements necessary to be entitled to the subsidy. FSP 106-2 is effective for Monsanto's first quarter of fiscal 2005. Monsanto is currently evaluating the effect that the adoption of FSP 106-2 will have on its results of operations and financial condition. Final authoritative guidance could require the company to change previously reported information. In December 2003, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 132 (Revised 2003), Employers' Disclosures about Pensions and Other Postretirement Benefits, which enhanced the required disclosures about pension plans and other postretirement benefit plans, but did not change the measurement or recognition principles for those plans. The statement requires additional interim and annual disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The required interim disclosures were effective for Monsanto in the third quarter of fiscal year 2004, and the required annual disclosures are effective for Monsanto's 10-K for the fiscal year ended Aug. 31, 2004. Refer to Note 9 - Postretirement Benefits - Pensions - for the required quarterly disclosures. In December 2003, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 104, Revenue Recognition (SAB 104). SAB 104 updates portions of the interpretive guidance included in Topic 13 of the 6 MONSANTO COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued) codification of Staff Accounting Bulletins in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The company believes it is following the guidance of SAB 104. In July 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations (SFAS 143). SFAS 143, which was effective for Monsanto on Jan. 1, 2003, addresses financial accounting for and reporting of costs and obligations associated with the retirement of tangible long-lived assets. Upon adopting this standard, in accordance with APB Opinion 20, Monsanto recorded an aftertax cumulative effect of accounting change of $12 million, or $0.05 per share. This noncash charge was recorded as of Jan. 1, 2003. In addition, as required by SFAS 143, as of Jan. 1, 2003, net property, plant and equipment increased by $10 million, and asset retirement obligations (a component of noncurrent liabilities) of $30 million were recorded. Adoption of this standard did not affect the company's liquidity. If SFAS 143 would have been effective for all periods presented, net earnings would have been reduced by $1 million for the nine months ended May 31, 2003, with no change to reported diluted earnings per share. In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146). SFAS 146 replaced Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS 146 requires companies to recognize costs associated with exit or disposal activities when they are actually incurred, rather than on the date the company commits itself to the exit or disposal plan. This statement is effective for any exit or disposal activities initiated after Dec. 31, 2002. Monsanto is following the guidance of SFAS 146 for the fiscal year 2004 restructuring plan. Refer to Note 3 - Restructuring - for further details. The adoption of SFAS 146 had no effect on Monsanto's 2002 and 2000 restructuring plans, which were both initiated prior to Dec. 31, 2002. Note 3 - Restructuring Restructuring charges were recorded in the Statement of Consolidated Operations as follows:
Three Months Ended Nine Months Ended May 31, May 31, ------------------------ ----------------------- 2004 2003 2004 2003(1) ---- ---- ---- ---- Cost of goods sold $ (2) $ -- $(19) $(10) Restructuring charges - net (2) (9) -- (66) (39) ---- ---- ---- ---- Loss from continuing operations before income taxes (11) -- (85) (49) Income tax benefit 4 -- 28 18 ---- ---- ---- ---- Loss from continuing operations (7) -- (57) (31) Income (loss) from operations of discontinued businesses (3) 25 -- (9) -- Income tax benefit -- -- 10 -- ---- ---- ---- ---- Income on discontinued operations 25 -- 1 -- ---- ---- ---- ---- Net income (loss) $ 18 $ -- $(56) $(31) ==== ==== ==== ====
(1) The $10 million of restructuring charges recorded in cost of goods sold was split by segment as follows: $1 million Seeds and Genomics and $9 million Agricultural Productivity. The $39 million of restructuring charges - net was split by segment as follows: $19 million Seeds and Genomics and $20 million Agricultural Productivity. (2) The restructuring charges for the three months ended May 31, 2004, were offset by $4 million in restructuring reversals related to prior plans, all of which was recorded in the Agricultural Productivity segment. Restructuring charges for the nine months ended May 31, 2004, and May 31, 2003, were offset by prior plan reversals of $6 million ($5 million in Agricultural Productivity and $1 million in Seeds and Genomics) and $12 million ($9 million in Agricultural Productivity and $3 million in Seeds and Genomics), respectively. (3) Fiscal year 2004 contains restructuring charges related to discontinued businesses (refer to Note 17 - Discontinued Operations). These restructuring charges were recorded in discontinued operations. Refer to the tables that follow for more details. 7 MONSANTO COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued) Fiscal Year 2004 Restructuring Plan On Oct. 15, 2003, Monsanto announced plans to continue to reduce the costs associated with its agricultural chemistry business as that segment matures globally. Total restructuring charges approved under the fiscal year 2004 restructuring plan were $289 million pretax. The company will further concentrate its resources on its core seeds and traits businesses. These plans included: (1) reducing costs associated with the company's ROUNDUP herbicide business, (2) exiting the European breeding and seed business for wheat and barley, and (3) discontinuing the plant-made pharmaceuticals program. These actions are expected to require total restructuring charges of up to $191 million pretax ($136 million aftertax) in fiscal year 2004. Additionally, the approved plan included the $69 million impairment of goodwill in the global wheat business (refer to Note 6 - Goodwill and Other Intangible Assets). Third quarter fiscal year 2004 pretax restructuring activity was comprised of income of $23 million related to the Seeds and Genomics segment (charges of $2 million in continuing operations and income of $25 million in discontinued operations), and charges of $13 million related to the Agricultural Productivity segment. Pretax restructuring charges of $100 million for the first nine months of fiscal year 2004 were comprised of $44 million related to the Seeds and Genomics segment ($35 million in continuing operations and $9 million in discontinued operations) and $56 million related to the Agricultural Productivity segment. Additional actions identified for reducing costs in the ROUNDUP herbicide business are expected to occur in the fourth quarter of fiscal year 2004. For fiscal year 2004, the company estimates that it will incur $145 million of pretax charges relating to the Agricultural Productivity segment and $115 million of pretax charges relating to the Seeds and Genomics segment. These estimates include $130 million of pretax charges relating to work force reductions, $51 million pretax in asset impairments (excluding the $69 million impairment of goodwill related to the global wheat reporting unit discussed in Note 6), and $10 million pretax in costs associated with facility closures during fiscal year 2004. Charges relating to asset impairments within the Seeds and Genomics segment are approximately $30 million lower than previously estimated due to the favorable results from the sale of the European wheat and barley business. During the third quarter of fiscal year 2004, pretax restructuring charges of $13 million were recorded in continuing operations related to work force reductions. Work force reductions were primarily related to downsizing of certain manufacturing and commercial operations and related support functions in the United States, as well as reductions in Europe resulting from changes in the business model. Asset impairments in continuing operations of $2 million were recorded in cost of goods sold, including property, plant and equipment impairments of $1 million in the United States related to production equipment, and inventory impairments of $1 million in Canada related to disposal of inventory at a production site being shutdown. Restructuring income of $25 million recorded in discontinued operations was related to the recently completed sale of the European wheat and barley business and reflects an increase in the value of that business and its related assets that were previously written down in the first quarter of 2004. Due to higher than anticipated sales proceeds and lower than expected employee-related costs, the company was able to obtain a higher value for the sale of the European wheat and barley business, and the fair value of the intangible assets was increased accordingly, but not above their pre-write down book values. See Note 17 - Discontinued Operations - for further discussion. In the first nine months of fiscal year 2004, pretax restructuring charges of $59 million were recorded related to work force reductions. Work force reductions in continuing operations of $56 million were primarily in the areas of research and development, manufacturing, information technology and marketing in the United States; downsizing the regional structure in Europe; and downsizing the sales force in Canada as a result of the realignment of the Canadian business to focus on the Seeds and Genomics segment. Work force reduction charges included in discontinued operations of $3 million were related to employees of the plant-made pharmaceuticals program. Facility closure charges in discontinued operations of $2 million were related to shutdown expenses resulting from the exit of the plant-made pharmaceuticals site. Asset impairments in continuing operations of $35 million included $19 million recorded in cost of goods sold and the remainder in restructuring charges - net. Property, plant and equipment impairments of $10 million were recorded in the United States and, to a lesser extent, in Asia for the shutdown of production lines and disposal of equipment. Inventory impairments of $9 million were also recorded related to discontinued seed hybrids in Argentina, discontinued agricultural chemical products and seed hybrids in Brazil, 8 MONSANTO COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued) discontinued agricultural chemical products in Asia, and disposal of inventory at a production site being shutdown in Canada. Asset impairments in restructuring charges - net consisted of $11 million for the closure of an office building in the United States, $2 million for the closure of a technology facility in Canada, an intangible asset impairment of $2 million in Asia (refer to Note 6), and approximately $1 million for the disposal of a computer system in Asia. Discontinued operations asset impairments of $4 million consisted of $1 million related to other intangible assets and $2 million related to property, plant and equipment, both associated with the European wheat and barley business; and property, plant and equipment impairments of $1 million associated with the plant-made pharmaceuticals program. Work force reduction and facility closure charges were cash charges. Asset impairments were non-cash charges. The following table displays the pretax charges incurred by segment under the fiscal year 2004 restructuring plan for the three months ended May 31, 2004 (before restructuring reversals related to prior year plans of $4 million):
Work Force Facility Asset Segment Reductions Closures Impairments Total - ------- ----------------- -------------- ----------------- ---------------- Continuing Operations: Seeds and Genomics $ 2 $-- $ -- $ 2 Agricultural Productivity 11 -- 2 13 ----------------- -------------- ----------------- ---------------- Total Continuing Operations 13 -- 2 15 Discontinued Operations: Seeds and Genomics -- -- (25) (25) Agricultural Productivity -- -- -- -- ----------------- -------------- ----------------- ---------------- Total Discontinuing Operations -- -- (25) (25) Total Segment Seeds and Genomics 2 -- (25) (23) Agricultural Productivity 11 -- 2 13 ----------------- -------------- ----------------- ---------------- Total $ 13 $-- $(23) $(10) ================= ============== ================= ================
The following table displays the pretax charges incurred by segment under the fiscal year 2004 restructuring plan for the nine months ended May 31, 2004 (before restructuring reversals related to prior year plans of $6 million):
Work Force Facility Asset Segment Reductions Closures Impairments Total - ------- ----------------- -------------- ----------------- ---------------- Continuing Operations: Seeds and Genomics $14 $-- $21 $ 35 Agricultural Productivity 42 -- 14 56 ----------------- -------------- ----------------- ---------------- Total Continuing Operations 56 -- 35 91 Discontinued Operations: Seeds and Genomics 3 2 4 9 Agricultural Productivity -- -- -- -- ----------------- -------------- ----------------- ---------------- Total Discontinuing Operations 3 2 4 9 Total Segment Seeds and Genomics 17 2 25 44 Agricultural Productivity 42 -- 14 56 ----------------- -------------- ----------------- ---------------- Total $59 $ 2 $39 $ 100 ================= ============== ================= ================
Charges incurred in connection with the fiscal year 2004 restructuring plan were accounted for under SFAS 146 (as discussed in Note 2 - New Accounting Standards) and SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The company's written human resource policies are indicative of an ongoing benefit arrangement in respect to severance packages. Benefits paid pursuant to an ongoing benefit arrangement are specifically excluded from the scope of SFAS 146 and should be accounted for in accordance with the accounting pronouncement applicable to the company's arrangement. Monsanto accounted for its severance packages under SFAS No. 88, Employers' Accounting for Settlements and Curtailments 9 MONSANTO COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued) of Defined Benefit Pension Plans and for Termination Benefits, which addresses the accounting for other employee benefits. The following table displays a rollforward of the liability established for restructuring expense from Oct. 15, 2003 (the date of board of directors approval), to May 31, 2004:
Work Force Facility Asset Reductions Closures Impairments Total --------------- -------------- ----------------- ----------------- Continuing Operations: Restructuring liability $56 $ -- $ 35 $ 91 Cash payments (38) -- -- (38) Asset impairment -- -- (35) (35) Reclassification of reserves to other balance sheet accounts: Misc. liability (1) -- -- (1) --------------- -------------- ----------------- ----------------- Ending liability as of May 31, 2004 17 -- -- 17 Discontinued Operations: Restructuring liability 3 2 4 9 Cash payments (3) (2) -- (5) Asset impairment -- -- (4) (4) --------------- -------------- ----------------- ----------------- Ending liability as of May 31, 2004 -- -- -- -- Total Restructuring Restructuring liability 59 2 39 100 Cash payments (41) (2) -- (43) Asset impairment -- -- (39) (39) Reclassification of reserves to other balance sheet accounts: Misc. liability (1) -- -- (1) --------------- -------------- ----------------- ----------------- Ending liability as of May 31, 2004 $17 $ -- $ -- $ 17 =============== ============== ================= =================
2002 Restructuring Plan (charges recorded in calendar year 2002) In 2002, Monsanto's management approved a restructuring plan to further consolidate or shut down facilities and to reduce the work force. Under this plan, various research and development programs and sites were shut down in the United States and Europe. This restructuring plan also involved the closure and downsizing of certain agricultural chemical manufacturing facilities in the Asia-Pacific region and the United States as a result of more efficient production capacity installed at other Monsanto manufacturing sites. Certain seed sites were consolidated within the United States and within Brazil, and certain U.S. swine facilities were exited. Finally, the plan included work force reductions in addition to those related to the facility closures. These additional reductions were primarily marketing and administrative positions in Asia-Pacific, Europe-Africa, and the United States. In connection with this plan, no charges were recorded in the three months ended May 31, 2003. In the first nine months of 2003, Monsanto recorded $61 million pretax of restructuring charges, of which $10 million was recorded in cost of goods sold and the remainder in the restructuring line item. The company also recorded reversals of $12 million for the 2000 and 2002 restructuring plans, resulting in net pretax restructuring expenses of $49 million for the nine months ended May 31, 2003. 10 MONSANTO COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued) Activities related to the 2002 restructuring plan during the first nine months of fiscal year 2004 were as follows:
Work Force Facility Reductions Closures Total ---------- -------- ----- Beginning liability as of Aug. 31, 2003 $ 2 $ 3 $ 5 Costs charged against reserves (1) (2) (3) Reclassification of reserves to other balance sheet accounts: Misc. liability -- (1) (1) Reversals of excess reserves (1) -- (1) ---- -- ---- Ending liability as of May 31, 2004 $ -- $-- $ -- ==== === ====
During the first nine months of fiscal year 2004, the reserve balance was reduced by $1 million for cash severance payments to former employees and $2 million for facility closure actions that were completed. No additional work force separation payments are expected, and accordingly, the related remaining reserves were reversed in third quarter 2004. As of May 31, 2004, the liability balance for the 2002 restructuring plan was less than $1 million. The remaining facility closure actions associated with this plan are expected to be completed during fiscal year 2004 and will be funded from operations; these actions are not expected to significantly affect the company's liquidity. 2000 Restructuring Plan (charges recorded in calendar years 2001 and 2000) In 2000, Monsanto's management formulated a plan as part of the company's overall strategy to focus on certain key crops and to streamline operations. Restructuring and other special items, primarily associated with the implementation of this plan, were recorded during calendar years 2001 and 2000. These charges totaled $474 million pretax ($334 million aftertax): $213 million ($137 million aftertax) recorded in calendar year 2001, and $261 million ($197 million aftertax) recorded in calendar year 2000. Activities related to the 2000 restructuring plan during the first nine months of fiscal year 2004 were as follows:
Work Force Facility Reductions Closures Total ---------- -------- ----- Beginning liability as of Aug. 31, 2003 $ 5 $ 3 $ 8 Costs charged against reserves (1) (2) (3) Reclassification of reserves to other balance sheet accounts: Misc. liability (1) (1) (2) Reversals of excess reserves (3) -- (3) ---- ---- ---- Ending liability as of May 31, 2004 $ -- $ -- $ -- ==== ==== ====
The 2000 plan restructuring reserves decreased $3 million in the first nine months of 2004 due to the sale of a U.S. manufacturing plant during second quarter 2004. In addition, reversals of $3 million were recorded in the first nine months of fiscal year 2004 ($2 million in third quarter 2004) related to work force reductions. Reversals were recorded primarily because costs were lower than originally estimated. As of May 31, 2004, the liability balance for the 2000 restructuring plan was less than $1 million. The remaining restructuring actions associated with this plan are expected to be completed during fiscal year 2004 and will be funded from operations; these actions are not expected to significantly affect the company's liquidity. Note 4 - Customer Financing Program In April 2002, Monsanto established a new $500 million revolving financing program for selected customers through a third-party specialty lender. Under the financing program, Monsanto originates customer loans on behalf of the lender, which is a special purpose entity (SPE) that Monsanto consolidates, pursuant to Monsanto's credit and other underwriting guidelines approved by the lender. Monsanto services the loans and provides a first loss guarantee of up to $100 million. Following origination, the 11 MONSANTO COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued) lender transfers the loans to multi-seller commercial paper conduits through a non-consolidated qualifying special purpose entity (QSPE). Monsanto accounts for this transaction as a sale, in accordance with SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. Monsanto has no ownership interest in the lender, in the QSPE, or in the loans. However, because Monsanto substantively originates the loans through the SPE (which it consolidates) and partially guarantees and services the loans, Monsanto accounts for the program as if it were the originator of the loans and the transferor selling the loans to the QSPE. Monsanto records its guarantee liability at a value that approximates fair value (except that it does not discount credit losses, because of the short term of the loans), primarily related to expected future credit losses. Monsanto does not recognize any servicing asset or liability, because the servicing fee is adequate compensation for the servicing activities. Discounts on the sale of the customer loans, and servicing revenues collected and earned were not significant during the first nine months of 2004 and 2003. Customer loans sold through the financing program totaled $124 million for the first nine months of fiscal year 2004 and $153 million for the comparable period last year. The loan balances outstanding as of May 31, 2004, and Aug. 31, 2003, were $97 million and $198 million, respectively. The $100 million first loss guarantee will be in place throughout the financing program. If a customer fails to pay an obligation when due, Monsanto would incur a liability to perform under the first loss guarantee. As of both May 31, 2004, and Aug. 31, 2003, less than $1 million of loans sold through this financing program were delinquent. As of May 31, 2004, and Aug. 31, 2003, Monsanto recorded its guarantee liability at less than $1 million, based on the company's historical collection experience with these customers and the company's current assessment of credit exposure. Adverse changes in the actual loss rate would increase the liability. If Monsanto is called upon to make payments under the first loss guarantee, it would have the benefit under the financing program of any amounts subsequently collected from the customer. As discussed in Note 2 - New Accounting Standards, in January 2003, FIN 46 was issued and then amended by FIN 46R in December 2003. The SPE is included in Monsanto's consolidated financial statements. Because QSPEs are excluded from the scope of FIN 46R and Monsanto does not have the unilateral right to liquidate the QSPE, this interpretation does not have an effect on Monsanto's accounting for the customer financing program. Note 5 - Inventories Components of inventories were:
As of May 31, As of Aug. 31, 2004 2003 ----------------- ---------------- Finished Goods $ 521 $ 516 Goods In Process 438 464 Raw Materials and Supplies 256 246 ------- ------- Inventories at FIFO Cost 1,215 1,226 Excess of FIFO over LIFO Cost (19) (19) ------- ------- Total $ 1,196 $ 1,207 ======= =======
12 MONSANTO COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued) Note 6 - Goodwill and Other Intangible Assets Changes in the net carrying amount of goodwill for the nine months ended May 31, 2004, by segment, are as follows:
Seeds and Agricultural Genomics Productivity Total --------- ------------ ----- Balance as of Aug. 31, 2003 $694 $74 $768 Adjustments of goodwill (69) -- (69) Effect of foreign currency translation adjustments 19 -- 19 ---- --- ---- Balance as of May 31, 2004 $644 $74 $718 ==== === ====
The 2003 annual goodwill impairment test was performed as of July 1, 2003, and no indications of impairment existed as of that date. The company's decision in October 2003 to exit the European wheat and barley business required a reevaluation for potential impairment of goodwill and other intangible assets related to the company's global wheat business. A potential impairment was determined in the wheat reporting unit during the quarter ended Nov. 30, 2003. Fair value calculations using a discounted cash flow methodology indicated a potential goodwill impairment, which required the company to perform the second step of the goodwill impairment test. The decision to exit the European wheat business had a negative effect on the assumptions underlying the fair value calculation of the remaining global wheat business because of its effect on the probability of success of the remaining product development efforts. The second step of the impairment assessment was completed during the quarter ended Nov. 30, 2003, and resulted in the $69 million impairment of goodwill in the global wheat business. The resulting impairment charge was specific to the wheat reporting unit. This impairment charge had no effect on Monsanto's liquidity or cash flow. Under SFAS 142, Goodwill and Other Intangible Assets, the company initially selected July 1 for performing the required annual impairment testing of goodwill since July 1 was the approximate time that the company completed its annual reassessment of its strategy and revised its long-term financial projections. Performing the SFAS 142 goodwill impairment testing at this time was appropriate as the revised long-term financial projections that were the basis for such measurements had been updated to reflect management's current strategic direction and considered the company's current and expected future business environment. Accordingly, when the decision was made to change the company's fiscal year-end from December 31 to August 31, the company also changed its annual strategic reassessment completion timing from approximately July 1 to approximately March 1. As a result, the company has changed its annual goodwill impairment testing date to March 1. The change is not intended to delay, accelerate, or avoid an impairment charge. Therefore, the company believes that the accounting change described above was to an alternative principle that is preferable under the circumstances. The fiscal year 2004 annual goodwill impairment test was performed as of March 1, 2004, and no indications of goodwill impairment existed as of that date. Information regarding the company's other intangible assets related to continuing operations is as follows:
As of May 31, 2004 As of Aug. 31, 2003 ------------------------------------ ------------------------------------- Carrying Accumulated Carrying Accumulated Amount Amortization Net Amount Amortization Net ------- ------------ --- -------- ------------ --- Germplasm $ 587 $(406) $181 $ 617 $(376) $241 Acquired biotechnology intellectual property 418 (206) 212 392 (172) 220 Trademarks 85 (25) 60 108 (26) 82 Other 47 (20) 27 44 (16) 28 ------- ------ ---- ------- ------ ---- Total $ 1,137 $(657) $480 $ 1,161 $(590) $571 ======= ===== ==== ======= ===== ====
In addition to the goodwill adjustment discussed above, germplasm and trademarks with carrying values of $7 million and $19 million, respectively, were also written off during the first quarter of fiscal year 2004 because of the decision to exit the European wheat and barley business. The amounts of these charges were based on the company's estimate 13 MONSANTO COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued) of fair value and were recorded within discontinued operations. In third quarter 2004, a definitive agreement for the divestiture of the European breeding and seed business for wheat and barley was reached and was finalized in the fourth quarter of fiscal year 2004. Based on the sales proceeds, Monsanto was able to obtain a higher value than originally estimated in the first quarter for the wheat and barley intangible assets that were previously written down. SFAS 144 requires a company to adjust the fair value of assets held for sale to reflect the anticipated sales proceeds in the valuation of the assets, but not in excess of the assets' pre-write down book value. Accordingly, in the third quarter of fiscal 2004, the value of the European wheat and barley intangible assets was increased by $25 million because of higher than anticipated sales proceeds and lower than expected employee termination costs. These assets are recorded in assets of discontinued operations. Germplasm intangible assets also decreased by $2 million in the first quarter of fiscal year 2004 for an intangible asset impairment recognized upon the company's decision to exit certain non-strategic projects in Asia as a result of the fiscal year 2004 restructuring plan. This impairment expense was recorded in restructuring charges - net for the Seeds and Genomics segment. The decreases in germplasm intangible assets were partially offset by the purchase of an additional interest in a Canadian seed company that occurred in the second quarter of fiscal 2004; approximately $4 million of the purchase price was allocated to germplasm and is being amortized over seven years. The increase in the carrying amount of acquired biotechnology intellectual property was primarily related to the acquisition of a software license for approximately $17 million in the second quarter of fiscal 2004. This license will provide enabling technology to Monsanto to improve the speed and efficiency of moving product concepts through its pipeline and has a useful life of seven years. Additionally, during the first nine months of fiscal 2004, deliverables totaling $9 million were received under the 2002 collaboration with Ceres, Inc. This existing technology has a weighted-average useful life of 10 years. Other intangible assets include the company's only nonamortizing intangible asset of $21 million associated with minimum pension liabilities, most of which was recognized in calendar year 2002. Total amortization expense of other intangible assets was $30 million for each of the three month periods ended May 31, 2004, and May 31, 2003 (exclusive of $1 million amortization expense included in discontinued operations in each period). Total amortization expense of other intangible assets for the nine months ended May 31, 2004, and May 31, 2003, was $92 million and $88 million, respectively (exclusive of the impairment charges discussed above and $2 million and $4 million amortization expense for the nine months ended May 31, 2004, and May 31, 2003, respectively, included in discontinued operations). Estimated intangible asset amortization expense for each of the five succeeding fiscal years has not changed significantly from the amounts disclosed in Monsanto's report on Form 10-K for the transition period ended Aug. 31, 2003. Note 7 - Income Taxes Management regularly assesses the likelihood that deferred tax assets will be recovered from future taxable income. To the extent management believes that it is more likely than not that a deferred tax asset will not be realized, a valuation allowance is established. During the second quarter of fiscal 2004, the company assessed the realizability of its deferred tax assets in Argentina and Brazil following completion of the crop season in these countries and the preparation of updated long-range financial projections for these countries. The company concluded that it was more likely than not that the deferred tax assets of $102 million related to net operating loss carryforwards (NOLs) in Argentina will not be realizable prior to their expiration from 2006 to 2009 and established a valuation allowance for the entire amount. This conclusion was based on the recent history of losses, the continued uncertain economic conditions and also the limited tax carryforward period of five years. Management is taking actions to attempt to realize such deferred tax assets; however, such actions are dependent, in part, on conditions that are not entirely in management's control. The company also concluded that it is more likely than not that it will realize its deferred tax assets in Argentina that are not related to the NOLs noted above through future projected taxable income. At the beginning of fiscal 2004, Monsanto Brazil had a valuation allowance of $90 million for deferred tax assets related to NOLs because management believed it was more likely than not that such deferred tax assets would not be realized. However, based on improvements in Monsanto Brazil's operations related to business changes that the company had begun implementing two crop seasons previously, and improvements over that period in Brazil's overall economy, and in particular the agricultural sector, management now believes it is more likely than not that such deferred tax 14 MONSANTO COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued) assets will be realized. Accordingly, the previously recorded $90 million valuation allowance, related to NOLs which have an indefinite life, was reversed in the second quarter of fiscal 2004. The company also concluded that it is more likely than not that it will realize its deferred tax assets in Brazil that are not related to the NOLs noted above through future projected taxable income. For the three months ended May 31, 2004, and May 31, 2003, the effective tax rate was 24 percent and 33 percent, respectively. The reduction in the tax rate was driven primarily by a favorable adjustment to the income tax reserve and, to a lesser extent, the geographic mix of earnings projected for fiscal year 2004 versus those in fiscal 2003. A settlement was reached with the Internal Revenue Service (IRS) on a number of issues. As a result, Monsanto has recorded a favorable adjustment in its third quarter 2004 results. For the nine months ended May 31, 2004, and May 31, 2003, the effective tax rate was 34 percent and 35 percent, respectively. As a result of the sale of the European wheat and barley business in the fourth quarter of fiscal year 2004, a deferred tax asset of $58 million was recorded at such time with a full valuation allowance. See Note 18 - Subsequent Events - for further details. Note 8 - Accounting for Derivative Instruments and Hedging Activities Monsanto's business and activities expose it to a variety of market risks, including risks related to changes in commodity prices, foreign-currency exchange rates, interest rates and, to a lesser degree, security prices and natural gas prices. These financial exposures are monitored and managed by the company as an integral part of its market risk management program. This program recognizes the unpredictability of financial markets and seeks to reduce the potentially adverse effects that market volatility could have on operating results. Monsanto's overall objective in holding derivatives is to minimize the risks by using the most effective methods to eliminate or reduce the effects of these exposures. Monsanto accounts for its derivatives in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and SFAS No. 149, Amendment of Statement 133 Derivative Instruments and Hedging Activities. The company hedges a portion of its net investment in Brazilian subsidiaries and reported an aftertax gain of $1 million in the third quarter of fiscal year 2004 and an aftertax loss of $18 million in the comparable period last year. The company recorded aftertax losses of $5 million and $2 million, respectively, for the nine months ended May 31, 2004, and May 31, 2003. These gains and losses are included in accumulated other comprehensive loss. Note 9 - Postretirement Benefits - Pensions The majority of Monsanto's employees are covered by noncontributory pension plans sponsored by the company. The company also provides certain postretirement health care and life insurance benefits for retired employees through insurance contracts. As stated in Note 2 - New Accounting Standards - the FASB revised SFAS 132 effective for all interim periods beginning after Dec. 15, 2003. SFAS 132 revises employers' disclosures about pension plans and other postretirement benefit plans including disclosures made in interim periods. While it does not change the measurement or recognition of those plans, it requires additional interim disclosures as detailed below. The company's net periodic benefit cost for pension and other postretirement benefit plans include the following components: 15 MONSANTO COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
Pension Benefits Three Months Ended Nine Months Ended May 31, May 31, ----------------------- ------------------------ 2004 2003 2004 2003 ---- ---- ---- ---- Service Cost for Benefits Earned During the Period $ 9 $ 8 $26 $24 Interest Cost on Benefit Obligation 28 25 81 76 Assumed Return on Plan Assets (32) (26) (92) (83) Amortization of Unrecognized Net Loss 8 4 23 7 SFAS 88 Settlement Charge -- 2 -- 5 --- --- --- --- Total Net Periodic Benefit Cost $ 13 $13 $38 $29 ==== === === ===
Other Postretirement Benefits Three Months Ended Nine Months Ended May 31, May 31, ----------------------- ------------------------ 2004 2003 2004 2003 ---- ---- ---- ---- Service Cost for Benefits Earned During the Period $ 2 $ 2 $ 5 $ 7 Interest Cost on Benefit Obligation 7 5 19 13 Amortization of Unrecognized Net Loss 1 1 3 3 --- --- --- --- Total Net Periodic Benefit Cost $10 $ 8 $27 $23 === === === ===
Monsanto did not make any contributions to its pension plan in the three months ended May 31, 2004, but made $150 million in contributions for the nine months ended May 31, 2004. Pending management's assessment of fourth quarter 2004 results of operations, the company may make an additional contribution to its pension plan in the fourth quarter of fiscal year 2004. In the three months and nine months ended May 31, 2003, pension plan contributions were $15 million and $35 million, respectively. Note 10 - Stock-Based Compensation Plans As permitted by current accounting literature, the company has elected to follow the guidance of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, for measuring and recognizing its stock-based transactions with employees. Accordingly, no compensation expense was recognized in relation to any of the Monsanto option plans in which Monsanto employees participate. For further details, please refer to the disclosures in Monsanto's report on Form 10-K for the transition period ended Aug. 31, 2003. Had stock-based compensation expense for these plans been determined based on the fair value consistent with the method of SFAS 148, Accounting for Stock-Based Compensation - Transition and Disclosure, which amends SFAS 123, Accounting for Stock-Based Compensation, Monsanto's net income and net income per share would have been adjusted to the pro forma amounts indicated as follows: 16 MONSANTO COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
Three Months Ended Nine Months Ended May 31, May 31, ------------------------ ----------------------- 2004 2003 2004 2003 ---- ---- ---- ---- Net Income: As reported $ 252 $ 174 $ 309 $ 256 Less: Total stock-based employee compensation expense determined under fair-value-based method for all awards, net of tax (3) (1) (9) (11) ----- ----- ---- ----- Pro forma $ 249 $ 173 $ 300 $ 245 ===== ===== ==== ===== Basic income per share: As reported $0.95 $0.67 $1.17 $0.98 Pro forma $0.94 $0.66 $1.14 $0.94 Diluted income per share: As reported $0.93 $0.66 $1.15 $0.98 Pro forma $0.92 $0.66 $1.12 $0.94
Note 11 - Comprehensive Income (Loss) Comprehensive income (loss) includes all nonshareowner changes in equity and consists of net income (loss), foreign currency translation adjustments, unrealized gains and losses on available-for-sale securities, additional minimum pension liability adjustments, and accumulated derivative gains or losses on cash flow hedges not yet realized. Information regarding comprehensive income is as follows:
Three Months Ended Nine Months Ended May 31, May 31, ------------------------ ----------------------- 2004 2003 2004 2003 ---- ---- ---- ---- Comprehensive income $173 $337 $350 $315
The principal difference between net income and total comprehensive income for the periods above relates to foreign currency translation adjustments. Note 12 - Earnings (Loss) Per Share Basic earnings (loss) per share (EPS) were computed using the weighted-average number of common shares outstanding during the period shown in the table below. Diluted EPS were computed taking into account the effect of dilutive potential common shares, as shown in the table below. Potential common shares consist of stock options using the treasury stock method and are excluded if their effect is antidilutive. Dilutive potential common shares noted below exclude stock options of approximately 0.4 million and 19.4 million for the three months ended May 31, 2004, and May 31, 2003, respectively, and 2.6 million and 19.4 million for the nine months ended May 31, 2004, and May 31, 2003, respectively. These potential common shares were excluded because the options' exercise prices were greater than the average market price of the common shares and, therefore, the effect would be antidilutive.
Three Months Ended Nine Months Ended May 31, May 31, ------------------------ ----------------------- 2004 2003 2004 2003 ---- ---- ---- ---- Weighted-average number of common shares 265.8 261.4 264.0 261.4 Dilutive potential common shares 4.9 0.3 4.7 0.1
17 MONSANTO COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued) Note 13 - Supplemental Cash Flow Information The effect of exchange rate changes on cash and cash equivalents was not material. Cash payments for interest and taxes for the nine months ended May 31, 2004, were $38 million and $46 million, respectively. Cash payments for interest and taxes for the nine months ended May 31, 2003, were $39 million and $63 million, respectively. On July 31, 2003, the Executive Committee of the board of directors authorized the purchase of up to $500 million of the company's common stock over a three-year period. As of May 31, 2004, the company purchased 4.6 million shares for $133 million. Note 14 - Commitments and Contingencies Solutia Inc.: Pursuant to the Sept. 1, 2000, Separation Agreement between Monsanto and Pharmacia, as amended (Separation Agreement), Monsanto was required to indemnify Pharmacia for liabilities that Solutia Inc. (Solutia) assumed from Pharmacia in connection with the spinoff of Solutia on Sept. 1, 1997, to the extent that Solutia fails to pay, perform or discharge those liabilities. Those liabilities remain the present responsibility of Pharmacia. In general, this indemnification obligation applies to Pharmacia liabilities that were assumed by Solutia, pursuant to the Sept. 1, 1997 Distribution Agreement between Solutia and Pharmacia, as amended (Distribution Agreement), and which Pharmacia would otherwise be required to pay. The liabilities that Solutia assumed from Pharmacia are referred to as "Solutia's Assumed Liabilities." Solutia's Assumed Liabilities may include, among others, litigation, environmental remediation, and certain retiree liabilities relating to individuals who were employed by Pharmacia prior to the Solutia spinoff. On Dec. 17, 2003, Solutia and 14 of its U.S. subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York. In the Chapter 11 proceeding, Solutia is seeking relief from paying certain liabilities, including some or all of Solutia's Assumed Liabilities. Solutia may retain responsibility for all or a portion of Solutia's Assumed Liabilities. However, if Solutia is discharged from all or a portion of Solutia's Assumed Liabilities, Monsanto may be required to indemnify Pharmacia for all or a portion of them. Monsanto is participating in the Chapter 11 proceeding as a creditor of Solutia and will act as appropriate to protect Monsanto's interests and the interests of its shareowners. Pharmacia or Monsanto may have defenses to payment obligations for some or all of Solutia's Assumed Liabilities, and Monsanto has legal claims against Solutia. However, it is unclear what effect the Chapter 11 proceeding will have on Monsanto's ability to recover on those claims. During the third quarter of fiscal 2004, two additional adversary proceedings were filed in the Bankruptcy Court. First, on April 20, 2004, Solutia filed a complaint for declaratory judgment against Pharmacia and Monsanto that, among other things: (a) any and all rights that Pharmacia and Monsanto have against Solutia for indemnification pursuant to the Distribution Agreement are "claims" that arose before Solutia filed its bankruptcy petition and may be discharged in the Chapter 11 proceeding; and (b) the Distribution Agreement has been fully performed. Second, on May 7, 2004, the Official Committee of Retirees filed a complaint for declaratory judgment against Solutia, Pharmacia and Monsanto that Pharmacia and Monsanto share responsibility for providing certain benefits to certain retirees and must pay certain benefits to certain retirees if Solutia reduces or terminates retiree benefits. The Official Committee of Retirees also seeks to have the Bankruptcy Court declare all claims held by Pharmacia and Monsanto subordinate to the retiree claims. Monsanto believes it has meritorious defenses to assert in each of these matters; however, it has not filed any response or asserted counterclaims because all parties have agreed to a limited stay of all litigation. Given the uncertain nature of litigation, Monsanto cannot reasonably predict the outcome of either proceeding. Both immediately prior to and since its Chapter 11 filing, Solutia has failed to perform its obligations relating to some of Solutia's Assumed Liabilities. These obligations relate primarily to third-party tort litigation and environmental matters and are described below. For the nine months of fiscal year 2004, Monsanto recorded approximately $43 million in OTHER EXPENSE - NET in the Statement of Consolidated Operations for the advancement of funds to pay for Solutia's Assumed Liabilities, in light of Solutia's refusal to pay for those liabilities during and prior to its bankruptcy, and for legal and other costs related to the Chapter 11 proceeding. Monsanto expects to pursue recovery of its costs for Solutia's Assumed Liabilities from Solutia in the bankruptcy proceedings. However, 18 MONSANTO COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued) neither the extent of Monsanto's ability to recover such costs, nor the potential future costs to Monsanto for advancement of funds and legal and other costs to protect its interests, can be reasonably estimated at this time. Litigation Obligations: On Feb. 17, 2004, Solutia notified Pharmacia and Monsanto that it was disclaiming its obligation to defend and indemnify Pharmacia and Monsanto for litigation matters that it had been managing under the Distribution Agreement, and that it would not accept defense of new cases relating to Solutia's Assumed Liabilities. Monsanto believes Solutia is required to meet its obligations unless and until those obligations are discharged by the Bankruptcy Court. However, in order to protect Pharmacia's and its interests until that issue is resolved, pursuant to its obligation to indemnify Pharmacia under the Separation Agreement, Monsanto has on an interim basis assumed the management and defense of such litigation. If additional such cases arise in the future, Monsanto may also assume their management in order to mitigate damages and protect Pharmacia and Monsanto. In addition, Monsanto may settle litigation related to Solutia's Assumed Liabilities and pay judgments entered with respect to Solutia's Assumed Liabilities if Solutia refuses to do so. Solutia's Assumed Liabilities include certain liabilities related to polychlorinated biphenyls (PCBs). In September 2003, the state and federal courts approved a global settlement of certain PCB litigation: Sabrina Abernathy et al. v. Monsanto Company et al. (a group of consolidated cases in the Circuit Court of Etowah County, Alabama) and Antonia Tolbert et al. v. Monsanto Company et al. (in the U.S. District Court for the Northern District of Alabama). Monsanto, Solutia and Pharmacia are each responsible for paying the full amount of the settlement; however, they agreed among themselves that Solutia would pay $50 million of the settlement amount over the next eleven years or more. If Solutia is discharged from this obligation in the Chapter 11 proceeding, Monsanto may be required to pay, or to indemnify Pharmacia for, this amount. Monsanto provided $150 million to the settlement fund during August 2003 and $400 million during September 2003 and expects to be partially reimbursed by commercial insurance. Monsanto recorded miscellaneous receivables of $155 million in fiscal year 2003 for the anticipated insurance reimbursement; however, this amount has been reduced by $6 million to reflect the discounted effect of the anticipated delay in receipt of the reimbursement. Monsanto and the insurer responsible for approximately $140 million of this reimbursement are negotiating the terms of the reimbursement, but Monsanto does not expect full receipt of the reimbursement in fiscal year 2004. Accordingly, a significant portion of the reimbursement receivable has also been reclassified from short-term to long-term assets. In connection with the global settlement of the Abernathy and Tolbert cases, Solutia also agreed to issue warrants to Monsanto for the purchase of up to 10 million shares of Solutia common stock, at an exercise price of $1.104 per share. Solutia did not execute a final warrant agreement or issue or deliver the warrants prior to the Chapter 11 filing, and Monsanto expects that Solutia's obligation to issue the warrants will be discharged in the Chapter 11 proceeding. Monsanto has not recorded the warrants in its financial statements because they were not received. Monsanto will make a claim for its unreimbursed settlement contribution in the course of the Chapter 11 proceeding. In 2002, in connection with litigation that Solutia was defending in Pennsylvania state court, Monsanto posted a $71 million appeal bond on Solutia's behalf pursuant to its indemnification obligation to Pharmacia under the Separation Agreement and an agreement with Pharmacia and Solutia. Solutia provided a $20 million bank letter of credit to secure a portion of Monsanto's obligations in connection with the appeal bond. Although this letter of credit remains available to Monsanto, Solutia has discontinued the payment of bank fees associated with maintaining the letter of credit. Monsanto is paying these fees and will make a claim for recovery of such fees against Solutia in the course of the Chapter 11 proceeding. Environmental Obligations: On Feb. 27, 2004, Solutia filed a declaratory judgment action requesting that the Bankruptcy Court declare that the automatic stay under bankruptcy law prevented Solutia from continuing to perform its environmental obligations under the Distribution Agreement with respect to any sites where it does not have current operations or beyond its property line at sites where it has current operations. Prior to the filing of its declaratory judgment action, Solutia stopped performing its environmental obligations under the Distribution Agreement and applicable environmental laws, except within the boundaries of its current operations. 19 MONSANTO COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued) Solutia also filed on Feb. 27, 2004, a motion for summary judgment seeking a declaration from the Bankruptcy Court that the bankruptcy automatic stay precluded the U.S. Environmental Protection Agency (EPA) from taking efforts to enforce a Partial Consent Decree issued by the United States District Court for the Northern District of Alabama (Alabama District Court). In light of Solutia's failure to perform under the Partial Consent Decree, the EPA had previously filed actions and pleadings in the Alabama District Court asserting that Solutia's bankruptcy filing does not eliminate Solutia's obligation to perform certain environmental activities. The Bankruptcy Court denied Solutia's summary judgment motion and directed that the Alabama District Court determine Solutia's performance obligations under the Partial Consent Decree. The Alabama District Court then entered an order that the automatic stay provisions of the Bankruptcy Code do not apply to Solutia's obligations under the Partial Consent Decree. Solutia has filed a motion to reconsider, modify, or clarify this order and has continued to selectively perform its environmental obligations. Based on Solutia's failure to perform these environmental obligations, on March 25, 2004, Monsanto entered into an arrangement with the EPA and Solutia to perform certain environmental obligations at the Sauget, Illinois, and Anniston, Alabama sites under existing orders where both Solutia and Pharmacia are named parties. As a part of this arrangement, Monsanto has agreed with the EPA to perform certain remedial work for a minimum period of six months, but this agreement is automatically extended if Monsanto does not invoke a sixty day notice of termination provision. Monsanto will assert claims and seek payment from Solutia for all the costs incurred in performing under this agreement. During the third quarter of fiscal 2004, Monsanto recorded a reserve of approximately $11 million for estimated remediation costs through Sept. 25, 2004, in accordance with this agreement. Monsanto believes that Solutia remains obligated to continue to meet its environmental obligations unless and until those obligations are discharged by the Bankruptcy Court. However, in order to protect Pharmacia's and its interests until that issue is resolved, pursuant to its contractual obligation to indemnify Pharmacia under the Separation Agreement, Monsanto has on an interim basis stepped in as Pharmacia's representative and funded some of Solutia's environmental obligations at sites in addition to Sauget, Illinois, and Anniston, Alabama. Monsanto may continue to fund Solutia's environmental obligations at these other sites in order to mitigate damages and to protect Pharmacia and Monsanto. Effect on Monsanto: It is reasonably possible that Monsanto's obligation under the Separation Agreement to indemnify Pharmacia for Solutia's Assumed Liabilities will result in a material adverse effect on Monsanto's financial position, profitability and/or liquidity. However, because of the many uncertainties relating to any resolution of Solutia's Chapter 11 proceeding, including the potential allocation of responsibility for and the ultimate resolution of Solutia's Assumed Liabilities, at this time Monsanto is unable to reasonably estimate the amount or range of any potential future liability or expense to the company. Other Solutia-related matters: At the time of Solutia's 1997 spinoff from Pharmacia, Solutia and Pharmacia entered into raw material supply contracts, including a 10-year requirements contract for the supply of formalin by Solutia. Because formalin is a raw material used in the production of glyphosate, this formalin supply contract was assigned to Monsanto pursuant to the Separation Agreement. In September 2003, Monsanto and Solutia amended this contract upon mutually beneficial terms. Pursuant to this amendment, Monsanto made a $25 million prepayment to Solutia for formalin. Under the terms of the amended agreement, the prepayment must either be exhausted or the remainder returned to Monsanto in cash or credit against other product sales by Sept. 30, 2004. In consideration for making this prepayment, the duration of Monsanto's obligation under the formalin supply contract was reduced. Through June 30, 2004, Solutia had delivered $16 million of product relating to this prepaid amount. At this time, Solutia has indicated that it will continue to perform its obligations under the formalin supply contract. Other Litigation: Monsanto is defending and prosecuting litigation in its own name. Monsanto is also defending and prosecuting certain cases that were brought in Pharmacia's name and for which Monsanto assumed responsibility under the Separation Agreement. Such matters relate to a variety of issues. Some of the lawsuits seek damages in very large amounts, or seek to restrict the company's business activities. Although the results of litigation cannot be predicted with certainty, it is management's belief that the final outcome of the lawsuits that Monsanto is defending or prosecuting (excluding litigation relating to Solutia's Assumed 20 MONSANTO COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued) Liabilities), will not have a material adverse effect on Monsanto's financial position, profitability, and/or liquidity. Guarantees: Monsanto provides a guarantee to a bank that provides loans to selected Monsanto customers in Poland. Terms of the guarantee are equivalent to terms of the bank loans, which are generally six months. When a customer fails to pay an obligation that is due, Monsanto incurs a liability to make these payments. As of May 31, 2004, the maximum potential amount of future payments under this guarantee is approximately $1 million. Based on the company's current assessment of credit exposure, Monsanto has recorded a liability of less than $1 million related to this guarantee. Monsanto's recourse under this guarantee is limited to the customer, and it is not currently estimable. As disclosed in Monsanto's report on Form 10-K for the transition period ended Aug. 31, 2003, Monsanto provides guarantees to certain banks that provide loans to Monsanto customers in Brazil. Due to the seasonal nature of Monsanto's business, the level of customer loans with these banks and the related Monsanto guarantees has increased since Aug. 31, 2003. As a result, the maximum potential amount of future payments under these guarantees is approximately $31 million as of May 31, 2004. Based on the company's current assessment of credit exposure, Monsanto has recorded a liability of less than $1 million related to these guarantees. Monsanto's recourse under these guarantees is limited to the customer, and it is not currently estimable. Except as described above, there have been no significant changes to guarantees made by Monsanto since Aug. 31, 2003. Disclosures regarding these guarantees made by Monsanto can be found in Note 22 - Commitments and Contingencies - of the notes to consolidated financial statements contained in Monsanto's report on Form 10-K for the transition period ended Aug. 31, 2003. Disclosure regarding the guarantee Monsanto provides to a specialty finance company for certain customer loans can be found in Note 4 - Customer Financing Program - of this Form 10-Q. Information regarding Monsanto's indemnification obligations to Pharmacia under the Separation Agreement relating to Solutia's Assumed Liabilities can be found above. Note 15 - Segment Information Monsanto manages its business in two segments: Seeds and Genomics, and Agricultural Productivity. The Seeds and Genomics segment consists of the global seeds and related traits businesses and biotechnology platforms. The Agricultural Productivity segment consists of the crop protection products, animal agriculture, residential lawn-and-garden herbicide products, and environmental technologies businesses. Sales between segments were not significant. Certain selling, general and administrative expenses are allocated between segments based primarily on the ratio of sales of the segment to total Monsanto sales, consistent with the company's historical practice. Based on the Seeds and Genomics segment's increasing contribution to total Monsanto operations, the allocation percentages were changed at the beginning of fiscal 2004. Segment data, as well as a reconciliation of total Monsanto Company earnings from continuing operations before cumulative effect of accounting change, interest and income taxes (EBIT) to net income for the three months and nine months ended May 31, 2004, and May 31, 2003, is presented in the table that follows. 21 MONSANTO COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
Three Months Ended Nine Months Ended May 31, May 31, ------------------------ ----------------------- 2004 2003 2004 2003 ---- ---- ---- ---- Net Sales: Seeds and Genomics $ 681 $ 612 $1,923 $1,624 Agricultural Productivity 998 856 2,276 1,983 ------- ------ ------ ----- Total Monsanto $ 1,679 $1,468 $4,199 $3,607 ======= ====== ====== ====== EBIT: Seeds and Genomics $ 161 $147 $ 341 $ 343 Agricultural Productivity 163 137 177 137 ------- ------ ------ ------ Total Monsanto 324 284 518 480 Less: Interest Expense - Net (21) (18) (53) (52) Less: Income Tax Expense (74) (87) (157) (151) ------- ------ ------ ------ Income From Continuing Operations 229 179 308 277 Discontinued Operations (Note 17): Income (loss) from operations of discontinued businesses (including adjustment to reflect sales proceeds for the three and nine months ended May 31, 2004) 22 (8) (9) (15) Income tax benefit (1) (3) (10) (6) ------- ------ ------ ------ Income (Loss) on Discontinued Operations 23 (5) 1 (9) ------- ------ ------ ------ Income Before Cumulative Effect of Accounting Change 252 174 309 268 Cumulative Effect of a Change in Accounting Principle - Net of Tax Benefit of $7 -- -- -- (12) ------- ------ ------ ------ Net Income $ 252 $ 174 $ 309 $ 256 ======= ====== ====== ====== Depreciation and Amortization Expense: Seeds and Genomics $ 64 $ 55 $ 198 $ 161 Agricultural Productivity 48 58 142 176 ------- ------ ------ ------ Total Monsanto $ 112 $ 113 $ 340 $ 337 ======= ====== ====== ======
22 MONSANTO COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued) Note 16 - Other Expense - Net For the three months and nine months ended May 31, 2004, and May 31, 2003, the significant components of other expense - net were:
Three Months Ended Nine Months Ended May 31, May 31, --------------------------- -------------------------- 2004 2003 2004 2003 ---- ---- ---- ---- Solutia's Assumed Liabilities and Bankruptcy-Related Legal and Other Expenses $29 $-- $ 43 $-- Equity Affiliate Expense - Net 6 10 26 32 Foreign-Currency Transaction Losses - Net 9 1 23 9 Hedging (Gains) Losses -- (1) 7 (5) Banking and Other Related Fees 3 6 11 8 Gains Realized Upon Sale of Equity Securities (4) -- (9) -- Other Miscellaneous Expense (Income) 9 5 13 (4) --- --- ---- --- Other Expense - Net $52 $21 $114 $40 === === ==== ===
Other miscellaneous expense (income) for the periods presented comprises numerous items that are individually immaterial. See Note 14 - Commitments and Contingencies - for a description of Solutia's Assumed Liabilities and bankruptcy-related legal and other expenses. Note 17 - Discontinued Operations As discussed earlier in Note 3 - Restructuring, on Oct. 15, 2003, Monsanto announced plans to (1) exit the European breeding and seed business for wheat and barley and (2) discontinue the plant-made pharmaceuticals program. As a result, these businesses have been presented as discontinued operations. Accordingly, for the three months and nine months ended May 31, 2004, and May 31, 2003, the Statement of Consolidated Operations has been conformed to this presentation. Also, as of May 31, 2004, the Condensed Statement of Consolidated Financial Position has been conformed to this presentation. These businesses were previously reported as part of the Seeds and Genomics segment. The assets and liabilities of these businesses follow:
As of May 31, 2004 -------------- Assets of discontinued businesses held for sale: Accounts receivable $ 1 Miscellaneous receivables 3 Inventories 3 Property, plant and equipment - net 9 Other intangible assets - net 26 --- Total assets of discontinued businesses held for sale $42 === Liabilities of discontinued businesses held for sale: Current liabilities $ 3 Postretirement liabilities 2 --- Total liabilities of discontinued businesses held for sale $ 5 ===
23 MONSANTO COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued) The following amounts related to the European breeding and seed business for wheat and barley and the plant-made pharmaceuticals program have been segregated from continuing operations and reflected as discontinued operations:
Three Months Ended Nine Months Ended May 31, May 31, ----------------------- ------------------------ 2004 2003 2004 2003 ---- ---- ---- ---- Net sales $ 1 $ 3 $20 $22 Income (loss) from operations of discontinued businesses (including adjustment to reflect sales proceeds for the three and nine months ended May 31, 2004) 22 (8) (9) (15) Income tax benefit (1) (3) (10) (6) Income (loss) on discontinued operations 23 (5) 1 (9)
In third quarter 2004, a definitive agreement for the divestiture of the European breeding and seed business for wheat and barley was reached and was finalized in the fourth quarter of fiscal year 2004. Based on the sales proceeds, Monsanto was able to obtain a higher value than originally estimated for the wheat and barley business and related assets that were previously written down in the first quarter of 2004. SFAS 144 requires a company to adjust the fair value of assets held for sale to reflect the anticipated sales proceeds in the valuation of the assets, but not to exceed the assets' pre-write down book value. Accordingly, in the third quarter of fiscal 2004, the value of the European wheat and barley intangible assets was increased by $25 million because of higher than anticipated sales proceeds and lower than expected employee termination costs. The write down of the intangible assets in the first quarter of 2004 was tax effected. Since the assets originally had no tax basis, the previously recorded deferred tax liability was reversed with the first quarter 2004 write down. The third quarter 2004 increase in intangible assets was not tax effected because, based on recently obtained valuation information, these assets have been reassessed and the revised tax basis approximately equals the adjusted book basis. Note 18 - Subsequent Events On June 15, 2004, Monsanto completed the sale of assets associated with the company's European wheat and barley business to Rodez, France-based RAGT Genetique, S.A. (RAGT). Monsanto originally stated its intention to exit the European wheat and barley breeding business as a part of the fiscal year 2004 restructuring plan. Pursuant to SFAS No. 109, Accounting for Income Taxes, a deferred tax asset of $58 million has been recorded in the fourth quarter of fiscal year 2004 based on the U.K. capital loss generated on the sale of the European wheat and barley business. Also, in accordance with this accounting guidance, a full valuation allowance has been recorded against the deferred tax asset since it is currently deemed more likely than not that this capital loss will not be utilized in the carryforward period. Monsanto is also evaluating alternative tax planning strategies in an effort to realize a benefit from the loss incurred on this investment, whether in the United Kingdom or another jurisdiction. Effective June 4, 2004, Monsanto finalized a new five-year, $1 billion revolving credit facility. This facility replaces the existing $500 million five-year and $500 million 364-day facilities. Covenants under the $1 billion revolving credit facility are consistent with the facilities replaced. 24 MONSANTO COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Background Monsanto Company is a leading global provider of agricultural products and integrated solutions for farmers. We produce leading seed brands, including DEKALB and ASGROW, and we develop biotechnology traits that assist farmers in controlling insects and weeds. We provide other seed companies with genetic material and biotechnology traits for their seed brands. We also make ROUNDUP herbicide and other herbicides. Our seeds, related biotechnology trait products, and herbicides can be combined to provide growers with integrated solutions that improve productivity and reduce the costs of farming. We also provide lawn-and-garden herbicide products for the residential market and animal agricultural products focused on improving dairy cow productivity and swine genetics. We manage our business in two segments: Seeds and Genomics, and Agricultural Productivity. The Seeds and Genomics segment consists of the global seeds and related traits businesses, and genetic technology platforms. The Agricultural Productivity segment consists of the crop protection products, animal agriculture, lawn-and-garden herbicide products, and environmental technologies businesses. In October 2003, we announced plans to exit the European breeding and seed business for wheat and barley and to discontinue the plant-made pharmaceuticals program. In third quarter 2004, we signed a definitive agreement for the sale of assets associated with our European wheat and barley business, and in fourth quarter 2004, this sale was finalized. Refer to Note 17 - Discontinued Operations - and Note 18 - Subsequent Events - for further details. As a result of the exit plans announced in October 2003, the European wheat and barley business and plant-made pharmaceuticals program have been presented as discontinued operations. Accordingly, for the three months and nine months ended May 31, 2004, and May 31, 2003, the Statement of Consolidated Operations has been conformed to this presentation. Also as of May 31, 2004, the Condensed Statement of Consolidated Financial Position has been conformed to this presentation. These businesses were previously reported as part of the Seeds and Genomics segment. Certain prior-period amounts have been reclassified to conform with current-year presentation. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with Monsanto's consolidated financial statements and the accompanying notes. This quarterly report on Form 10-Q should also be read in conjunction with Monsanto's report on Form 10-K for the transition period ended Aug. 31, 2003, and Monsanto's quarterly reports on Form 10-Q for the periods ended Nov. 30, 2003, and Feb. 29, 2004. Financial information for the first nine months of fiscal year 2004 should not be annualized because of the seasonality of our business. Change in Fiscal Year End In July 2003, Monsanto's board of directors approved a change to Monsanto's fiscal year end from December 31 to August 31. This change aligned our fiscal year more closely with the seasonal nature of our business. In view of this change, MD&A compares the unaudited consolidated financial statements as of and for the three months and nine months ended May 31, 2004 (also referred to as the third quarter and first nine months, respectively, of fiscal year 2004), with the unaudited consolidated financial statements as of and for the three months and nine months ended May 31, 2003. Financial Measures The primary operating performance measure for our two business segments is earnings (loss) from continuing operations before cumulative effect of accounting change, interest and income taxes (EBIT). We believe that EBIT is useful to investors and management to demonstrate the operational profitability of our segments by excluding interest and taxes, which are generally accounted for across the entire company on a consolidated basis. EBIT is also one of the measures used by Monsanto management in determining resource allocation within the company. 25 MONSANTO COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) We also provide information regarding free cash flow, an important liquidity measure for Monsanto. We define free cash flow as the total of net cash provided or required by operations and provided or required by investing activities. We believe that free cash flow is useful to investors and management as a measure of the ability of our business to generate cash. This cash can be used for business needs and obligations, to reinvest into the company for future growth, or returned to our shareowners through dividend payments or share repurchases. Free cash flow is also one of the performance measures management uses to determine incentive compensation. The presentation of EBIT and free cash flow information is intended to supplement investors' understanding of our operating performance and liquidity. Our EBIT and free cash flow measures may not be comparable to other companies' EBIT and free cash flow measures. Furthermore, these measures are not intended to replace net income (loss), cash flows, financial position, or comprehensive income (loss), as determined in accordance with accounting principles generally accepted in the United States. Results of Operations - Third Quarter Fiscal Year 2004
- -------------------------------------------------------------------------------- Three Months Ended May 31, -------------------- Total Monsanto Company and Subsidiaries: 2004 2003 ---------------------------------------- ---- ---- Net sales $1,679 $1,468 ====== ====== Gross profit $ 839 $ 726 ====== ====== Income from continuing operations $ 229 $ 179 ====== ====== Net income $ 252 $ 174 ====== ====== - --------------------------------------------------------------------------------
The following factors affected the quarter-to-quarter comparison of Monsanto's third quarter continuing operations: Net sales improved 14 percent, or $211 million, in third quarter 2004 from the prior year comparable period. Both segments had substantial net sales increases: Seeds and Genomics 11 percent, or $69 million; and Agricultural Productivity 17 percent, or $142 million. In third quarter 2004, we had increases in corn, soybean and all other crops seed and trait net sales from the same period a year ago. Higher corn seed and trait net sales of $24 million were driven by European corn seed and U.S. corn traits, which were slightly offset by lower sales of U.S. corn seed. Sales of all other crops seeds and traits improved $29 million from the same period in the prior year primarily because of cotton traits in India and the United States, and canola traits in Canada. ROUNDUP and other glyphosate-based herbicide sales improved in nearly all markets, with the most significant improvements in Canada, Argentina and the United States. For a more detailed discussion of the factors affecting the net sales comparison, please see "Seeds and Genomics Segment" and "Agricultural Productivity Segment." Gross profit increased 16 percent, or $113 million, in the current year quarter. As a percent of net sales, gross profit improved one percentage point to 50 percent in third quarter 2004. Higher Canadian trait revenues for canola, soybeans and corn primarily drove the gross profit improvement in the current year quarter. Operating expenses increased to $463 million for the current quarter, from $421 million in the same period last year. o Selling, general and administrative (SG&A) expenses decreased $8 million in the current year quarter primarily because of non-restructuring severance expenses recorded in the same period a year ago, and timing of U.S. marketing and advertising expenses in the current year. Employee-related costs for accrued incentive 26 MONSANTO COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) compensation were flat for the quarter-over-quarter comparison as incentives were accrued in both periods. o Restructuring charges - net of $9 million were recorded in third quarter 2004. We recorded $13 million of restructuring charges in third quarter 2004 for the fiscal year 2004 restructuring plan, which were reduced by $4 million in restructuring reversals related to our prior restructuring plans. There were no restructuring charges recorded in the prior year comparable period. Restructuring activity was recorded within cost of goods sold, restructuring charges - net and discontinued operations. Operating expenses include restructuring charges - net. For further details on our restructuring plans, please see the "Restructuring" section of MD&A and Note 3 - Restructuring. o The increase in bad-debt expense of $30 million was primarily for exposures related to potential uncollectible Argentine trade receivables. In fiscal year 2004, we continued to restructure our Argentine business model. This redesign focused on streamlining distribution, improving working capital management and rationalizing our product portfolio. In addition, these changes, coupled with the continued economic and business challenges, led to increased credit exposure. We have performed a thorough review of our past due trade receivables in Argentina and, as a result, have increased the allowance for estimated uncollectible receivables. Although we cannot determine with certainty how government actions and economic conditions in Argentina will affect the value of net receivables outstanding, we continue to pursue customer collections aggressively to minimize exposure. The increase in bad-debt expense also included a reserve for trade receivables related to two minor crops that were exited during fiscal 2004, which has resulted in a lower probability of collection. Third quarter 2004 also had higher bad-debt expense incurred in the normal course of business. o Research and development (R&D) expenses increased nine percent, or $11 million, in third quarter 2004 from the same period a year ago primarily because of higher salary expenses and outside service expenses. As a percent of sales, R&D expenses were eight percent in both three-month periods. Other expense - net increased $31 million to $52 million in third quarter 2004 from $21 million in the same period a year ago. During the current quarter, other expense - net contained $29 million for the advancement of funds to pay for Solutia's Assumed Liabilities in light of Solutia's refusal to pay for those liabilities and for legal and other expenses related to the Solutia bankruptcy. Refer to Note 14 - Commitments and Contingencies - for further details. Refer to Note 16 - Other Expense - Net - for further details of the increase in this line item. Income tax expense for the quarter decreased 15 percent to $74 million, compared to an increase in pretax earnings of 14 percent. The effective tax rate improved to 24 percent, a reduction of nine percent versus the prior year period. This improvement was primarily driven by a favorable adjustment to our income tax reserve and, to a lesser extent, the geographic mix of earnings projected for fiscal 2004 versus those in fiscal 2003. A settlement was reached with the Internal Revenue Service (IRS) on a number of issues. As a result, we have recorded a favorable adjustment in our third quarter 2004 results. Discontinued operations generated an aftertax gain of $23 million in third quarter 2004 and an aftertax loss of $5 million in the same period a year ago. In first quarter fiscal 2004, we recorded a loss on disposal of $26 million pretax for the intangible assets related to the European wheat and barley business based upon our initial estimate of the net sales proceeds from the sale of the business and employee termination costs. In third quarter 2004, a definitive agreement for the divestiture of the European wheat and barley business was reached, and in fourth quarter 2004, this sale was finalized (refer to Note 18 - Subsequent Events). We were able to obtain a higher value for the wheat and barley business and related assets that were previously written down in the first quarter of 2004. SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, requires a company to adjust the fair value of assets held for sale to reflect the anticipated sales proceeds in the valuation of its assets, but not in excess of the assets' pre-write down book value. Accordingly, in the third quarter of fiscal 2004, we adjusted the value of the European wheat and barley assets by $25 million pretax because of higher than anticipated sales proceeds and lower than expected employee termination costs. The tax treatment of these adjustments was different for the first and third quarters of 2004. The write down of the European wheat and barley intangible assets in the first quarter of 2004 was tax effected. Since the assets originally had no tax basis, the previously recorded deferred tax liability was reversed with the first quarter 2004 write down. The third quarter 2004 increase in intangible assets was not tax effected because, based on recently obtained valuation information, these assets have been 27 MONSANTO COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) reassessed and the revised tax basis approximately equals the adjusted book basis. Restructuring expenses recorded in discontinued operations were less than $1 million for the third quarter of fiscal 2004. For further details of our discontinued operations, please refer to Note 17 - Discontinued Operations. Seeds and Genomics Segment The Seeds and Genomics segment consists of our global seeds and related trait businesses, and our genetic technology platforms. We produce leading seed brands, including DEKALB and ASGROW, and we develop biotechnology traits that assist farmers in controlling insects and weeds. We also provide genetic material and biotechnology traits to other seed companies for their seed brands.
Three Months Ended May 31, ------------------------ 2004 2003 ---- ---- Net sales Corn seed and traits $291 $267 Soybean seed and traits 159 143 All other crops seeds and traits 231 202 ---- ---- Total net sales $681 $612 ==== ==== Gross profit Corn seed and traits $166 $143 Soybean seed and traits 77 73 All other crops seeds and traits (1) 172 147 ---- ---- Total gross profit $415 $363 ==== ==== EBIT(2) $161 $147 ==== ====
(1) Includes any net restructuring charges for the segment that were recorded within cost of goods sold. See Note 3 - Restructuring, and "Restructuring" in MD&A for further details. (2) Earnings (loss) from continuing operations before cumulative effect of accounting change, interest and income taxes. See Note 15 - Segment Information - for further details. Net sales for the Seeds and Genomics segment increased 11 percent to $681 million in third quarter fiscal 2004 from $612 million in the comparable prior year period. Gross profit for this segment increased 14 percent to $415 million from the same period in the prior year of $363 million. As a percent of net sales, gross profit improved two percentage points to 61 percent. Corn seed and trait net sales increased nine percent, or $24 million, in third quarter 2004 compared to the same period a year ago. Third quarter 2004 European corn seed sales benefited from stronger market performance in several European countries and favorable exchange rates. Higher sales of corn seed in Europe almost entirely offset the decline in U.S. corn seed sales. Third quarter fiscal 2004 corn seed sales in the United States declined from the same period in the prior year because of higher accruals for marketing programs. U.S. corn trait sales increased because of higher corn trait penetration and growth in stacked corn traits. Timing of revenues for licensed traits also benefited the current year quarter. The third quarter 2004 U.S. corn trait revenues reflect an increase in the average prices of our branded seed, which includes our ROUNDUP READY traits, to reflect the value those products provide to growers. Net sales of soybean seed and traits increased 11 percent, or $16 million, in third quarter fiscal 2004 over sales in the prior year comparable period primarily because of higher sales of Canadian soybean seed and traits. Sales of Canadian soybean traits were higher in the third quarter of fiscal 2004 from the prior year comparable period because of timing of royalties from seed licensees. The timing was a shift from fourth quarter to third quarter in fiscal year 2004 versus the same period in the 28 MONSANTO COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) prior year. Soybean seed and trait sales in Canada also benefited from a favorable exchange rate. Gross profit as percent of sales declined three percent for soybean seed and traits primarily because of hedging losses. All other crops seed and trait net sales increased 14 percent, or $29 million, in third quarter 2004 from the comparable prior year period. Third quarter 2004 revenues of cotton traits in India improved from the same period a year ago primarily because of increased acreage planted with BOLLGARD cotton traits. In the prior year, farmers saw the crop protection benefits of our cotton traits. As a result, more farmers began using or increased their acreage planted with BOLLGARD traits in the current year. Revenues of cotton traits also increased in the United States because of higher average net selling prices and the introduction of ROUNDUP READY BOLLGARD II traits. Canadian canola trait revenues also increased in third quarter 2004 from the prior year comparable period because of timing of branded canola trait revenues and royalties from seed licensees and, to a lesser extent, favorable exchange rates. The timing was a shift from fourth quarter to third quarter in fiscal year 2004 versus the same periods a year ago. Gross profit as a percent of net sales improved two percentage points in third quarter 2004 primarily because of the timing of Canadian canola, soybean and corn trait revenues, which were recorded in third quarter 2004 compared to the three months ended Aug. 31, 2003. Also, branded corn seed in the United States had lower cost of goods sold (COGS) per unit in third quarter 2004 from the same period in the prior year because of higher than expected yield and higher plantings due to expected market share growth. EBIT increased by 10 percent, or $14 million, for the Seeds and Genomics segment. In third quarter 2004, this segment experienced higher SG&A and bad-debt expenses from the prior year comparable period of approximately $32 million. SG&A expenses increased because a higher percentage of certain expenses was allocated to this segment in third quarter 2004 versus the same period a year ago based on the Seeds and Genomics segment's increasing contribution to total Monsanto operations. The allocation percentages were changed at the beginning of fiscal 2004. Our allocation methodology is primarily based on the ratio of sales of the Seeds and Genomics segment to total Monsanto sales, and is consistent with our historical practice. Bad-debt expense increased because of the uncollectible Argentine trade receivables discussed in the "Results of Operations - Third Quarter Fiscal Year 2004" section of MD&A. Agricultural Productivity Segment Our Agricultural Productivity segment consists of our crop protection products (ROUNDUP and other glyphosate-based herbicides and selective chemistries) and our animal agriculture, lawn-and-garden herbicides, and environmental technologies businesses. We are a leading worldwide developer, producer and marketer of crop protection products, including ROUNDUP herbicides.
Three Months Ended May 31, ----------------------- 2004 2003 ---- ---- Net sales ROUNDUP and other glyphosate-based herbicides $588 $463 All other agricultural productivity products 410 393 ---- ---- Total net sales $998 $856 ==== ==== Gross profit ROUNDUP and other glyphosate-based herbicides $235 $170 All other agricultural productivity products (1) 189 193 ---- ---- Total gross profit $424 $363 ==== ==== EBIT(2) $163 $137 ==== ====
(1) Includes any net restructuring charges for the segment that were recorded within cost of goods sold. See Note 3 - Restructuring, and "Restructuring" in MD&A for further details. (2) Earnings (loss) from continuing operations before cumulative effect of accounting change, interest and income taxes. See Note 15 - Segment Information - for further details. 29 MONSANTO COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Net sales for the Agricultural Productivity segment increased 17 percent to $998 million in third quarter fiscal 2004 from $856 million in the comparable prior year period. Gross profit for this segment also increased 17 percent to $424 million from last year's same period level of $363 million. As a percent of net sales, gross profit was 42 percent in both three-month periods. ROUNDUP and other glyphosate-based herbicides net sales increased 27 percent, or $125 million, in third quarter 2004 from the same period a year ago. Net sales increased in nearly all markets with the largest increases occurring in Canada, Argentina and the United States. Canadian ROUNDUP net sales increased because of the introduction of ROUNDUP WEATHERMAX in third quarter 2004, favorable weather conditions and favorable exchange rates. Compared to the same period in the prior year, some Canadian ROUNDUP 2004 sales occurred earlier in the season as they shifted from the fourth quarter into the third quarter. Favorable wet weather conditions in late spring contributed to dealers taking a stronger inventory position. Additionally, a reorganized Canadian sales force focused on ROUNDUP played a role in the earlier season sales and higher demand. Third quarter 2004 sales of ROUNDUP increased in Argentina because of advance customer purchases related to market supply constraints, strong on-farm cash flow and market concerns related to the significant price increases taken across the industry in previous months in Argentina. Sales of ROUNDUP and other glyphosate-based herbicides increased in the United States primarily because of timing. The timing was a shift in U.S. volume from fourth quarter to third quarter in fiscal 2004 compared to the same periods in the prior year. During third quarter 2004, we continued to experience competitive pressures and a shift in sales volume to our lower-priced branded and nonbranded glyphosate products. The shift in product mix was reflected in our average net selling price for ROUNDUP herbicides in the United States, which declined during the third quarter of 2004 from the same period in the prior year. Third quarter 2004 sales of our other Agricultural Productivity products increased four percent, or $17 million, to $410 million from $393 million in the prior year comparable period. Third quarter 2004 sales increases in lawn-and-garden herbicides, the environmental technologies business and other selective herbicides more than offset the sales decline in animal agriculture products. Lawn-and-garden herbicide net sales increased because of strong market performance in the United States and favorable exchange rates in Europe. U.S. sales benefited from the introduction of a private label product at a large national retailer in fiscal 2004 and a favorable product mix. Sales for the environmental technologies business increased because of several new significant projects compared to no significant projects in the same period a year ago. Other selective herbicides net sales increased because of timing from earlier season corn plantings in the United States. Sales of animal agriculture products decreased primarily because of the POSILAC product allocation resulting from corrections and improvements being made by Sandoz GmbH at their manufacturing facility in Austria. These changes are being made in response to issues raised by the U.S. Food and Drug Administration (FDA) during and following a November 2003 inspection of Sandoz's facility and further identified in a March 29, 2004, FDA warning letter to Sandoz. Sandoz manufactures the finished dose formulation of POSILAC, and is our sole supplier of the finished dose formulation until we receive FDA approval at our Augusta, Georgia facility. For a further discussion of POSILAC refer to the "Outlook - Update - Agricultural Productivity" section of MD&A. EBIT for the Agricultural Productivity segment increased 19 percent, or $26 million, in third quarter 2004 from the same period a year ago. Gross profit as a percent of sales remained constant for both three-month periods at 42 percent. Third quarter 2004 operating expenses were higher than the same period a year ago primarily because of increases in other expense - net and bad-debt expense. The increase in other expense - net was primarily because of the advancement of funds to pay for Solutia's Assumed Liabilities in light of Solutia's refusal to pay for those liabilities and for legal and other expenses of $29 million related to the Solutia bankruptcy. Bad-debt expense increased because of the uncollectible Argentine trade receivables discussed in the "Results of Operations - Third Quarter Fiscal Year 2004" section of MD&A. SG&A expenses for the Agricultural Productivity segment declined in the third quarter 2004 from the same period a year ago because of the lower allocation of certain SG&A expenses to the Agricultural Productivity segment in third quarter 2004. Refer to the previous section "Seeds and Genomics Segment" for a further explanation of the change in allocation percentages between segments of SG&A expenses. 30 MONSANTO COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Results of Operations - First Nine Months of Fiscal Year 2004
- -------------------------------------------------------------------------------- Nine Months Ended May 31, ---------------------- Total Monsanto Company and Subsidiaries: 2004 2003 ---------------------------------------- ---- ---- Net sales $4,199 $3,607 ====== ====== Gross profit $2,055 $1,715 ====== ====== Income from continuing operations $ 308 $ 277 ====== ====== Net income $ 309 $ 256 ====== ====== - --------------------------------------------------------------------------------
Net sales improved 16 percent, or $592 million, in the first nine months of fiscal 2004 from last year's first nine months net sales. Sales increased 18 percent, or $299 million, for the Seeds and Genomics segment and 15 percent, or $293 million, for the Agricultural Productivity segment. Corn and soybean seed and trait net sales in the United States drove the improvement in the Seeds and Genomics segment. Net sales of ROUNDUP and other glyphosate-based herbicides increased in all world areas for the first nine months of fiscal 2004 compared to the same period a year ago. Brazil, Argentina and Australia were the largest contributors to the net sales increase in ROUNDUP and other glyphosate-based herbicides. For a more detailed discussion of the factors affecting the net sales comparison, please see "Seeds and Genomics Segment" and "Agricultural Productivity Segment." Gross profit increased 20 percent, or $340 million, in the first nine months of fiscal year 2004 compared to the same period in the prior year. Gross profit as a percent of net sales increased over one percentage point to 49 percent. The Seeds and Genomics segment gross profit as a percent of net sales increased two percentage points to 62 percent primarily because of the gross profit improvement that comes from stacking more than one biotech trait in corn, increased trait penetration, and higher average net selling prices for branded corn seed and higher royalties from seed licensees. Gross profit also benefited from higher branded soybean trait prices and royalties from licensees. The Agricultural Productivity segment gross profit percentage was 38 percent for both nine-month periods. Operating expenses increased 19 percent, or $228 million, to $1,423 million for the first nine months of 2004 from $1,195 million for the same period last year. o SG&A expenses increased 11 percent, or $86 million. Increased employee-related costs, primarily related to accrued incentive compensation and, to a lesser extent, employee-benefit related expenses, were the primary drivers of the increase in SG&A expenses. SG&A expenses also increased because of higher expenses associated with the institution of a royalty system for ROUNDUP READY soybean traits in Brazil. o We recognized $69 million of noncash goodwill adjustments in the first quarter of 2004, related to our global wheat business. Our decision to exit the European wheat business required us to reevaluate the goodwill related to the wheat reporting unit for impairment. o Restructuring charges - net were recorded in both nine-month periods. Restructuring charges recorded in the first nine months of 2004 for the fiscal year 2004 restructuring plan were $72 million. Our first nine months of 2004 restructuring charges were reduced by $6 million of restructuring reversals related to our prior restructuring plans. During the prior year comparable period, we recognized $51 million of restructuring charges in operating expenses related to our 2002 restructuring plan. These restructuring charges were offset by $12 million of restructuring reversals related to the 2000 and 2002 restructuring plans. Thus, restructuring charges - net were $66 million for the first nine months of 2004 and $39 million in the prior year comparable period. o Bad-debt expense increased $36 million in the first nine months of 2004. We recorded $64 million in higher bad-debt expense from the same 31 MONSANTO COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) period a year ago for exposures related to potential uncollectible Argentine accounts receivable. Lower bad-debt expenses in Europe and the United States somewhat offset the increase in Argentina. In fiscal year 2004, we continued to restructure our Argentine business model. This redesign focused on streamlining distribution, improving working capital management and rationalizing our product portfolio. In addition, these changes, coupled with the continued economic and business challenges, led to increased credit exposure. We have performed a thorough review of our past due trade receivables in Argentina and, as a result, have increased the allowance for estimated uncollectible receivables. Although we cannot determine with certainty how government actions and economic conditions in Argentina will affect the value of net receivables outstanding, we continue to pursue customer collections aggressively to minimize exposure. The increase in bad-debt expense also included a reserve for trade receivables related to two minor crops that were exited during fiscal 2004, which has resulted in a lower probability of collection. The first nine months of 2004 also had higher bad-debt expense incurred in the normal course of business. o R&D expenses increased three percent, or $10 million, from last year's first nine months. As a percent of sales, R&D expenses for the first nine months of 2004 declined one percent from the comparable prior year period. Net interest expense for the first nine months of 2004 totaled $53 million, which was consistent with net interest expense of $52 million in the same period a year ago. Our average borrowing level in the first nine months of the current fiscal year of $1.5 billion was consistent with our average borrowing levels in the prior year comparable period. We recorded other expense - net of $114 million in the first nine months of 2004 and $40 million in the comparable period last year. During the first nine months of 2004, we recorded $43 million for the advancement of funds to pay for Solutia's Assumed Liabilities in light of Solutia's refusal to pay for those liabilities and for legal and other expenses related to the Solutia bankruptcy. Refer to Note 14 - Commitments and Contingencies - for further details. Foreign-currency translation losses, hedging losses and several individually immaterial items in other miscellaneous expense caused the remainder of the year-over-year increase. Please see Note 16 - Other Expense - Net - for further details. Income tax expense for the first nine months of fiscal 2004 increased four percent to $157 million, compared to an increase in pretax earnings of nine percent. The effective tax rate improved to 34 percent, a reduction of one percent versus the prior year period. Absent the goodwill adjustments in the first quarter of fiscal year 2004, the effective tax rate would have been 29 percent, a reduction of six percent versus the prior year period. This improvement was driven primarily by a favorable adjustment to our income tax reserve and, to a lesser extent, the geographic mix of earnings projected for fiscal 2004 versus those in fiscal 2003. A settlement was reached with the IRS on a number of issues. As a result, we have recorded a favorable adjustment in our third quarter 2004 results. In addition, income tax expense for the first nine months of 2004 includes two adjustments for valuation allowances against our deferred tax assets in Argentina and Brazil. For further details of these deferred tax adjustments, please refer to Note 7 - Income Taxes. Discontinued operations generated an aftertax gain of $1 million in the first nine months of 2004, reflecting $1 million in aftertax restructuring income. We were able to obtain a higher value for the wheat and barley business and related assets that were previously written down in the first quarter of 2004. SFAS 144 requires a company to adjust the fair value of assets held for sale to reflect the anticipated sales proceeds but not in excess of their pre-write down book value. Accordingly, in third quarter of fiscal 2004, we adjusted the value of the European wheat and barley assets by $25 million pretax because of higher than anticipated sales proceeds and lower than expected employee termination costs. Despite the pretax charges of $9 million, we recorded an income tax benefit of $10 million. The European wheat and barley intangible assets that were written down in the first quarter of 2004 were tax effected. Since the assets originally had no tax basis, the previously recorded deferred tax liability was reversed with the first quarter 2004 write down. The third quarter 2004 increase in intangible assets was not tax effected because, based on recently obtained valuation information, these assets have been reassessed and the revised tax basis approximately equals the adjusted book basis. Discontinued operations in the prior year period generated an aftertax loss of $9 million. For further details of our discontinued operations, please refer to Note 17 - Discontinued Operations. 32 MONSANTO COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) The factors above explain the change in income before cumulative effect of accounting change. In the first nine months of the prior year, a new accounting standard relating to asset retirement obligations was adopted on Jan. 1, 2003, which negatively affected our net income by $12 million, or $0.05 per share, aftertax.
Seeds and Genomics Segment Nine Months Ended May 31, ------------------------ 2004 2003 ---- ---- Net sales Corn seed and traits $ 956 $ 782 Soybean seed and traits 636 561 All other crops seeds and traits 331 281 ------- ------ Total net sales $ 1,923 $1,624 ======= ====== Gross profit Corn seed and traits $ 578 $ 445 Soybean seed and traits 400 344 All other crops seeds and traits (1) 211 181 ------- ------ Total gross profit $ 1,189 $ 970 ======= ====== EBIT(2) $ 341 $ 343 ======= ======
(1) Includes any net restructuring charges for the segment that were recorded within cost of goods sold. See Note 3 - Restructuring, and "Restructuring" in MD&A for further details. (2) Earnings (loss) from continuing operations before cumulative effect of accounting change, interest and income taxes. See Note 15 - Segment Information - for further details. Net sales for the Seeds and Genomics segment increased 18 percent, or $299 million, to $1,923 million in the first nine months of 2004. Sales increased for all seed and trait crops in the first nine months of 2004 from the same period a year ago. Corn seed and traits was the largest contributor, representing 58 percent of the total segment improvement. Net sales for corn seed and traits in the first nine months of 2004 increased 22 percent, or $174 million, from the prior year comparable period. Corn seed and trait sales were driven higher primarily by increases in the United States. Corn seed net sales also increased in Brazil and Europe, and to a lesser extent, in Mexico. Argentina corn seed and trait sales declined slightly, which partially offset the gains in the above regions. Gross profit for this segment increased 23 percent, or $219 million, from the comparable prior year period. As a percent of net sales, gross profit increased two percentage points to 62 percent in the first nine months of 2004. The increase in U.S. corn seed was because of stronger market performance and increased average net selling prices. Our branded corn business expects to capture 14 share points this year, which is a one-point increase over the prior year. Sales of U.S. corn traits increased primarily because of growth in stacked traits and higher corn trait penetration. The number of U.S. acres in 2004 that growers chose to plant with stacked corn traits has increased substantially. To a lesser extent, the timing of licensed trait royalties also favorably impacted the year-over-year comparison. Corn seed net sales in Brazil increased from the same period a year ago because of improved market conditions, which included a fiscal 2004 price increase, a mix shift to higher value products, and the favorable Brazilian real exchange rate. Europe corn seed sales increased because of favorable exchange rates, market share gains in France and Turkey, and a favorable product mix. Argentina experienced drought conditions in an extremely competitive marketplace in the first nine months of 2004, which led to a decrease in net sales of corn seed and traits from the prior year comparable period. The unfavorable weather conditions caused many farmers to reduce plantings in the first nine months of 2004, and to shift to other crops such as soybeans. Soybean seed and traits net sales increased 13 percent, or $75 million, in the first nine months of 2004 and were driven by higher soybean trait sales in the United States compared to the same period a year ago. 33 MONSANTO COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) U.S. soybean trait revenues benefited from higher prices for branded soybeans and royalties from seed licensees. All other crops seed and trait sales in the first nine months of 2004 increased 18 percent, or $50 million, from the first nine months of 2003. Canadian canola trait revenues increased because of timing of branded canola trait revenues and royalties from seed licensees and, to a lesser extent, favorable exchange rates. The timing was a shift from fourth quarter to third quarter in fiscal year 2004 versus the same period a year ago. Cotton trait revenues in India for the first nine months of 2004 improved from the same period a year ago primarily because of increased acreage planted with BOLLGARD cotton traits. In the prior year, farmers saw the crop protection benefits of our cotton traits. As a result, more farmers began using or increased their acreage planted with BOLLGARD traits in the current year. Revenues of cotton traits also increased in the United States because of higher average net selling prices and the introduction of ROUNDUP READY BOLLGARD II traits. EBIT for the Seeds and Genomics segment decreased less than one percent in the first nine months of 2004 from the prior year comparable period. Gross profit as a percent of sales for the Seeds and Genomics segment increased two percentage points to 62 percent because of the gross profit improvement that comes from stacking more than one biotech trait in corn, higher volumes and average net selling prices for branded corn, and higher corn seed royalties from licensees. Gross profit also benefited from higher branded soybean trait prices and royalties from licensees. The timing of Canadian canola, soybean and corn trait royalties favorably impacted this ratio. Additionally, branded corn seed COGS per unit was lower in the United States because of higher yield and higher planting due to expected market share growth. Operating expenses increased primarily because of higher SG&A expenses and the $69 million global wheat goodwill impairment. SG&A expenses increased because a higher percentage of certain expenses was allocated to this segment in the first nine months of 2004 versus the same period a year ago based on the Seeds and Genomics segment's increasing contribution to total Monsanto operations. The allocation percentages were changed at the beginning of fiscal 2004. Our allocation methodology is primarily based on the ratio of sales of the Seeds and Genomics segment to total Monsanto sales, and is consistent with our historical practice. SG&A expenses also increased in the first nine months of 2004 because of higher accrued incentive compensation. To a lesser extent, this segment also had higher bad-debt expense, R&D expense and restructuring expense in the first nine months of 2004.
Agricultural Productivity Segment Nine Months Ended May 31, ----------------------- 2004 2003 ---- ---- Net sales ROUNDUP and other glyphosate-based herbicides $1,380 $1,096 All other agricultural productivity products 896 887 ------ ------ Total net sales $2,276 $1,983 ====== ====== Gross profit ROUNDUP and other glyphosate-based herbicides $ 489 $ 362 All other agricultural productivity products (1) 377 383 ------ ------ Total gross profit $ 866 $ 745 ====== ====== EBIT(2) $ 177 $ 137 ====== ======
(1) Includes any net restructuring charges for the segment that were recorded within cost of goods sold. See Note 3 - Restructuring, and "Restructuring" in MD&A for further details. (2) Earnings (loss) from continuing operations before cumulative effect of accounting change, interest and income taxes. See Note 15 - Segment Information - for further details. 34 MONSANTO COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Net sales for the Agricultural Productivity segment increased 15 percent, or $293 million, to $2,276 million in the first nine months of 2004 from $1,983 million in the comparable prior year period. An increase in sales of ROUNDUP herbicides and, to a lesser extent, other glyphosate-based herbicides contributed to the net sales increase in the first nine months of 2004 for the Agricultural Productivity segment. Gross profit for this segment increased 16 percent to $866 million from last year's same period level of $745 million. As a percent of net sales, gross profit was 38 percent in both nine-month periods. Gross profit as a percent of sales for this segment would have increased slightly if restructuring expenses were excluded from cost of goods sold. In the first nine months of 2004, we recorded $13 million of restructuring charges related to the fiscal year 2004 restructuring plan in cost of goods sold. During the prior year comparable first nine months, we recorded $9 million in cost of goods sold for the 2002 restructuring plan. For further details on our restructuring plans, please see the "Restructuring" section of MD&A and Note 3 - Restructuring. Net sales of ROUNDUP and other glyphosate-based herbicides increased in all world areas for the first nine months of fiscal 2004 compared to the same period a year ago. The largest increases in year-over-year net sales were achieved in Brazil, Argentina and Australia. To a lesser extent, Canada and the United States had increases in ROUNDUP net sales in the first nine months of fiscal 2004 from the same period a year ago. Brazil's net sales of ROUNDUP and other glyphosate-based herbicides in the first nine months of 2004 benefited from improved market and pricing conditions, our operational changes that took place in the prior year, and the favorable effect of the Brazilian real exchange rate. Net sales of ROUNDUP herbicides in Argentina increased in the first nine months of 2004 compared to the same period in the prior year. Argentine sales in the first quarter of fiscal year 2003 included the effect of actions taken in conjunction with our customers during a time of economic and market turmoil. A one-time exception to our policy regarding crop protection product returns reduced the first nine months of 2003's sales by approximately $60 million, but also reduced risks for both parties. Excluding the prior year actions, net sales slightly decreased in the first nine months of 2004 because sales were negatively affected by competitive conditions and dry weather. Sales of glyphosate products in Australia increased for the first nine months of 2004 from the same period a year ago because of improved market conditions and favorable exchange rates. Canadian ROUNDUP net sales increased because of the introduction of ROUNDUP WEATHERMAX, favorable weather conditions and favorable exchange rates. Compared to the prior year, some Canadian ROUNDUP 2004 sales occurred earlier in the season as they shifted from the fourth quarter into the first nine months of 2004. Favorable wet weather conditions in late spring contributed to dealers taking a stronger inventory position. Additionally, a reorganized Canadian sales force focused on ROUNDUP played a role in the earlier season sales and higher demand. Net sales of ROUNDUP and, to a lesser extent, other glyphosate-based herbicides, in the United States increased in the first nine months of 2004 from the same period a year ago. Volumes for both branded and nonbranded glyphosate products increased, which were both partially offset by lower average net selling prices. Early positioning and applications of ROUNDUP drove business performance for the first nine months of 2004, and created a timing shift between third quarter and fourth quarter versus the prior year comparable period. During the first nine months of 2004, we continued to experience competitive pressures and a shift of sales volume to our lower-priced branded and nonbranded products. For the full year, we continue to expect a lower-value mix of branded and nonbranded products, and a decline in the market share of ROUNDUP herbicides in the United States compared to fiscal year 2003. Net sales of all other agricultural productivity products increased $9 million in the first nine months of 2004 from the same period a year ago. Sales increases in the first nine months of 2004 for lawn-and-garden herbicides and the environmental technologies business were partially offset by a sales decline in the animal agricultural business. Lawn-and-garden herbicide net sales increased because of strong market performance in the United States and favorable exchange rates in Europe. U.S. sales benefited from the introduction of a private label product at a large national retailer in fiscal 2004 and a favorable product mix. The environmental technologies business net sales increased in the first nine months of fiscal 2004 because of several major projects that were in progress; there were no major projects in the prior year comparable period. Sales of animal agriculture products decreased because of the POSILAC product allocation resulting from corrections and improvements being made by Sandoz GmbH at their manufacturing facility in Austria. For further explanation of the POSILAC product allocation, please refer to the "Agricultural Productivity" segment discussion for third quarter fiscal 2004 in MD&A. 35 MONSANTO COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) EBIT for the Agricultural Productivity segment increased $40 million for the first nine months of 2004. Gross profit year-over-year increased $121 million, however, as a percent of net sales was flat at 38 percent. Higher other expenses, bad-debt expense and restructuring expenses reduced EBIT. Other expenses were $67 million higher in the first nine months of 2004 from the same period a year ago. The increase in other expense was primarily because of the advancement of funds to pay for Solutia's Assumed Liabilities in light of Solutia's refusal to pay for those liabilities and for legal and other expenses related to the Solutia bankruptcy of $43 million. The increase in bad-debt expense was because of the uncollectible Argentine accounts receivable discussed in the "Results of Operations - First Nine Months of Fiscal Year 2004" section of MD&A. Net restructuring charges recorded in the first nine months of 2004 were $51 million compared to $29 million recorded in the same period a year ago. Offsetting these higher expenses was the impact of a lower allocation of certain SG&A expenses to the Agricultural Productivity segment in the first nine months of 2004. Please see the previous section "Seeds and Genomics Segment" for a further explanation of the change in allocation percentages between segments of SG&A expenses. Our Agreement with The Scotts Company In 1998, Monsanto entered into an agency and marketing agreement with The Scotts Company (Scotts) with respect to our lawn-and-garden herbicide business. Under the agreement, beginning in the fourth quarter of 1998, Scotts was obligated to pay us a $20 million fixed fee each year to defray costs associated with the lawn-and-garden business. Scotts' payment of a portion of this fee owed in each of the first three years of the agreement was deferred and is required to be paid at later dates, with interest. Monsanto is accruing the deferred portions of the $20 million annual fixed fee owed by Scotts ratably over the periods during which it is being earned as a reduction of SG&A expenses. We are also accruing the interest on the amounts owed by Scotts and including it in interest income. The total amount owed by Scotts, including accrued interest, was approximately $49 million and $50 million as of May 31, 2004, and Aug. 31, 2003, respectively. Scotts began paying these deferred amounts ($5 million per year in monthly installments) beginning in October 2002. 36 MONSANTO COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Restructuring During the three months and nine months ended May 31, 2004, and May 31, 2003, we recorded charges relating to our restructuring plans. These net charges were recorded in the Statement of Consolidated Operations as outlined below. Please see Note 3 - Restructuring - for further details.
Three Months Ended Nine Months Ended May 31, May 31, ------------------------ ----------------------- 2004 2003 2004 2003(1) ---- ---- ---- ---- Cost of goods sold $(2) $-- $(19) $(10) Restructuring charges - net(2) (9) -- (66) (39) --- -- ---- ---- Loss from continuing operations before income taxes 11 -- (85) (49) Income tax benefit 4 -- 28 18 --- --- ---- ---- Loss from continuing operations (7) -- (57) (31) Income (loss) from operations of discontinued businesses(3) 25 -- (9) -- Income tax benefit -- -- 10 -- --- --- ---- ---- Income on discontinued operations 25 -- 1 -- --- -- ---- ---- Net income (loss) $18 $-- $(56) $(31) === === ==== ====
(1) The $10 million of restructuring charges recorded in cost of goods sold was split by segment as follows: $1 million Seeds and Genomics and $9 million Agricultural Productivity. The $39 million of restructuring charges - net was split by segment as follows: $19 million Seeds and Genomics and $20 million Agricultural Productivity. (2) The restructuring charges for the three months ended May 31, 2004, were offset by $4 million in restructuring reversals related to prior plans, all of which was recorded in the Agricultural Productivity segment. Restructuring charges for the nine months ended May 31, 2004, and May 31, 2003, were offset by prior plan reversals of $6 million ($1 million in Seeds and Genomics and $5 million in Agricultural Productivity) and $12 million ($3 million in Seeds and Genomics and $9 million in Agricultural Productivity), respectively. (3) Fiscal year 2004 contains restructuring charges related to discontinued businesses (refer to Note 17 - Discontinued Operations). These restructuring charges were recorded in discontinued operations. Fiscal Year 2004 Restructuring Plan In October 2003, we announced plans to continue to reduce the costs associated with our agricultural chemistry business as that segment matures globally. Total restructuring charges approved under the fiscal year 2004 restructuring plan were $289 million pretax. We will further concentrate our resources on our core seeds and traits businesses. These plans included: (1) reducing costs associated with our ROUNDUP herbicide business, (2) exiting the European breeding and seed business for wheat and barley, and (3) discontinuing the plant-made pharmaceuticals program. These actions were originally expected to require restructuring charges of up to $220 million pretax ($155 million aftertax) in fiscal year 2004. Additionally, the approved plan included the $69 million impairment of goodwill in the global wheat business (refer to Note 6 - Goodwill and Other Intangible Assets). The goodwill impairment was not deductible for tax purposes. The following table outlines the pretax restructuring charges related to our fiscal year 2004 restructuring plan recorded by segment in continuing operations and discontinued operations for the three months and nine months ended May 31, 2004. We are following SFAS 144 and SFAS 146 to account for these actions. 37 MONSANTO COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Three Months Nine Months Ended Ended May 31, 2004 May 31, 2004 ---------------- --------------- Continuing Operations: Seeds and Genomics $ 2 $ 35 Agricultural Productivity 13 56 ---- ----- Total Continuing Operations 15 91 Discontinued Operations: Seeds and Genomics (25) 9 Agricultural Productivity -- -- ---- ----- Total Discontinuing Operations (25) 9 Total Segment: Seeds and Genomics (23) 44 Agricultural Productivity 13 56 ---- ----- Total $(10) $ 100 ==== =====
In the first nine months of fiscal year 2004, we recorded pretax restructuring charges of $59 million related to work force reductions. Work force reductions in continuing operations of $56 million were primarily in the areas of R&D, manufacturing, information technology and marketing in the United States; downsizing the regional structure in Europe; and downsizing the sales force in Canada as a result of the realignment of the Canadian business to focus on the Seeds and Genomics segment. Discontinued operations work force reductions of $3 million were related to employees of the plant-made pharmaceuticals program. Facility closure charges in discontinued operations of $2 million related to shutdown expenses resulting from the exit of the plant-made pharmaceuticals site. Asset impairments in continuing operations were $35 million, of which $19 million was recorded in cost of goods sold and the remainder in restructuring charges - net. Property, plant and equipment impairments of $10 million were recorded in the United States and, to a lesser extent, in Asia for the shutdown of production lines and disposal of equipment. We also recorded $9 million in inventory impairments related to discontinued seed hybrids in Argentina, discontinued agricultural chemical products and seed hybrids in Brazil, discontinued agricultural chemical products in Asia, and disposal of inventory at a production site being shutdown in Canada. Asset impairments in restructuring charges - net consisted of $11 million for the closure of an office building in the United States, $2 million for the closure of a research facility in Canada, an intangible asset impairment of $2 million in Asia, and approximately $1 million for the disposal of a computer system in Asia. Discontinued operations asset impairments of $4 million consisted of $2 million of property, plant and equipment impairments and $1 million of other intangible assets, both associated with the European wheat and barley business; and property, plant and equipment impairments of $1 million associated with the plant-made pharmaceuticals program. For details of restructuring charges recorded in third quarter 2004 for the fiscal year 2004 restructuring plan, refer to Note 3. We expect to incur total restructuring charges of $191 million pretax ($136 million aftertax) in fiscal year 2004 (not including the $69 million impairment of goodwill). For fiscal year 2004, we expect approximately $115 million of pretax charges to relate to the Seeds and Genomics segment and $145 million to relate to the Agricultural Productivity segment. We estimate that this restructuring will require approximately $140 million of cash, relating to work force reductions and to a lesser extent, facility closures. We also estimate we will incur $51 million of noncash pretax asset impairments during fiscal year 2004, not including the $69 million impairment of goodwill related to the global wheat reporting unit. Charges relating to asset impairments within the Seeds and Genomics segment are approximately $30 million lower than previously estimated due to the favorable results from the sale of the European wheat and barley business. The actions relating to this restructuring plan are expected to produce aftertax savings of approximately $20 million to $26 million in fiscal year 2004, approximately $80 million to $95 million in fiscal year 2005, and approximately $90 million to $105 million in fiscal year 2006, with continuing savings going forward. We expect that these actions will lower our costs, primarily SG&A, as a percent of sales. 38 MONSANTO COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) 2002 Restructuring Plan (charges recorded in calendar year 2002) In 2002, Monsanto's management approved a restructuring plan to further consolidate or shut down facilities and to reduce the work force. Under this plan, various research and development programs and sites were shut down, and certain agricultural chemical manufacturing facilities in the Asia-Pacific region and the United States were closed or downsized. Certain seed sites were consolidated, and certain U.S. swine facilities were exited. In connection with this plan, we recorded $61 million pretax of restructuring charges during the first nine months of 2003. During the first nine months of 2003, $10 million was recorded in cost of goods sold and the remainder in the restructuring line item. The company also recorded reversals of $12 million in the nine months ended May 31, 2003, for the 2000 and 2002 restructuring plans. Net pretax restructuring expenses of $49 million were recorded in the nine months ended May 31, 2003. As of May 31, 2004, the liability balance for the 2002 restructuring plan was less than $1 million. The reserve balance decreased approximately $5 million during the nine months ended May 31, 2004. The reserve balance was reduced $1 million for cash severance payments to former employees and $2 million for facility closure actions that were completed. No additional work force separation payments are expected, and accordingly, the remaining reserves for work force reductions of $1 million were reversed in third quarter 2004. The remaining facility closure actions associated with this plan are expected to be completed in fourth quarter 2004. The remaining actions will be funded from operations, and are not expected to significantly affect the company's liquidity. We anticipate that the actions related to this plan will yield annual cash savings of more than $50 million. 2000 Restructuring Plan (charges recorded in calendar years 2001 and 2000) In 2000, Monsanto's management formulated a plan as part of the company's overall strategy to focus on certain key crops and to streamline operations. Restructuring and other special items, primarily associated with the implementation of this plan, were recorded during calendar years 2001 and 2000. These charges totaled $474 million pretax ($334 million aftertax): $213 million ($137 million aftertax) recorded in calendar year 2001 and $261 million ($197 million aftertax) recorded in calendar year 2000. As of May 31, 2004, the liability balance for the 2000 restructuring plan was less than $1 million. The reserve balance decreased approximately $8 million during the nine months ended May 31, 2004. The 2000 plan restructuring reserves decreased $3 million due to the sale of a U.S. manufacturing plant during the second quarter of 2004. In addition, reversals of $3 million were recorded in the first nine months of fiscal year 2004 ($2 million in third quarter 2004) related to work force reductions. Reversals were recorded primarily because costs were lower than originally estimated. The remaining facility closure actions associated with this plan are expected to be completed in fourth quarter 2004, and are not expected to significantly affect the company's liquidity. These actions under the 2000 restructuring plan have yielded annual cash savings of more than $100 million. Financial Condition, Liquidity, and Capital Resources Working Capital and Financial Condition
As of As of As of May 31, 2004 Aug. 31, 2003 May 31, 2003* ------------ ------------- ------------- Working capital $3,179 $2,920 $3,055 Current ratio 2.75:1 2.45:1 2.53:1 *All data as of May 31, 2003, are derived from our unaudited consolidated statement of financial position, which is not presented herein.
Working capital increased $259 million from Aug. 31, 2003, to May 31, 2004. Current assets increased $61 million, and current liabilities decreased $198 million. An increase in trade accounts receivable was somewhat offset by decreases in short-term investments and deferred tax assets. Trade accounts receivable as of May 31, 2004, increased $441 million from the level as of Aug. 31, 2003. The increase was primarily 39 MONSANTO COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) because of the seasonality of our business. A large amount of the trade receivables balance as of May 31, 2004, represented sales of our Agricultural Productivity products in the United States. These U.S. receivables will become due in the fourth quarter of 2004. There were no short-term investments as of May 31, 2004, and $230 million in short-term investments as of Aug. 31, 2003. We invested excess cash in short-term securities as of Aug. 31, 2003. There was no impact to working capital between May 31, 2004, and Aug. 31, 2003, for the taxes related to the PCB litigation settlement. When the PCB litigation settlement was funded in September 2003, the deferred tax asset balance was reduced and the current tax liability decreased. Current liabilities decreased from Aug. 31, 2003, to May 31, 2004, primarily because of the $400 million payment for the PCB litigation settlement. Short-term debt was $132 million higher as of May 31, 2004, compared to Aug. 31, 2003. The increase in short-term debt lowered our working capital. Total debt outstanding as of May 31, 2004, and Aug. 31, 2003, was unchanged at approximately $1.5 billion for both periods; the mix shifted from long-term to short-term based upon current maturities. Working capital as of May 31, 2004, increased $124 million from May 31, 2003, reflecting lower current assets of $51 million and lower current liabilities of $175 million. Current assets decreased because of $142 million in lower inventory and $131 million in lower trade accounts receivables, which were partially offset by higher cash and cash equivalents of $198 million. Argentine finished goods seed inventory declined primarily because of higher inventory obsolescence charges in 2004 and product line discontinuances. ROUNDUP finished goods inventory declined in Argentina because of higher third quarter 2004 sales compared to the same period in the prior year (refer to the "Results of Operations - Third Quarter Fiscal Year 2004" section of MD&A), which lowered our inventory levels as of May 31, 2004. For both segments in Argentina, we have been focused on improved inventory management in 2004. Finished goods inventory also declined in the United States because of product rationalization of ROUNDUP and other selective herbicides. Further, the United States produces glyphosate intermediate product to meet global demand; as sales outside the United States increased, there has been less glyphosate intermediate product available for U.S. production, causing finished goods inventory levels to decline. Trade accounts receivable were lower as of May 31, 2004, compared to May 31, 2003, primarily because of lower accounts receivable in Argentina and the United States. We increased our Argentine allowance for doubtful accounts in fiscal 2004, which lowered our accounts receivable balance. We saw a significant decline in the Argentine, and, to a lesser extent, the U.S. days sales outstanding between the respective periods. U.S. collections improved because of prepayments in both segments, which were somewhat offset by higher sales. Current liabilities decreased because of a lower current tax liability and lower short-term debt levels. The current tax liability was approximately $164 million lower than the balance as of May 31, 2003. The current tax liability decreased between May 31, 2003, and May 31, 2004, because of the taxes related to the PCB litigation settlement, which became deductible in September 2003 when we funded the PCB litigation settlement, and the payment of income taxes owed to Pharmacia in the first nine months of 2004. Short-term debt was approximately $150 million lower as of May 31, 2004. We had no commercial paper outstanding as of May 31, 2004, and approximately $135 million of commercial paper outstanding as of May 31, 2003. Total debt outstanding was approximately $1.5 billion as of May 31, 2004, and $1.7 billion as of May 31, 2003. Customer Financing Program: In connection with a financing option that is available to certain of our customers, we collected approximately $124 million in the first nine months of 2004 and $153 million during the same period last year. This $500 million revolving credit and liquidity facility allows certain U.S. customers to finance product purchases, and allows us to reduce our reliance on commercial paper borrowings. The company originates these loans on behalf of the third-party specialty lender using Monsanto's credit guidelines approved by the lender, a special purpose entity. The loans are sold to multi-seller commercial paper conduits through a non-consolidated qualifying special purpose entity (QSPE). We have no ownership interest in the lender, the QSPE, or the loans. We service the loans and provide a first loss guarantee of up to $100 million. We have not issued, nor are we obligated to issue, any debt or equity securities in connection with this arrangement. The customer loan balance outstanding as of May 31, 2004, and May 31, 2003, was $97 million and $129 million, respectively. The lender or the conduits may restrict or discontinue the facility at any time. If the facility were to terminate, existing sold loans would be collected by the QSPE over their remaining terms (generally 12 months or less), and we would revert to our past practice of providing customers with direct credit purchase terms. Servicing fee revenues were not significant. As of May 31, 2004, Monsanto's guarantee liability was less than $1 million, based on our 40 MONSANTO COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) historical collection experience with these customers and our current assessment of credit exposure. Adverse changes in the actual loss rate would increase the liability.
Cash Flow Nine Months Ended May 31, ----------------------- 2004 2003 ---- ---- Net cash provided by operations $112 $554 Net cash provided (required) by investing activities 60 (195) ---- ---- Free Cash Flow 172 359 Net cash required by financing activities (126) (368) ---- ---- Net Increase (Decrease) in Cash and Cash Equivalents $ 46 $ (9) ==== ====
Free cash flow (refer to the "Financial Measures" section of MD&A) decreased $187 million for the first nine months of 2004 to $172 million from $359 million in the prior year comparable period. The primary drivers of the decrease were the PCB litigation settlement and pension funding. In September 2003, we paid $400 million related to the Solutia PCB litigation settlement. We are also continuing to voluntarily contribute to our U.S. qualified pension plan, with $150 million contributed in the first nine months of 2004 compared to $35 million in the first nine months of 2003. The change in accounts receivable required cash of $496 million in the first nine months of 2004 and $183 million in the first nine months of 2003. Sales increased in the current nine-month period at a rate higher than our rate of collections during this time period. Although our year-to-date collections have increased substantially as compared to the nine months ended May 31, 2003, our increase in year-to-date sales more than offset this improvement in collections in the cash flow statement. Deferred income taxes were a source of cash of $213 million in the first nine months of 2004 and a use of cash of $48 million in the comparable prior year period. Similar to the current tax liability discussion in "Working Capital and Financial Condition", the PCB litigation settlement expense was the primary driver of this line. The tax impact of the PCB litigation settlement was recorded in the current deferred tax asset account as of Aug. 31, 2003. In September 2003 after the PCB litigation settlement was funded, this amount was recorded to current tax liability. Essentially the higher source of cash from deferred income taxes was offset by the higher use of cash for accounts payable and accrued liabilities in the first nine months of 2004 from the same period in the prior year. Thus, overall net cash from operations was unaffected by taxes related to the PCB litigation settlement in the first nine months of 2004. Net cash provided by investing activities was $60 million for the first nine months of 2004 compared to net cash required by investing activities of $195 million in the prior year comparable period. The fluctuation between the nine-month periods was primarily because of purchases and maturities of short-term investments. For the first nine months of 2003, we invested $250 million in short-term securities in December 2002, which matured in April and May of 2003. Thus, there was no cash flow impact of short-term securities during the nine months of 2003. During the first nine months of 2004, short-term investments of $230 million matured in October 2003, and we reinvested $250 million in short-term securities in December 2003. The December 2003 securities matured in March and April 2004. The net impact was a source of cash in the amount of $230 million. Investment and property disposal proceeds exceeded prior year by $16 million primarily because of the sale of an equity security during the first nine months of 2004. Capital spending was down two percent from the prior year level of $151 million. Net cash required by financing activities was $126 million in the first nine months of 2004 compared to $368 million for the first nine months of 2003. The net change in cash required for short-term financing was $51 million in the first nine months of 2004 and $459 million in the first nine months of 2003. During the first nine months of 2004, we had 41 MONSANTO COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) strong cash flows, which has reduced our need for seasonal borrowings. In the first nine months of 2003, we used our free cash flow to pay down our short-term borrowings. Commercial paper outstanding decreased approximately $480 million between Aug. 31, 2002, and May 31, 2003. No commercial paper was outstanding as of Aug. 31, 2003, and May 31, 2004. Long-term debt proceeds in the first nine months of 2004 were from our Brazil medium term borrowings. During the first nine months of 2003, we issued $250 million of 4% Senior Notes under our May 2002 shelf registration. Stock option exercises totaled $163 million during the first nine months of 2004 compared to no exercises in the prior year comparable period. During the first nine months of 2004, treasury share purchases totaled $133 million. The share repurchases are part of our three-year, $500 million share repurchase program, which was authorized by the Executive Committee of the board of directors on July 31, 2003. Dividend payments increased 10 percent, or $9 million, for the first nine months of 2004. In April 2003, the board of directors approved an increase in the quarterly dividend from 12 cents per share to 13 cents per share. In May 2004, the board of directors approved an increase in the quarterly dividend from 13 cents per share to 14.5 cents per share. Capital Resources and Liquidity Effective June 4, 2004, we finalized a new five-year, $1 billion revolving credit facility. This facility replaces the existing $500 million five-year and $500 million 364-day facilities. Covenants under the $1 billion revolving credit facility are consistent with the facilities replaced. Contingent Liabilities Relating to Solutia Inc. (Off-Balance Sheet Arrangement) Under our Separation Agreement with Pharmacia, we were required to indemnify Pharmacia for liabilities that Solutia assumed from Pharmacia in connection with the spinoff of Solutia on Sept. 1, 1997 (Solutia's Assumed Liabilities), to the extent that Solutia fails to pay, perform or discharge those liabilities. Those liabilities remain the present responsibility of Pharmacia. In general, this indemnification obligation applies to Solutia's Assumed Liabilities for which Pharmacia would otherwise be required to pay. Solutia's Assumed Liabilities may include, among others, litigation, environmental remediation, and certain retiree liabilities relating to individuals who were employed by Pharmacia prior to the Solutia spinoff. Solutia and 14 of its U.S. subsidiaries filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York. In the Chapter 11 proceeding, Solutia is seeking relief from paying certain liabilities, including Solutia's Assumed Liabilities. Solutia has notified Pharmacia and Monsanto that it is repudiating its obligation to defend litigation which Solutia had been managing or to accept new cases relating to Solutia's Assumed Liabilities pursuant to the terms of agreements between Pharmacia, Solutia and Monsanto. Solutia has also taken the position that the bankruptcy proceeding prevents it from continuing to perform its environmental obligations except within the boundaries of its current operations. If Solutia is discharged from all or a portion of Solutia's Assumed Liabilities, Monsanto may be required to indemnify Pharmacia for all or a portion of them. Under the rules of the SEC, these contingent liabilities are considered to be an off-balance sheet arrangement. Part I. Item 1 - Note 14 - Commitments and Contingencies - includes further information regarding Solutia's Assumed Liabilities and the reasonable possibility of a material adverse effect on our financial position, profitability and/or liquidity. Also see Part II. Item 1 - Legal Proceedings - and Item 5 - Other Information - Relationships Among Monsanto Company, Pharmacia Corporation and Solutia Inc. - for further information. 42 MONSANTO COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Outlook - Update Focused Strategy Monsanto has established leadership in agricultural markets by applying advanced technology to develop high-value products ahead of competitors, and by reinforcing strong brands and customer relationships. We continually improve our products to maintain market leadership and support near-term performance. Our capabilities in biotechnology research are generating a rich product pipeline that is expected to drive long-term growth. We believe that our focused approach to our business and the value we bring to our customers will allow us to maintain an industry leadership position in a highly competitive and difficult agricultural and economic environment. Our strategic actions will allow us to focus on continued growth in our seeds and traits businesses, with the goal of ensuring that ROUNDUP and our other herbicides continue to make strong contributions to cash flow and income. Monsanto is continuing to evolve into a company led by its strengths in seeds and biotechnology traits as a means of delivering solutions to our customers. As we concentrate our resources on this growth sector of the agricultural industry, we are taking steps to reduce SG&A costs - particularly those associated with our agricultural chemistry business as that sector matures globally. Monsanto remains the leading manufacturer of the best-selling herbicide, ROUNDUP, and maintains a very strong manufacturing cost position. As part of this seed and technology-based strategic initiative, we are focusing on projects that we believe have the best commercial potential. Our research and marketing focuses on three crops grown on significant acreage: corn, soybeans and cotton. Following our announced exit from our European breeding and seed business for wheat and barley, we entered into a definitive agreement in third quarter of fiscal year 2004 for the sale of assets associated with that business, and finalized the sale in June 2004. Recently, we made the decision to realign our research and development investments to accelerate the development of new and improved traits in corn, cotton and oilseeds. As part of this realignment, we are deferring all further efforts to introduce ROUNDUP READY wheat, until such time that other wheat biotechnology traits are introduced. This decision was reached after a comprehensive review of our research investment portfolio and extensive consultation with customers in the wheat industry. We will also focus geographically on our top agricultural markets, where we can bring together a broad complement of our products and technologies, while pursuing ways to best participate in other markets. We have accordingly adopted different business models for different markets. These actions allow us to diversify our exposure to risk from changes in the marketplace. Our financial strategy will continue to emphasize both earnings and cash flow, and we believe that Monsanto is positioned to sustain earnings growth and strong cash flow. We remain committed to returning cash to shareowners. Our board of directors increased our dividend rate in April 2003, and again in May 2004. We began our share repurchase program in the first quarter of 2004. We expect to continue the share repurchase program until the earlier of July 2006 or such time as we have reached the $500 million amount authorized by the board of directors. We also applied our strong cash position to participate in a settlement of Solutia's PCB litigation and continue to make voluntary contributions to our pension plan. We will also evaluate using our cash position for acquisition opportunities that meet the strategic needs of our seed and traits businesses or for technology arrangements that have the potential to increase the efficiency and effectiveness of our research and development efforts. We have taken decisive steps to address key risks in our business position. These include the measures noted above, reducing costs in our agricultural chemistry business and pursuing the evolution of our business to an emphasis on seeds and traits. We have also taken steps to reduce risk and stabilize our business position in Latin America. We remain focused on cost and cash management both to support the progress we have made in managing our investment in working capital - in particular, receivables and inventories - and to realize the full earnings potential of our businesses. We will continue to seek additional external financing opportunities for our customers. 43 MONSANTO COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) We implemented changes in how we approach our Argentina business that negatively impacted our sales and earnings in fiscal year 2003 and the first nine months of 2004 but are intended to stabilize our business position in this important agricultural market. The actions we have taken with our customers were designed to reduce risk and to balance earnings and cash during a particularly difficult economic period. We continue to follow through on business decisions made in recent years aimed at maintaining market leadership and restoring profitability in Argentina. Although economic and market uncertainties remain, we believe we are making progress. In addition, we continue to focus on reducing inventories and receivables in Argentina. Seeds and Genomics Monsanto has built a leading global position in seeds, and the successful integration of seed businesses acquired in the 1990s has allowed us to improve our seed portfolio. We continue to make improvements in our base seed business, as advanced breeding techniques combined with production practices and plant capital investments have significantly improved germplasm quality, yields and cost. The performance of Monsanto germplasm is reflected in market share gains for both our branded and licensed seed businesses. We also use our genetic material to develop new varieties for other seed companies' brands. Outstanding seed quality and leading germplasm provide a vehicle for introducing biotechnology seed traits, such as herbicide tolerance and insect protection. Biotechnology traits offer growers several benefits: lower costs, greater convenience and flexibility, higher yields, and the ability to adopt environmentally responsible practices such as conservation tillage and reduced pesticide use. We invest more than 80 percent of our R&D in the areas of seeds, genomics and biotechnology. These are the fastest-growing segments of the agriculture industry. By shifting our focus to create value for farmers in seeds and traits, we have set Monsanto on a path of sustainable growth, as we expect increasing gross profit from seeds and traits to more than offset a declining contribution from agricultural chemicals. At the same time, we expect to continue to reduce seed production costs through higher yields on seed production acres and careful management of our seed product portfolio. ROUNDUP and other glyphosate-based herbicides can be applied over the top of glyphosate-tolerant ROUNDUP READY crops, controlling weeds without injury to the crop. This integration of agricultural chemicals and enhanced seeds offers growers a cost-effective solution for weed control. To date, we have introduced ROUNDUP READY traits in soybeans, corn, canola and cotton. In addition, our insect-protection seed traits, such as YIELDGARD for corn and BOLLGARD and BOLLGARD II for cotton, serve as alternatives to certain chemical pesticides. Key near-term growth opportunities in seeds and traits include: o Continued growth in Monsanto's branded and licensed seed market shares, through successful breeding of high-performance germplasm and continuous improvement in the quality of our seeds; o Continued growth in licensing of seed germplasm and biotechnology traits to other seed companies through our Holden's/Corn States business and the newly established Cotton States business; and, o Expansion of existing traits, especially in corn, and stacking of additional traits in current biotechnology products. We can achieve continued growth through stacking and increased penetration of traits in approved markets. Trait stacking is a key growth driver in our seeds and traits business because it allows Monsanto to earn a greater share of the farmer's expenditures on each acre. Our past successes provide a significant competitive advantage in delivering stacked-trait products and improved, second-generation traits. Stacked-trait cotton overtook single-trait cotton products in Monsanto's product mix in 2003. We are seeing the same trend in our corn seed business, where higher-value, stacked-trait products represent a growing share of total seed sales. The EPA has granted Monsanto registration and we have obtained Japanese import approval for YIELDGARD Plus, YIELDGARD Corn Borer and YIELDGARD Rootworm stacked traits in corn, with ROUNDUP READY. We will be 44 MONSANTO COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) launching this product in the United States in fiscal year 2005. Another source of growth in the near term is the commercialization of second-generation traits, such as BOLLGARD II cotton. In addition to delivering new stacked-trait products and second-generation traits in the near term, we are working toward developing products to generate long-term growth. We believe our strategic head start in first- and second-generation input traits will give us a leadership position in developing output traits that provide consumer benefits and create value for the food industry. We are working to achieve greater acceptance and to secure additional approvals for our existing biotechnology products globally, and toward the development and timely commercialization of additional products in our pipeline. We are prioritizing our efforts to gain approvals for biotechnology crops, and while we continue to gain new approvals in global markets, we are pursuing strategies that enable growth even with delays in some global regulatory approvals. The Brazilian government passed a measure, which legalized the planting of ROUNDUP READY soybeans in Brazil for the 2003-2004 crop year. Although we expect this legislation to extend to the 2004-2005 crop year, the extension is not yet completed. Monsanto is working with the Brazilian grain industry to collect royalties for the use of our technology, as ROUNDUP READY grain is sold to grain handlers. We are continuing our efforts to obtain long-term approval for the planting of ROUNDUP READY soybeans in Brazil, and plan to continue to develop a royalty system, which matches the decisions made by the government of Brazil. More than 95 percent of the grain handlers in two southern Brazil states have signed contracts to collect this royalty upon the delivery and sale of the grain produced with ROUNDUP READY soybean technology. We have collected checks from grain handlers in these two southern states, however, after deducting expenses we expect the system to have a roughly neutral to negative effect on our earnings in fiscal year 2004. This same approach may also be applicable to other parts of Latin America. However, there is no certainty that royalties on ROUNDUP READY soybeans will be profitably collected in Brazil or other parts of Latin America. Additionally, Monsanto is pursuing approvals to enable the importation of corn and processed corn products that contain the ROUNDUP READY and YIELDGARD rootworm traits into Europe. Crop import restrictions in some key markets, most notably the European Union (EU), reduce potential expansion of current and future biotechnology crops in the United States and other markets where they are approved. The development of effective systems to enable farmers growing crops in the United States to sell into elevator systems that do not export to the EU, however, is mitigating the effect of these restrictions. We are committed to addressing concerns raised by consumers and by public interest groups and questions from government regulators regarding agricultural and food products developed through biotechnology. We also continue to address concerns about the adventitious or certain unintended trace presence of biotechnology materials in seed, grain or feed and food products. We are responding to the issue of adventitious presence in several ways. These include seeking sound, science-based rules and regulations that clarify and allow for trace amounts, and providing industry leadership to establish the highest standards of purity reasonably achievable and to establish global standards for quality. We are also working with the seed industry to develop strategies on production interventions that may reduce the likelihood of adventitious presence. Agricultural Productivity In recent years, we have seen reduced revenues and earnings from ROUNDUP herbicides, which reflect both the overall decline in the agricultural chemicals market and the expiration of U.S. patent protection for the active ingredient in ROUNDUP in 2000. By aligning our infrastructure and costs with our expectations for the glyphosate herbicide market, however, we believe the ROUNDUP franchise can continue to be a significant and sustainable source of cash and income generation for Monsanto, even in the face of increased competition. As expected, the market share and net average selling price of ROUNDUP herbicides in the United States have declined since the patent expired in 2000. Although prices may continue to decline in the future, we do not currently expect the decline in the future net average selling price to be as significant as it has been in recent years. We expect the net average selling price of ROUNDUP in the United States in fiscal 2005 to be generally consistent with the net average selling price for fiscal 2004. We also believe we will be able to maintain our leadership position and continue to generate cash from this business. In postpatent markets around the world, ROUNDUP has maintained a leading market position and a price premium compared with generics. We will continue to support the market leadership of ROUNDUP with product innovations, superior customer service 45 MONSANTO COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) and logistics, low-cost manufacturing, and further expansion of ROUNDUP READY crops and conservation tillage. We have several patents on our glyphosate formulations and manufacturing processes in the United States and in other countries. We continue to differentiate ROUNDUP with innovations using proprietary technology. We also provide more concentrated formulations that provide greater convenience for farmers while reducing production and logistics costs. We offer a variety of products to meet farmers' needs. The U.S. launch of premium ROUNDUP WEATHERMAX was followed by successful introduction of ROUNDUP ORIGINAL MAX, which offers key brand advantages versus imitator products at a very competitive price, for the 2004 growing season. Monsanto will support ROUNDUP through expansion of ROUNDUP READY crops and promotion of conservation tillage. Conservation tillage helps farmers reduce soil erosion by replacing plowing with the judicious use of herbicides to control weeds. Further penetration of ROUNDUP READY crops also enhances the market position of ROUNDUP as a brand-name product that farmers trust to avoid the risk of crop injury in over-the-top use on these crops. Monsanto maintains strong distribution relationships and a unique bulk tank system to support retailers. Monsanto remains the primary global producer of glyphosate, the active ingredient in ROUNDUP, with agreements to supply glyphosate to many of our competitors. Our high volume combined with patented process technology allows us to maintain low unit costs. We continue to reduce production costs, and we are also achieving reductions in working capital through careful management of inventories. Several years ago distribution channel inventories had increased significantly in the United States. However, ROUNDUP distribution inventory levels at the end of fiscal year 2003 were slightly down from levels at the end of fiscal year 2002. Distribution inventory levels as of May 31, 2004, continued to be flat compared to the same date in the prior year. Like most chemical herbicides, Monsanto's selective herbicides face declining markets and increasing competitive pressures, but they continue to complement our ability to offer fully integrated solutions, particularly in ROUNDUP READY corn. While rapid penetration of ROUNDUP READY corn in the United States has also had a negative effect on sales of Monsanto selective corn herbicides, increased gross profit from the ROUNDUP READY trait and the ROUNDUP used on these acres are significantly higher than the lost selective herbicide sales. Our lawn-and-garden herbicide business remains a strong cash generator and supports Monsanto's brand equity in the marketplace. Another key product in our Agricultural Productivity segment is POSILAC bovine somatotropin, which improves dairy cow productivity. The active ingredient for POSILAC is manufactured both at our new plant in Augusta, Georgia, and by Sandoz GmbH in Austria. Sandoz also manufactures the finished dose formulation of POSILAC, and will remain the sole supplier of the finished dose formulation until we obtain approval from the FDA to manufacture the finished dose formulation at Augusta. In second quarter of fiscal year 2004, we notified our customers that supplies of POSILAC would be temporarily limited while Sandoz completes necessary corrections and improvements at its facility in response to issues identified by the FDA. This limitation has temporarily reduced volumes of POSILAC available for sale and required us to allocate available supplies. The allocation is expected to have a material adverse effect on POSILAC revenues as long as it continues. Other Information As discussed in Part I. Item 1 - Note 14 - Commitments and Contingencies, Monsanto is involved in a number of lawsuits and claims relating to a variety of issues. Many of these lawsuits relate to intellectual property disputes. We expect that such disputes will continue to occur as the agricultural biotechnology industry evolves. For additional information on the outlook for Monsanto, see "Cautionary Statements: Risk Factors Regarding Forward-Looking Statements." 46 MONSANTO COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Critical Accounting Policies and Estimates In preparing our financial statements, we must select and apply various accounting policies. Our most significant policies are described in Note 2 - Significant Accounting Policies - to the consolidated financial statements contained in our report on Form 10-K for the transition period ended Aug. 31, 2003. In order to apply our accounting policies, we often need to make estimates based on judgments about future events. In making such estimates, we rely on historical experience, market and other conditions, and on assumptions that we believe to be reasonable. However, the estimation process is, by its nature, uncertain given that estimates depend on events over which we may not have control. If market and other conditions change from those that we anticipate, our financial condition, results of operations, or liquidity may be affected materially. In addition, if our assumptions change, we may need to revise our estimates, or take other corrective actions, either of which may have a material effect on our financial condition, results of operations, or liquidity. The estimates that have a higher degree of inherent uncertainty and require our most significant judgments are outlined in Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our report on Form 10-K for the transition period ended Aug. 31, 2003. During the second quarter of 2004, management evaluated those estimates and determined our critical accounting policies and estimates should be expanded to include litigation and other contingencies as discussed below. Had we used estimates different from any of those contained in such report on Form 10-K, our financial condition, profitability, or liquidity for the current period could have been materially different from those presented. Litigation and Other Contingencies: We are involved in various patent, product liability, consumer, commercial, environmental and other litigation, claims and legal proceedings, for example proceedings relating to Solutia's bankruptcy filing; environmental remediation; and government investigations. We routinely assess the likelihood of adverse judgments or outcomes to those matters, as well as ranges of probable losses, to the extent losses are reasonably estimable. We record accruals for such contingencies to the extent that we conclude their occurrence is probable and the financial impact, should an adverse outcome occur, is reasonably estimable. Disclosure for specific legal contingencies is provided if the likelihood of occurrence is at least reasonably possible and the exposure is considered material to the consolidated financial statements. In making determinations of likely outcomes of litigation matters, management considers many factors. These factors include, but are not limited to, past history, scientific and other evidence, and the specifics and status of each matter. If our assessment of the various factors changes, we may change our estimates. That may result in the recording of an accrual or a change in a previously recorded accrual. Predicting the outcome of claims and litigation, and estimating related costs and exposure involves substantial uncertainties that could cause actual costs to vary materially from estimates and accruals. New Accounting Standards In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46), and amended it by issuing FIN 46R in December 2003. FIN 46R addresses the consolidation of business enterprises to which the usual condition of consolidation (ownership of a majority voting interest) does not apply. This interpretation focuses on controlling financial interests that may be achieved through arrangements that do not involve voting interests. It concludes that, in the absence of clear control through voting interests, a company's exposure (variable interest) to the economic risks and potential rewards from the variable interest entity's assets and activities are the best evidence of control. If an enterprise holds a majority of the variable interests of an entity, it would be considered the primary beneficiary. The primary beneficiary is required to include the assets, liabilities and results of operations of the variable interest entity in its financial statements. Monsanto adopted the provisions of FIN 46R for the quarter ended Feb. 29, 2004, for interests in variable interest entities that are considered to be special-purpose entities. Monsanto has an arrangement with a special-purpose entity to provide a financing program for selected Monsanto customers. See Note 4 - Customer Financing Program - for a description of this arrangement. This special-purpose entity is consolidated. 47 MONSANTO COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) As of May 31, 2004, the company adopted the provisions of FIN 46R for all other types of variable interest entities. The company has evaluated its relationships with two entities and has determined that, although the entities are variable interest entities and Monsanto holds variable interests in the entities, these investments are not required to be consolidated in the company's financial statements pursuant to FIN 46R as Monsanto is not the primary beneficiary. One entity is a biotechnology company focused on plant gene research, development and commercialization, in which the company had a nine percent equity investment as of May 31, 2004. Monsanto currently has an agreement in place under which Monsanto makes payments for research services and receives rights to intellectual property developed within funded research. The entity reported total assets of $31 million and total liabilities of $13 million as of Dec. 31, 2003, and revenues of $20 million for the year ended Dec. 31, 2003. The second entity is a joint venture in which the company has a 49 percent equity investment. This joint venture packages and sells seeds, with a focus in corn and sunflower seeds, and also sells and distributes agricultural chemical products. The joint venture reported total assets of $24 million and total liabilities of $17 million as of Dec. 31, 2003, and revenues of $18 million for the year ended Dec. 31, 2003. As of May 31, 2004, Monsanto's total estimate of maximum exposure to loss as a result of its relationships with these entities is approximately $23 million, which represents Monsanto's equity investments in these entities. In January 2004, the FASB issued FASB Staff Position No. 106-1 (FSP 106-1), Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. FSP 106-1 permits a sponsor of a postretirement health care plan that provides a prescription drug benefit to make a one-time election to defer accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act), which was signed into law on Dec. 8, 2003. The Act introduced a prescription drug benefit under Medicare, as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare. These provisions of the new law will affect accounting measurements of our postretirement benefit obligation and expense. As permitted by FSP 106-1, we made a one-time election to defer accounting for the effect of the Act and, as a result, the amounts included in the consolidated financial statements related to our postretirement benefit plans do not reflect the effects of the Act. In May 2004, the FASB issued FSP No. 106-2 (FSP 106-2), which superseded FSP 106-1. FSP 106-2 provides authoritative guidance on the accounting for the federal subsidy and specifies the disclosure requirements for employers who have adopted FSP 106-2. Detailed regulations necessary to implement the Act have not been issued, including those that would specify the manner in which actuarial equivalency must be determined, the evidence required to demonstrate actuarial equivalency, and the documentation requirements necessary to be entitled to the subsidy. FSP 106-2 is effective for Monsanto's first quarter of fiscal year 2005. Monsanto is currently evaluating the effect that the adoption of FSP 106-2 will have on its results of operations and financial condition. Final authoritative guidance could require the company to change previously reported information. In December 2003, the FASB issued SFAS No. 132 (Revised 2003), Employers' Disclosures about Pensions and Other Postretirement Benefits, which enhanced the required disclosures about pension plans and other postretirement benefit plans, but did not change the measurement or recognition principles for those plans. The statement requires additional interim and annual disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. The required interim disclosures were effective for Monsanto in the third quarter of fiscal year 2004, and the required annual disclosures are effective for Monsanto's Form 10-K for the fiscal year ended Aug. 31, 2004. Refer to Note 9 - Postretirement Benefits - Pensions - for the required quarterly disclosures. In December 2003, the SEC issued SAB No. 104, Revenue Recognition (SAB 104). SAB 104 updates portions of the interpretive guidance included in Topic 13 of the codification of Staff Accounting Bulletins in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. The company believes it is following the guidance of SAB 104. In July 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations (SFAS 143). SFAS 143, which was effective for Monsanto on Jan. 1, 2003, addresses financial accounting for and reporting of costs and obligations associated with the retirement of tangible long-lived assets. Upon adopting this standard, in accordance with APB Opinion 20, we recorded an aftertax cumulative effect of accounting change of $12 million, or $0.05 per share. This noncash charge was recorded as of Jan. 1, 2003. In addition, as required by SFAS 143, as of Jan. 1, 2003, net 48 MONSANTO COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) property, plant and equipment increased by $10 million, and asset retirement obligations (a component of noncurrent liabilities) of $30 million were recorded. Adoption of this standard did not affect the company's liquidity. If SFAS 143 would have been effective for all periods presented, net earnings would have been reduced by $1 million for the nine months ended May 31, 2003, with no change to reported diluted earnings per share. In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146). SFAS 146 replaced EITF Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS 146 requires companies to recognize costs associated with exit or disposal activities when they are actually incurred, rather than on the date the company commits itself to the exit or disposal plan. This statement is effective for any exit or disposal activities initiated after Dec. 31, 2002. We are following the guidance of SFAS 146 for the fiscal year 2004 restructuring plan. Refer to Note 3 - Restructuring - for further details. The adoption of SFAS 146 had no effect on our 2002 and 2000 restructuring plans, which were both initiated prior to Dec. 31, 2002. Cautionary Statements: Risk Factors Regarding Forward-Looking Statements In this report, and from time to time throughout the year, we share our expectations for our company's future performance. These forward-looking statements represent our best estimates and expectations at the time that we make those statements. However, by their nature, these types of statements are uncertain and are not guarantees of our future performance. Many events beyond our control will determine whether our expectations will be realized. In the interests of our investors, and in accordance with the "safe harbor" provisions of the U.S Private Securities Litigation Reform Act of 1995, this section of our report explains some of the important reasons that actual results may be materially different from those that we anticipate. Our forward-looking statements include statements about: our business plans; the potential development, regulatory approval, and public acceptance of our products; our expected financial performance and the anticipated effect of our strategic actions; domestic or international economic, political and market conditions; and other factors that could affect our future operations or financial position. Any statements we make that are not matters of current reportage or historical fact should be considered forward-looking. Such statements often include words such as "believes," "expects," "anticipates," "intends," "plans," "estimates," "will," and similar expressions. Our forward-looking statements are current only as of the date of this report. Circumstances change constantly, often unpredictably, and investors should not place undue reliance on these statements. We disclaim any current intention to revise or update any forward-looking statements, or the factors that may affect their realization, whether in light of new information, future events or otherwise, and investors should not rely on us to do so. Competition for ROUNDUP Herbicides: We expect to face continued competition for our branded ROUNDUP herbicide product line. The extent to which we can realize cash and gross profit from these products will depend on our ability to predict and respond effectively to competitor pricing, to provide marketing programs meeting the needs of our customers and of the farmers who are our end-users, to maintain an efficient distribution system, to control manufacturing and marketing costs without adversely affecting sales, and to develop new formulations with features attractive to our end-users. Regulation and Public Acceptance of Seed Biotechnology: Regulatory and legislative requirements affect the testing and planting of seeds containing our biotechnology traits, and the import of crops grown from those seeds. Obtaining testing, planting and import approvals can be lengthy and costly, with no guarantee of success. Planting approvals may also include significant regulatory requirements that can limit our sales. Lack of approval to import crops containing biotechnology traits into key markets (particularly those influenced by the European Union) can affect sales of our traits, even in jurisdictions where planting has been approved. Legislation or regulation may also require the tracking of biotechnology products and the labeling of food or feed products with ingredients grown from seeds containing biotechnology traits. Such traceability and labeling requirements may cause food processors and food 49 MONSANTO COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) companies to avoid biotechnology and select non-biotechnology crop sources, which can affect grower seed purchase decisions and the sale of our products. Some opponents of the technology publicly express concern about potential effects of our biotechnology traits on other plants and on the environment, and about potential effects of crops containing these traits on animals and human health. Such concerns can affect government approvals and may adversely affect sales of our traits, even after approvals are granted. In addition, violent opponents of agricultural biotechnology have attacked facilities used by agricultural biotechnology companies, and may launch future violent attacks against our field testing sites, and research, production, or other facilities. Adventitious Presence of Biotechnology Traits: The detection of unintended but unavoidable trace amounts (sometimes called "adventitious presence") of commercial biotechnology traits in conventional (non-biotechnology) seed, or in the grain or products produced from seeds containing these traits, may negatively affect our business or results of operations. The detection of adventitious presence of traits not approved in the country where detected may result in the withdrawal of seed lots from sale, or in compliance actions such as crop destruction or product recalls. Some growers of organic and conventional crops have claimed that the adventitious presence of any biotechnology traits if present in their crops could cause them commercial harm. The potential for adventitious presence of biotechnology traits is a factor in general public acceptance of these traits. Concern about adventitious presence may possibly lead to increased regulation, which may include: requirements for labeling and traceability; liability transfer mechanisms such as financial protection such as insurance; and possible restrictions or moratoria on testing, planting or use of biotechnology traits. Regulation and Legislation Affecting Agricultural Products: In addition to regulation and legislation specifically affecting our seed biotechnology products, agricultural products and their manufacturers are subject to other government regulation, which affects our sales and profitability. These regulations affect the development, manufacture and distribution of our products, and non-compliance could affect our sales and profitability. Farm legislation encouraging or discouraging the planting of specific crops can affect our sales. In addition, claims that increased use of glyphosate herbicides increases the potential for the development of glyphosate-resistant weeds could result in restrictions on the use of glyphosate and of seeds containing our ROUNDUP READY traits, and thereby reduce our sales. Intellectual Property: Intellectual property rights are crucial to our business, and we endeavor to obtain and protect these rights in jurisdictions in which our products are produced or used, and in jurisdictions into which our products are imported. Intellectual property rights are particularly important with respect to our seeds and genomics segment. However, we may be unable to obtain protection for our intellectual property in key jurisdictions. Even if protection is obtained, competitors, growers, or others in the chain of commerce may illegally infringe on our rights, and such infringement may be difficult to prevent or detect. For example, the practice of saving seeds from non-hybrid crops (including, for example, soybeans, canola and cotton) containing our biotechnology may prevent us from realizing the full value of our intellectual property, particularly outside the United States. We must also protect our intellectual property against legal challenges by competitors. Efforts to protect our intellectual property rights against infringement and legal challenges can increase our costs, and will not always succeed. In addition, because of the rapid pace of technological change, and the confidentiality of patent applications in some jurisdictions, competitors may be issued patents from applications that were unknown to us prior to issuance. These patents could reduce the value of our commercial or pipeline products. Because of the rapid pace of change and the complexity of the legal and factual issues involved, we could unknowingly rely on key technologies that are or become patent-protected by others, which would require that we seek to obtain licenses or cease using the technology, no matter how valuable to our business. Research and Development: The continued development and commercialization of pipeline products is key to our growth. The ability to develop and bring new products to market, especially agricultural biotechnology products, requires adequately funded, efficient and successful research and development programs. Inadequate availability of funds, failure to focus R&D efforts efficiently, or lack of productivity in R&D, would hurt our future growth. Competition in Plant Biotechnology: Many companies engage in plant biotechnology research. Their success could render our existing products less competitive. In addition, a company's speed in getting its new product 50 MONSANTO COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) to market can be a significant competitive advantage. We expect to see more competition, from agricultural biotechnology firms and from major agrichemical, seed and food companies, some of which have substantially greater financial and marketing resources than we do. Weather, Natural Disasters and Accidents: Our sales and profitability are subject to significant risk from weather conditions and natural disasters that affect commodity prices, seed yields, and grower decisions about purchases of our products. Weather conditions also affect the quality, cost and volumes of the seed that we are able to produce and sell. Natural disasters or industrial accidents could also affect our own manufacturing facilities, our major suppliers, or our major customers. Manufacturing: Because we use hazardous and other regulated materials in our product development programs and chemical manufacturing processes, we are subject to risks of accidental environmental contamination, and therefore to potential personal injury claims and fines. We are also subject to regulation of air emissions, waste water discharges and solid waste. Compliance may be costly, and failure to comply may result in penalties and remediation obligations. In addition, lapses in quality or other manufacturing controls could affect our sales and result in claims for defective products. Short-Term Financing: We regularly extend credit to our customers in certain areas of the world so that they can buy agricultural products at the beginning of their growing seasons. Because of these credit practices and the seasonality of our sales, we may need to issue short-term debt at certain times of the year to fund our cash flow requirements. The amount of short-term debt will be greater to the extent that we are unable to collect customer receivables when due, to repatriate funds from ex-U.S. operations, and to manage our costs and expenses. Any downgrade in our credit rating, or other limitation on our access to short-term financing or refinancing, would increase our interest cost and adversely affect our profitability. Litigation and Contingencies: We are involved in major lawsuits concerning contracts, intellectual property, biotechnology, antitrust allegations, and other matters. Adverse outcomes could subject us to substantial damages or limit our ability to sell our products. In addition, in connection with the separation of our businesses from those of Pharmacia on Sept. 1, 2000, we were required to indemnify Pharmacia for Solutia's Assumed Liabilities, to the extent that Solutia fails to pay, perform or discharge those liabilities. Solutia has filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code, and is seeking relief from paying certain liabilities, including Solutia's Assumed Liabilities. Both prior to and since its Chapter 11 filing, Solutia has failed to perform obligations relating to some of Solutia's Assumed Liabilities including repudiating its obligation to defend certain litigation proceedings and refusing to perform certain of its environmental obligations. In order to protect its and Pharmacia's interest, Monsanto has advanced, and expects to advance in the future, funds to pay for some of Solutia's Assumed Liabilities, in light of Solutia's refusal to pay for those liabilities, and for legal and other expenses related to Solutia's bankruptcy. If Solutia is discharged from all or a portion of these liabilities and obligations in its Chapter 11 proceeding, Monsanto may be required to indemnify Pharmacia for all or a portion of them. It is reasonably possible that such advancement of funds and/or obligation to indemnify Pharmacia will result in a material adverse effect on Monsanto's financial position, profitability and/or liquidity. Additional information about our relationship with Solutia and risks related to Solutia may be found in Part I. Item 1 - Note 14 - Commitments and Contingencies and in other sections of this report. Product Distribution: To market our products successfully, we must estimate growers' future needs, and match our production and the level of product at our distributors to those needs. However, growers' decisions are affected by market and economic conditions that are not known in advance. Failure to provide distributors with enough inventory of our products will reduce our current sales. However, high product inventory levels at our distributors may reduce sales in future periods, as those distributor inventories are worked down. Large distributor inventories also diminish our ability to react to changes in the market, and increase the risk of obsolescence and seed returns. In addition, inadequate distributor liquidity could affect distributors' ability to pay for our products. Cost Management: In October 2003, we announced strategic initiatives that include cost reductions in our ROUNDUP business. Inability to implement these cost reductions while maintaining sales, or unanticipated increases in our costs, could reduce our profitability. 51 MONSANTO COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Commodity Prices: Fluctuations in commodity prices can affect our costs and our sales. We purchase our seed inventories from production growers at market prices, and retain the seed in inventory until it is sold. We use hedging strategies to mitigate the risk of changes in these prices. In addition, the prices of our seeds and traits could be affected by commodity prices. Farmers' income, and therefore their ability to purchase our herbicides, seeds and traits, is also affected by commodity prices. Accounting Policies and Estimates: Changes to our accounting policies could affect future results. In addition, changes to generally accepted accounting principles could require adjustments to financial statements for prior periods and changes to our policies for future periods. In addition, if actual experience differs from the estimates, judgments and assumptions that we used in order to prepare our financial statements, adjustments will need to be made in future periods, which may affect revenues and profitability. Finally, changes in our business practices may result in changes to the way we account for transactions, and may affect comparability between periods. Operations Outside the United States: Sales outside the United States represent more than 40 percent of our revenues. In addition, we engage in manufacturing, seed production, sales, and/or research and development in many parts of the world. Although we have operations in virtually every region, our ex-U.S. sales are principally to external customers in Argentina, Brazil, Canada, France and Mexico. Accordingly, developments in those parts of the world generally have a more significant effect on our operations than developments in other places. Operations outside the United States are subject to special risks and limitations, including: fluctuations in currency values and foreign-currency exchange rates; exchange control regulations; changes in local political or economic conditions; import and trade restrictions; import or export licensing requirements and trade policy; restrictions on the ability to repatriate funds; and other potentially detrimental domestic and foreign governmental practices or policies affecting U.S. companies doing business abroad. Acts of terror or war may impair our ability to operate in particular countries or regions, and may impede the flow of goods and services between countries. Customers in weakened economies may be unable to purchase our products, or we may be unable to collect receivables; and imported products could become more expensive for customers to purchase in their local currency. Changes in exchange rates may affect our earnings, the book value of our assets outside the United States, and our equity. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There are no material changes related to market risk from the disclosures in Monsanto's report on Form 10-K for the transition period ended Aug. 31, 2003. Item 4. CONTROLS AND PROCEDURES We maintain a comprehensive set of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (Exchange Act)) designed to ensure that information required to be disclosed in our filings under the Exchange Act is recorded, processed, summarized and reported accurately and within the time periods specified in the SEC's rules and forms. As of May 31, 2004 (the Evaluation Date), an evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, the design and operation of these disclosure controls and procedures were effective to provide reasonable assurance of the achievement of the objectives described above. During the quarter that ended on the Evaluation Date, there was no change in internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting. 52 PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS This portion of the report on Form 10-Q describes material legal proceedings that we are defending or prosecuting. These include proceedings to which we are party in our own name, as well as proceedings to which Pharmacia is a named party, but for which we have assumed responsibility pursuant to the Separation Agreement between Monsanto and Pharmacia, effective Sept. 1, 2000, as amended (Separation Agreement). Under that agreement, we assumed responsibility for, among other things described below, legal proceedings primarily related to the agricultural business that Pharmacia transferred to us on that date. As a result, although Pharmacia may remain the defendant or plaintiff in some of these cases, we manage and are responsible for the litigation. In the following discussion, we may use the phrase "the former Monsanto Company" to refer to Pharmacia prior to the date of the Separation Agreement. As required by the Separation Agreement, in the proceedings primarily related to the agricultural business that Pharmacia transferred to us where Pharmacia is the defendant, we will indemnify Pharmacia for costs, expenses and any judgments or settlements; and in such proceedings where Pharmacia is the plaintiff, we will pay the fees and costs of, and receive any benefits from, the litigation. We are also defending or prosecuting other legal proceedings, not described in this section, which arise in the ordinary course of our business. Pursuant to the Separation Agreement, we were also required to indemnify Pharmacia for liabilities that Solutia assumed from Pharmacia under a Distribution Agreement entered into between those companies in connection with the spinoff of Solutia on Sept. 1, 1997, as amended (Distribution Agreement), to the extent that Solutia fails to pay, perform or discharge those liabilities. Those liabilities remain the present responsibility of Pharmacia. In general, this indemnification obligation applies to Pharmacia liabilities that were assumed by Solutia, pursuant to the Distribution Agreement, and which Pharmacia would otherwise be required to pay. The liabilities that Solutia assumed from Pharmacia are referred to as "Solutia's Assumed Liabilities." Solutia's Assumed Liabilities may include, among others, litigation, environmental remediation, and certain retiree liabilities relating to individuals who were employed by Pharmacia prior to the Solutia spinoff. On Dec. 17, 2003, Solutia and 14 of its U.S. subsidiaries filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York (Bankruptcy Court). In the Chapter 11 proceeding, Solutia is seeking relief from paying certain liabilities, including some or all of Solutia's Assumed Liabilities. On Feb. 17, 2004, Solutia notified Pharmacia and Monsanto that it was disclaiming its obligation to defend litigation that Solutia had been managing, pursuant to powers of attorney granted by Pharmacia and by Monsanto under the Distribution Agreement, and to accept new cases relating to Solutia's Assumed Liabilities. We believe Solutia remains obligated to continue to defend such litigation unless and until discharged from such obligations by the Bankruptcy Court. However, in order to protect our interests and those of Pharmacia while that issue is resolved, we have assumed, on an interim basis, the management of that litigation for which Solutia has disclaimed responsibility. To the extent additional such matters arise in the future, we may also assume management of those matters for purposes of defense and resolution. We are advancing and expect to continue to advance funds for the defense, performance or disposition of these matters and will pursue recovery of our expenses from Solutia in the Chapter 11 proceeding. For additional information, see Part I. Item 1 - Note 14 - Commitments and Contingencies and Part II. Item 5 - Other Information - Relationships Among Monsanto Company, Pharmacia Corporation and Solutia Inc. While the results of litigation cannot be predicted with certainty, we do not believe that the resolution of the proceedings that we are defending or prosecuting, excluding litigation relating to Solutia's Assumed Liabilities, either individually or taken as a whole, will have a material adverse effect on our financial position, profitability and/or liquidity. As discussed in Part I. Item 1 - Note 14, it is reasonably possible that the resolution of Solutia's bankruptcy proceeding, including the allocation of responsibility for the litigation relating to Solutia's Assumed Liabilities, could have a material effect on our financial position, profitability and/or liquidity. We have meritorious legal arguments and will continue to represent our interests vigorously in all of the proceedings that we are defending or prosecuting, including those related to Solutia's Assumed Liabilities. The following discussion provides new and updated information regarding certain proceedings to which Pharmacia or Monsanto is a party and 53 for which we are responsible and proceedings that we are managing related to Solutia's Assumed Liabilities. Other information with respect to legal proceedings appears in our report on Form 10-K for the transition period ended Aug. 31, 2003, and in our reports on Form 10-Q for the quarterly periods ended Nov. 30, 2003, and Feb. 29, 2004. Patent and Commercial Proceedings The following updates the proceedings involving Mycogen Plant Science Inc. (Mycogen Plant Science), now part of Dow AgroSciences LLC, a subsidiary of The Dow Chemical Company: o As described in our report on Form 10-K for the transition period ended Aug. 31, 2003, as updated in our report on Form 10-Q for the quarterly period ended Feb. 29, 2004, on May 19, 1995, Mycogen Plant Science filed suit against the former Monsanto Company in the U.S. District Court in California alleging infringement of its patent involving synthetic Bt genes, and seeking unspecified damages and injunctive relief, which we refer to as the "Synthetic Bt case." Monsanto prevailed on summary judgment in dismissing all claims. On May 10, 2004, Mycogen Plant Science dismissed with prejudice its lawsuit against the former Monsanto Company. As part of that dismissal, Mycogen Plant Science was required to agree not to sue Monsanto, its affiliates, or its sublicensees under the patent at issue for all of Monsanto's current commercial and pipeline products. o As described in our report on Form 10-K for the transition period ended Aug. 31, 2003, as updated in our report on Form 10-Q for the quarterly period ended Feb. 29, 2004, Monsanto was also involved in interference proceedings against Mycogen Plant Science in the U.S. Patent and Trademark Office to determine the first party to invent certain technology related to the synthetic Bt technology at issue in the California case. Under U.S. law, patents are issued to the first to invent, not the first to file for a patent on, a subject invention. If two or more parties seek patent protection on the same invention, as is the case with our synthetic Bt technology, the U.S. Patent and Trademark Office may hold interference proceedings to identify the party who first invented the particular invention in dispute. In prior litigation between the parties Monsanto has been determined to be the prior inventor of patent claims associated with synthetic Bt technology. On Jan. 29, 2004, the Board of Patent Appeals determined that Monsanto scientists were the first to invent synthetic Bt genes for expression in plants. As a result of this decision, we expect that Monsanto's scientists will receive a patent covering this technology. On March 29, 2004, Mycogen Plant Science filed with the U.S. District Court for the Southern District of Indiana an appeal from the decision of the Board of Patent Appeals in which it seeks to have the decision of the Board of Patent Appeals reversed. On June 15, 2004, the District Court denied Monsanto's motion to transfer Mycogen Plant Science's appeal to the U.S. District Court in California in which the Synthetic Bt case was pending prior to its dismissal by Mycogen Plant Science. The following updates a proceeding involving Bayer CropScience AG (formerly Aventis CropScience S.A., previously Rhone Poulenc Agrochimie S.A.) (Bayer CropScience), a subsidiary of Bayer AG, and its affiliates: o As described in our report on Form 10-K for the transition period ended Aug. 31, 2003, as updated in our reports on Form 10-Q for the quarterly periods ended Nov. 30, 2003, and Feb. 29, 2004, on Dec. 4, 2000, in view of threats of patent infringement made by Bayer CropScience against Monsanto's licensees for its YIELDGARD corn, Monsanto filed suit in the U.S. District Court for the Eastern District of Missouri for a declaratory judgment against Bayer CropScience to invalidate four patents that had been assigned to Bayer CropScience by Plant Genetics Systems, N.V. Monsanto successfully maintained that the patents, which involve claims to truncated Bt technology, were invalid and not infringed by MON810 in YIELDGARD corn. Bayer CropScience counterclaimed to request royalties for prior sales of YIELDGARD corn and injunctive relief. On Dec. 27, 2002, Monsanto's motion for summary judgment was granted. Bayer CropScience appealed the District Court's judgment to the U.S. Court of Appeals for the Federal Circuit. On Nov. 14, 2003, in light of its finding of inequitable conduct against Bayer CropScience, the District Court ordered Bayer CropScience to pay Monsanto $4.78 million in attorneys' fees and costs. On March 30, 2004, the Federal Circuit determined that possible contested issues of fact exist that made summary judgment inappropriate and reversed the District Court's decision. On June 22, 2004, Bayer CropScience dismissed with prejudice its claims on three of the four patents in dispute. As part of that dismissal, Bayer CropScience agreed not to sue 54 Monsanto, its affiliates or its sublicensees under those patents for any of Monsanto's current commercial products. Monsanto intends to seek recovery from Bayer CropScience of its attorneys' fees involved in defending against the claims Bayer CropScience is dismissing and to assert defenses, including non-infringement and invalidity of the remaining patent in the litigation. The following proceedings involve affiliates of Syngenta AG (Syngenta): o On May 10, 2004, Monsanto filed suit against Syngenta Seeds, Inc. (Syngenta Seeds) in the Circuit Court of St. Louis County, Missouri, for declaratory judgment seeking a determination that, under its license from Monsanto for ROUNDUP READY soy, Syngenta Seeds is limited to commercializing its ROUNDUP READY soy under one product brand. On May 19, 2004, in response to Monsanto's lawsuit, Syngenta Seeds filed a lawsuit in the District Court for Hennepin County, Minnesota seeking an injunction against Monsanto and a determination that it could commercialize ROUNDUP READY soy under a second brand. On June 2, 2004, the District Court denied Syngenta Seeds' request for a temporary injunction and granted Monsanto's motion to stay the Minnesota case in deference to the St. Louis litigation, which will determine the respective rights of the parties. o Syngenta has also announced that it acquired certain rights to a glyphosate tolerant corn product, known as GA21 corn and that it intended to commercialize GA21 corn in the United States in 2005. Monsanto, however, has various patent rights that cover GA21 corn, to which Syngenta holds no license. To protect Monsanto's intellectual property rights, on May 12, 2004, Monsanto filed suit against Syngenta Seeds, Inc. and Syngenta Biotechnology, Inc. in the U. S. District Court for the District of Delaware alleging infringement of one of Monsanto's patents involving glyphosate tolerant crops. Monsanto is seeking an injunction against Syngenta's sale of GA21 corn and damages for willful infringement of our patent. As described in our report on Form 10-Q for the period ended Feb. 29, 2004, on July 10, 2003, PT Panen Buah Emas (Emas) commenced proceedings in the South Jakarta District Court against Monsanto and two of its Indonesian affiliates regarding an alleged wrongful termination of a Cotton Processing Agreement (CPA) between one of the affiliates and Emas. The CPA contains an arbitration clause prescribing exclusive dispute resolution by arbitration in Singapore. Monsanto and its affiliates believe such clause should be dispositive but were not successful in their challenge to the jurisdiction of the South Jakarta District Court. On June 6, 2004, the South Jakarta District Court awarded Emas $8.4 million in damages. Monsanto and its affiliates have appealed the decision, including the damage award. Grower Lawsuits As described in our report on Form 10-K for the transition period ended Aug. 31, 2003, as updated in our reports on Form 10-Q for the quarterly periods ended Nov. 30, 2003, and Feb. 29, 2004, two purported class action lawsuits by farmers, concerning our biotechnology trait products have been consolidated in the U.S. District Court for the Eastern District of Missouri. The suits were initially filed against the former Monsanto Company by two groups of farmers: one on Dec. 14, 1999, in the U.S. District Court for the District of Columbia; and the other on Feb. 14, 2002, in the U.S. District Court for the Southern District of Illinois. In March 2001, plaintiffs amended their complaint to add Pioneer Hi-Bred International, Inc., Syngenta Seeds, Syngenta Crop Protection Inc., and Bayer CropScience as defendants. The complaints included both tort and antitrust allegations. The tort claims included alleged violations of unspecified international laws through patent license agreements, alleged breaches of an implied warranty of merchantability, and alleged violations of unspecified consumer fraud and deceptive business practices laws, all in connection with the sale of genetically modified seed. The antitrust claims included allegations of violations of various antitrust laws, including allegations of a conspiracy among defendants to fix seed prices in the United States in violation of federal antitrust laws. Plaintiffs sought declaratory and injunctive relief in addition to antitrust, treble, compensatory and punitive damages and attorneys' fees. On Sept. 22, 2003, the District Court granted Monsanto's motion for summary judgment on all tort claims and denied plaintiffs' motion to allow the tort claims to proceed as a class action. On Sept. 30, 2003, the District Court for the Eastern District of Missouri denied plaintiffs' motion to allow their antitrust claims to proceed as a class action. On Dec. 16, 2003, the U.S. Court of Appeals for the Eighth Circuit granted plaintiffs' request for immediate appellate review of the District Court's decision denying class 55 certification of their antitrust claims. In addition to this action, starting the week of March 7, 2004, individual plaintiffs filed essentially identical purported class actions, on behalf of direct and indirect purchasers in 16 different state courts essentially realleging claims set forth in the Federal Cases. Proceedings Related to Delta and Pine Land Company As described in our report on Form 10-K for the transition period ended Aug. 31, 2003, on Jan. 18, 2000, Delta and Pine Land Company (Delta and Pine Land) reinstituted a suit against the former Monsanto Company in the Circuit Court of the First Judicial District of Bolivar County, Mississippi, seeking unspecified compensatory damages for lost stock market value of not less than $1 billion, as well as punitive damages, resulting from alleged failure to exercise reasonable efforts to complete a merger between the two companies. The amended complaint alleges that the former Monsanto Company tortiously interfered with Delta and Pine Land's prospective business relations by feigning interest in the merger so as to keep Delta and Pine Land from pursuing transactions with other entities. On Sept. 9, 2003, the Court granted Monsanto's motion to file a counterclaim seeking to set aside the merger agreement on the basis of Delta and Pine Land's fraudulent nondisclosure of material information, and substantial damages including recoupment of the $83 million breakup fee previously paid to Delta and Pine Land. While it considers certain motions of the parties, including a motion for partial summary judgment filed by Monsanto, the Court has suspended all deadlines in the case and indicated that it will hold a new scheduling conference in the future. No trial date has been set. On May 20, 2004, Monsanto filed a request with the American Arbitration Association for arbitration and a determination that Monsanto has the right to terminate the 1996 U.S. licensing agreements that provided Delta and Pine Land with access to Monsanto's BOLLGARD insect-protected cotton and ROUNDUP READY herbicide-tolerant technologies for cotton. Monsanto believes Delta and Pine Land has violated its duties to, and its contracts with, Monsanto in a variety of ways including: (i) failing to calculate, collect and ensure that Monsanto was paid all royalty amounts due under the agreements; (ii) breaching its fiduciary duty to Monsanto as the managing agent of D&M Partners by neglecting to properly collect and allocate the income of D&M Partners; and (iii) misusing Monsanto's intellectual property by inappropriately providing Monsanto technology to an unlicensed party. Agent Orange As described in our report on Form 10-K for the transition period ended Aug. 31, 2003, certain Korean veterans of the Vietnam War have filed suit in Seoul, South Korea, against The Dow Chemical Company and the former Monsanto Company. Plaintiffs allege that they were exposed to herbicides, and that they suffered injuries or their children suffered birth defects as a result. Three separate complaints filed in October 1999 are being handled collectively and currently involve approximately 16,700 plaintiffs. The complaints fail to assert any specific causes of action but seek damages of 300 million won (approximately US$260,000) per plaintiff. On May 23, 2002, the Seoul District Court ruled in favor of the manufacturers and dismissed all claims of the plaintiffs on the basis of lack of causation and statutes of limitations. Plaintiffs have filed an appeal de novo with the Seoul High Court and the parties have engaged in the briefing process required by that Court. The Seoul High Court has held three preparatory hearings to address issues on the appeal and has indicated that it will hold a formal hearing on the appeal on Oct. 4, 2004. Other ancillary actions are also pending in Korea, including a request for provisional relief pending resolution of the main action. Pension Plan On June 23, 2004, two former employees of Monsanto and Pharmacia filed a purported class action lawsuit in the U.S. District Court for the Southern District of Illinois against Monsanto and the Monsanto Company Pension Plan, which we refer to as the "Plan." The suit claims that the Plan underpaid certain benefits and violated federal law against age discrimination from Jan. 1, 1997 (when the Plan was sponsored by Pharmacia, then known as Monsanto Company) and continuing to the present. On July 13, 2004, Monsanto tendered defense of this suit to Pharmacia pursuant to the terms of the Separation Agreement and demanded that (a) Pharmacia defend Monsanto or pay Monsanto's costs of defense, and (b) indemnify Monsanto for any liabilities arising from the lawsuit. 56 Litigation Relating to Solutia's Assumed Liabilities As described above, Solutia managed and directed the defense of litigation with respect to Solutia's Assumed Liabilities until approximately Feb. 17, 2004, when Solutia notified Pharmacia and Monsanto of its intention to cease or suspend performance. In order to protect the interests of Pharmacia and Monsanto, we have assumed management of these matters on an interim basis or until resolution of Solutia's Chapter 11 proceeding. As we are now managing litigation relating to Solutia's Assumed Liabilities, a description of material proceedings relating to those liabilities is included in this portion of this report on Form 10-Q. The following updates the proceedings that have alleged damages arising from exposure to polychlorinated biphenyls (PCBs), which were discharged from an Anniston, Alabama, plant site that was formerly owned by Pharmacia and that was transferred to Solutia as part of the spinoff of Solutia from Pharmacia: o Other Anniston Cases: As described in our report on Form 10-Q for the quarterly period ended Feb. 29, 2004, after the global settlement of the multiplaintiff cases known as Abernathy and Tolbert, 12 cases remained pending in various Circuit Courts in the state of Alabama. Three additional cases brought by three pro se plaintiffs have been filed with various courts, but have not been served on any defendants. On March 15, 2004, Monsanto, on behalf of Pharmacia removed all but one of those to the United States District Court for the Northern District of Alabama. Monsanto has moved to consolidate all the removed cases before the same court in which the Tolbert matter remains pending for administrative purposes. Two of the removed cases have been remanded to state court. Decisions on the remaining cases that Monsanto removed remain pending. As described in our report on Form 10-Q for the quarterly period ended Feb. 29, 2004, there are currently pending in Mississippi 14 PCB cases, which were originally filed in state courts in Copiah County and Hinds County, Mississippi on behalf of a total of 785 plaintiffs. The plaintiffs are either present or former employees of a transformer manufacturing facility owned by Kuhlman Electric Corporation located in Crystal Springs, Mississippi or present or former residents of the Crystal Springs community. The cases assert various negligence and product liability claims and seek damages for personal injury and/or property damage caused by exposure to PCBs. The plaintiffs seek to recover both compensatory and punitive damages in unspecified amounts. The plaintiffs in these cases name as defendants in various combinations Solutia, Inc., Monsanto Company and/or Pharmacia. On Feb. 20, 2003, Feb. 24, 2003, and June 4, 2004, Monsanto and/or Monsanto on behalf of Pharmacia, removed these cases to the United States District Court for the Southern District of Mississippi. Motions to remand have been filed in 13 of the 14 cases. In addition, on Dec. 30, 2002, a wrongful death case was filed against Monsanto Company in the Circuit Court of Hinds County on behalf of three wrongful death beneficiaries for damages allegedly arising from their decedent's exposure to PCBs in the course of his work as an electrician in the Ingall's shipyard in Pascagoula, Mississippi. Pharmacia is not named as defendant in this suit. The case was removed to federal court and a motion to remand was recently denied by the federal court. 57 Item 2. SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES The following table includes all issuer repurchases, including those made pursuant to publicly announced plans or programs and those not made pursuant to publicly announced plans or programs.
----------------------------------------------------------------------------------------------------------- (c) Total Number of Shares (d) Approximate Dollar (a) Total (b) Purchased as Part Value of Shares that number of Average of Publicly May Yet Be Purchased Shares Price Paid Announced Plans Under the Plans Period Purchased per Share or Programs or Programs ----------------------------------------------------------------------------------------------------------- March 2004: 791,700 $33.21 791,700 $367,365,481 (March 1, 2004 through March 31, 2004) ----------------------------------------------------------------------------------------------------------- April 2004: (April 1, 2004 through April 30, 2004) -- -- -- $367,365,481 ----------------------------------------------------------------------------------------------------------- May 2004: (May 1, 2004 through May 31, 2004) 487(1) 34.07 -- $367,365,481 ----------------------------------------------------------------------------------------------------------- Total 792,187 $33.23 791,700 $367,365,481 -----------------------------------------------------------------------------------------------------------
(1) Represents total number of restricted shares withheld to cover the withholding taxes upon the vesting of restricted stock. On July 31, 2003, the Executive Committee of the board of directors authorized the purchase of up to $500 million of the company's common stock over a three-year period. The plan expires on July 30, 2006. There were no other publicly announced plans outstanding as of May 31, 2004. Item 5. OTHER INFORMATION (a) Relationships Among Monsanto Company, Pharmacia Corporation and Solutia Inc. Prior to Sept. 1, 1997, a corporation that was then known as Monsanto Company (Former Monsanto) operated an agricultural products business (the Ag Business), a pharmaceuticals and nutrition business (the Pharmaceuticals Business) and a chemical products business (the Chemicals Business). Former Monsanto is today known as Pharmacia Corporation (Pharmacia). Pharmacia is now a wholly owned subsidiary of Pfizer Inc. (Pfizer), which together with its subsidiaries operates the Pharmaceuticals Business. Our business consists of the operations, assets and liabilities that were previously the Ag Business. Solutia Inc. (Solutia) comprises the operations, assets and liabilities that were previously the Chemicals Business. The following table sets forth a chronology of events that resulted in the formation of Monsanto, Pharmacia and Solutia as three separate and distinct corporations, and provides a brief background on the relationships among these three corporations. 58
-------------------- -------------------------------------------------------------------------------- Date of Event Description of Event -------------------- -------------------------------------------------------------------------------- Sept. 1, 1997 o Pharmacia (then known as Monsanto Company) entered into a Distribution Agreement with Solutia related to the transfer of the operations, assets and liabilities of the Chemicals Business from Pharmacia (then known as Monsanto Company) to Solutia. o Pursuant to the Distribution Agreement, Solutia assumed and agreed to indemnify Pharmacia (then known as Monsanto Company) for certain liabilities related to the Chemicals Business. -------------------- -------------------------------------------------------------------------------- Dec. 19, 1999 o Pharmacia (then known as Monsanto Company) entered into an agreement with Pharmacia & Upjohn, Inc. (PNU) relating to a merger (the Merger). -------------------- -------------------------------------------------------------------------------- Feb. 9, 2000 o We were incorporated in Delaware as a wholly owned subsidiary of Pharmacia (then known as Monsanto Company) under the name "Monsanto Ag Company." -------------------- -------------------------------------------------------------------------------- Mar. 31, 2000 o Effective date of the Merger. o In connection with the Merger, (1) PNU became a wholly owned subsidiary of Pharmacia (then known as Monsanto Company); (2) Pharmacia (then known as Monsanto Company) changed its name from "Monsanto Company" to "Pharmacia Corporation"; and (3) we changed our name from "Monsanto Ag Company" to "Monsanto Company." -------------------- -------------------------------------------------------------------------------- Sept. 1, 2000 o We entered into a Separation Agreement with Pharmacia related to the transfer of the operations, assets and liabilities of the Ag Business from Pharmacia to us. o Pursuant to the Separation Agreement, we were required to indemnify Pharmacia for any liabilities primarily related to the Ag Business or the Chemicals Business, and for liabilities assumed by Solutia pursuant to the Sept. 1, 1997, Distribution Agreement, to the extent that Solutia fails to pay, perform or discharge those liabilities. -------------------- -------------------------------------------------------------------------------- Oct. 23, 2000 o We completed an initial public offering in which we sold approximately 15 percent of the shares of our common stock to the public. Pharmacia continued to own 220 million shares of our common stock. -------------------- -------------------------------------------------------------------------------- July 1, 2002 o Pharmacia, Solutia and we amended the Sept. 1, 1997, Distribution Agreement, to provide that Solutia will indemnify us for the same liabilities for which it had agreed to indemnify Pharmacia, and to clarify the parties' rights and obligations. o Pharmacia and we amended the Sept. 1, 2000, Separation Agreement, to clarify our respective rights and obligations relating to our indemnification obligations. -------------------- -------------------------------------------------------------------------------- Aug. 13, 2002 o Pharmacia distributed the 220 million shares of our common stock that it owned to its shareowners via a tax-free stock dividend (the Monsanto Spinoff). o As a result of the Monsanto Spinoff, Pharmacia no longer owns any equity interest in Monsanto. -------------------- -------------------------------------------------------------------------------- Apr. 16, 2003 o Pursuant to a merger transaction, Pharmacia became a wholly owned subsidiary of Pfizer -------------------- -------------------------------------------------------------------------------- Dec. 17, 2003 o Solutia and 14 of its U.S. subsidiaries filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. -------------------- --------------------------------------------------------------------------------
Part I. Item 1 - Note 14 - Commitments and Contingencies, includes further information regarding Solutia's bankruptcy, the related reasonable possibility of a material adverse effect on our financial position, profitability and/or liquidity, and other arrangements between Monsanto and Solutia. Part II. Item 1 - Legal Proceedings includes information concerning litigation matters that Monsanto is managing pursuant to its obligation under the Sept. 1, 2000 Separation Agreement to indemnify Pharmacia. (b) Procedures by which Shareowners may Recommend Director Nominees to the Board During the third quarter of fiscal 2004, the Nominating and Corporate Governance Committee of the Board of Directors (the "Committee") adopted the Board of Directors Candidate Nomination Policy. In accordance with this Policy, the Committee, which is responsible for identifying any need to add an additional member to the Board, will consider candidates recommended by shareowners. Shareowners may recommend a director candidate by writing to the Company Secretary or the Chairman. In order to be considered by the Committee, the recommendation must include the following information: o The director candidate's name and business address, 59 o A resume or curriculum vitae describing the director candidate's qualifications, which clearly addresses the desirable characteristics reflected on Attachment B to the Board of Directors' Charter and Corporate Governance Guidelines, o Whether, during the past ten years, the director candidate has been convicted in a criminal proceeding (excluding traffic violations) and, if so, the dates, the nature of the conviction, the name or other disposition of the case, and whether the individual has been involved in any other legal proceeding during the past five years, o A statement from the director candidate that he or she consents to serve on the Board if elected, and o A statement from the person submitting the director candidate that he or she is the registered holder of shares of Monsanto, or if the shareowner is not the registered holder, a written statement from the "record" holder of the shares (usually a broker or bank) verifying that at the time the shareowner submitted the director candidate that he or she was a shareowner. All director candidates nominated by a shareowner pursuant to the foregoing requirements will be submitted to the Committee for its review and may be accompanied by an analysis of such director candidate from the Company's management. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (A) Exhibits: See Exhibit Index (B) Reports on Form 8-K: Date Filed or Furnished Item No. Description - ------------- ------- ----------- April 5, 2004 Item 12 The company furnished a report on Form 8-K (Item 12), providing: (i) a press release announcing Monsanto Company's financial and operating results for the period ended Feb. 29, 2004; (ii) second quarter fiscal year 2004 unaudited supplemental data; and (iii) a slide presentation which accompanied the company's webcast financial results conference call held on March 31, 2004. 60 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MONSANTO COMPANY (Registrant) /S/ Richard B. Clark ---------------------------------------------- RICHARD B. CLARK Vice President and Controller (On behalf of the Registrant and as Principal Accounting Officer) Date: July 14, 2004 61 EXHIBIT INDEX Exhibit Number Description - ------- ----------- 2 Omitted 3.2 Amended and Restated By-Laws of the Company amended May 4, 2004 4 Omitted 10.14 $1,000,000,000 Five Year Credit Agreement dated June 4, 2004 10.16.2 Form of Non-Employee Director Restricted Share Grant Terms and Conditions Under the Monsanto Company Long-Term Incentive Plan, approved by the Board of Directors 11 Omitted - see Note 12 of Notes to Consolidated Financial Statements 15 Omitted 18 Omitted 19 Omitted 22 Omitted 23 Omitted 24 Omitted 31.1 Rule 13a-14(a)/15d-14(a) Certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, executed by the Chief Executive Officer of Monsanto Company) 31.2 Rule 13a-14(a)/15d-14(a) Certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, executed by the Chief Financial Officer of Monsanto Company) 32 Section 1350 Certifications (pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, executed by the Chief Executive Officer and the Chief Financial Officer of Monsanto Company) 99 Computation of Ratio of Earnings to Fixed Charges 62 EX-3.(II) 2 c10q2004ex3.txt BY-LAWS EXHIBIT 3.2 MONSANTO COMPANY AMENDED AND RESTATED BY-LAWS ("By-Laws") Amended May 4, 2004 Offices 1. Registered The name of the registered agent of the Company is Corporation Service Company and the registered office of the Company shall be located at 1013 Centre Drive, Wilmington, Delaware 19805 (County of New Castle). 2. Other The Company shall have its General Offices in the County of St. Louis, State of Missouri, and may also have offices at such other places both within or without the State of Delaware as the Board of Directors may from time to time designate or the business of the Company may require. Stockholders' Meetings 3. Annual Meeting An annual meeting of stockholders shall be held on such day and at such time as may be designated by the Board of Directors for the purpose of electing Directors and for the transaction of such other business as properly may come before such meeting. Any previously scheduled annual meeting of the stockholders may be postponed by resolution of the Board of Directors upon public notice given on or prior to the date previously scheduled for such annual meeting of stockholders. 4. Business to be Conducted at Annual Meeting (a) At an annual meeting of stockholders, only such business shall be conducted as shall have been brought before the meeting (i) pursuant to the Company's notice of the meeting, (ii) by or at the direction of the Board of Directors or (iii) by any stockholder of the Company who is a stockholder of record at the time of giving of the notice provided for in this By-Law, who shall be entitled to vote at such meeting and who shall have complied with the notice procedures set forth in this By-Law. (b) For business to be properly brought before an annual meeting by a stockholder pursuant to Section (a)(iii) of this By-Law, notice in writing must be delivered or mailed to the Secretary and received at the General Offices of the Company, not less than 90 days nor more than 120 days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date, notice by the stockholder must be received not earlier than the 120th day prior to such annual meeting and not later than the close of business on the later of the 90th day prior to such annual meeting or the tenth day following the day on which public announcement of the date of the annual meeting is first made. Such stockholder's notice shall set forth as to each matter the stockholder proposes to bring before the annual meeting (i) a brief description of the business to be brought before the annual meeting and the reasons for conducting such business at such meeting; (ii) the name and address, as they appear on the Company's books, of the stockholder proposing such business, and the name and address of the beneficial owner, if any, on whose behalf the proposal is made; (iii) the class and number of shares of the Company's stock which are beneficially owned by the stockholder, and by the beneficial owner, if any, on whose behalf the proposal is made; and (iv) any material interest of the stockholder, and of the beneficial owner, if any, on whose behalf the proposal is made, in such business. For purposes of these By-Laws, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable news service or in a document publicly filed by the Company with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). (c) Notwithstanding anything in these By-Laws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this By-Law. The chairman of the meeting may, if the facts warrant, determine that the business was not properly brought before the meeting in accordance with the provisions of this By-Law; and if the chairman should so determine, the chairman shall so declare to the meeting, and any such business not properly brought before the meeting shall not be transacted. Notwithstanding the foregoing provisions of this By-Law, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this By-Law. Nothing in this By-Law shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Company's proxy statement pursuant to Rule 14a-8 under the Exchange Act. The provisions of this Section 4 shall also govern what constitutes timely notice for purposes of Rule 14a-4(c) of the Exchange Act. 5. Special Meetings Special meetings of stockholders, unless otherwise provided by the law of Delaware, may be called pursuant to resolution of the Board of Directors. The Board of Directors shall have the sole right to determine the proper purpose or purposes of such meeting. Business transacted at a special meeting of stockholders shall be confined to the purpose or purposes of the meeting as stated in the notice of such meeting. Any previously scheduled special meeting of the stockholders may be postponed by resolution of the Board of Directors upon notice by public announcement given on or prior to the date previously scheduled for such special meeting of stockholders. 6. Place of Meetings All meetings of stockholders shall be held at the General Offices of the Company in the County of St. Louis, State of Missouri, unless otherwise -2- determined by resolution of the Board of Directors; provided that the Board may, in its sole discretion, determine that the meeting shall not be held at any place, but may instead be held solely by means of remote communication as authorized by Section 211(a)(2) of the General Corporation Law of the State of Delaware (the "General Corporation Law of Delaware"). 7. Notice of Meetings (a) Except as otherwise required by the law of Delaware, notice of each meeting of the stockholders, whether annual or special, shall be given, by or at the direction of the Secretary or Chief Executive Officer, except that (i) it shall not be necessary to give notice to any stockholder who properly waives notice before or after the meeting, whether in writing or by electronic transmission or otherwise, and (ii) no notice of an adjourned meeting need be given except when required under these By-Laws or by law. Such notice shall state the place, date and hour of the meeting, and in the case of a special meeting, shall also state the purpose or purposes thereof. Each notice of a meeting shall be given, personally or by mail or, as provided below, by means of electronic transmission, not less than ten (10) nor more than sixty (60) days before the meeting and shall state the time and place of the meeting, or if held by remote communications, the means of remote communications by which stockholders and proxyholders may be deemed to be present in person and vote at such meeting, and unless it is the annual meeting, shall state at whose direction or request the meeting is called and the purposes for which it is called. The attendance of any stockholder at a meeting, without protesting at the beginning of the meeting that the meeting is not lawfully called or convened, shall constitute a waiver of notice by him or her. Any previously scheduled meeting of stockholders may be postponed, and (unless the Amended and Restated Certificate of Incorporation, as amended (the "Certificate of Incorporation"), otherwise provides) any special meeting of stockholders may be canceled, by resolution of the Board upon public announcement (as defined in Section 4 of these By-Laws) given on or prior to the date previously scheduled for such meeting of stockholders. (b) Without limiting the manner by which notice otherwise may be given effectively to stockholders, any notice to a stockholder given by the Company may be given by a form of electronic transmission consented to by the stockholder to whom the notice is given. Any such consent shall be revocable by the stockholder by written notice to the Company. Any such consent shall be deemed revoked (i) if the Company is unable to deliver by electronic transmission two consecutive notices given by the Company in accordance with such consent and (ii) such inability becomes known to the Secretary or an Assistant Secretary of the Company or to the transfer agent or other person responsible for the giving of notice; provided, however, the inadvertent failure to treat such inability as a revocation shall not invalidate any meeting or other action. For purposes of these By-Laws, "electronic transmission" means any form of communication, not directly involving the physical transmission of paper, that creates a record that may be retained, retrieved and reviewed by a recipient thereof, and that may be directly reproduced in paper form by such a recipient through an automated process. (c) Notice shall be deemed given, if mailed, when deposited in the United States mail with postage prepaid, if addressed to a stockholder at his or her address on the Company's records. Notice given by electronic transmission shall be deemed given (i) if by facsimile, when directed to a number at which the stockholder has consented to receive notice; (ii) if by electronic mail, when -3- directed to an electronic mail address at which the stockholder has consented to receive notice; (iii) if by posting on an electronic network together with separate notice to the stockholder of such specific posting, upon the later of (A) such posting and (B) the giving of such separate notice; and (iv) by any other form of electronic transmission, when directed to the stockholder. (d) An affidavit of the Secretary or an Assistant Secretary or of the transfer agent or other agent of the Company that the notice has been given, whether by a form of electronic transmission or otherwise, shall, in the absence of fraud, be prima facie evidence of the facts stated therein. 8. Nominations of Directors (a) Only persons who are nominated in accordance with the procedures set forth in these By-Laws shall be eligible for election as Directors. Nominations of persons for election to the Board of Directors may be made at a meeting of stockholders (i) by or at the direction of the Board of Directors or (ii) by any stockholder of the Company who is a stockholder of record at the time of giving of the notice provided for in this By-Law, who shall be entitled to vote for the election of Directors at the meeting and who complies with the notice procedures set forth in this By-Law. (b) Nominations by stockholders shall be made pursuant to notice in writing, delivered or mailed to the Secretary and received at the General Offices of the Company (i) in the case of an annual meeting, not less than 90 days nor more than 120 days prior to the first anniversary of the preceding year's annual meeting, provided, however, that in the event that the date of the meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date, notice by the stockholder must be received not earlier than the 120th day prior to such annual meeting and not later than the close of business on the later of the 90th day prior to such annual meeting or the tenth day following the day on which public announcement of the date of the meeting is first made; or (ii) in the case of a special meeting at which Directors are to be elected, not earlier than the 120th day prior to such special meeting and not later than the close of business on the later of the 90th day prior to such special meeting or the tenth day following the day on which public announcement of the date of the meeting and of the nominees proposed by the Board of Directors to be elected at such meeting is first made. In the case of a special meeting of stockholders at which Directors are to be elected, stockholders may nominate a person or persons (as the case may be) for election only to such position(s) as are specified in the Company's notice of meeting as being up for election at such meeting. Such stockholder's notice shall set forth (i) as to each person whom the stockholder proposes to nominate for election or reelection as a Director, all information relating to such person that would be required to be disclosed in solicitations of proxies for election of Directors, or is otherwise required, in each case pursuant to Regulation 14A under the Exchange Act (including such person's written consent to being named as a nominee and to serving as a Director if elected); (ii) as to the stockholder giving the notice, the name and address, as they appear on the Company's books, of such stockholder and the class and number of shares of the Company's stock which are beneficially owned by such stockholder; and (iii) as to any beneficial owner on whose behalf the nomination is made, the name and address of such person and the class and -4- number of shares of the Company's stock which are beneficially owned by such person. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a Director shall furnish to the Secretary that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. Notwithstanding anything in this By-Law to the contrary, in the event that the number of Directors to be elected to the Board of Directors of the Company is increased and there is no public statement naming all the nominees for Director or specifying the size of the increased Board of Directors made by the Company at least 100 days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this By-Law shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal offices of the Company not later than the close of business on the 10th day following the day on which such public announcement is first made by the Company. (c) No person shall be eligible for election as a Director of the Company unless nominated in accordance with the procedures set forth in these By-Laws. The chairman of the meeting may, if the facts warrant, determine that a nomination was not made in accordance with the procedures prescribed in this By-Law; and if the chairman should so determine, the chairman shall so declare to the meeting, and the defective nomination shall be disregarded. Notwithstanding the foregoing provisions of this By-Law, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this By-Law. 9. List of Stockholders (a) Not less than ten (10) days prior to the date of any meeting of stockholders, the Secretary of the Company shall prepare a complete list of stockholders entitled to vote at the meeting, arranged in alphabetical order and showing the address of each stockholder and the number of shares registered in the name of such stockholder; provided, that the Company shall not be required to include electronic mail addresses or other electronic contact information on such list. For a period of not less than ten (10) days prior to the meeting, the list shall be available during ordinary business hours for inspection by any stockholder for any purpose germane to the meeting. During this period, the list shall be kept either (1) on a reasonably accessible electronic network, provided that the information required to gain access to such list is provided with the notice of the meeting or (2) during ordinary business hours, at the principal place of business of the Company. If the Company determines to make the list available on an electronic network, the Company may take reasonable steps to ensure that such information is available only to stockholders of the Company. If the meeting is to be held at a place, then the list shall be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. If the meeting is to be held solely by means of remote communication, then the list shall also be open to the examination of any stockholder during the whole time of the meeting on a reasonably accessible electronic network, and the information required to access such list shall be provided with the notice of the meeting. (b) The stock ledger of the Company shall be the only evidence as to the identity of the stockholders entitled (i) to vote in person or by proxy at any -5- meeting of stockholders, or (ii) to exercise the rights in accordance with Delaware law to examine the stock ledger, the list required by this By-Law or the books and records of the Company, or for any other purpose permitted under Delaware law. 10. Quorum; Adjournment The holders of a majority of the voting power of the shares of capital stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum for the transaction of any business at all meetings of the stockholders, except as otherwise provided by the law of Delaware, by the Certificate of Incorporation or by these By-Laws. The stockholders present at any duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of sufficient stockholders to render the remaining stockholders less than a quorum. Whether or not a quorum is present, either the chairman of the meeting or the holders of a majority of the voting power of the shares of capital stock entitled to vote thereat, present in person or by proxy, shall have power to adjourn the meeting from time to time to another time or place or means of remote communications, without notice other than announcement at the meeting of the time and place, if any, and the means of remote communications, if any, by which stockholders and proxy holders may be deemed to be present in person and vote at such adjourned meeting. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. At such adjourned meeting at which the requisite amount of voting stock shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. 11. Voting and Required Vote (a) Subject to the provisions of the Certificate of Incorporation, each stockholder shall, at every meeting of stockholders, be entitled to one vote for each share of capital stock held by such stockholder. Subject to the provisions of the Certificate of Incorporation and Delaware law, Directors shall be chosen by the vote of a plurality of the shares present in person or represented by proxy at the meeting; and all other questions shall be determined by the affirmative vote of the holders of a majority of the shares present in person or represented by proxy at the meeting. In all matters, votes cast in accordance with any method adopted by the Company shall be valid so long as such method is permitted under Delaware law. (b) Any stockholder entitled to vote on any matter may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or, except when the matter is the election of directors, may vote the remaining shares against the proposal; but if the stockholder fails to specify the number of shares which the stockholder is voting affirmatively or otherwise indicate how the number of shares to be voted affirmatively is to be determined, it will be conclusively presumed that the stockholder's approving vote is with respect to all shares which the stockholder is entitled to vote. (c) Voting need not be by ballot unless requested by a stockholder at the meeting or ordered by the chairman of the meeting; however, all elections of -6- directors shall be by written ballot, unless otherwise provided in the Certificate of Incorporation; provided, that if authorized by the Board, a written ballot may be submitted by electronic transmission, provided that any such electronic transmission must either set forth or be submitted with information from which it can be determined that the electronic transmission was authorized by the stockholder or proxyholder. 12. Proxies (a) Each stockholder entitled to vote at a meeting of stockholders may authorize another person or persons to act for such stockholder by proxy, in any manner permitted by law, including, without limitation, in the form of a telegram, cablegram or other means of electronic transmission which sets forth or is submitted with information from which it can be determined that the telegram, cablegram or other means of electronic transmission was authorized by the stockholder. No proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212(e) of the General Corporation Law of Delaware. A stockholder may revoke any proxy which is not irrevocable by attending the meeting and voting in person or by filing an instrument in writing revoking the proxy or by filing another duly executed proxy bearing a later date with the Secretary of the Company. (b) A proxy is not revoked by the death or incapacity of the maker unless, before the vote is counted, written notice of such death or incapacity is received by the Secretary of the Company. 13. Inspectors of Election; Polls Before each meeting of stockholders, the Chairman of the Board, the President or another officer of the Company designated by resolution of the Board of Directors shall appoint one or more inspectors of election for the meeting and may appoint one or more inspectors to replace any inspector unable to act. If any of the inspectors appointed shall fail to attend, or refuse or be unable to serve, substitutes shall be appointed by the chairman of the meeting. Each inspector, who may be an employee of the Company, shall have such duties as are provided by law, and shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of such person's ability. The chairman of the meeting shall fix and announce at the meeting the date and time of the opening and closing of the polls for each matter upon which the stockholders will vote at the meeting. 14. Organization (a) The Chairman of the Board of Directors, or in the Chairman's absence, (i) the President, if a member of the Board of Directors, (ii) one of the Vice Chairmen of the Board who is a member of the Board of Directors, if any, in such -7- order as may be designated by the Chairman of the Board, in that order, or (iii) in the absence of each of them, a chairman chosen by a majority of the Directors present, shall act as chairman of the meetings of the stockholders. (b) The Board shall be entitled to make such rules or regulations for the conduct of meetings of stockholders as it shall deem appropriate. Subject to such rules and regulations of the Board, if any, the person presiding over the meeting shall have the right and authority to convene and adjourn the meeting, to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of the person presiding over the meeting, are necessary, appropriate or convenient for the proper conduct of the meeting, including, without limitation, establishing an agenda or order of business for the meeting, rules and procedures for maintaining order at the meeting and the safety of those present, limitations on participation in such meeting to stockholders of record of the Company and their duly authorized and constituted proxies and such other persons as the person presiding over the meeting shall permit, restrictions on entry to the meeting after the time fixed for the commencement thereof, limitations on the time allotted to questions or comments by participants and regulation of the opening and closing of the polls for balloting and matters which are to be voted on by ballot. The person presiding over the meeting, in addition to making any other determinations that may be appropriate to the conduct of the meeting, shall, if the facts warrant, determine and declare to the meeting that a matter or business was not properly brought before the meeting and if the person presiding over the meeting should so determine and declare, any such matter or business shall not be transacted or considered. (c) Without limiting the generality of the foregoing, if a stockholder (or qualified representative) does not appear at the meeting of stockholders of the Company to present a nomination or business pursuant to Section 4 or Section 8 of these By-Laws, such nomination shall be disregarded and such proposed business shall not be transacted, even though proxies in respect of such vote may have been received by the Company. 15. No Stockholder Action by Written Consent Any action required or permitted to be taken by the stockholders of the Company must be effected at a duly called annual or special meeting of stockholders of the Company and may not be effected by any consent in writing in lieu of a meeting of such stockholders. Board of Directors 16. General Powers, Number, Term of Office (a) The business of the Company shall be managed under the direction of its Board of Directors. Subject to the rights of the holders of any series of preferred stock, par value $0.01 per share, of the Company ("Preferred Stock") to elect additional Directors under specified circumstances, the number of Directors of the Company which shall constitute the whole Board shall be not less than five nor more than 20. The exact number of Directors within the minimum and maximum limitation specified in the preceding sentence shall be fixed from time to time exclusively by resolution of a majority of the whole Board. -8- (b) At the first annual meeting of stockholders after August 13, 2002 (the "First Meeting") , the Directors, other than those who may be elected by the holders of any outstanding series of Preferred Stock or any other series or class of stock as set forth in the Certificate of Incorporation, shall be divided into three classes, as nearly equal in number as possible and designated Class I, Class II and Class III. Class I shall be initially elected for a term expiring at the first annual meeting of stockholders following the First Meeting, Class II shall be initially elected for a term expiring at the second annual meeting of stockholders following the First Meeting, and Class III shall be initially elected for a term expiring at the third annual meeting of stockholders following the First Meeting. Members of each class shall hold office until their successors are elected and qualified. At each succeeding annual meeting of the stockholders of the Company, the successors of the class of Directors whose term expires at that meeting shall be elected for a term expiring at the annual meeting of stockholders held in the third year following the year of their election. In case of any increase or decrease, from time to time, in the number of Directors, other than those who may be elected by the holders of any outstanding series of Preferred Stock or any other series or class of stock as set forth in the Certificate of Incorporation, the number of Directors in each class shall be apportioned as nearly equal as possible. (c) Directors need not be stockholders of the Company or residents of the State of Delaware. 17. Vacancies Subject to the rights, if any, of the holders of any outstanding series of Preferred Stock, newly created directorships resulting from any increase in the authorized number of Directors or any vacancies in the Board resulting from death, resignation, retirement, disqualification, removal from office or other cause shall be filled solely by the affirmative vote of a majority of the remaining Directors then in office, even though less than a quorum of the Board. Any Director so chosen shall hold office until his or her successor shall be elected and qualified and, if the Board at such time is classified, until the next election of the class for which such Directors shall have been chosen. No decrease in the number of Directors shall shorten the term of any incumbent Director. 18. Regular Meetings The Board of Directors by resolution may provide for the holding of regular meetings and may fix the times and places at which such meetings shall be held. Notice of regular meetings shall not be required, provided that whenever the time or place of regular meetings shall be fixed or changed, notice of such action shall be given promptly to each Director, as provided in Section 19 below, who was not present at the meeting at which such action was taken. 19. Special Meetings Special meetings of the Board of Directors shall be held whenever called by the Chairman of the Board of Directors or the President, or in the absence of -9- each of them, by any Vice Chairman of the Board, or by the Secretary at the written request of a majority of the Directors. 20. Notices Notice of any special meeting of the Board of Directors shall be addressed to each Director at such Director's residence or business address and shall be sent to such Director by mail, electronic mail, telecopier, telegram or telex or telephoned or delivered to such Director personally. If such notice is sent by mail, it shall be sent not later than three days before the day on which the meeting is to be held. If such notice is sent by electronic mail, telecopier, telegram or telex, it shall be sent not later than 12 hours before the time at which the meeting is to be held. If such notice is telephoned or delivered personally, it shall be received not later than 12 hours before the time at which the meeting is to be held. Such notice shall state the time, place and purpose or purposes of the meeting. Any oral notice given personally or by telephone may be communicated either to the Director or to a person at the office of the Director who the person giving the notice has reason to believe will promptly communicate it to the Director. 21. Quorum One-third of the total number of Directors constituting the whole Board, but not less than two, shall constitute a quorum for the transaction of business at any meeting of the Board of Directors, but if less than such required number of Directors for a quorum is present at a meeting, a majority of the Directors present may adjourn the meeting from time to time without further notice. Except as otherwise specifically provided by the law of Delaware, the Certificate of Incorporation or these By-Laws, the act of a majority of the Directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. 22. Organization At each meeting of the Board of Directors, other than meetings of the non-management Directors in executive session, the Chairman of the Board or, in the Chairman's absence, (i) the President, if a member of the Board of Directors, (ii) one of the Vice Chairmen of the Board who is a member of the Board of Directors, if any, in such order as may be designated by the Chairman of the Board, in that order, or (iii) in the absence of each of them, a chairman chosen by a majority of the Directors present, shall act as chairman of the meeting, and the Secretary or, in the Secretary's absence, an Assistant Secretary or any employee of the Company appointed by the chairman of the meeting, shall act as secretary of the meeting. The non-management Directors shall choose a non-management Director to preside at meetings of the non-management Directors in executive session. 23. Resignations Any Director may resign at any time by giving notice in writing or by electronic transmission to the Chairman of the Board, the President or the Secretary of the Company. Such resignation shall take effect upon receipt -10- thereof or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. 24. Removal Subject to the rights of the holders of any outstanding series of Preferred Stock or any other series or class of stock as set forth in the Certificate of Incorporation to elect additional Directors under specified circumstances, any Director or the entire Board may be removed from office only for cause and only by the affirmative vote of the holders of at least 70 percent of the voting power of the outstanding stock of the Company entitled to vote, voting together as a single class. 25. Action Without a Meeting Unless otherwise restricted by the Certificate of Incorporation or these By-Laws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. 26. Location of Books Except as otherwise provided by resolution of the Board of Directors and subject to the law of Delaware, the books of the Company may be kept at the General Offices of the Company and at such other places as may be necessary or convenient for the business of the Company. 27. Dividends Subject to the provisions of the Certificate of Incorporation and the law of Delaware, dividends upon the capital stock of the Company may be declared by the Board of Directors at any regular or special meeting. Dividends may be paid in cash, in property, or in shares of the Company's capital stock. 28. Compensation of Directors Directors shall receive such compensation and benefits as may be determined by resolution of the Board for their services as members of the Board and committees. Directors shall also be reimbursed for their expenses of attending Board and committee meetings. Nothing contained herein shall preclude any Director from serving the Company in any other capacity and receiving compensation therefor. 29. Additional Powers In addition to the powers and authorities by these By-Laws expressly conferred upon it, the Board of Directors may exercise all such powers of the -11- Company and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these By-Laws directed or required to be exercised or done by the stockholders. Committees of Directors 30. Designation, Power, Alternate Members The Board of Directors may, by resolution or resolutions passed by a majority of the whole Board, designate an Executive Committee and one or more additional committees, each committee to consist of one or more of the Directors of the Company. Any such committee, to the extent provided in said resolution or resolutions and subject to any limitations provided by law, shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the Company. The Board of Directors may designate one or more Directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. The term of office of the members of each committee shall be as fixed from time to time by the Board; provided, however, that any committee member who ceases to be a member of the Board shall automatically cease to be a committee member. 31. Quorum, Manner of Acting At any meeting of a committee, the presence of one-third, but not less than two, of its members then in office (or, in the case of a committee consisting of one director, its sole member) shall constitute a quorum for the transaction of business; and the act of a majority of the members present at a meeting at which a quorum is present shall be the act of the committee; provided, however, that in the event that any member or members of the committee is or are in any way interested in or connected with any other party to a contract or transaction being approved at such meeting, or are themselves parties to such contract or transaction, the act of a majority of the members present who are not so interested or connected, or are not such parties, shall be the act of the committee. Each committee may provide for the holding of regular meetings, make provision for the calling of special meetings and, except as otherwise provided in these By-Laws or by resolution of the Board of Directors, make rules for the conduct of its business. 32. Minutes The committees shall keep minutes of their proceedings and report the same to the Board of Directors when required; but failure to keep such minutes shall not affect the validity of any acts of the committee or committees. Advisory Directors 33. Advisory Directors The Board of Directors may, by resolution adopted by a majority of the whole Board, appoint such number of senior executives of the Company as Advisory Directors as the Board may from time to time determine. The Advisory Directors -12- shall have such advisory responsibilities as the Chairman of the Board may designate and the term of office of such Advisory Directors shall be as fixed by the Board. Officers 34. Designation The officers of the Company shall be a Chairman of the Board, a Chief Executive Officer, a President, a Chief Financial Officer, one or more Vice Presidents, a Secretary, a Treasurer and a Controller. The Board of Directors may also elect one or more Vice Chairmen of the Board, one or more Vice Chairmen of the Company, one or more Executive Vice Presidents, Senior Vice Presidents, Group Vice Presidents, Deputy and Assistant Secretaries, Deputy and Assistant Treasurers, Deputy and Assistant Controllers and such other officers as it shall deem necessary. Any number of offices may be held by the same person. The Chairman of the Board of Directors shall be chosen from among the Directors. 35. Election and Term At least annually, the Board of Directors of the Company shall elect the officers of the Company and at any time thereafter the Board may elect additional officers of the Company and each such officer shall hold office until the officer's successor is elected and qualified or until the officer's earlier death, resignation, termination of employment or removal. 36. Removal Any officer shall be subject to removal or suspension at any time, for or without cause, by the affirmative vote of a majority of the whole Board of Directors. 37. Resignations Any officer may resign at any time by giving written notice to the Chairman of the Board, the President or to the Secretary. Such resignation shall take effect upon receipt thereof or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. 38. Vacancies A vacancy in any office because of death, resignation, removal or any other cause may be filled for the unexpired portion of the term by the Board of Directors. 39. Chairman of the Board The Chairman of the Board shall preside at all meetings of the stockholders and of the Board of Directors, except as may be otherwise required under the law of Delaware. The Chairman of the Board shall also preside at all meetings of the Board of Directors except, if the Chairman is an employee of the Company, at meetings of the non-management Directors in executive session. The Chairman, alone or with the President, one or more of the Vice Chairmen of the Board, -13- and/or the Secretary shall sign and send out reports and other messages which are to be sent to stockholders from time to time. The Chairman shall also perform such other duties as may be assigned to the Chairman by these By-Laws or the Board of Directors. 40. Chief Executive Officer The Chief Executive Officer shall have the general and active management and supervision of the business of the Company. The Chief Executive Officer shall see that all orders and resolutions of the Board of Directors are carried into effect. The Chief Executive Officer shall also perform such other duties as may be assigned to the Chief Executive Officer by these By-Laws or the Board of Directors. The Chief Executive Officer shall designate who shall perform the duties of the Chief Executive Officer in the Chief Executive Officer's absence. 41. President The President, if a member of the Board of Directors, shall, in the absence of the Chairman of the Board, preside at all meetings of the stockholders and of the Board of Directors, except at meetings of the non-management Directors in executive session. The President shall perform such other duties as may be assigned to the President by these By-Laws, the Board of Directors or the Chief Executive Officer. 42. Vice Chairmen of the Board; Vice Chairmen The Vice Chairmen of the Board, if a member of the Board of Directors, shall, in the absence of the Chairman of the Board and the President, and in such order as may be designated by the Chairman of the Board, preside at all meetings of the stockholders and of the Board of Directors, except at meetings of the non-management Directors in executive session. The Vice Chairmen of the Board and the Vice Chairmen shall perform such other duties as may be assigned to them by these By-Laws, the Board of Directors or the Chief Executive Officer. 43. Chief Financial Officer The Chief Financial Officer shall act in an executive financial capacity. The Chief Financial Officer shall assist the Chairman of the Board and the President in the general supervision of the Company's financial policies and affairs. 44. Executive, Senior, Group and other Vice Presidents Each Executive Vice President, Senior Vice President, Group Vice President and each other Vice President shall perform the duties and functions and exercise the powers assigned to such officer by the Board of Directors or the Chief Executive Officer. 45. Secretary The Secretary shall attend all meetings of the Board of Directors and of the stockholders and record all votes and the minutes of all proceedings in a book to be kept for that purpose. The Secretary shall give, or cause to be -14- given, notice of all meetings of the stockholders and special meetings of the Board of Directors and, when appropriate, shall cause the corporate seal to be affixed to any instruments executed on behalf of the Company. The Secretary shall also perform all duties incident to the office of Secretary and such other duties as may be assigned to the Secretary by these By-Laws, the Board of Directors, the Chairman of the Board or the Chief Executive Officer. 46. Assistant Secretaries The Assistant Secretaries shall, during the absence of the Secretary, perform the duties and functions and exercise the powers of the Secretary. Each Assistant Secretary shall perform such other duties as may be assigned to such Assistant Secretary by the Board of Directors, the Chairman of the Board, the Chief Executive Officer or the Secretary. 47. Treasurer The Treasurer shall have the custody of the funds and securities of the Company and shall deposit them in the name and to the credit of the Company in such depositories as may be designated by the Board of Directors or by any officer or officers authorized by the Board of Directors to designate such depositories; disburse funds of the Company when properly authorized by vouchers prepared and approved by the Controller; and invest funds of the Company when authorized by the Board of Directors or a committee thereof. The Treasurer shall render to the Board of Directors, the Chief Executive Officer, or the Chief Financial Officer, whenever requested, an account of all transactions as Treasurer and shall also perform all duties incident to the office of Treasurer and such other duties as may be assigned to the Treasurer by these By-Laws, the Board of Directors, the Chief Executive Officer, or the Chief Financial Officer. 48. Assistant Treasurers The Assistant Treasurers shall, during the absence of the Treasurer, perform the duties and functions and exercise the powers of the Treasurer. Each Assistant Treasurer shall perform such other duties as may be assigned to the Assistant Treasurer by the Board of Directors, the Chief Executive Officer, the Chief Financial Officer or the Treasurer. 49. Controller The Controller shall serve as the principal accounting officer of the Company and shall keep full and accurate account of receipts and disbursements in books of the Company and render to the Board of Directors, the Chief Executive Officer, or the Chief Financial Officer, whenever requested, an account of all transactions as Controller and of the financial condition of the Company. The Controller shall also perform all duties incident to the office of Controller and such other duties as may be assigned to the Controller by these By-Laws, the Board of Directors, the Chief Executive Officer, or the Chief Financial Officer. -15- 50. Assistant Controllers The Assistant Controllers shall, during the absence of the Controller, perform the duties and functions and exercise the powers of the Controller. Each Assistant Controller shall perform such other duties as may be assigned to such officer by the Board of Directors, the Chief Executive Officer, the Chief Financial Officer or the Controller. 51. Other Officers The Board of Directors may appoint such other officers as it shall deem necessary, who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board. Company Checks, Drafts and Proxies 52. Checks, Drafts All checks, drafts or other orders for the payment of money by the Company shall be signed by such person or persons as from time to time may be designated by the Board of Directors or by any officer or officers authorized by the Board of Directors to designate such signers; and the Board of Directors or such officer or officers may determine that the signature of any such authorized signer may be facsimile. 53. Voting of Interests in Other Companies or Entities Except as otherwise provided by resolution of the Board of Directors, the Chairman of the Board, the President, any Vice Chairman of the Board, the Chief Financial Officer, any Vice President, the Treasurer and any Assistant Treasurer, the Controller and any Assistant Controller, the Secretary and any Assistant Secretary of the Company, shall each have full power and authority, on behalf of the Company, to vote, represent and exercise any and all rights of the Company incident to its ownership of shares or other interests in any other company or entity of any type, foreign or domestic (including without limitation corporations, limited liability companies and partnerships), including without limitation the authority to vote at any meeting of shareholders, members or partners of such other company or entity, to execute and deliver proxies, and to consent in writing to action without a meeting. Capital Stock 54. Stock Certificates and Transfers The interest of each stockholder of the Company shall be evidenced by certificates or by registration in book-entry accounts without certificates for shares of stock in such form as the appropriate officers of the Company may from time to time prescribe. The shares of the stock of the Company shall be transferred on the books of the Company by the holder thereof in person or by his attorney, upon surrender for cancellation of certificates for the same number of shares, with an assignment and power of transfer endorsed thereon or attached thereto, duly executed, with such proof of the authenticity of the -16- transfer and payment of any applicable transfer taxes as the Company or its agents may reasonably require or by appropriate book-entry procedures. Certificates of stock shall be signed by, or in the name of the Company by, the Chairman of the Board, the President, any Vice Chairman of the Board, any Executive Vice President, any Senior Vice President, any Group Vice President or any other Vice President, and by the Treasurer or any Assistant Treasurer, or the Secretary or any Assistant Secretary, of the Company, certifying the number of shares owned by such holder in the Company. Any of or all the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Company with the same effect as if such person were such officer, transfer agent or registrar at the date of issue. 55. Record Ownership The Company shall be entitled to treat the person in whose name any share, right or option is registered as the owner thereof, for all purposes, and shall not be bound to recognize any equitable or other claim to or interest in such share, right or option on the part of any other person, whether or not the Company shall have notice thereof, except as otherwise provided by the law of Delaware. 56. Record Dates In order that the Company may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix a record date, which shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors and which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. 57. Lost, Stolen or Destroyed Certificates The Board of Directors may authorize a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Company alleged to have been lost, stolen or destroyed, upon the making of an affidavit of the fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or the owner's legal representative, to give the Company a bond sufficient to indemnify it against any claim that may be made against the Company on account of the alleged loss, theft or destruction of such certificate or the issuance of such new certificate. -17- 58. Terms of Preferred Stock The provisions of these By-Laws, including those pertaining to voting rights, election of Directors and calling of special meetings of stockholders, are subject to the terms, preferences, rights and privileges of any then outstanding class or series of Preferred Stock as set forth in the Certificate of Incorporation and in any resolutions of the Board of Directors providing for the issuance of such class or series of Preferred Stock; provided, however, that the provisions of any such Preferred Stock shall not affect or limit the authority of the Board of Directors to fix, from time to time, the number of Directors which shall constitute the whole Board as provided in Section 16 above, subject to the right of the holders of any class or series of Preferred Stock to elect additional Directors as and to the extent specifically provided by the provisions of such Preferred Stock. Indemnification 59. Indemnification (a) The Company shall indemnify and hold harmless, to the fullest extent permitted by applicable law as it presently exists or may hereafter be amended, any person who was or is made or is threatened to be made a party or is otherwise involved in any claim, action, suit, or proceeding, whether civil, criminal, administrative or investigative (a "proceeding") by reason of the fact that the person, or a person for whom he or she is the legal representative, is or was a Director or officer of the Company or is or was serving at the request of the Company as a director, officer or fiduciary of another corporation or of a partnership, joint venture, trust, non-profit entity, or other enterprise, including service with respect to employee benefit plans, against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person. The right to indemnification conferred in this By-Law shall be a contract right. Except as provided in paragraph (c) of this By-Law with respect to proceedings seeking to enforce rights to indemnification, the Company shall indemnify a person in connection with a proceeding initiated by such person or a claim made by such person against the Company only if such proceeding or claim was authorized by the Board of Directors of the Company. (b) Subject to applicable law, the Company shall pay the expenses incurred in defending any proceeding in advance of its final disposition, provided, however, that if and to the extent required by law the payment of expenses incurred by any person covered hereunder in advance of the final disposition of the proceeding shall be made only upon receipt of an undertaking by or on behalf of the affected person to repay all amounts advanced if it should ultimately be determined that such person is not entitled to be indemnified under this By-Law or otherwise. (c) If a claim for indemnification or payment of expenses under this By-Law is not paid in full within thirty days, or such other period as might be provided pursuant to contract, after a written claim therefor has been received by the Company, the claimant may file suit to recover the unpaid amount of such claim or may seek whatever other remedy might be provided pursuant to contract. In any such action the Company shall have the burden of proving that the -18- claimant was not entitled to the requested indemnification or payment of expenses under applicable law. If successful in whole or in part, claimant shall be entitled to be paid the expense of prosecuting such claim. Neither the failure of the Company (including its Directors, independent legal counsel or stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because the claimant has met the applicable standard of conduct set forth in the General Corporation Law of the State of Delaware, nor an actual determination by the Company (including its Directors, independent legal counsel or stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. (d) Any determination regarding whether indemnification of any person is proper in the circumstances because such person has met the applicable standard of conduct set forth in the General Corporation Law of the State of Delaware shall be made by independent legal counsel selected by such person with the consent of the Company (which consent shall not unreasonably be withheld). (e) The Company may, but shall not be required to, indemnify and hold harmless, to the fullest extent permitted by applicable law as it presently exists or may hereafter be amended, any person who was or is made or is threatened to be made a party or is otherwise involved in any claim, action, suit, or proceeding, whether civil, criminal, administrative or investigative (a "proceeding") by reason of the fact that the person, or a person for whom he or she is the legal representative, is or was an employee or agent of the Company or is or was serving at the request of the Company as an employee or agent of another corporation or of a partnership, joint venture, trust, non-profit entity, or other enterprise, including service with respect to employee benefit plans, against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person. (f) The rights conferred on any person by this By-Law shall not be exclusive of any other rights which such person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, these By-Laws, agreement, vote of stockholders or disinterested Directors or otherwise. (g) Any repeal or modification of the foregoing provisions of this By-Law shall not adversely affect any right or protection hereunder of any person with respect to any act or omission occurring prior to or at the time of such repeal or modification. Miscellaneous 60. Corporate Seal The seal of the Company shall be circular in form, containing the words "Monsanto Company" and the word "Delaware" on the circumference surrounding the word "Seal." Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. -19- 61. Fiscal Year The fiscal year of the Company shall end on the last day of August in each year. 62. Auditors The Audit and Finance Committee of the Board of Directors, or any successor audit committee, shall select certified public accountants to audit the books of account and other appropriate corporate records of the Company annually and at such other times as the Board shall determine by resolution. 63. Waiver of Notice Whenever notice is required to be given pursuant to the law of Delaware, the Certificate of Incorporation or these By-Laws, a written waiver thereof, signed by the person entitled to notice, or a waiver by electronic transmission by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting of stockholders or the Board of Directors or a committee thereof shall constitute a waiver of notice of such meeting, except when the stockholder or Director attends such meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders or the Board of Directors or committee thereof need be specified in any written waiver of notice or any waiver by electronic transmission unless so required by the Certificate of Incorporation or by these By-Laws. 64. Construction; Definitions Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the General Corporation Law of Delaware shall govern the construction of these By-Laws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, the term "person" includes a natural person, a corporation or any other entity of any type, and the masculine gender includes the feminine gender and vice versa. 65. Provisions Additional to Provisions of Law All restrictions, limitations, requirements and other provisions of these By-Laws shall be construed, insofar as possible, as supplemental and additional to all provisions of law applicable to the subject matter thereof and shall be fully complied with in addition to the said provisions of law unless such compliance shall be illegal. 66. Provisions Contrary to Provisions of Law Any article, section, subsection, subdivision, sentence, clause or phrase of these By-Laws which upon being construed in the manner provided in Section 65 hereof, shall be contrary to or inconsistent with any applicable provisions of law, shall not apply so long as said provisions of law shall remain in effect, -20- but such result shall not affect the validity or applicability of any other portions of these By-Laws, it being hereby declared that these By-Laws would have been adopted and each article, section, subsection, subdivision, sentence, clause or phrase thereof, irrespective of the fact that any one or more articles, sections, subsections, subdivisions, sentences, clauses or phrases is or are illegal. Amendment to By-Laws 67. Amendments Notwithstanding any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any series of Preferred Stock of the Company required by law, the Certificate of Incorporation or any Preferred Stock designation, the affirmative vote of the holders of at least 70 percent of the voting power of all of the then-outstanding shares of the Company's voting stock, voting together as a single class, shall be required for the stockholders to amend or repeal the By-Laws or to adopt new By-Laws. The By-Laws may also be amended or repealed, and new By-Laws may be adopted, by the affirmative vote of a majority of the whole Board of Directors at any regular or special meeting of the Board of Directors. -21- EX-10 3 c10q2004ex10.txt REVOLVING CREDIT AGREEMENT EXHIBIT 10.14 EXECUTION COPY U.S. $1,000,000,000 FIVE-YEAR CREDIT AGREEMENT Dated as of June 4, 2004 Among MONSANTO COMPANY as Borrower, THE INITIAL LENDERS NAMED HEREIN as Initial Lenders, CITIBANK, N.A. as Administrative Agent, JPMORGAN CHASE BANK as Syndication Agent, ABN AMRO BANK N.V. THE BANK OF TOKYO-MITSUBISHI, LTD. and BANK OF AMERICA, N.A. as Co-Documentation Agents and CITIGROUP GLOBAL MARKETS INC. and J.P. MORGAN SECURITIES INC. as Joint Lead Arrangers and Joint Bookrunners
TABLE OF CONTENTS Page ARTICLE I DEFINITIONS AND ACCOUNTING TERMS SECTION 1.01. Certain Defined Terms...............................................................................1 ---------------------- SECTION 1.02. Computation of Time Periods........................................................................11 ---------------------------- SECTION 1.03. Accounting Terms...................................................................................11 ----------------- ARTICLE II AMOUNTS AND TERMS OF THE ADVANCES SECTION 2.01. The Revolving Credit Advances......................................................................11 ------------------------------ SECTION 2.02. Making the Revolving Credit Advances...............................................................11 ------------------------------------- SECTION 2.03. The Competitive Bid Advances.......................................................................12 ----------------------------- SECTION 2.04. Fees...............................................................................................15 ----- SECTION 2.05. Optional Termination or Reduction of the Commitments...............................................15 ----------------------------------------------------- SECTION 2.06. Repayment of Revolving Credit Advances.............................................................15 --------------------------------------- SECTION 2.07. Interest on Revolving Credit Advances; Regulation D Compensation...................................15 ----------------------------------------------------------------- SECTION 2.08. Interest Rate Determination........................................................................16 ---------------------------- SECTION 2.09. Optional Conversion of Revolving Credit Advances...................................................17 ------------------------------------------------- SECTION 2.10. Optional Prepayments of Revolving Credit Advances..................................................17 -------------------------------------------------- SECTION 2.11. Increased Costs....................................................................................17 ---------------- SECTION 2.12. Illegality.........................................................................................19 ----------- SECTION 2.13. Payments and Computations..........................................................................20 -------------------------- SECTION 2.14. Taxes..............................................................................................20 ------ SECTION 2.15. Sharing of Payments, Etc...........................................................................22 ------------------------- SECTION 2.16. Use of Proceeds....................................................................................22 ---------------- SECTION 2.17. Increase in the Aggregate Commitments..............................................................22 -------------------------------------- SECTION 2.18. Evidence of Debt...................................................................................23 ----------------- ARTICLE III CONDITIONS TO EFFECTIVENESS AND LENDING SECTION 3.01. Conditions Precedent to Effectiveness of Sections 2.01 and 2.03....................................24 ---------------------------------------------------------------- SECTION 3.02. Conditions Precedent to Each Revolving Credit Borrowing and Commitment Increase....................25 -------------------------------------------------------------------------------- SECTION 3.03. Conditions Precedent to Each Competitive Bid Borrowing.............................................25 ------------------------------------------------------- i SECTION 3.04. Determinations Under Section 3.01..................................................................26 ---------------------------------- ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01. Representations and Warranties of the Borrower.....................................................26 ----------------------------------------------- SECTION 4.02. Representation and Warranty of the Lenders.........................................................27 ------------------------------------------- ARTICLE V COVENANTS OF THE BORROWER SECTION 5.01. Affirmative Covenants..............................................................................27 ---------------------- SECTION 5.02. Negative Covenants.................................................................................28 ------------------- SECTION 5.03. Financial Covenant.................................................................................29 ------------------- ARTICLE VI EVENTS OF DEFAULT SECTION 6.01. Events of Default..................................................................................30 ------------------ ARTICLE VII THE AGENT SECTION 7.01. Authorization and Action...........................................................................31 ------------------------- SECTION 7.02. Agent's Reliance, Etc..............................................................................32 ---------------------- SECTION 7.03. Citibank and Affiliates............................................................................32 ------------------------ SECTION 7.04. Lender Credit Decision.............................................................................32 ----------------------- SECTION 7.05. Indemnification....................................................................................32 ---------------- SECTION 7.06. Successor Agent....................................................................................33 ---------------- SECTION 7.07. Other Agents.......................................................................................33 ------------- ARTICLE VIII MISCELLANEOUS SECTION 8.01. Amendments, Etc....................................................................................33 ---------------- SECTION 8.02. Notices, Etc.......................................................................................33 ------------- SECTION 8.03. No Waiver; Remedies................................................................................34 -------------------- SECTION 8.04. Costs and Expenses.................................................................................34 ------------------- SECTION 8.05. Right of Set-off...................................................................................35 ----------------- SECTION 8.06. Binding Effect.....................................................................................35 --------------- SECTION 8.07. Assignments and Participations.....................................................................35 ------------------------------- SECTION 8.08. Confidentiality....................................................................................37 ---------------- SECTION 8.09. Governing Law......................................................................................37 -------------- ii SECTION 8.10. Execution in Counterparts..........................................................................37 -------------------------- SECTION 8.11. Jurisdiction, Etc..................................................................................38 ------------------ SECTION 8.11.1 USA Patriot Act Notification......................................................................39 ---------------------------- SECTION 8.12. Waiver of Jury Trial...............................................................................39 --------------------- Schedules - --------- Schedule I - List of Applicable Lending Offices Schedule 3.01(b) - Disclosed Litigation Exhibits - -------- Exhibit A-1 - Form of Revolving Credit Note Exhibit A-2 - Form of Competitive Bid Note Exhibit B-1 - Form of Notice of Revolving Credit Borrowing Exhibit B-2 - Form of Notice of Competitive Bid Borrowing Exhibit C - Form of Assignment and Acceptance Exhibit D Form of Assumption Agreement iii
FIVE YEAR CREDIT AGREEMENT Dated as of June 4, 2004 MONSANTO COMPANY, a Delaware corporation (the "Borrower"), the banks, financial institutions and other institutional lenders (the "Initial Lenders") listed on the signature pages hereof, CITIBANK, N.A. ("Citibank"), as administrative agent (the "Agent") for the Lenders (as hereinafter defined), CITIGROUP GLOBAL MARKETS INC. and J.P. MORGAN SECURITIES INC., as joint lead arrangers and joint bookrunners (the "Joint Lead Arrangers"), JPMORGAN CHASE BANK, as syndication agent, and ABN AMRO BANK N.V., THE BANK OF TOKYO-MITSUBISHI, LTD. and BANK OF AMERICA, N.A., as co-documentation agents, agree as follows: ARTICLE I DEFINITIONS AND ACCOUNTING TERMS SECTION 1.01. Certain Defined Terms. As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Advance" means a Revolving Credit Advance or a Competitive Bid Advance. "Affiliate" means, as to any Person, any other Person that, directly or indirectly, controls, is controlled by or is under common control with such Person or is a director or officer of such Person. For purposes of this definition, the term "control" (including the terms "controlling", "controlled by" and "under common control with") of a Person means the possession, direct or indirect, of the power to vote 5% or more of the Voting Stock of such Person or to direct or cause the direction of the management and policies of such Person, whether through the ownership of Voting Stock, by contract or otherwise. "Agent's Account" means the account of the Agent maintained by the Agent at Citibank with its office at 388 Greenwich Street, New York, New York 10013, Account No. 36852248, Attention: William Clark. "Aggregate Amount of Financing Outstanding" at any time means the aggregate amount of proceeds received in connection with a Permitted Receivables Financing, less (a) any amounts collected in connection with the accounts receivable sold, conveyed or otherwise transferred pursuant to such financing and (b) the amount of any defaulted accounts receivable the uncollectibility of which is a risk assumed by the transferee of such accounts receivable. "Applicable Lending Office" means, with respect to each Lender, such Lender's Domestic Lending Office in the case of a Base Rate Advance and such Lender's Eurodollar Lending Office in the case of a Eurodollar Rate Advance and, in the case of a Competitive Bid Advance, the office of such Lender notified by such Lender to the Agent as its Applicable Lending Office with respect to such Competitive Bid Advance. "Applicable Margin" means, for Base Rate Advances, 0.0% per annum and, for Eurodollar Rate Advances as of any date, a percentage per annum determined by reference to the Public Debt Rating in effect on such date as set forth below: - ---------------------------------- -------------------------------- Public Debt Rating Applicable Margin for S&P/Moody's Eurodollar Rate Advances - ---------------------------------- -------------------------------- - ---------------------------------- -------------------------------- Level 1 A+ or A1 0.180% - ---------------------------------- -------------------------------- - ---------------------------------- -------------------------------- Level 2 Lower than Level 1 but at least A or A2 0.220% - ---------------------------------- -------------------------------- - ---------------------------------- -------------------------------- Level 3 Lower than Level 2 but at least A- or A3 0.305% - ---------------------------------- -------------------------------- - ---------------------------------- -------------------------------- Level 4 Lower than Level 3 but at least BBB+ or Baa1 0.500% - ---------------------------------- -------------------------------- - ---------------------------------- -------------------------------- Level 5 Lower than Level 4 0.800% - ---------------------------------- -------------------------------- "Applicable Percentage" means, for each date, a percentage per annum determined by reference to the Public Debt Rating in effect on such date as set forth below: - ---------------------------------- ------------------------------- Public Debt Rating Applicable S&P/Moody's Percentage - ---------------------------------- ------------------------------- - ---------------------------------- ------------------------------- Level 1 0.070% A+ or A1 - ---------------------------------- ------------------------------- - ---------------------------------- ------------------------------- Level 2 Lower than Level 1 but at least A or A2 0.080% - ---------------------------------- ------------------------------- - ---------------------------------- ------------------------------- Level 3 Lower than Level 2 but at least A- or A3 0.095% - ---------------------------------- ------------------------------- - ---------------------------------- ------------------------------- Level 4 Lower than Level 3 but at least BBB+ or Baa1 0.125% - ---------------------------------- ------------------------------- - ---------------------------------- ------------------------------- Level 5 0.200% Lower than Level 4 - ---------------------------------- ------------------------------- "Applicable Utilization Fee" means, for each date that the aggregate principal amount of the Advances exceeds 25% of the aggregate Commitments, a percentage per annum determined by reference to the Public Debt Rating in effect on such date as set forth below: - ---------------------------------- ------------------------------- Public Debt Rating Applicable S&P/Moody's Utilization Fee - ---------------------------------- ------------------------------- - ---------------------------------- ------------------------------- Level 1 0.050% A+ or A1 - ---------------------------------- ------------------------------- - ---------------------------------- ------------------------------- Level 2 Lower than Level 1 but at least A or A2 0.050% - ---------------------------------- ------------------------------- - ---------------------------------- ------------------------------- Level 3 Lower than Level 2 but at least A- or A3 0.100% - ---------------------------------- ------------------------------- 2 - ---------------------------------- ------------------------------- Level 4 Lower than Level 3 but at least BBB+ or Baa1 0.125% - ---------------------------------- ------------------------------- - ---------------------------------- ------------------------------- Level 5 0.250% Lower than Level 4 - ---------------------------------- ------------------------------- "Assignment and Acceptance" means an assignment and acceptance entered into by a Lender and an Eligible Assignee, and accepted by the Agent, in substantially the form of Exhibit C hereto. "Assuming Lender" has the meaning specified in Section 2.17(b). "Assumption Agreement" has the meaning specified in Section 2.17(c)(ii). "Base Rate" means a fluctuating interest rate per annum in effect from time to time, which rate per annum shall at all times be equal to the highest of: (a) the rate of interest announced publicly by Citibank in New York, New York, from time to time, as Citibank's base rate; (b) the sum (adjusted to the nearest 1/4 of 1% or, if there is no nearest 1/4 of 1%, to the next higher 1/4 of 1%) of (i)1/2of 1% per annum, plus (ii) the rate obtained by dividing (A) the latest three-week moving average of secondary market morning offering rates in the United States for three-month certificates of deposit of major United States money market banks, such three-week moving average (adjusted to the basis of a year of 360 days) being determined weekly on each Monday (or, if such day is not a Business Day, on the next succeeding Business Day) for the three-week period ending on the previous Friday by Citibank on the basis of such rates reported by certificate of deposit dealers to and published by the Federal Reserve Bank of New York or, if such publication shall be suspended or terminated, on the basis of quotations for such rates received by Citibank from three New York certificate of deposit dealers of recognized standing selected by Citibank, by (B) a percentage equal to 100% minus the average of the daily percentages specified during such three-week period by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including, but not limited to, any emergency, supplemental or other marginal reserve requirement) for Citibank with respect to liabilities consisting of or including (among other liabilities) three-month U.S. dollar non-personal time deposits in the United States, plus (iii) the average during such three-week period of the annual assessment rates estimated by Citibank for determining the then current annual assessment payable by Citibank to the Federal Deposit Insurance Corporation (or any successor) for insuring U.S. dollar deposits of Citibank in the United States; and (c) 1/2 of one percent per annum above the Federal Funds Rate. "Base Rate Advance" means an Advance that bears interest as provided in Section 2.07(a)(i). "Borrowing" means a Revolving Credit Borrowing or a Competitive Bid Borrowing. "Business Day" means a day of the year on which banks are not required or authorized by law to close in New York City and, if the applicable Business Day relates to any Eurodollar Rate Advances, on which dealings are carried on in the London interbank market. "Commitment" means as to any Lender (a) the amount set forth opposite such Lender's name on the signature pages hereof, (b) if such Lender has become a Lender hereunder pursuant to an Assumption Agreement, the amount set forth in such Assumption Agreement or (c) if such Lender has entered into any Assignment and Acceptance, the amount set forth for such Lender in 3 the Register maintained by the Agent pursuant to Section 8.07(d), as such amount may be reduced pursuant to Section 2.05 or increased pursuant to Section 2.17. "Commitment Date" has the meaning specified in Section 2.17(b). "Commitment Increase" has the meaning specified in Section 2.17(a). "Competitive Bid Advance" means an advance by a Lender to the Borrower as part of a Competitive Bid Borrowing resulting from the competitive bidding procedure described in Section 2.03 and refers to a Fixed Rate Advance or a LIBO Rate Advance. "Competitive Bid Borrowing" means a borrowing consisting of simultaneous Competitive Bid Advances from each of the Lenders whose offer to make one or more Competitive Bid Advances as part of such borrowing has been accepted by the Borrower under the competitive bidding procedure described in Section 2.03. "Competitive Bid Note" means a promissory note of the Borrower of a Competitive Bid Advance payable to the order of any Lender, in substantially the form of Exhibit A-2 hereto, evidencing the indebtedness of the Borrower to such Lender resulting from such Competitive Bid Advance made by such Lender. "Competitive Bid Reduction" has the meaning specified in Section 2.01. "Confidential Information" means information that the Borrower furnishes to the Agent or any Lender which information is non-public, confidential or proprietary in nature, but does not include any such information (a) that is or becomes generally available to the public other than as the result of an unauthorized disclosure by the Agent or any Lender or (b) that is or becomes available to the Agent or such Lender from a source other than the Borrower and the Agent or such Lender had no reason to believe that such source did not have legitimate possession of such information or such source was under any obligation to keep such information confidential. "Consolidated" refers to the consolidation of accounts in accordance with GAAP. "Consolidated Net Worth" at any time, means the sum of the capital stock accounts (excluding capital stock subscribed for and unissued), surplus accounts (including earned surplus, capital surplus and the balance of the current profit and loss account not transferred to surplus) and other equity accounts (including accumulated currency adjustments, unrealized investment or derivative gains and losses, minimum pension liabilities and reserve for ESOP debt retirement) of the Borrower and its Subsidiaries appearing on the most recent Consolidated balance sheet of the Borrower and its Subsidiaries delivered pursuant to Section 5.01(f)(i) or (ii), as applicable, prepared in accordance with generally accepted accounting principles consistent with those applied in the preparation of the financial statements referred to in Section 4.01(e). "Convert", "Conversion" and "Converted" each refers to a conversion of Revolving Credit Advances of one Type into Revolving Credit Advances of the other Type pursuant to Section 2.08 or 2.09. "Debt" of any Person means, without duplication, (a) all indebtedness of such Person for borrowed money, (b) all obligations of such Person for the deferred purchase price of property or services (other than trade payables not overdue by more than 60 days incurred in the ordinary course of such Person's business), (c) all obligations of such Person evidenced by notes, bonds, debentures or other similar instruments, (d) all obligations of such Person created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (e) all obligations of such Person as lessee under leases that have been or should be, in accordance with GAAP, recorded as capital leases, (f) all obligations, contingent or otherwise, of such Person in 4 respect of acceptances, letters of credit or similar extensions of credit, (g) all obligations of such Person in respect of Hedge Agreements, (h) all Debt of others referred to in clauses (a) through (g) above or clause (i) below guaranteed directly or indirectly in any manner by such Person, or in effect guaranteed directly or indirectly by such Person through an agreement (1) to pay or purchase such Debt or to advance or supply funds for the payment or purchase of such Debt, (2) to purchase, sell or lease (as lessee or lessor) property, or to purchase or sell services, primarily for the purpose of enabling the debtor to make payment of such Debt or to assure the holder of such Debt against loss, (3) to supply funds to or in any other manner invest in the debtor (including any agreement to pay for property or services irrespective of whether such property is received or such services are rendered) or (4) otherwise to assure a creditor against loss, and (i) all Debt referred to in clauses (a) through (h) above secured by (or for which the holder of such Debt has an existing right, contingent or otherwise, to be secured by) any Lien on property (including, without limitation, accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Debt, provided, that, if such Person has not assumed or become liable for the payment of such Debt, it shall be taken into account only to the extent of the book value or fair market value, whichever is greater, of the property subject to such Lien. "Debt for Borrowed Money" of any Person means, without duplication, (a) all indebtedness of such Person for borrowed money, (b) all obligations of such Person evidenced by notes, bonds, debentures or other similar instruments, (c) all obligations of such Person as lessee under leases that have been or should be, in accordance with GAAP, recorded as capital leases, (d) during the term of a Permitted Receivables Financing, the Aggregate Amount of Financing Outstanding in connection with domestic accounts receivable pursuant to such financing and (e) all debt of others referred to in clauses (a) through (d) above guaranteed directly or indirectly in any manner by such Person. "Default" means any Event of Default or any event that would constitute an Event of Default but for the requirement that notice be given or time elapse or both. "Disclosed Litigation" has the meaning specified in Section 3.01(b). "Domestic Lending Office" means, with respect to any Lender, the office of such Lender specified as its "Domestic Lending Office" opposite its name on Schedule I hereto or in the Assumption Agreement or the Assignment and Acceptance pursuant to which it became a Lender, or such other office of such Lender as such Lender may from time to time specify to the Borrower and the Agent. "EDGAR" means the electronic disclosure system for the receipt, storage, retrieval and dissemination of public documents filed with the Securities and Exchange Commission. "Effective Date" has the meaning specified in Section 3.01. "Eligible Assignee" means (i) a Lender; (ii) an Affiliate of a Lender; and (iii) any other Person approved by the Agent and, unless an Event of Default has occurred and is continuing at the time any assignment is effected in accordance with Section 8.07, the Borrower, such approval not to be unreasonably withheld or delayed; provided, however, that neither the Borrower nor an Affiliate of the Borrower shall qualify as an Eligible Assignee. "Environmental Action" means any action, suit, demand, demand letter, claim, notice of non-compliance or violation, notice of liability or potential liability, investigation, proceeding, consent order or consent agreement relating to any Environmental Law, Environmental Permit or Hazardous Materials or arising from alleged injury or threat of injury to health, safety or the environment, including, without limitation, (a) by any governmental or regulatory authority for enforcement, cleanup, removal, response, remedial or other actions or damages and (b) by any governmental or regulatory authority or any third party for damages, contribution, indemnification, cost recovery, compensation or injunctive relief. "Environmental Law" means any federal, state, local or foreign statute, law, ordinance, rule, regulation, code, order, judgment, decree or 5 written judicial policy or guidance that is publicly available, in each case relating to pollution or protection of the environment, health and safety as they relate to Hazardous Materials or natural resources, including, without limitation, those relating to the use, handling, transportation, treatment, storage, disposal, release or discharge of Hazardous Materials. "Environmental Permit" means any permit, approval, identification number, license or other authorization required under any Environmental Law. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and rulings issued thereunder. "ERISA Affiliate" means any Person that for purposes of Title IV of ERISA is a member of the Borrower's controlled group, or under common control with the Borrower, within the meaning of Section 414 of the Internal Revenue Code. "ERISA Event" means (a) the occurrence of a reportable event, within the meaning of Section 4043 of ERISA, with respect to any Plan unless the 30-day notice requirement with respect to such event has been waived by the PBGC; (b) the application for a minimum funding waiver with respect to a Plan; (c) the provision by the administrator of any Plan of a notice of intent to terminate such Plan pursuant to Section 4041(c) of ERISA (including any such notice with respect to a plan amendment referred to in Section 4041(e) of ERISA); (d) the cessation of operations at a facility of the Borrower or any ERISA Affiliate in the circumstances described in Section 4062(e) of ERISA; (e) the withdrawal by the Borrower or any ERISA Affiliate from a Multiple Employer Plan during a plan year for which it was a substantial employer, as defined in Section 4001(a)(2) of ERISA; (f) the conditions for the imposition of a lien under Section 302(f) of ERISA shall have been met with respect to any Plan; (g) the adoption of an amendment to a Plan requiring the provision of security to such Plan pursuant to Section 307 of ERISA; or (h) the institution by the PBGC of proceedings to terminate a Plan pursuant to Section 4042 of ERISA, or the occurrence of any event or condition described in Section 4042 of ERISA that constitutes grounds for the termination of, or the appointment of a trustee to administer, a Plan. "Eurocurrency Liabilities" has the meaning assigned to that term in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Eurodollar Lending Office" means, with respect to any Lender, the office of such Lender specified as its "Eurodollar Lending Office" opposite its name on Schedule I hereto or in the Assumption Agreement or the Assignment and Acceptance pursuant to which it became a Lender (or, if no such office is specified, its Domestic Lending Office), or such other office of such Lender as such Lender may from time to time specify to the Borrower and the Agent. "Eurodollar Rate" means, for any Interest Period for each Eurodollar Rate Advance comprising part of the same Revolving Credit Borrowing, an interest rate per annum equal to the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Telerate Markets Page 3750 (or any successor page) as the London interbank offered rate for deposits in U.S. dollars at approximately 11:00 A.M. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period or, if for any reason such rate is not available, the average (rounded upward to the nearest whole multiple of 1/16 of 1% per annum, if such average is not such a multiple) of the rate per annum at which deposits in U.S. dollars are offered by the principal office of each of the Reference Banks in London, England to prime banks in the London interbank market at 11:00 A.M. (London time) two Business Days before the first day of such Interest Period in an amount substantially equal to such Reference Bank's ratable share of an amount equal to such Revolving Credit Borrowing to be outstanding during such Interest Period and for a period equal to such Interest Period. If the Telerate Markets Page 3750 (or any successor page) is unavailable, the Eurodollar Rate for any Interest Period for each Advance comprising part of the same Revolving Credit Borrowing shall be determined by the Agent on the basis of applicable rates furnished to and received by the Agent from the Reference Banks two Business Days before the first day of such Interest Period, subject, however, to the provisions of Section 2.08. 6 "Eurodollar Rate Advance" means an Advance that bears interest as provided in Section 2.07(a)(ii). "Eurodollar Rate Reserve Percentage" for any Interest Period for all Eurodollar Rate Advances or LIBO Rate Advances comprising part of the same Borrowing means the reserve percentage applicable two Business Days before the first day of such Interest Period under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including, without limitation, any emergency, supplemental or other marginal reserve requirement) for a member bank of the Federal Reserve System in New York City with respect to liabilities or assets consisting of or including Eurocurrency Liabilities (or with respect to any other category of liabilities that includes deposits by reference to which the interest rate on Eurodollar Rate Advances or LIBO Rate Advances is determined) having a term equal to such Interest Period. "Events of Default" has the meaning specified in Section 6.01. "Federal Funds Rate" means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for such day on such transactions received by the Agent from three Federal funds brokers of recognized standing selected by it. "Fixed Rate Advances" has the meaning specified in Section 2.03(a)(i). "GAAP" has the meaning specified in Section 1.03. "Hazardous Materials" means (a) petroleum and petroleum products, byproducts or breakdown products, radioactive materials, asbestos-containing materials, polychlorinated biphenyls and radon gas and (b) any other chemicals, materials or substances designated, classified or regulated as hazardous or toxic or as a pollutant or contaminant under any Environmental Law. "Hedge Agreements" means interest rate swap, cap or collar agreements, interest rate future or option contracts, currency swap agreements, currency future or option contracts and other similar agreements. "Increase Date" has the meaning specified in Section 2.17(a). "Increasing Lender" has the meaning specified in Section 2.17(b). "Information Memorandum" means the information memorandum dated May 5, 2004 (including all exhibits and attachments thereto) used by the Agent in connection with the syndication of the Commitments, as up-dated from time to time by any subsequent filings by the Borrower with the Securities and Exchange Commission. "Interest Period" means, for each Eurodollar Rate Advance comprising part of the same Revolving Credit Borrowing and each LIBO Rate Advance comprising part of the same Competitive Bid Borrowing, the period commencing on the date of such Eurodollar Rate Advance or LIBO Rate Advance or the date of the Conversion of any Base Rate Advance into such Eurodollar Rate Advance and ending on the last day of the period selected by the Borrower pursuant to the provisions below and, thereafter, with respect to Eurodollar Rate Advances, each subsequent period commencing on the last day of the immediately preceding Interest Period and ending on the last day of the period selected by the Borrower pursuant to the provisions below. The duration of each such Interest Period shall be one, two, three or six months or, if available to all Lenders, nine months, as the Borrower may, 7 upon notice received by the Agent not later than 11:00 A.M. (New York City time) on the third Business Day prior to the first day of such Interest Period, select; provided, however, that: (i) the Borrower may not select any Interest Period that ends after the Termination Date; (ii) Interest Periods commencing on the same date for Eurodollar Rate Advances comprising part of the same Revolving Credit Borrowing or for LIBO Rate Advances comprising part of the same Competitive Bid Borrowing shall be of the same duration; (iii) whenever the last day of any Interest Period would otherwise occur on a day other than a Business Day, the last day of such Interest Period shall be extended to occur on the next succeeding Business Day, provided, however, that, if such extension would cause the last day of such Interest Period to occur in the next following calendar month, the last day of such Interest Period shall occur on the next preceding Business Day; and (iv) whenever the first day of any Interest Period occurs on the last day of a calendar month or on a day of an initial calendar month for which there is no numerically corresponding day in the calendar month that succeeds such initial calendar month by the number of months equal to the number of months in such Interest Period, such Interest Period shall end on the last Business Day of such succeeding calendar month. "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated and rulings issued thereunder. "Lenders" means the Initial Lenders, each Assuming Lender that shall become a party hereto pursuant to Section 2.17 and each Person that shall become a party hereto pursuant to Section 2.11, Section 2.12 or Section 8.07. "Leverage Ratio" of the Borrower means the ratio of Consolidated Debt for Borrowed Money of the Borrower and its Subsidiaries to the sum of Consolidated Debt for Borrowed Money of the Borrower and its Subsidiaries plus Consolidated Net Worth. "LIBO Rate" means, for any Interest Period for all LIBO Rate Advances comprising part of the same Competitive Bid Borrowing, an interest rate per annum equal to the rate per annum (rounded upward to the nearest 1/100 of 1%) appearing on Telerate Markets Page 3750 (or any successor page) as the London interbank offered rate for deposits in U.S. dollars at approximately 11:00 A.M. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period or, if for any reason such rate is not available, the average (rounded upward to the nearest whole multiple of 1/16 of 1% per annum, if such average is not such a multiple) of the rate per annum at which deposits in U.S. dollars are offered by the principal office of each of the Reference Banks in London, England to prime banks in the London interbank market at 11:00 A.M. (London time) two Business Days before the first day of such Interest Period in an amount substantially equal to the amount that would be the Reference Banks' respective ratable shares of such Borrowing if such Borrowing were to be a Revolving Credit Borrowing to be outstanding during such Interest Period and for a period equal to such Interest Period. If the Telerate Markets Page 3750 (or any successor page) is unavailable, the LIBO Rate for any Interest Period for each LIBO Rate Advance comprising part of the same Competitive Bid Borrowing shall be determined by the Agent on the basis of applicable rates furnished to and received by the Agent from the Reference Banks two Business Days before the first day of such Interest Period, subject, however, to the provisions of Section 2.08. "LIBO Rate Advance" has the meaning specified in Section 2.03(a)(i). 8 "Lien" means any lien, security interest or other charge or encumbrance of any kind, or any other type of preferential arrangement having the effect of security, including, without limitation, the lien or retained security title of a conditional vendor. "Material Adverse Change" means any material adverse change in the financial condition or results of operations of the Borrower or the Borrower and its Consolidated Subsidiaries taken as a whole. "Material Adverse Effect" means a material adverse effect on (a) the financial condition or results of operations of the Borrower or the Borrower and its Consolidated Subsidiaries taken as a whole or (b) the ability of the Borrower to perform its obligations under this Agreement or any Note. "Material Subsidiary" means, at any time, a domestic Consolidated Subsidiary of the Borrower having (i) at least 10% of the total Consolidated assets of the Borrower and its Subsidiaries (determined as of the last day of the most recent fiscal quarter of the Borrower) or (ii) at least 10% of the Consolidated net sales of the Borrower and its Subsidiaries for the twelve month period ending on the last day of the most recent fiscal quarter of the Borrower. "Moody's" means Moody's Investors Service, Inc. "Multiemployer Plan" means a multiemployer plan, as defined in Section 4001(a)(3) of ERISA, to which the Borrower or any ERISA Affiliate is making or accruing an obligation to make contributions, or has within any of the preceding five plan years made or accrued an obligation to make contributions. "Multiple Employer Plan" means a single employer plan, as defined in Section 4001(a)(15) of ERISA, that (a) is maintained for employees of the Borrower or any ERISA Affiliate and at least one Person other than the Borrower and the ERISA Affiliates or (b) was so maintained and in respect of which the Borrower or any ERISA Affiliate could have liability under Section 4064 or 4069 of ERISA in the event such plan has been or were to be terminated. "Note" means a Revolving Credit Note or a Competitive Bid Note. "Notice of Revolving Credit Borrowing" has the meaning specified in Section 2.02(a). "Notice of Competitive Bid Borrowing" has the meaning specified in Section 2.03(a). "PBGC" means the Pension Benefit Guaranty Corporation (or any successor). "Permitted Receivables Financing" means any financing pursuant to which the Borrower or any Subsidiary of the Borrower may sell, convey, or otherwise transfer to a Receivables Subsidiary or any other Person, or grant a security interest in, any accounts receivable (and related assets) of the Borrower or such Subsidiary, provided that such financing shall be on customary market terms and shall be with limited or no recourse to the Borrower and its Subsidiaries (other than the Receivables Subsidiary) except to the extent customary for such transactions. "Person" means an individual, partnership, corporation (including a business trust), joint stock company, trust, unincorporated association, joint venture, limited liability company or other entity, or a government or any political subdivision or agency thereof. "Plan" means a Single Employer Plan or a Multiple Employer Plan. "Public Debt Rating" means, as of any date, the lowest rating that has been most recently announced by either S&P or Moody's, as the case may be, for any class of non-credit enhanced long-term senior unsecured debt issued by the Borrower. For purposes of the foregoing, (a) if only one of S&P and Moody's shall have in effect a Public Debt Rating, the Applicable Margin, the Applicable Percentage and the Applicable Utilization Fee shall be determined by reference to the available rating; (b) if neither S&P nor 9 Moody's shall have in effect a Public Debt Rating, the Applicable Margin, the Applicable Percentage and the Applicable Utilization Fee will be set in accordance with Level 5 under the definition of "Applicable Margin", "Applicable Percentage" or "Applicable Utilization Fee", as the case may be; (c) if the ratings established by S&P and Moody's shall fall within different levels, the Applicable Margin, the Applicable Percentage and the Applicable Utilization Fee shall be based upon the higher rating, provided that if the lower of such ratings is more than one level below the higher of such ratings, then the Applicable Margin, the Applicable Percentage and the Applicable Utilization Fee shall be based on the rating that is the level above the lower of such ratings; (d) if any rating established by S&P or Moody's shall be changed, such change shall be effective as of the date on which such change is first announced publicly by the rating agency making such change; and (e) if S&P or Moody's shall change the basis on which ratings are established, each reference to the Public Debt Rating announced by S&P or Moody's, as the case may be, shall refer to the then equivalent rating by S&P or Moody's, as the case may be. "Receivables Subsidiary" means a bankruptcy-remote, special-purpose wholly owned Subsidiary formed in connection with a Permitted Receivables Financing. "Reference Banks" means Citibank, JPMorgan Chase Bank and The Bank of Tokyo-Mitsubishi, Ltd., Chicago Branch; provided that the Borrower may at any time substitute another Lender as one of the Reference Banks, but such substitution shall terminate after 30 days if within such period the Required Lenders shall have notified the Agent of their objection to such substitution. "Register" has the meaning specified in Section 8.07(c). "Required Lenders" means at any time Lenders owed more than 50% of the then aggregate unpaid principal amount of the Revolving Credit Advances owing to Lenders, or, if no such principal amount is then outstanding, Lenders having more than 50% of the Commitments. "Revolving Credit Advance" means an advance by a Lender to the Borrower as part of a Revolving Credit Borrowing and refers to a Base Rate Advance or a Eurodollar Rate Advance (each of which shall be a "Type" of Revolving Credit Advance). "Revolving Credit Borrowing" means a borrowing consisting of simultaneous Revolving Credit Advances of the same Type made by each of the Lenders pursuant to Section 2.01. "Revolving Credit Note" means a promissory note of the Borrower payable to the order of any Lender, in substantially the form of Exhibit A-1 hereto, evidencing the aggregate indebtedness of the Borrower to such Lender resulting from the Revolving Credit Advances made by such Lender. "S&P" means Standard & Poor's, a division of The McGraw-Hill Companies, Inc. "Single Employer Plan" means a single employer plan, as defined in Section 4001(a)(15) of ERISA, that (a) is maintained for employees of the Borrower or any ERISA Affiliate and no Person other than the Borrower and the ERISA Affiliates or (b) was so maintained and in respect of which the Borrower or any ERISA Affiliate could have liability under Section 4069 of ERISA in the event such plan has been or were to be terminated. "Subsidiary" of any Person means any corporation, partnership, joint venture, limited liability company, trust or estate of which (or in which) more than 50% of (a) the issued and outstanding capital stock having ordinary voting power to elect a majority of the Board of Directors of such corporation (irrespective of whether at the time capital stock of any other class or classes of such corporation shall or might have voting power upon the occurrence of any contingency), (b) the interest in the capital or profits of such limited liability company, partnership or joint venture or (c) the beneficial interest in such trust or estate is at the time directly or indirectly owned or controlled by such Person, by such Person and one or more of its other Subsidiaries or by one or more of such Person's other Subsidiaries. 10 "Termination Date" means the earlier of (a) June 4, 2009 and (b) the date of termination in whole of the Commitments pursuant to Section 2.05 or 6.01. "Voting Stock" means capital stock issued by a corporation, or equivalent interests in any other Person, the holders of which are ordinarily, in the absence of contingencies, entitled to vote for the election of directors (or persons performing similar functions) of such Person, even if the right so to vote has been suspended by the happening of such a contingency. SECTION 1.02. Computation of Time Periods. In this Agreement in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each mean "to but excluding". SECTION 1.03. Accounting Terms. All accounting terms not specifically defined herein shall be construed in accordance with generally accepted accounting principles consistent with those applied in the preparation of the financial statements referred to in Section 4.01(e) ("GAAP"), notwithstanding any changes to such principles which may become applicable subsequent to the date of such financial statements. ARTICLE II AMOUNTS AND TERMS OF THE ADVANCES SECTION 2.01. The Revolving Credit Advances. Each Lender severally agrees, on the terms and conditions hereinafter set forth, to make Revolving Credit Advances to the Borrower from time to time on any Business Day during the period from the Effective Date until the Termination Date in an aggregate amount not to exceed at any time outstanding such Lender's Commitment, provided that the aggregate amount of the Commitments of the Lenders shall be deemed used from time to time to the extent of the aggregate amount of the Competitive Bid Advances then outstanding and such deemed use of the aggregate amount of the Commitments shall be allocated among the Lenders ratably according to their respective Commitments (such deemed use of the aggregate amount of the Commitments being a "Competitive Bid Reduction"). Each Revolving Credit Borrowing shall be in an aggregate amount of $10,000,000 or an integral multiple of $1,000,000 in excess thereof and shall consist of Revolving Credit Advances of the same Type made on the same day by the Lenders ratably according to their respective Commitments. Within the limits of each Lender's Commitment, the Borrower may borrow under this Section 2.01, prepay pursuant to Section 2.10 and reborrow under this Section 2.01. SECTION 2.02. Making the Revolving Credit Advances. (a) Each Revolving Credit Borrowing shall be made on notice, given not later than 11:00 A.M. (New York City time) on the third Business Day prior to the date of the proposed Revolving Credit Borrowing in the case of a Revolving Credit Borrowing consisting of Eurodollar Rate Advances, or not later than 11:00 A.M. (New York City time) on the date of the proposed Revolving Credit Borrowing in the case of a Revolving Credit Borrowing consisting of Base Rate Advances, by the Borrower to the Agent, which shall give to each Lender prompt notice thereof by telecopier. Each such notice of a Revolving Credit Borrowing (a "Notice of Revolving Credit Borrowing") shall be by telephone, confirmed immediately in writing, or telecopier, in substantially the form of Exhibit B-1 hereto, specifying therein the requested (i) date of such Borrowing, (ii) Type of Advances comprising such Revolving Credit Borrowing, (iii) aggregate amount of such Revolving Credit Borrowing, and (iv) in the case of a Revolving Credit Borrowing consisting of Eurodollar Rate Advances, initial Interest Period for each such Advance. Each Lender shall, before 1:00 P.M. (New York City time) on the date of such Revolving Credit Borrowing, make available for the account of its Applicable Lending Office to the Agent at the Agent's Account, in same day funds, such Lender's ratable portion of such Revolving Credit Borrowing. After the Agent's receipt of such funds and upon fulfillment of the applicable conditions set forth in Article III, the Agent will make such funds available to the Borrower that requested such Revolving Credit Borrowing at the Agent's address referred to in Section 8.02. (b) Anything in subsection (a) above to the contrary notwithstanding, (i) the Borrower may not select Eurodollar Rate Advances for any Revolving Credit Borrowing if the aggregate amount of such Revolving Credit Borrowing is less than $10,000,000 or if the obligation of the Lenders to make Eurodollar Rate Advances shall then be suspended pursuant to Section 2.08 or 2.12 and (ii) the Eurodollar Rate Advances may not be outstanding as part of more than eight separate Revolving Credit Borrowings. 11 (c) Each Notice of Revolving Credit Borrowing shall be irrevocable and binding on the Borrower. In the case of any Revolving Credit Borrowing that the related Notice of Revolving Credit Borrowing specifies is to be comprised of Eurodollar Rate Advances, the Borrower shall indemnify each Lender against any loss, cost or expense incurred by such Lender as a result of any failure to fulfill on or before the date specified in such Notice of Revolving Credit Borrowing for such Revolving Credit Borrowing the applicable conditions set forth in Article III, including, without limitation, any loss (excluding loss of anticipated profits), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender to fund the Revolving Credit Advance to be made by such Lender as part of such Revolving Credit Borrowing when such Revolving Credit Advance, as a result of such failure, is not made on such date. (d) Unless the Agent shall have received notice from a Lender prior to the date of any Revolving Credit Borrowing that such Lender will not make available to the Agent such Lender's ratable portion of such Revolving Credit Borrowing, the Agent may assume that such Lender has made such portion available to the Agent on the date of such Revolving Credit Borrowing in accordance with subsection (a) of this Section 2.02 and the Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Lender shall not have so made such ratable portion available to the Agent, such Lender and the Borrower severally agree to repay to the Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Agent, at (i) in the case of the Borrower, the interest rate applicable at the time to Revolving Credit Advances comprising such Revolving Credit Borrowing and (ii) in the case of such Lender, the Federal Funds Rate. If such Lender shall repay to the Agent such corresponding amount, such amount so repaid shall constitute such Lender's Revolving Credit Advance as part of such Borrowing for purposes of this Agreement. (e) The failure of any Lender to make the Revolving Credit Advance to be made by it as part of any Revolving Credit Borrowing shall not relieve any other Lender of its obligation, if any, hereunder to make its Revolving Credit Advance on the date of such Borrowing, but no Lender shall be responsible for the failure of any other Lender to make the Revolving Credit Advance to be made by such other Lender on the date of any Revolving Credit Borrowing. SECTION 2.03. The Competitive Bid Advances. (a) Each Lender severally agrees that the Borrower may make Competitive Bid Borrowings under this Section 2.03 from time to time on any Business Day during the period from the date hereof until the date occurring 30 days prior to the Termination Date in the manner set forth below; provided that, following the making of each Competitive Bid Borrowing, the aggregate amount of the Advances then outstanding shall not exceed the aggregate amount of the Commitments of the Lenders (computed without regard to any Competitive Bid Reduction). (i) The Borrower may request a Competitive Bid Borrowing under this Section 2.03 by delivering to the Agent, by telecopier, a notice of a Competitive Bid Borrowing (a "Notice of Competitive Bid Borrowing"), in substantially the form of Exhibit B-2 hereto, specifying therein the requested (v) date of such proposed Competitive Bid Borrowing, (w) aggregate amount of such proposed Competitive Bid Borrowing, (x) in the case of a Competitive Bid Borrowing consisting of LIBO Rate Advances, Interest Period, or in the case of a Competitive Bid Borrowing consisting of Fixed Rate Advances, maturity date for repayment of each Fixed Rate Advance to be made as part of such Competitive Bid Borrowing (which maturity date may not be earlier than the date occurring 30 days after the date of such Competitive Bid Borrowing or later than the Termination Date), (y) interest payment date or dates relating thereto, and (z) other terms (if any) to be applicable to such Competitive Bid Borrowing, not later than 10:00 A.M. (New York City time) (A) at least one Business Day prior to the date of the proposed Competitive Bid Borrowing, if the Borrower shall specify in the Notice of Competitive Bid Borrowing that the rates of interest to be offered by the Lenders shall be fixed rates per annum (the Advances comprising any such Competitive Bid Borrowing being referred to herein as "Fixed Rate Advances") and (B) at least five Business Days prior to the date of the proposed Competitive Bid Borrowing, if the Borrower shall instead specify in the Notice of Competitive Bid Borrowing that the rates of interest be offered by the Lenders are to be based on the LIBO Rate (the Advances comprising such Competitive Bid Borrowing being referred to herein as "LIBO Rate Advances"). Each Notice of Competitive Bid Borrowing shall be irrevocable and binding on the Borrower. The Agent shall 12 in turn promptly notify each Lender of each request for a Competitive Bid Borrowing received by it from the Borrower by sending such Lender a copy of the related Notice of Competitive Bid Borrowing. (ii) Each Lender may, if, in its sole discretion, it elects to do so, irrevocably offer to make one or more Competitive Bid Advances to the Borrower as part of such proposed Competitive Bid Borrowing at a rate or rates of interest specified by such Lender in its sole discretion, by notifying the Agent (which shall give prompt notice thereof to the Borrower), before 9:30 A.M. (New York City time) on the date of such proposed Competitive Bid Borrowing, in the case of a Competitive Bid Borrowing consisting of Fixed Rate Advances and before 10:00 A.M. (New York City time) three Business Days before the date of such proposed Competitive Bid Borrowing, in the case of a Competitive Bid Borrowing consisting of LIBO Rate Advances, of the minimum amount and maximum amount of each Competitive Bid Advance which such Lender would be willing to make as part of such proposed Competitive Bid Borrowing (which amounts may, subject to the proviso to the first sentence of this Section 2.03(a), exceed such Lender's Commitment, if any), the rate or rates of interest therefor and such Lender's Applicable Lending Office with respect to such Competitive Bid Advance; provided that if the Agent in its capacity as a Lender shall, in its sole discretion, elect to make any such offer, it shall notify the Borrower of such offer at least 30 minutes before the time and on the date on which notice of such election is to be given to the Agent by the other Lenders. If any Lender shall elect not to make such an offer, such Lender shall so notify the Agent, at least 30 minutes prior to the time at which notice of such election is to be given to the Agent by the other Lenders, and such Lender shall not be obligated to, and shall not, make any Competitive Bid Advance as part of such Competitive Bid Borrowing; provided that the failure by any Lender to give such notice shall not cause such Lender to be obligated to make any Competitive Bid Advance as part of such proposed Competitive Bid Borrowing. (iii) The Borrower shall, in turn, before 10:30 A.M. (New York City time) on the date of such proposed Competitive Bid Borrowing, in the case of a Competitive Bid Borrowing consisting of Fixed Rate Advances and before 11:00 A.M. (New York City time) three Business Days before the date of such proposed Competitive Bid Borrowing, in the case of a Competitive Bid Borrowing consisting of LIBO Rate Advances, either: (x) cancel such Competitive Bid Borrowing by giving the Agent notice to that effect, or (y) accept one or more of the offers made by any Lender or Lenders pursuant to paragraph (ii) above, in its sole discretion, by giving notice to the Agent of the amount of each Competitive Bid Advance (which amount shall be equal to or greater than the minimum amount, and equal to or less than the maximum amount, notified to the Borrower by the Agent on behalf of such Lender for such Competitive Bid Advance pursuant to paragraph (ii) above) to be made by each Lender as part of such Competitive Bid Borrowing, and reject any remaining offers made by Lenders pursuant to paragraph (ii) above by giving the Agent notice to that effect. The Borrower shall accept the offers made by any Lender or Lenders to make Competitive Bid Advances in order of the lowest to the highest rates of interest offered by such Lenders. If two or more Lenders have offered the same interest rate, the amount to be borrowed at such interest rate will be allocated among such Lenders in proportion to the amount that each such Lender offered at such interest rate. (iv) If the Borrower notifies the Agent that such Competitive Bid Borrowing is cancelled pursuant to paragraph (iii)(x) above, the Agent shall give prompt notice thereof to the Lenders and such Competitive Bid Borrowing shall not be made. (v) If the Borrower accepts one or more of the offers made by any Lender or Lenders pursuant to paragraph (iii)(y) above, the Agent shall in turn promptly notify (A) each Lender that has made an offer as described in paragraph (ii) above, of the date and aggregate amount of such Competitive Bid Borrowing and whether or not any offer or offers made by such Lender pursuant to paragraph (ii) above have been accepted by the Borrower, (B) each Lender that is to make a Competitive Bid Advance as part of such Competitive Bid Borrowing, of the amount of each Competitive Bid Advance to 13 be made by such Lender as part of such Competitive Bid Borrowing, and (C) each Lender that is to make a Competitive Bid Advance as part of such Competitive Bid Borrowing, upon receipt, that the Agent has received forms of documents appearing to fulfill the applicable conditions set forth in Article III. Each Lender that is to make a Competitive Bid Advance as part of such Competitive Bid Borrowing shall, before 12:00 noon (New York City time) on the date of such Competitive Bid Borrowing specified in the notice received from the Agent pursuant to clause (A) of the preceding sentence or any later time when such Lender shall have received notice from the Agent pursuant to clause (C) of the preceding sentence, make available for the account of its Applicable Lending Office to the Agent at the Agent's Account, in same day funds, such Lender's portion of such Competitive Bid Borrowing. Upon fulfillment of the applicable conditions set forth in Article III and after receipt by the Agent of such funds, the Agent will make such funds available to the Borrower at the Agent's address referred to in Section 8.02. Promptly after each Competitive Bid Borrowing the Agent will notify each Lender of the amount of the Competitive Bid Borrowing, the consequent Competitive Bid Reduction and the dates upon which such Competitive Bid Reduction commenced and will terminate. (vi) If the Borrower notifies the Agent that it accepts one or more of the offers made by any Lender or Lenders pursuant to paragraph (iii)(y) above, such notice of acceptance shall be irrevocable and binding on the Borrower. The Borrower shall indemnify each Lender against any loss, cost or expense incurred by such Lender as a result of any failure to fulfill on or before the date specified in the related Notice of Competitive Bid Borrowing for such Competitive Bid Borrowing the applicable conditions set forth in Article III, including, without limitation, any loss (excluding loss of anticipated profits), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender to fund the Competitive Bid Advance to be made by such Lender as part of such Competitive Bid Borrowing when such Competitive Bid Advance, as a result of such failure, is not made on such date. (b) Each Competitive Bid Borrowing shall be in an aggregate amount of $10,000,000 or an integral multiple of $1,000,000 in excess thereof and, following the making of each Competitive Bid Borrowing, the Borrower shall be in compliance with the limitation set forth in the proviso to the first sentence of subsection (a) above. (c) Within the limits and on the conditions set forth in this Section 2.03, the Borrower may from time to time borrow under this Section 2.03, repay or prepay pursuant to subsection (d) below, and reborrow under this Section 2.03, provided that a Competitive Bid Borrowing shall not be made within three Business Days of the date of any other Competitive Bid Borrowing. (d) The Borrower shall repay to the Agent for the account of each Lender that has made a Competitive Bid Advance, on the maturity date of each Competitive Bid Advance (such maturity date being that specified by the Borrower for repayment of such Competitive Bid Advance in the related Notice of Competitive Bid Borrowing delivered pursuant to subsection (a)(i) above and provided in the Competitive Bid Note evidencing such Competitive Bid Advance), the then unpaid principal amount of such Competitive Bid Advance. No Borrower shall have any right to prepay any principal amount of any Competitive Bid Advance unless, and then only on the terms, specified by the Borrower for such Competitive Bid Advance in the related Notice of Competitive Bid Borrowing delivered pursuant to subsection (a)(i) above and set forth in the Competitive Bid Note evidencing such Competitive Bid Advance. (e) The Borrower shall pay interest on the unpaid principal amount of each Competitive Bid Advance from the date of such Competitive Bid Advance to the date the principal amount of such Competitive Bid Advance is repaid in full, at the rate of interest for such Competitive Bid Advance specified by the Lender making such Competitive Bid Advance in its notice with respect thereto delivered pursuant to subsection (a)(ii) above, payable on the interest payment date or dates specified by the Borrower for such Competitive Bid Advance in the related Notice of Competitive Bid Borrowing delivered pursuant to subsection (a)(i) above, as provided in the Competitive Bid Note evidencing such Competitive Bid Advance. Upon the occurrence and during the continuance of an Event of Default under Section 6.01(a), the Borrower shall pay interest on the amount of unpaid principal of and interest on each Competitive Bid Advance owing to a Lender, payable in arrears on the date or dates interest is payable thereon, at a rate per annum equal at all times to 2% per annum above the rate per annum required 14 to be paid on such Competitive Bid Advance under the terms of the Competitive Bid Note evidencing such Competitive Bid Advance unless otherwise agreed in such Competitive Bid Note. (f) The indebtedness of the Borrower resulting from each Competitive Bid Advance made as part of a Competitive Bid Borrowing shall be evidenced by a separate Competitive Bid Note payable to the order of the Lender making such Competitive Bid Advance. SECTION 2.04. Fees. (a) Facility Fee. The Borrower agrees to pay to the Agent for the account of each Lender a facility fee on the aggregate amount of such Lender's Commitment from the Effective Date in the case of each Initial Lender and from the later of the Effective Date and the effective date specified in the Assumption Agreement or the Assignment and Acceptance pursuant to which it became a Lender in the case of each other Lender until the Termination Date at a rate per annum equal to the Applicable Percentage in effect from time to time, payable in arrears quarterly on the last day of each March, June, September and December commencing September 30, 2004, and on the Termination Date. (b) Agent's Fees. The Borrower shall pay to the Agent for its own account such fees as may from time to time be agreed between the Borrower and the Agent, and shall pay to each Joint Lead Arranger for its own account such fees and as may from time to time be agreed between the Borrower and such Joint Lead Arranger. SECTION 2.05. Optional Termination or Reduction of the Commitments. The Borrower shall have the right, upon at least three Business Days' notice to the Agent, to terminate in whole or reduce ratably in part the unused portions of the respective Commitments of the Lenders, provided that each partial reduction shall be in the aggregate amount of $10,000,000 or an integral multiple of $1,000,000 in excess thereof and provided further that the aggregate amount of the Commitments of the Lenders shall not be reduced to an amount that is less than the aggregate principal amount of the Competitive Bid Advances then outstanding. SECTION 2.06. Repayment of Revolving Credit Advances. The Borrower shall repay to the Agent for the ratable account of the Lenders on the Termination Date the aggregate principal amount of the Revolving Credit Advances then outstanding. SECTION 2.07. Interest on Revolving Credit Advances; Regulation D Compensation. (a) Scheduled Interest. The Borrower shall pay interest on the unpaid principal amount of each Revolving Credit Advance owing to each Lender from the date of such Revolving Credit Advance until such principal amount shall be paid in full, at the following rates per annum: (i) Base Rate Advances. During such periods as such Revolving Credit Advance is a Base Rate Advance, a rate per annum equal at all times to the sum of (x) the Base Rate in effect from time to time plus (y) the Applicable Margin in effect from time to time plus (2) the Applicable Utilization Fee, if any, in effect from time to time, payable in arrears quarterly on the last day of each March, June, September and December, during such periods and on the date such Base Rate Advance shall be Converted or paid in full. (ii) Eurodollar Rate Advances. During such periods as such Revolving Credit Advance is a Eurodollar Rate Advance, a rate per annum equal at all times during each Interest Period for such Revolving Credit Advance to the sum of (x) the Eurodollar Rate for such Interest Period for such Revolving Credit Advance plus (y) the Applicable Margin in effect from time to time plus (z) the Applicable Utilization Fee, if any, in effect from time to time, payable in arrears on the last day of such Interest Period and, if such Interest Period has a duration of more than three months, on each day that occurs during such Interest Period every three months from the first day of such Interest Period and on the date such Eurodollar Rate Advance shall be Converted or paid in full. (b) Default Interest. Upon the occurrence and during the continuance of an Event of Default under Section 6.01(a), the Borrower shall pay interest on (i) the unpaid principal amount of each Revolving Credit Advance made to it owing to each Lender, payable in arrears on the dates referred to in clause (a) above, at a rate per annum equal at all times to 2% per annum above the rate per annum 15 required to be paid on such Revolving Credit Advance pursuant to clause (a) above and (ii) to the fullest extent permitted by law, the amount of any interest, fee or other amount payable hereunder that is not paid when due, from the date such amount shall be due until such amount shall be paid in full, payable in arrears on the date such amount shall be paid in full and on demand, at a rate per annum equal at all times to 2% per annum above the rate per annum required to be paid on Base Rate Advances pursuant to clause (a)(i) above. (c) Regulation D Compensation. Each Lender that is subject to reserve requirements of the Board of Governors of the Federal Reserve System (or any successor) may require the Borrower to pay, contemporaneously with each payment of interest on Eurodollar Rate Advances or LIBO Rate Advances, additional interest on the related Eurodollar Rate Advances or LIBO Rate Advances, as applicable, of such Lender at the rate per annum equal to the excess of (i)(A) the applicable Eurodollar Rate or LIBO Rate, divided by (B) one minus the Eurodollar Rate Reserve Percentage over (ii) the rate specified in clause (i)(A). Any Lender wishing to require payment of such additional interest shall so notify the Agent and the Borrower, in which case such additional interest on the Eurodollar Rate Advances or LIBO Rate Advances, as applicable, of such Lender shall be payable to such Lender at the place indicated in such notice with respect to each Interest Period commencing after the giving of such notice. SECTION 2.08. Interest Rate Determination. (a) Each Reference Bank agrees to furnish to the Agent timely information for the purpose of determining each Eurodollar Rate and each LIBO Rate. If any one or more of the Reference Banks shall not furnish such timely information to the Agent for the purpose of determining any such interest rate, the Agent shall determine such interest rate on the basis of timely information furnished by the remaining Reference Banks. The Agent shall give prompt notice to the Borrower and the Lenders of the applicable interest rate determined by the Agent for purposes of Section 2.07(a)(i) or (ii), and the rate, if any, furnished by each Reference Bank for the purpose of determining the interest rate under Section 2.07(a)(ii). (b) If, with respect to any Eurodollar Rate Advances, the Required Lenders notify the Agent that the Eurodollar Rate for any Interest Period for such Advances will not adequately reflect the cost to such Required Lenders of making, funding or maintaining their respective Eurodollar Rate Advances for such Interest Period, the Agent shall forthwith so notify the Borrower and the Lenders, whereupon (i) each Eurodollar Rate Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance, and (ii) the obligation of the Lenders to make, or to Convert Revolving Credit Advances into, Eurodollar Rate Advances shall be suspended until the Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist. (c) If the Borrower shall fail to select the duration of any Interest Period for any Eurodollar Rate Advances in accordance with the provisions contained in the definition of "Interest Period" in Section 1.01, the Agent will forthwith so notify the Borrower and the Lenders and such Advances will automatically, on the last day of the then existing Interest Period therefor, Convert into Base Rate Advances. (d) On the date on which the aggregate unpaid principal amount of Eurodollar Rate Advances comprising any Borrowing shall be reduced, by payment or prepayment or otherwise, to less than $10,000,000, such Advances shall automatically Convert into Base Rate Advances. (e) Upon the occurrence and during the continuance of any Event of Default, (i) each Eurodollar Rate Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance and (ii) the obligation of the Lenders to make, or to Convert Advances into, Eurodollar Rate Advances shall be suspended. (f) If Telerate Markets Page 3750 (or any successor page) is unavailable and fewer than two Reference Banks furnish timely information to the Agent for determining the Eurodollar Rate or LIBO Rate for any Eurodollar Rate Advances or LIBO Rate Advances, as the case may be, (i) the Agent shall forthwith notify the Borrower and the Lenders that the interest rate cannot be determined for such Eurodollar Rate Advances, 16 (ii) with respect to Eurodollar Rate Advances, each such Advance will automatically, on the last day of the then existing Interest Period therefor, Convert into a Base Rate Advance (or if such Advance is then a Base Rate Advance, will continue as a Base Rate Advance), and (iii) the obligation of the Lenders to make Eurodollar Rate Advances or LIBO Rate Advances, or to Convert Revolving Credit Advances into, Eurodollar Rate Advances shall be suspended until the Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist. SECTION 2.09. Optional Conversion of Revolving Credit Advances. The Borrower may on any Business Day, upon notice given to the Agent not later than 11:00 A.M. (New York City time) on the third Business Day prior to the date of the proposed Conversion and subject to the provisions of Sections 2.08 and 2.12, Convert all Revolving Credit Advances of one Type comprising the same Borrowing into Revolving Credit Advances of the other Type; provided, however, that any Conversion of Eurodollar Rate Advances into Base Rate Advances shall be made only on the last day of an Interest Period for such Eurodollar Rate Advances, any Conversion of Base Rate Advances into Eurodollar Rate Advances shall be in an amount not less than the minimum amount specified in Section 2.02(b) and no Conversion of any Revolving Credit Advances shall result in more separate Revolving Credit Borrowings than permitted under Section 2.02(b). Each such notice of a Conversion shall, within the restrictions specified above, specify (i) the date of such Conversion, (ii) the Revolving Credit Advances to be Converted, and (iii) if such Conversion is into Eurodollar Rate Advances, the duration of the initial Interest Period for each such Advance. Each notice of Conversion shall be irrevocable and binding on the Borrower giving such notice. SECTION 2.10. Optional Prepayments of Revolving Credit Advances. The Borrower may, in the case of Eurodollar Rate Advances, upon at least two Business Days' notice to the Agent and, in the case of Base Rate Advances, upon notice to the Agent not later than 10:00 A.M. (New York City time) on the date of the proposed prepayment, stating in each case the proposed date and aggregate principal amount of the prepayment, and if such notice is given the Borrower shall, prepay the outstanding principal amount of the Revolving Credit Advances comprising part of the same Revolving Credit Borrowing in whole or ratably in part, together with accrued interest to the date of such prepayment on the principal amount prepaid; provided, however, that (x) each partial prepayment shall be in an aggregate principal amount of $10,000,000 or an integral multiple of $1,000,000 in excess thereof and (y) in the event of any such prepayment of a Eurodollar Rate Advance, the Borrower shall be obligated to reimburse the Lenders in respect thereof pursuant to Section 8.04(c). SECTION 2.11. Increased Costs. (a) If, due to either (i) the introduction of or any change in or in the interpretation of any law or regulation or (ii) the compliance with any guideline or request from any central bank or other governmental authority (whether or not having the force of law), there shall be any increase in the cost to any Lender of agreeing to make or making, funding or maintaining Eurodollar Rate Advances or LIBO Rate Advances (excluding for purposes of this Section 2.11 any such increased costs resulting from (i) Taxes or Other Taxes (as to which Section 2.14 shall govern) and (ii) changes in the basis of taxation of overall net income or overall gross income by the United States or by the foreign jurisdiction or state under the laws of which such Lender is organized or has its Applicable Lending Office or any political subdivision thereof), then such Lender may from time to time give notice of such circumstances to the Borrower (with a copy of such notice to the Agent); provided, however, that each Lender agrees, before giving any such notice, to use its reasonable efforts (consistent with its internal policy and legal and regulatory restrictions) to designate a different Applicable Lending Office if the making of such designation would avoid the need for, or reduce the amount of, such increased costs and would not be disadvantageous to such Lender. The amount sufficient to compensate such Lender in light of such increase in costs to such Lender or any corporation controlling such Lender shall be determined by such Lender in good faith on a basis that allocates the amounts sufficient to compensate such Lender in light of such increase ratably among all applicable Advances. A certificate specifying the event referred to in this Section 2.11(a), the amount sufficient to compensate such Lender and the basis of its calculations (which shall be reasonable), submitted in good faith to the Borrower and the Agent by such Lender, shall be conclusive and binding for all purposes, absent manifest error. Each Lender agrees to provide reasonably prompt notice to the Borrower of the occurrence of any event referred to in the first sentence of this Section 2.11(a). (b) If any Lender determines that compliance with any law or regulation or any guideline or request from any central bank or other governmental authority 17 (whether or not having the force of law) after the date hereof affects or would affect the amount of capital required or expected to be maintained by such Lender or any corporation controlling such Lender and that the amount of such capital is increased by or based upon the existence of such Lender's commitment to lend hereunder and other commitments of this type, then, such Lender may from time to time give notice of such circumstances to the Borrower (with a copy of such notice to the Agent); provided, however, that each Lender agrees, before giving any such notice, to use its reasonable efforts (consistent with its internal policy and legal and regulatory restrictions) to designate a different Applicable Lending Office if the making of such designation would avoid the need for, or reduce the amount of, the cost to such Lender of such increase in the amount of capital maintained by such Lender and would not be disadvantageous to such Lender. The amount sufficient to compensate such Lender in light of such increase in capital maintained by such Lender or any corporation controlling such Lender shall be determined by such Lender in good faith to the extent that such Lender reasonably determines such increase in capital to be allocable to the existence of such Lender's commitment to lend hereunder. A certificate specifying the event referred to in this Section 2.11(b), the amount sufficient to compensate such Lender and the basis of its calculations (which shall be reasonable), submitted in good faith to the Borrower and the Agent by such Lender, shall be conclusive and binding for all purposes, absent manifest error. Each Lender agrees to provide reasonably prompt notice to the Borrower of the occurrence of any event referred to in the first sentence of this Section 2.11(b). (c) The Borrower shall, within five days of receiving a notice from any Lender pursuant to clause (a) or (b) of this Section 2.11, elect (and shall notify such Lender and the Agent of such election) to: (i) pay to the Agent for the account of such Lender, from time to time commencing on the date of notice by such Lender and as specified by such Lender, (A) the amount such Lender has set forth in the certificate which such Lender has delivered to the Borrower pursuant to clause (a) of this Section 2.11 or (B) the amount such Lender has set forth in the certificate which such Lender has delivered to the Borrower pursuant to clause (b) of this Section 2.11, as the case may be; or (ii) terminate such Lender's Commitment on a date which shall be specified in the notice sent by the Borrower, and such Lender's Commitment shall terminate on such date; provided, however, that the aggregate amount of the Commitments of the Lenders shall not be reduced, as a result of any such termination, to an amount that is less than the sum of the aggregate principal amount of the Advances then outstanding; provided, further, that such termination shall not be effective if, after giving effect to such termination, the aggregate amount of the Commitments so terminated or assigned under this Section 2.11 and Section 2.12(b) during the term of this Agreement would exceed 25% of the aggregate amount of the Commitments as of the Effective Date; and provided further, that upon termination of a Lender's Commitment under this Section 2.11(c)(ii), the Borrower shall on the date such termination becomes effective pay, prepay or cause to be prepaid the aggregate principal amount of all Advances owing to such Lender, together with accrued interest thereon to the date of payment of such principal amount, all facility fees and other fees payable to such Lender and all other amounts payable to such Lender under this Agreement (including, but not limited to, any increased costs or other additional amounts (computed in accordance with this Section 2.11), and any Taxes, incurred by such Lender prior to the effective date of such termination and amounts payable under Section 8.04(a)). Upon such payments and prepayments, the obligations of such Lender hereunder, by the provisions hereof, shall be released and discharged. Such Lender's rights under Sections 2.11, 2.14 and 8.04(b), and its obligations under Section 7.05, shall survive such release and discharge as to matters occurring prior to date of such termination; or (iii) require that such Lender assign to the Borrower's designated assignee or assignees, in accordance with the terms of Section 8.07, all Advances then owing to such Lender and all rights and obligations of such Lender hereunder; provided that (A) each such assignment shall be either an assignment of all of the rights and obligations of the assigning Lender under this Agreement or an assignment of a portion of such rights and obligations made concurrently with another such assignment or assignments which together cover all of the rights and obligations of the assigning Lender under this Agreement, (B) no Lender shall be obligated to make any such assignment as a result of a demand by the Borrower pursuant to this Section 2.11(c) unless and until such Lender shall have received one or more payments from either the Borrower or one or more assignees in an aggregate amount at least equal to the aggregate outstanding principal amount of all Advances owing to such Lender, together with accrued interest thereon to the date of payment of such principal amount, all facility fees 18 and other fees payable to such Lender and all other amounts payable to such Lender under this Agreement (including, but not limited to, any increased costs or other additional amounts (computed in accordance with this Section 2.11), and any Taxes, incurred by such Lender prior to the effective date of such assignment and amounts payable under Section 8.04(a)) and (C) each such assignment shall be made pursuant to an Assignment and Acceptance; provided, however, that such assignment shall not be effective if, after giving effect to such assignment, the aggregate amount of the Commitments so assigned or terminated under this Section 2.11 and Section 2.12(b) during the term of this Agreement would exceed 25% of the aggregate amount of the Commitments as of the Effective Date. Upon such payments and prepayments, the obligations of such Lender hereunder, by the provisions hereof, shall be released and discharged; provided, however, that such Lender's rights under Sections 2.11, 2.14 and 8.04(b), and its obligations under Section 7.05, shall survive such release and discharge as to matters occurring prior to the date of termination of such Lender's Commitment. SECTION 2.12. Illegality. (a) Notwithstanding any other provision of this Agreement, if any Lender (any such Lender being referred to herein as an "Affected Lender") shall notify the Agent that the introduction of or any change in or in the interpretation of any law or regulation makes it unlawful, or any central bank or other governmental authority asserts that it is unlawful, for any Lender or its Eurodollar Lending Office to perform its obligations hereunder to make Eurodollar Rate Advances or LIBO Rate Advances or to fund or maintain Eurodollar Rate Advances or LIBO Rate Advances hereunder, the obligation of the Lenders to make, or to Convert Revolving Credit Advances into, Eurodollar Rate Advances shall be suspended until the Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist. The Borrower's right to require an assignment in accordance with clause (b)(ii) below shall not be effective to the extent that Lenders representing a majority of the Commitments then outstanding shall be "Affected Lenders". (b) The Borrower shall, within five days of receiving a notice from any Affected Lender pursuant to clause (a) of this Section 2.12, elect (and shall notify such Affected Lender and the Agent of such election) to: (i) prepay in full all Eurodollar Rate Advances or LIBO Rate Advances then outstanding, together with interest thereon, unless in the case of Eurodollar Rate Advances the Borrower, within five Business Days of written notice from the Agent, converts all Eurodollar Rate Advances of all Lenders then outstanding into Base Rate Advances in accordance with Section 2.09; or (ii) require that such Affected Lender assign to the Borrower's designated assignee or assignees, in accordance with the terms of Section 8.07, all Advances then owing to such Affected Lender and all rights and obligations of such Affected Lender hereunder; provided that (A) each such assignment shall be either an assignment of all of the rights and obligations of the assigning Affected Lender under this Agreement or an assignment of a portion of such rights and obligations made concurrently with another such assignment or assignments which together cover all of the rights and obligations of the assigning Affected Lender under this Agreement, (B) no Affected Lender shall be obligated to make any such assignment as a result of a demand by the Borrower pursuant to this Section 2.12(b) unless and until such Affected Lender shall have received one or more payments from either the Borrower or one or more assignees in an aggregate amount at least equal to the aggregate outstanding principal amount of all Advances owing to such Affected Lender, together with accrued interest thereon to the date of payment of such principal amount, all facility fees and other fees payable to such Affected Lender and all other amounts payable to such Affected Lender under this Agreement (including, but not limited to, any increased costs or other additional amounts (computed in accordance with Section 2.11), and any Taxes, incurred by such Affected Lender prior to the effective date of such assignment and amounts payable under Section 8.04(a)) and (C) each such assignment shall be made pursuant to an Assignment and Acceptance; provided, however, that such assignment shall not be effective if, after giving effect to such assignment, the aggregate amount of the Commitments so assigned or terminated under this Section 2.12(b) and Section 2.11 during the term of this Agreement would exceed 25% of the aggregate amount of the Commitments as of the Effective Date. Upon such payments and prepayments, the obligations of such Affected Lender hereunder, by the provisions hereof, shall be released and discharged; provided, however, that such Affected Lender's rights under Sections 2.11, 2.14 and 8.04(b), and its obligations under Section 7.05, shall survive such release and discharge as to matters occurring prior to the date of termination of such Affected Lender's Commitment. 19 SECTION 2.13. Payments and Computations. (a) The Borrower shall make each payment hereunder and under the Notes, without reduction for counterclaim or setoff, not later than 11:00 A.M. (New York City time) on the day when due in U.S. dollars to the Agent at the Agent's Account in same day funds. The Agent will promptly thereafter cause to be distributed like funds relating to the payment of principal or interest or facility fees ratably (other than amounts payable pursuant to Section 2.03, 2.11, 2.14 or 8.04(c)) to the Lenders for the account of their respective Applicable Lending Offices, and like funds relating to the payment of any other amount payable to any Lender to such Lender for the account of its Applicable Lending Office, in each case to be applied in accordance with the terms of this Agreement. Upon any Assuming Lender becoming a Lender hereunder as a result of a Commitment Increase pursuant to Section 2.17, and upon the Agent's receipt of such Lender's Assumption Agreement and recording of the information contained therein in the Register, from and after the applicable Increase Date, the Agent shall make all payments hereunder and under any Notes issued in connection therewith in respect of the interest assumed thereby to the Assuming Lender. Upon its acceptance of an Assignment and Acceptance and recording of the information contained therein in the Register pursuant to Section 8.07(d), from and after the effective date specified in such Assignment and Acceptance, the Agent shall make all payments hereunder and under the Notes in respect of the interest assigned thereby to the Lender assignee thereunder, and the parties to such Assignment and Acceptance shall make all appropriate adjustments in such payments for periods prior to such effective date directly between themselves. (b) All computations of interest based on the Base Rate shall be made by the Agent on the basis of a year of 365 or 366 days, as the case may be, and all computations of interest based on the Eurodollar Rate or the LIBO Rate or the Federal Funds Rate or in respect of Fixed Rate Advances and of facility fees shall be made by the Agent on the basis of a year of 360 days, in each case for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest or facility fees are payable. Each determination by the Agent of an interest rate and of facility fees hereunder shall be conclusive and binding for all purposes, absent manifest error. (c) Whenever any payment hereunder or under the Notes shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest or facility fee, as the case may be; provided, however, that, if such extension would cause payment of interest on or principal of Eurodollar Rate Advances or LIBO Rate Advances to be made in the next following calendar month, such payment shall be made on the next preceding Business Day. (d) Unless the Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Lenders hereunder that the Borrower will not make such payment in full, the Agent may assume that the Borrower has made such payment in full to the Agent on such date and the Agent may, in reliance upon such assumption, cause to be distributed to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent the Borrower shall not have so made such payment in full to the Agent, each Lender shall repay to the Agent forthwith on demand such amount distributed to such Lender together with interest thereon, for each day from the date such amount is distributed to such Lender until the date such Lender repays such amount to the Agent, at the Federal Funds Rate. SECTION 2.14. Taxes. (a) Any and all payments by the Borrower hereunder or under the Notes shall be made, in accordance with Section 2.13, free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of each Lender and the Agent, taxes imposed on its overall net income, and franchise taxes imposed on it in lieu of net income taxes, by the jurisdiction under the laws of which such Lender or the Agent (as the case may be) is organized or any political subdivision thereof and, in the case of each Lender, taxes imposed on its overall net income, and franchise taxes imposed on it in lieu of net income taxes, by the jurisdiction of such Lender's Applicable Lending Office or any political subdivision thereof (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities in respect of payments hereunder or under the Notes being hereinafter referred to as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder or under any Note to any Lender or the Agent, (i) the sum payable shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 2.14) such Lender or the Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the 20 relevant taxation authority or other authority in accordance with applicable law. (b) In addition, the Borrower shall pay any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies that arise from any payment made hereunder or under the Notes or from the execution, delivery or registration of, performing under, or otherwise with respect to, this Agreement or the Notes (hereinafter referred to as "Other Taxes"). (c) The Borrower shall indemnify each Lender and the Agent for and hold it harmless against the full amount of Taxes or Other Taxes (including, without limitation, taxes of any kind imposed by any jurisdiction on amounts payable under this Section 2.14) imposed on or paid by such Lender or the Agent (as the case may be) and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. This indemnification shall be made within 30 days from the date such Lender or the Agent (as the case may be) makes written demand therefor. (d) Within 30 days after the date of any payment of Taxes, the Borrower shall furnish to the Agent, at its address referred to in Section 8.02, the original or a certified copy of a receipt evidencing such payment. In the case of any payment hereunder or under the Notes by or on behalf of the Borrower through an account or branch outside the United States or by or on behalf of the Borrower by a payor that is not a United States person, if the Borrower determines that no Taxes are payable in respect thereof, the Borrower shall furnish, or shall cause such payor to furnish, to the Agent, at such address, an opinion of counsel acceptable to the Agent stating that such payment is exempt from Taxes. For purposes of this subsection (d) and subsection (e), the terms "United States" and "United States person" shall have the meanings specified in Section 7701 of the Internal Revenue Code. (e) Each Lender organized under the laws of a jurisdiction outside the United States, on or prior to the date of its execution and delivery of this Agreement in the case of each Initial Lender and on the date of the Assumption Agreement or the Assignment and Acceptance pursuant to which it becomes a Lender in the case of each other Lender, and from time to time thereafter as requested in writing by the Borrower (but only so long as such Lender remains lawfully able to do so), shall provide each of the Agent and the Borrower with two original Internal Revenue Service forms W-8BEN or W-8ECI, as appropriate, or any successor or other form prescribed by the Internal Revenue Service, certifying that such Lender is exempt from or entitled to a reduced rate of United States withholding tax on payments pursuant to this Agreement or the Notes. If the form provided by a Lender at the time such Lender first becomes a party to this Agreement indicates a United States interest withholding tax rate in excess of zero, withholding tax at such rate shall be considered excluded from Taxes unless and until such Lender provides the appropriate forms certifying that a lesser rate applies, whereupon withholding tax at such lesser rate only shall be considered excluded from Taxes for periods governed by such form; provided, however, that, if at the date of the Assignment and Acceptance pursuant to which a Lender assignee becomes a party to this Agreement, the Lender assignor was entitled to payments under subsection (a) in respect of United States withholding tax with respect to interest paid at such date, then, to such extent, the term Taxes shall include (in addition to withholding taxes that may be imposed in the future or other amounts otherwise includable in Taxes) United States withholding tax, if any, applicable with respect to the Lender assignee on such date. If any form or document referred to in this subsection (e) requires the disclosure of information, other than information necessary to compute the tax payable and information required on the date hereof by Internal Revenue Service form W-8BEN or W-8ECI, that the Lender reasonably considers to be confidential, the Lender shall give notice thereof to the Borrower and shall not be obligated to include in such form or document such confidential information. (f) For any period with respect to which a Lender has failed to provide the Borrower with the appropriate form described in Section 2.14(e) (other than if such failure is due to a change in law occurring subsequent to the date on which a form originally was required to be provided, or if such form otherwise is not required under subsection (e) above), such Lender shall not be entitled to indemnification under Section 2.14(a) or (c) with respect to Taxes imposed by the United States by reason of such failure; provided, however, that should a Lender become subject to Taxes because of its failure to deliver a form required hereunder, the Borrower shall take such steps as the Lender shall reasonably request to assist the Lender to recover such Taxes. (g) Any Lender claiming any additional amounts payable pursuant to this Section 2.14 agrees to use reasonable efforts (consistent with its internal policy and legal and regulatory restrictions) to change the jurisdiction of its 21 Eurodollar Lending Office if the making of such a change would avoid the need for, or reduce the amount of, any such additional amounts that may thereafter accrue and would not, in the reasonable judgment of such Lender, be otherwise disadvantageous to such Lender. SECTION 2.15. Sharing of Payments, Etc. If any Lender shall obtain any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) on account of the Revolving Credit Advances owing to it (other than pursuant to Section 2.11, 2.14 or 8.04(c)) in excess of its ratable share of payments on account of the Revolving Credit Advances obtained by all the Lenders, such Lender shall forthwith purchase from the other Lenders such participations in the Revolving Credit Advances owing to them as shall be necessary to cause such purchasing Lender to share the excess payment ratably with each of them; provided, however, that if all or any portion of such excess payment is thereafter recovered from such purchasing Lender, such purchase from each Lender shall be rescinded and such Lender shall repay to the purchasing Lender the purchase price to the extent of such recovery together with an amount equal to such Lender's ratable share (according to the proportion of (i) the amount of such Lender's required repayment to (ii) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered. The Borrower agrees that any Lender so purchasing a participation from another Lender pursuant to this Section 2.15 may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off) with respect to such participation as fully as if such Lender were the direct creditor of the Borrower in the amount of such participation. SECTION 2.16. Use of Proceeds. The proceeds of the Advances shall be available (and the Borrower agrees that it shall use such proceeds) solely for general corporate purposes of the Borrower and its Subsidiaries. SECTION 2.17. Increase in the Aggregate Commitments. (a) The Borrower may, at any time but in any event not more than once in any calendar year prior to the Termination Date, by notice to the Agent, request that the aggregate amount of the Commitments be increased by an amount of $10,000,000 or an integral multiple thereof (each a "Commitment Increase") to be effective as of a date that is at least 90 days prior to the scheduled Termination Date then in effect (the "Increase Date") as specified in the related notice to the Agent; provided, however that (i) in no event shall the aggregate amount of the Commitments at any time exceed $1,100,000,000 and (ii) on the date of any request by the Borrower for a Commitment Increase and on the related Increase Date the applicable conditions set forth in Article III shall be satisfied. (b) The Agent shall promptly notify such Eligible Assignees as the Borrower may identify of a request by the Borrower for a Commitment Increase, which notice shall include (i) the proposed amount of such requested Commitment Increase, (ii) the proposed Increase Date and (iii) the date by which Lenders and other Eligible Assignees wishing to participate in the Commitment Increase must commit thereto (the "Commitment Date"). Each Lender that is willing to participate in such requested Commitment Increase (each an "Increasing Lender") and each other Eligible Assignee that agrees to participate in such requested Commitment Increase (each such Eligible Assignee, an "Assuming Lender") shall give written notice to the Agent on or prior to the Commitment Date of the amount by which it is willing to participate in such Commitment Increase. If the Lenders and Assuming Lenders notify the Agent that they are willing to participate in the requested Commitment Increase by an aggregate amount that exceeds the amount of the requested Commitment Increase, the requested Commitment Increase shall be allocated among the Lenders and such Assuming Lenders in such amounts as are agreed between the Borrower and the Agent; provided, however, that the Commitment of each such Assuming Lender shall be in an amount of $5,000,000 or more. (c) On each Increase Date, each Assuming Lender shall become a Lender party to this Agreement as of such Increase Date and the Commitment of each Increasing Lender for such requested Commitment Increase shall be so increased by such amount (or by the amount allocated to such Lender pursuant to the last sentence of Section 2.17(b)) as of such Increase Date; provided, however, that the Agent shall have received on or before such Increase Date the following, each dated such date: (i) (A) certified copies of resolutions of the Board of Directors of the Borrower or the Executive Committee of such Board approving the Commitment Increase and the corresponding modifications to this Agreement 22 and (B) an opinion of counsel for the Borrower (which may be in-house counsel), in substantially the form of Exhibit E hereto; (ii) an assumption agreement from each Assuming Lender, if any, in the form of Exhibit D hereto (each an "Assumption Agreement"), duly executed by such Eligible Assignee, the Agent and the Borrower; and (iii) confirmation from each Increasing Lender of the increase in the amount of its Commitment in a writing satisfactory to the Borrower and the Agent. On each Increase Date, upon fulfillment of the conditions set forth in the immediately preceding sentence of this Section 2.17(c), the Agent shall notify the Lenders (including, without limitation, each Assuming Lender) and the Borrower, on or before 1:00 P.M. (New York City time), by telecopier, of the occurrence of the Commitment Increase to be effected on such Increase Date and shall record in the Register the relevant information with respect to each Increasing Lender and each Assuming Lender on such date. If any Base Rate Advances are outstanding on the date of any Increase Date, the Agent shall give appropriate notice to the Increasing Lenders and the Assuming Lenders to fund their respective pro rata shares of such outstanding Advances, and shall reallocate such Advances among the Lenders so that, after giving effect to such reallocation, each Lender shall participate in each outstanding Base Rate Borrowing ratably according to their respective Commitments. If any Eurodollar Rate Advances are outstanding on the date of any Increase Date, the Agent shall, on the last day of the applicable Interest Periods, give appropriate notice to the Increasing Lenders and the Assuming Lenders to fund their respective pro rata shares of such outstanding Advances, and shall reallocate such Advances among the Lenders so that, after giving effect to such reallocation, each Lender shall participate in such outstanding Eurodollar Rate Borrowing ratably according to their respective Commitments SECTION 2.18. Evidence of Debt. (a) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrower to such Lender resulting from each Advance owing to such Lender from time to time, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder in respect of Advances. The Borrower agrees that upon notice by any Lender (with a copy of such notice to the Agent) to the effect that a Note is required or appropriate in order for such Lender to evidence (whether for purposes of pledge, enforcement or otherwise) the Advances owing to, or to be made by, such Lender, the Borrower shall promptly execute and deliver to such Lender a Note payable to the order of such Lender in a principal amount up to the Commitment of such Lender. (b) The Register maintained by the Agent pursuant to Section 8.07(d) shall include a control account, and a subsidiary account for each Lender, in which accounts (taken together) shall be recorded (i) the date and amount of each Borrowing made hereunder, the Type of Advances comprising such Borrowing and, if appropriate, the Interest Period applicable thereto, (ii) the terms of each Assumption Agreement and each Assignment and Acceptance delivered to and accepted by it, (iii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder and (iv) the amount of any sum received by the Agent from the Borrower hereunder and each Lender's share thereof. (c) Entries made in good faith by the Agent in the Register pursuant to subsection (b) above, and by each Lender in its account or accounts pursuant to subsection (a) above, shall be prima facie evidence of the amount of principal and interest due and payable or to become due and payable from the Borrower to, in the case of the Register, each Lender and, in the case of such account or accounts, such Lender, under this Agreement, absent manifest error; provided, however, that the failure of the Agent or such Lender to make an entry, or any finding that an entry is incorrect, in the Register or such account or accounts shall not limit or otherwise affect the obligations of the Borrower under this Agreement. 23 ARTICLE III CONDITIONS TO EFFECTIVENESS AND LENDING SECTION 3.01. Conditions Precedent to Effectiveness of Sections 2.01 and 2.03. Sections 2.01 and 2.03 of this Agreement shall become effective on and as of the first date (the "Effective Date") on which the following conditions precedent have been satisfied: (a) As of the Effective Date, except as disclosed in the Borrower's Quarterly Report on Form 10-Q for the quarter ending February 29, 2004, since August 31, 2003 there shall have occurred no Material Adverse Change. (b) As of the Effective Date, there shall exist no action, suit, investigation, litigation or proceeding affecting the Borrower or any of its Consolidated Subsidiaries pending or, to its knowledge, threatened before any court, governmental agency or arbitrator that (i) could be reasonably likely to have a Material Adverse Effect other than the matters disclosed by the Borrower in filings with the United States Securities and Exchange Commission prior to the date hereof or described on Schedule 3.01(b) hereto (collectively, the "Disclosed Litigation") or (ii) purports and is reasonably likely to affect the legality, validity or enforceability of this Agreement or any Note or the consummation of the transactions contemplated hereby. (c) As of the Effective Date, the Borrower shall not have been notified that anything has come to the attention of the Lenders during the course of their due diligence investigation to lead them to believe that the Information Memorandum was or has become misleading, incorrect or incomplete in any material respect; without limiting the generality of the foregoing, the Lenders shall have been given such access to the management, records, books of account, contracts and properties of the Borrower and its Subsidiaries as they shall have reasonably requested. (d) All governmental and third party consents and approvals necessary in connection with the transactions contemplated hereby shall have been obtained (without the imposition of any conditions that are not acceptable to the Lenders) and shall remain in effect, and no law or regulation shall be applicable in the reasonable judgment of the Lenders that restrains, prevents or imposes materially adverse conditions upon the transactions contemplated hereby. (e) The Borrower shall have notified the Agent as to the proposed Effective Date. (f) The Borrower shall have paid all accrued fees and invoiced expenses of the Agent and the Lenders (including the accrued fees and invoiced expenses of counsel to the Agent). (g) On the Effective Date, the following statements shall be true and the Agent shall have received for the account of each Lender a certificate signed by a duly authorized officer of the Borrower, dated the Effective Date, stating that: (i) The representations and warranties contained in Section 4.01 are correct on and as of the Effective Date, and (ii) No event has occurred and is continuing that constitutes a Default. (h) The Agent shall have received on or before the Effective Date the following, each dated such day, in form and substance satisfactory to the Agent and (except for the Revolving Credit Notes) in sufficient copies for each Lender: (i) The Revolving Credit Notes to the order of the Lenders to the extent requested by any Lender pursuant to Section 2.18. 24 (ii) Certified copies of the resolutions of the Board of Directors of the Borrower approving this Agreement and the Revolving Credit Notes to be delivered by it, and of all documents evidencing other necessary corporate action and governmental approvals, if any, with respect to this Agreement and such Notes. (iii) A certificate of the Secretary or an Assistant Secretary of the Borrower certifying the names and true signatures of the officers of the Borrower authorized to sign this Agreement and such Notes to be delivered by it and the other documents to be delivered by it hereunder. (iv) A favorable opinion of the General Counsel or Associate General Counsel of the Borrower, in form and substance satisfactory to the Agent. (v) A favorable opinion of Shearman & Sterling LLP, counsel for the Agent, in form and substance satisfactory to the Agent. (i) The Borrower shall have terminated the commitments, and paid in full all Debt, interest, fees and other amounts outstanding, under (i) the 364-Day Credit Agreement dated as of July 2, 2003 among the Borrower, the lenders and agents parties thereto and Citibank, as administrative agent, and (ii) the Five Year Credit Agreement dated as of August 8, 2000 among the Borrower, the lenders and agents parties thereto and Citibank, as administrative agent, and each of the Lenders that is a party to each such credit agreement hereby waives, upon execution of this Agreement the requirement of prior notice under each such credit agreement relating to the termination of commitments thereunder. SECTION 3.02. Conditions Precedent to Each Revolving Credit Borrowing and Commitment Increase. The obligation of each Lender to make a Revolving Credit Advance on the occasion of each Revolving Credit Borrowing, and the effectiveness of each Commitment Increase, shall be subject to the conditions precedent that the Effective Date shall have occurred; and that on the date of such Revolving Credit Borrowing or the applicable Increase Date the following statements shall be true (and each of the giving of the applicable Notice of Revolving Credit Borrowing, a request for a Commitment Increase, or the acceptance by the Borrower of the proceeds of such Revolving Credit Borrowing shall constitute a representation and warranty by the Borrower that on the date of Notice, request, such Revolving Credit Borrowing or such Increase Date such statements are or will be true): (a) the representations and warranties contained in Section 4.01 (except the representations set forth in subsection (e) thereof and in subsection (f)(i) thereof) are correct on and as of the date of such Revolving Credit Borrowing or such Increase Date, before and after giving effect to such Revolving Credit Borrowing and to the application of the proceeds therefrom or such Commitment Increase, as though made on and as of such date, and (b) no event has occurred and is continuing, or would result from such Revolving Credit Borrowing or from the application of the proceeds therefrom or from such Commitment Increase, that constitutes a Default. SECTION 3.03. Conditions Precedent to Each Competitive Bid Borrowing. The obligation of each Lender that is to make a Competitive Bid Advance on the occasion of a Competitive Bid Borrowing to make such Competitive Bid Advance as part of such Competitive Bid Borrowing is subject to the conditions precedent that (i) the Agent shall have received the written confirmatory Notice of Competitive Bid Borrowing with respect thereto, (ii) on or before the date of such Competitive Bid Borrowing, but prior to such Competitive Bid Borrowing, the Agent shall have received a Competitive Bid Note payable to the order of such Lender for each of the one or more Competitive Bid Advances to be made by such Lender as part of such Competitive Bid Borrowing, in a principal amount equal to the principal amount of the Competitive Bid Advance to be evidenced thereby and otherwise on such terms as were agreed to for such Competitive Bid Advance in accordance with Section 2.03, and (iii) on the date of such Competitive Bid Borrowing the following statements shall be true (and each of the giving of the 25 applicable Notice of Competitive Bid Borrowing and the acceptance by the Borrower of the proceeds of such Competitive Bid Borrowing shall constitute a representation and warranty by the Borrower that on the date of such Competitive Bid Borrowing such statements are true): (a) the representations and warranties contained in Section 4.01 (except the representations set forth in the last sentence of subsection (e) thereof and in subsection (f)(i) thereof) are correct on and as of the date of such Competitive Bid Borrowing, before and after giving effect to such Competitive Bid Borrowing and to the application of the proceeds therefrom, as though made on and as of such date, and (b) no event has occurred and is continuing, or would result from such Competitive Bid Borrowing or from the application of the proceeds therefrom, that constitutes a Default. SECTION 3.04. Determinations Under Section 3.01. For purposes of determining compliance with the conditions specified in Section 3.01, each Lender shall be deemed to have consented to, approved or accepted or to be satisfied with each document or other matter required thereunder to be consented to or approved by or acceptable or satisfactory to the Lenders unless an officer of the Agent responsible for the transactions contemplated by this Agreement shall have received notice from such Lender prior to the date that the Borrower, by notice to the Lenders, designates as the proposed Effective Date, specifying its objection thereto. The Agent shall promptly notify the Lenders of the occurrence of the Effective Date. ARTICLE IV REPRESENTATIONS AND WARRANTIES SECTION 4.01. Representations and Warranties of the Borrower. The Borrower represents and warrants as follows: (a) The Borrower is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. (b) The execution, delivery and performance by the Borrower of this Agreement and the Notes, and the consummation of the transactions contemplated hereby, are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, and do not contravene (i) the Borrower's charter or by-laws or (ii) law or any contractual restriction binding on or affecting the Borrower. (c) No authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body or any other third party is required for the due execution, delivery and performance by the Borrower of this Agreement or the Notes. (d) This Agreement has been, and each of the Notes when delivered hereunder will have been, duly executed and delivered by the Borrower. This Agreement is, and each of the Notes when delivered hereunder will be, the legal, valid and binding obligation of the Borrower enforceable against the Borrower in accordance with their respective terms. (e) The Consolidated balance sheet of the Borrower and its Subsidiaries as at August 31, 2003, and the related Consolidated statements of income and cash flows of the Borrower and its Subsidiaries for the eight-month transition period then ended, accompanied by an opinion of Deloitte & Touche LLP, independent public accountants, and the Consolidated balance sheet of the Borrower and its Subsidiaries as at February 29, 2004, and the related Consolidated statements of income and cash flows of the Borrower and its Subsidiaries for the three months then ended, duly certified by the Chief Financial Officer, Treasurer, Assistant Treasurer, Controller or Assistant Controller of the Borrower, copies of which have been furnished to each Lender, fairly present, subject, in the case of said balance sheet as at February 29, 2004, and said statements of income and cash flows for the three months then ended, to year-end audit adjustments, the Consolidated financial condition of the Borrower and its Subsidiaries as at such dates and the Consolidated results of the operations of the Borrower and its Subsidiaries for the periods ended on such dates, all in accordance with generally accepted accounting principles consistently applied. Except as disclosed in the Borrower's Quarterly Report on Form 26 10-Q for the quarter ending February 29, 2004, since August 31, 2003, there has been no Material Adverse Change. (f) There is no pending or, to the knowledge of the Borrower, threatened action, suit, investigation, litigation or proceeding, including, without limitation, any Environmental Action, affecting the Borrower or any of its Consolidated Subsidiaries before any court, governmental agency or arbitrator that (i) is reasonably likely to have a Material Adverse Effect (other than the Disclosed Litigation), and there has been no material adverse change in the status of, or financial effect on the Borrower or any of its Consolidated Subsidiaries as a result of, the Disclosed Litigation or (ii) purports to affect the legality, validity or enforceability of this Agreement, any Note or the consummation of the transactions contemplated hereby. (g) The Borrower is not an "investment company", or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. SECTION 4.02. Representation and Warranty of the Lenders. Each Lender represents and warrants that in good faith it has not and will not rely upon any margin stock (as such term is defined in Regulation U of the Board of Governors of the Federal Reserve System) as collateral in the making and maintaining of its Advances hereunder. ARTICLE V COVENANTS OF THE BORROWER SECTION 5.01. Affirmative Covenants. So long as any Advance shall remain unpaid or any Lender shall have any Commitment hereunder, the Borrower will: (a) Compliance with Laws, Etc. Comply, and cause each of its Material Subsidiaries to comply, in all material respects, with all applicable laws, rules, regulations and orders, such compliance to include, without limitation, compliance with ERISA and Environmental Laws, except such non-compliance as would not have a Material Adverse Effect. (b) Payment of Taxes, Etc. Pay and discharge, and cause each of its Material Subsidiaries to pay and discharge, before the date on which penalties are attached thereto, all taxes, assessments and governmental charges or levies imposed upon it or upon its property; provided, however, that neither the Borrower nor any of its Material Subsidiaries shall be required to pay or discharge any such tax, assessment, charge or claim that is being contested in good faith and by proper proceedings or are not of material importance to the business, financial condition or results of operations of the Borrower and its Consolidated Subsidiaries. (c) Maintenance of Insurance. Maintain, and cause each of its Material Subsidiaries to maintain, insurance with responsible and reputable insurance companies or associations in such amounts and covering such risks as is consistent with prudent business practice. This section shall not prevent the use of deductible or excess loss insurance and shall not prevent the Borrower or a Consolidated Subsidiary from acting as a self-insurer or maintaining insurance with a Subsidiary or Subsidiaries so long as such action is consistent with sound business practice. (d) Preservation of Corporate Existence, Etc. Preserve and maintain its corporate existence, rights (charter and statutory) and franchises; provided, however, that the Borrower may consummate any merger or consolidation permitted under Section 5.02(b) and provided further that the Borrower shall not be required to preserve any right or franchise if the Borrower shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Borrower. (e) Keeping of Books. Keep, and cause each of its Material Subsidiaries to keep, proper books of record and account, in which full and correct entries shall be made of all financial transactions and the assets 27 and business of the Borrower and each such Material Subsidiary in accordance with generally accepted accounting principles in effect from time to time. (f) Reporting Requirements. Furnish to the Agent, and in sufficient copies for the Lenders (provided, however, that, in the case of the Consolidated balance sheet and Consolidated statements of income and cash flows referred to in clause (i) below, the annual audit report and accompanying information referred to in clause (ii) below and the reports and registration statements referred to in clause (iv) below, such information will be deemed to have been furnished to the Agent if it is readily available through EDGAR): (i) as soon as available and in any event within 60 days after the end of each of the first three quarters of each fiscal year of the Borrower, the Consolidated balance sheet of the Borrower and its Subsidiaries as of the end of such quarter and Consolidated statements of income and cash flows of the Borrower and its Subsidiaries for the period commencing at the end of the previous fiscal year and ending with the end of such quarter, duly certified (subject to year-end audit adjustments) by the Chief Financial Officer, Treasurer, Assistant Treasurer, Controller, Assistant Controller, or other authorized financial officer of the Borrower as having been prepared in accordance with generally accepted accounting principles and certificates of the Chief Financial Officer Treasurer, Assistant Treasurer, Controller or Assistant Controller of the Borrower as to compliance with the terms of this Agreement; (ii) as soon as available and in any event within 120 days after the end of each fiscal year of the Borrower, a copy of the annual audit report for such year for the Borrower and its Subsidiaries, containing the Consolidated balance sheet of the Borrower and its Subsidiaries as of the end of such fiscal year and Consolidated statements of income and cash flows of the Borrower and its Subsidiaries for such fiscal year, in each case accompanied by an opinion acceptable to the Required Lenders by Deloitte & Touche LLP or other independent public accountants acceptable to the Required Lenders; (iii) as soon as possible and in any event within five days after the determination by the Borrower of the occurrence of a Default that is continuing on the date of such statement, a statement of the Chief Financial Officer, Treasurer, Assistant Treasurer, Controller, Assistant Controller, or other authorized financial officer of the Borrower setting forth details of such Default and the action that the Borrower has taken and proposes to take with respect thereto; (iv) promptly after the sending or filing thereof, copies of all material reports that the Borrower sends to its securityholders (or any class of them) or its creditors (or any class of them), and copies of all reports and registration statements that the Borrower or any Subsidiary files with the Securities and Exchange Commission; (v) promptly after the commencement thereof, notice of all actions and proceedings before any court, governmental agency or arbitrator affecting the Borrower or any of its Subsidiaries of the type described in Section 4.01(f); and (vi) such other information (excluding trade secrets) respecting the Borrower or any of its Subsidiaries as any Lender through the Agent may from time to time reasonably request. SECTION 5.02. Negative Covenants. So long as any Advance shall remain unpaid or any Lender shall have any Commitment hereunder, no Borrower will: (a) Liens, Etc. Create or suffer to exist, or permit any of its Material Subsidiaries to create or suffer to exist, any Lien on or with respect to any of its assets, whether now owned or hereafter acquired, or assign, or permit any of its Material Subsidiaries to assign, any right to receive income, other than: 28 (i) (A) Liens for taxes, assessments, governmental charges or levies or other amounts owed to governmental entities other than for borrowed money; (B) Liens imposed by law, such as materialmen's, mechanics', carriers', workmen's and repairmen's Liens and other similar Liens arising in the ordinary course of business securing obligations that are not overdue for a period of more than 30 days or that are being contested in good faith; (C) pledges or deposits to secure obligations under workers' compensation laws or similar legislation or to secure public or statutory obligations; (D) easements, rights of way and other encumbrances on title to real property that do not render title to the property encumbered thereby unmarketable or materially adversely affect the use of such property for its present purposes; and (E) Liens in favor of a landlord arising in the ordinary course of business, (ii) purchase money Liens upon or in any property, assets or stock acquired or held by the Borrower or any Material Subsidiary in the ordinary course of business to secure the purchase price or construction cost of such property or to secure Debt incurred solely for the purpose of financing the acquisition or construction of such property whether incurred prior or subsequent to such acquisition or construction, or Liens existing on such property at the time of its acquisition (other than any such Lien created in contemplation of such acquisition) or extensions, renewals or replacements of any of the foregoing for the same or a lesser amount, provided, however, that no such Lien shall extend to or cover any property other than the property being acquired, and no such extension, renewal or replacement shall extend to or cover any property not theretofore subject to the Lien being extended, renewed or replaced, (iii) Liens existing on the Effective Date, (iv) (A) assignments of the right to receive income in connection with any Permitted Receivables Financing and (B) other Liens or assignments of the right to receive income that would otherwise be prohibited; provided that the Aggregate Amount of Financing Outstanding in connection with Permitted Receivables Financings described in clause (A), plus the aggregate principal amount of Debt secured by Liens described in clause (B) at any time outstanding (which amount, for purposes of assignments of rights to receive income, shall be deemed to be the aggregate proceeds received from such assignments, reduced according to the original schedule of collection of such income), shall not exceed 10% of the Consolidated Net Worth of the Borrower at such time, (v) the replacement, extension or renewal of any Lien permitted by clauses (ii) and (iii) above upon or in the same property theretofore subject thereto or the replacement, extension or renewal (without increase in the amount or change in any direct or contingent obligor) of the amount secured thereby, and (vi) intercompany Liens. (b) Mergers, Etc. Merge or consolidate with or into, or convey, transfer, lease or otherwise dispose of (whether in one transaction or in a series of transactions) all or substantially all of its assets (whether now owned or hereafter acquired) to, any Person, or permit any of its Material Subsidiaries to do so, except that (x) any Material Subsidiary of the Borrower may merge or consolidate with or into, or dispose of assets to, any other Material Subsidiary of the Borrower or any other Subsidiary of the Borrower that shall become a Material Subsidiary as a result of such transaction and (y) any Material Subsidiary of the Borrower may merge into or dispose of assets to the Borrower, provided, in each case, that no Default shall have occurred and be continuing at the time of such proposed transaction or would result therefrom. (c) Change in Nature of Business. Make, or permit any of its Subsidiaries to make, any material change in the nature of its business taken as a whole as carried on at the date hereof. SECTION 5.03. Financial Covenant. So long as any Advance shall remain unpaid or any Lender shall have any Commitment hereunder, the Borrower shall maintain at the end of each fiscal quarter of the Borrower a Leverage Ratio of not more than 0.45:1.00. 29 ARTICLE VI EVENTS OF DEFAULT SECTION 6.01. Events of Default. If any of the following events ("Events of Default") shall occur and be continuing: (a) The Borrower shall fail to pay any principal of any Advance when the same becomes due and payable; or the Borrower shall fail to pay any interest on any Advance or make any other payment of fees or other amounts payable under this Agreement or any Note within five Business Days after the same becomes due and payable; or (b) Any representation or warranty made by the Borrower herein or by the Borrower (or any of its officers) in connection with this Agreement shall prove to have been incorrect in any material respect when made; or (c) (i) The Borrower shall fail to perform or observe any term, covenant or agreement contained in Section 5.01(d) or (f)(iii), 5.02(a), 5.02(b) or 5.03, or (ii) the Borrower shall fail to perform or observe any term, covenant or agreement contained in Section 5.01(f)(i) or (ii) if such failure shall remain unremedied for 5 days after written notice thereof shall have been given to the Borrower by the Agent or any Lender, or (iii) the Borrower shall fail to perform or observe any other term, covenant or agreement contained in this Agreement on its part to be performed or observed if such failure shall remain unremedied for 30 days after written notice thereof shall have been given to the Borrower by the Agent or any Lender; or (d) The Borrower or any of its Material Subsidiaries shall fail to pay any principal of or premium or interest on any Debt that is outstanding in a principal amount of at least $50,000,000 in the aggregate (but excluding Debt outstanding hereunder) of the Borrower or such Material Subsidiary (as the case may be), when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Debt; or any other event shall occur or condition shall exist under any agreement or instrument relating to any such Debt and shall continue after the applicable grace period, if any, specified in such agreement or instrument, if the effect of such event or condition is to accelerate the maturity of such Debt; or any such Debt shall be declared to be due and payable, or required to be prepaid or redeemed (other than by a regularly scheduled required prepayment or redemption), purchased or defeased, or an offer to prepay, redeem, purchase or defease such Debt shall be required to be made, in each case prior to the stated maturity thereof; provided, that for purposes of this paragraph, the termination of a Hedge Agreement in accordance with its terms shall not be deemed to be an acceleration of the resulting payment obligation thereunder, but shall be deemed to create Debt which becomes payable at the due date of such acceleration payment in an amount equal to such acceleration payment; or (e) The Borrower or any of its Material Subsidiaries shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors; or any proceeding shall be instituted by or against the Borrower or any of its Material Subsidiaries seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its property and, in the case of any such proceeding instituted against it (but not instituted by it), either such proceeding shall remain undismissed or unstayed for a period of 30 days, or any of the actions sought in such proceeding (including, without limitation, the entry of an order for relief against, or the appointment of a receiver, trustee, custodian or other similar official for, it or for any substantial part of its property) shall occur; or the Borrower or any of its Material Subsidiaries shall take any corporate action to authorize any of the actions set forth above in this subsection (e); or 30 (f) Any judgment or order for the payment of money in excess of $75,000,000 in the aggregate shall be rendered against the Borrower or any of its Material Subsidiaries and either (i) a lawsuit shall have been properly commenced by any creditor to enforce such judgment or order or (ii) such judgment is not, within 30 days after entry thereof, paid, bonded, discharged or stayed during appeal, or is not discharged within 30 days after the expiration of such stay; provided, however, that the rendering of any such judgment or order shall not be an Event of Default under this Section 6.01(f) if and for so long as (i) the amount of such judgment or order, or a portion thereof in an amount sufficient to reduce the total uninsured amount to an amount less than $75,000,000, is covered by a valid and binding policy of insurance between the defendant and the insurer covering payment thereof and (ii) such insurer, which shall be rated at least "A" by A.M. Best Company, has been notified of, and has not properly disputed the claim made for payment of, the amount of such judgment or order; or (g) Any Person or two or more Persons acting in concert shall have, on or after the date of this Agreement, acquired beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934), directly or indirectly, of Voting Stock of the Borrower (or other securities convertible into such Voting Stock) representing 25% or more of the combined voting power of all Voting Stock of the Borrower; or (ii) during any period of up to 24 consecutive months, commencing on or after the date of this Agreement, individuals who at the beginning of such 24-month period were directors of the Borrower (together with any new directors who (A) were properly and duly elected to the board of directors pursuant to the Borrower's bylaws by the affirmative vote of a majority of the remaining directors then in office or (B) were nominated by a majority of the remaining members of the board of directors of the Borrower and thereafter elected as directors by the shareholders of the Borrower) shall cease for any reason to constitute a majority of the board of directors of the Borrower; or (h) The Borrower or any of its ERISA Affiliates shall incur, or, in the reasonable opinion of the Required Lenders, shall be reasonably likely to incur liability in excess of $75,000,000 in the aggregate as a result of one or more of the following: (i) the occurrence of any ERISA Event, provided that the occurrence of the ERISA Event described in PBGC Regulation Sections 4040.23, 4043.29 or 4043.32 shall constitute an Event of Default under this Section 6.01(h) only if it is reasonably expected to result in a Material Adverse Effect, (ii) the partial or complete withdrawal of the Borrower or any of its ERISA Affiliates from a Multiemployer Plan; or (iii) the reorganization or termination of a Multiemployer Plan; then, and in any such event, the Agent (i) shall at the request, or may with the consent, of the Required Lenders, by notice to the Borrower, declare the obligation of each Lender to make Advances to be terminated, whereupon the same shall forthwith terminate, and (ii) shall at the request, or may with the consent, of the Required Lenders, by notice to the Borrower, declare the Advances, all interest thereon and all other amounts payable under this Agreement to be forthwith due and payable, whereupon the Advances, all such interest and all such amounts shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower; provided, however, that in the event of an actual or deemed entry of an order for relief with respect to the Borrower under the Federal Bankruptcy Code, (A) the obligation of each Lender to make Advances shall automatically be terminated and (B) the Advances, all such interest and all such amounts shall automatically become and be due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by the Borrower. ARTICLE VII THE AGENT SECTION 7.01. Authorization and Action. Each Lender hereby appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers and discretion under this Agreement as are delegated to the Agent by the terms hereof, together with such powers and discretion as are reasonably incidental thereto. As to any matters not expressly provided for by this Agreement (including, without limitation, enforcement or collection of the Notes), the Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Required Lenders, and such instructions shall be binding upon all Lenders 31 and all holders of Notes; provided, however, that the Agent shall not be required to take any action that exposes the Agent to personal liability or that is contrary to this Agreement or applicable law. The Agent agrees to give to each Lender prompt notice of each notice given to it by the Borrower pursuant to the terms of this Agreement. SECTION 7.02. Agent's Reliance, Etc.Neither the Agent nor any of its directors, officers, agents or employees shall be liable for any action taken or omitted to be taken by it or them under or in connection with this Agreement, except for its or their own gross negligence or willful misconduct. Without limitation of the generality of the foregoing, the Agent: (i) may treat the Lender that made any Advance as the holder of the Debt resulting therefrom until the Agent receives and accepts an Assumption Agreement entered into by an Assuming Lender as provided in Section 2.17 or an Assignment and Acceptance entered into by such Lender, as assignor, and an Eligible Assignee, as assignee, as provided in Section 8.07; (ii) may consult with legal counsel (including counsel for the Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts; (iii) makes no warranty or representation to any Lender and shall not be responsible to any Lender for any statements, warranties or representations (whether written or oral) made in or in connection with this Agreement; (iv) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of this Agreement on the part of the Borrower or to inspect the property (including the books and records) of the Borrower; (v) shall not be responsible to any Lender for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto; and (vi) shall incur no liability under or in respect of this Agreement by acting upon any notice, consent, certificate or other instrument or writing (which may be by telecopier or telegram) believed by it to be genuine and signed or sent by the proper party or parties. SECTION 7.03. Citibank and Affiliates. With respect to its Commitment, the Advances made by it and any Note issued to it, Citibank shall have the same rights and powers under this Agreement as any other Lender and may exercise the same as though it were not the Agent; and the term "Lender" or "Lenders" shall, unless otherwise expressly indicated, include Citibank in its individual capacity. Citibank and its Affiliates may accept deposits from, lend money to, act as trustee under indentures of, accept investment banking engagements from and generally engage in any kind of business with, the Borrower, any of its Subsidiaries and any Person who may do business with or own securities of the Borrower or any such Subsidiary, all as if Citibank were not the Agent and without any duty to account therefor to the Lenders. SECTION 7.04. Lender Credit Decision. Each Lender acknowledges that it has, independently and without reliance upon the Agent or any other Lender and based on the financial statements referred to in Section 4.01 and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement. SECTION 7.05. Indemnification. The Lenders agree to indemnify the Agent (to the extent not reimbursed by the Borrower), ratably according to the respective principal amounts of the Revolving Credit Advances then owed to each of them (or if no Revolving Credit Advances are at the time outstanding, ratably according to the respective amounts of their Commitments), from and against any and all claims, damages, losses, liabilities and expenses (including, without limitation, reasonable fees and expenses of counsel) that may be incurred by or asserted or awarded against the Agent in any way relating to or arising out of this Agreement or any action taken or omitted by the Agent under this Agreement (collectively, the "Indemnified Costs"), provided that no Lender shall be liable for any portion of the Indemnified Costs resulting from the Agent's gross negligence or willful misconduct. Without limitation of the foregoing, each Lender agrees to reimburse the Agent promptly upon demand for its ratable share of any out-of-pocket expenses (including counsel fees) incurred by the Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, to the extent that the Agent is not reimbursed for such expenses by the Borrower. In the case of any investigation, litigation or proceeding giving rise to any Indemnified Costs, this Section 7.05 applies whether any such investigation, litigation or proceeding is brought by the Agent, any Lender or a third party. 32 SECTION 7.06. Successor Agent. The Agent may resign at any time by giving written notice thereof to the Lenders and the Borrower and may be removed at any time with or without cause by the Required Lenders. Upon any such resignation or removal, the Required Lenders shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed by the Required Lenders, and shall have accepted such appointment, within 30 days after the retiring Agent's giving of notice of resignation or the Required Lenders' removal of the retiring Agent, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent, which shall be a commercial bank organized under the laws of the United States of America or of any State thereof and having a combined capital and surplus of at least $50,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, discretion, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations under this Agreement. After any retiring Agent's resignation or removal hereunder as Agent, the provisions of this Article VII shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. SECTION 7.07. Other Agents. Each Lender hereby acknowledges that none of the syndication agent, any documentation agent or any other Lender designated as any "Agent" on the signature pages hereof has any liability hereunder other than in its capacity as a Lender. ARTICLE VIII MISCELLANEOUS SECTION 8.01. Amendments, Etc.No amendment or waiver of any provision of this Agreement or the Revolving Credit Notes, nor consent to any departure by the Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by the Required Lenders, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no amendment, waiver or consent shall, unless in writing and signed by all the Lenders, do any of the following: (a) waive any of the conditions specified in Section 3.01, (b) increase the Commitments of the Lenders or subject the Lenders to any additional obligations, (c) reduce the principal of, or interest on, the Revolving Credit Advances or any fees or other amounts payable hereunder, (d) postpone any date fixed for any payment of principal of, or interest on, the Revolving Credit Advances or any fees or other amounts payable hereunder, (e) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Revolving Credit Advances, or the number of Lenders, that shall be required for the Lenders or any of them to take any action hereunder or (f) amend this Section 8.01; provided further that no amendment, waiver or consent shall, unless in writing and signed by the Agent in addition to the Lenders required above to take such action, affect the rights or duties of the Agent under this Agreement or any Note; and provided further that this Section 8.01 shall not apply to changes in Commitments pursuant to Section 2.11, Section 2.12, Section 2.17 or any other Section of this Agreement. SECTION 8.02. Notices, Etc.. (a) All notices and other communications provided for hereunder shall be either (x) in writing (including telecopier or telegraphic communication) and mailed, telecopied, telegraphed or delivered or (y) as and to the extent set forth in Section 8.02(b) and in the proviso to this Section 8.02(a), if to the Borrower, at its address at 800 Lindbergh Boulevard, St Louis, Missouri 63167, Attention: Chief Financial Officer, with an information copy to the Secretary at the same address, if to any Initial Lender, at its Domestic Lending Office specified opposite its name on Schedule I hereto; if to any other Lender, at its Domestic Lending Office specified in the Assumption Agreement or the Assignment and Acceptance pursuant to which it became a Lender; and if to the Agent, at its address at Two Penns Way, New Castle, Delaware 19720, Attention: Bank Loan Syndications Department; or, as to the Borrower or the Agent, at such other address as shall be designated by such party in a written notice to the other parties and, as to each other party, at such other address as shall be designated by such party in a written notice to the Borrower and the Agent, provided that materials required to be delivered pursuant to Section 5.01(f)(i), (ii) or (iv) shall be delivered to the Agent as specified in Section 8.02(b) or as otherwise specified to the Borrower by the Agent. All such notices and communications shall be effective upon receipt. Delivery by telecopier of an executed counterpart of any amendment or waiver of any provision of this Agreement or the Notes or of any Exhibit hereto to be executed and delivered hereunder shall be effective as delivery of a manually executed counterpart thereof. 33 (b) So long as Citibank or any of its Affiliates is the Agent, materials required to be delivered pursuant to Section 5.01(f)(i), (ii) or (iv) may be delivered to the Agent in an electronic medium in a format acceptable to the Agent and the Lenders by e-mail at oploanswebadmin@citigroup.com. The Borrower agrees that the Agent may make such materials, as well as any other written information, documents, instruments and other material relating to the Borrower, any of its Subsidiaries or any other materials or matters relating to this Agreement, the Notes or any of the transactions contemplated hereby, but not any notices delivered pursuant to Article II (collectively, the "Communications") available to the Lenders by posting such notices on Intralinks or a substantially similar electronic system (the "Platform"). The Borrower acknowledges that (i) the distribution of material through an electronic medium is not necessarily secure and that there are confidentiality and other risks associated with such distribution, (ii) the Platform is provided "as is" and "as available" and (iii) neither the Agent nor any of its Affiliates warrants the accuracy, adequacy or completeness of the Communications or the Platform and each expressly disclaims liability for errors or omissions in the Communications or the Platform. No warranty of any kind, express, implied or statutory, including, without limitation, any warranty of merchantability, fitness for a particular purpose, non-infringement of third party rights or freedom from viruses or other code defects, is made by the Agent or any of its Affiliates in connection with the Platform. (c) Each Lender agrees that notice to it (as provided in the next sentence) (a "Notice") specifying that any Communications have been posted to the Platform shall constitute effective delivery of such information, documents or other materials to such Lender for purposes of this Agreement; provided that if requested by any Lender the Agent shall deliver a copy of the Communications to such Lender by email or telecopier. Each Lender agrees (i) to notify the Agent in writing of such Lender's e-mail address to which a Notice may be sent by electronic transmission (including by electronic communication) on or before the date such Lender becomes a party to this Agreement (and from time to time thereafter to ensure that the Agent has on record an effective e-mail address for such Lender) and (ii) that any Notice may be sent to such e-mail address. SECTION 8.03. No Waiver; Remedies. No failure on the part of any Lender or the Agent to exercise, and no delay in exercising, any right hereunder or under any Note shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. SECTION 8.04. Costs and Expenses. (a) The Borrower agrees to pay on demand all reasonable costs and expenses of the Agent in connection with the preparation, execution, delivery, modification and amendment of this Agreement, the Notes and the other documents to be delivered hereunder, including, without limitation, (A) all due diligence, syndication (including printing, distribution and bank meetings), transportation, computer, duplication, appraisal, consultant, and audit expenses and (B) the reasonable fees and expenses of counsel for the Agent with respect thereto and with respect to advising the Agent as to its rights and responsibilities under this Agreement. The Borrower further agrees to pay on demand all reasonable costs and expenses of the Agent and the Lenders, if any (including, without limitation, reasonable counsel fees and expenses), in connection with the enforcement (whether through negotiations, legal proceedings or otherwise) of this Agreement, the Notes and the other documents to be delivered hereunder, including, without limitation, reasonable fees and expenses of counsel for the Agent and each Lender in connection with the enforcement of rights under this Section 8.04(a). (b) The Borrower agrees to indemnify and hold harmless the Agent and each Lender and each of their Affiliates and their officers, directors, employees, agents and advisors (each, an "Indemnified Party") from and against any and all claims, damages, losses, liabilities and expenses (including, without limitation, reasonable fees and expenses of counsel) that may be incurred by or asserted or awarded against any Indemnified Party, in each case arising out of or in connection with or by reason of (including, without limitation, in connection with any investigation, litigation or proceeding or preparation of a defense in connection therewith) (i) the actual or proposed use of the proceeds of the Advances by the Borrower or any of its Subsidiaries or (ii) the actual or alleged presence of Hazardous Materials on any property of the Borrower or any of its Subsidiaries or any Environmental Action relating in any way to the Borrower or any of its Subsidiaries, except to the extent such claim, damage, loss, liability or expense resulted from such Indemnified Party's gross negligence or willful misconduct. In the case of an investigation, litigation or other proceeding to which the indemnity in this Section 8.04(b) applies, such indemnity shall be effective whether or not such investigation, litigation or proceeding is brought by the Borrower, its directors, shareholders or creditors or an Indemnified Party or any other Person or any Indemnified Party is otherwise a party thereto and whether or not the transactions contemplated hereby are consummated. The Borrower also agrees not to assert any claim against 34 the Agent, any Lender, any of their Affiliates, or any of their respective directors, officers, employees, attorneys and agents, on any theory of liability, for special, indirect, consequential or punitive damages arising out of or otherwise relating to the Notes, this Agreement, any of the transactions contemplated herein or the actual or proposed use of the proceeds of the Advances. (c) If any payment of principal of, or Conversion of, any Eurodollar Rate Advance or LIBO Rate Advance is made by the Borrower to or for the account of a Lender other than on the last day of the Interest Period for such Advance, as a result of a payment or Conversion pursuant to Section 2.08(d) or (e), 2.10 or 2.12, acceleration of the maturity of the Advances pursuant to Section 6.01 or for any other reason, or by an Eligible Assignee to a Lender other than on the last day of the Interest Period for such Advance upon an assignment of rights and obligations under this Agreement pursuant to Section 8.07 as a result of a demand by the Borrower pursuant to Section 8.07(a), the Borrower shall, upon demand by such Lender (with a copy of such demand to the Agent), pay to the Agent for the account of such Lender any amounts required to compensate such Lender for any additional losses, costs or expenses that it may reasonably incur as a result of such payment or Conversion, including, without limitation, any loss (excluding loss of anticipated profits), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by any Lender to fund or maintain such Advance. (d) Without prejudice to the survival of any other agreement of the Borrower hereunder, the agreements and obligations of the Borrower contained in Sections 2.11, 2.14 and 8.04 shall survive the payment in full of principal, interest and all other amounts payable hereunder and under the Notes. SECTION 8.05. Right of Set-off. Nothing herein shall derogate any Lender's right, if any, if and to the extent payment owed to such Lender is not made when due hereunder or under any Note held by such Lender, to set off from time to time against any or all of the Borrower's deposit (general or special, time or demand, provisional or final) accounts with such Lender any amount so due. Each Lender agrees promptly to notify the Borrower after any such set off and application made by such Lender, provided that the failure to give such notice shall not affect the validity of such set off and application. The rights of each Lender under this Section 8.05 are in addition to other rights and remedies which such Lender may have. SECTION 8.06. Binding Effect. This Agreement shall become effective (other than Sections 2.01 and 2.03, which shall only become effective upon satisfaction of the conditions precedent set forth in Section 3.01) when it shall have been executed by the Borrower and the Agent and when the Agent shall have been notified by each Initial Lender that such Initial Lender has executed it and thereafter shall be binding upon and inure to the benefit of the Borrower, the Agent and each Lender and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of the Lenders. SECTION 8.07. Assignments and Participations. (a) Each Lender may and, if demanded by the Borrower (following a demand by such Lender pursuant to Section 2.11 or Section 2.12 if no Event of Default has occurred and is continuing) upon at least 5 Business Days' notice to such Lender and the Agent, will assign to one or more Persons all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment, the Revolving Credit Advances owing to it and any Revolving Credit Note or Notes held by it, and any Competitive Bid Advances or Competitive Bid Notes held by it required to be assigned pursuant to Section 2.11 or Section 2.12) with the consent of the Agent and, so long as no Event of Default has occurred and is continuing, the Borrower (which consent shall not unreasonably be withheld); provided, however, that (i) each such assignment shall be of a constant, and not a varying, percentage of all rights and obligations under this Agreement (other than any Competitive Bid Advances owing to it and any Competitive Bid Notes held by it, except any such Competitive Bid Advances or Competitive Bid Notes required to be assigned pursuant to Section 2.11 or Section 2.12), (ii) except in the case of an assignment to an Affiliate of such Lender or a Person that, immediately prior to such assignment, was a Lender or an assignment of all of a Lender's rights and obligations under this Agreement, the amount of the Commitment of the assigning Lender being assigned pursuant to each such assignment (determined as of the date of the Assignment and Acceptance with respect to such assignment) shall in no event be less than $5,000,000 or an integral multiple of $1,000,000 in excess thereof, (iii) each such assignment shall be to an Eligible Assignee, (iv) each such assignment made as a result of a demand by the Borrower pursuant to this Section 8.07(a) shall be arranged by 35 the Borrower after consultation with the Agent and shall be either an assignment of all of the rights and obligations of the assigning Lender under this Agreement or an assignment of a portion of such rights and obligations made concurrently with another such assignment or other such assignments that together cover all of the rights and obligations of the assigning Lender under this Agreement, (v) no Lender shall be obligated to make any such assignment as a result of a demand by the Borrower pursuant to this Section 8.07(a) unless and until such Lender shall have received one or more payments from either the Borrower or one or more Eligible Assignees in an aggregate amount at least equal to the aggregate outstanding principal amount of the Advances owing to such Lender, together with accrued interest thereon to the date of payment of such principal amount and all other amounts payable to such Lender under this Agreement, (vi) the parties to each such assignment shall execute and deliver to the Agent, for its acceptance and recording in the Register, an Assignment and Acceptance, together with any Revolving Credit Note subject to such assignment and a processing and recordation fee of $3,500, and (vii) any Lender may, without the approval of the Borrower and the Agent, assign all or a portion of its rights to any of its Affiliates or to a Person that, immediately prior to such assignment, was a Lender. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, (x) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, have the rights and obligations of a Lender hereunder and (y) the Lender assignor thereunder shall, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment and Acceptance, relinquish its rights (other than its rights under Sections 2.11, 2.14 and 8.04 to the extent any claim thereunder relates to an event arising prior to such assignment) and be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto). (b) By executing and delivering an Assignment and Acceptance, the Lender assignor thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than as provided in such Assignment and Acceptance, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto; (ii) such assigning Lender makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or the performance or observance by the Borrower of any of its obligations under this Agreement or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Agreement, together with copies of the financial statements referred to in Section 4.01 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon the Agent, such assigning Lender or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (v) such assignee confirms that it is an Eligible Assignee; (vi) such assignee appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers and discretion under this Agreement as are delegated to the Agent by the terms hereof, together with such powers and discretion as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all of the obligations that by the terms of this Agreement are required to be performed by it as a Lender. (c) The Agent shall maintain at its address referred to in Section 8.02 a copy of each Assumption Agreement and each Assignment and Acceptance delivered to and accepted by it and a register for the recordation of the names and addresses of the Lenders and the Commitment of, and principal amount of the Advances owing to, each Lender from time to time (the "Register"). The entries in the Register shall be conclusive and binding for all purposes, absent manifest error, and the Borrower, the Agent and the Lenders may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice. (d) Upon its receipt of an Assignment and Acceptance executed by an assigning Lender and an assignee representing that it is an Eligible Assignee, together with any Revolving Credit Note or Notes subject to such assignment, the Agent shall, if such Assignment and Acceptance has been completed and is in substantially the form of Exhibit C hereto, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Borrower. 36 (e) Each Lender may sell participations to one or more banks or other entities (other than the Borrower or any of its Affiliates) in or to all or a portion of its rights and obligations under this Agreement (including, without limitation, all or a portion of its Commitment, the Advances owing to it and any Note or Notes held by it); provided, however, that (i) such Lender's obligations under this Agreement (including, without limitation, its Commitment to the Borrower hereunder) shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) such Lender shall remain the holder of any such Note for all purposes of this Agreement, (iv) the Borrower, the Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement and (v) no participant under any such participation shall have any right to approve any amendment or waiver of any provision of this Agreement or any Note or the Guaranty, or any consent to any departure by the Borrower therefrom, except to the extent that such amendment, waiver or consent would reduce the principal of, or interest on, the Advances or any fees or other amounts payable hereunder, in each case to the extent subject to such participation, or postpone any date fixed for any payment of principal of, or interest on, the Advances or any fees or other amounts payable hereunder, in each case to the extent subject to such participation. Upon the sale of a participation pursuant to this Section 8.07(e), such Lender shall promptly provide notice to the Borrower of the sale of a participation (other than a sale of a participation pursuant to Section 2.15); provided, however, that the failure by such Lender to provide such notice shall not invalidate the sale of such participation. (f) Any Lender may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 8.07, disclose to the assignee or participant or proposed assignee or participant, any information relating to the Borrower furnished to such Lender by or on behalf of the Borrower; provided that, prior to any such disclosure, the assignee or participant or proposed assignee or participant shall agree to preserve the confidentiality of any Confidential Information relating to the Borrower received by it from such Lender; provided further that, so long as no Default has occurred and is continuing, the Borrower shall have consented in advance to the disclosure of any non-public information, such consent not to be unreasonably withheld. (g) Notwithstanding any other provision set forth in this Agreement, any Lender may at any time create a security interest in all or any portion of its rights under this Agreement (including, without limitation, the Advances owing to it and any Note held by it) in favor of any Federal Reserve Bank in accordance with Regulation A of the Board of Governors of the Federal Reserve System. (h) Each Lender agrees that it will not assign any right, obligation or Note, or sell any participation, in any manner or under any circumstances that would require registration, qualification or filings under the securities laws of the United States of America, of any state or any country. SECTION 8.08. Confidentiality. Neither the Agent nor any Lender shall disclose any Confidential Information to any other Person without the consent of the Borrower, other than (a) to the Agent's or such Lender's Affiliates and their officers, directors, employees, agents and advisors and, to the extent contemplated by Section 8.07(f), to actual or prospective assignees and participants, and then only on a confidential basis, (b) as required by any law, rule or regulation or judicial process, provided that the Agent or such Lender, as the case may be, has notified the Borrower (if permitted by law) and has otherwise taken reasonable steps to protect such information from any unnecessary disclosure, and (c) as requested or required by any state, federal or foreign authority or examiner regulating banks or banking, provided that, without prejudice to its right to disclose to such examiner or regulator, the Agent and the Lenders agree to use reasonable efforts to limit the amount of Confidential Information which is disclosed. SECTION 8.09. Governing Law. This Agreement and the Notes shall be governed by, and construed in accordance with, the laws of the State of New York. SECTION 8.10. Execution in Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Agreement by telecopier shall be effective as delivery of a manually executed counterpart of this Agreement. 37 SECTION 8.11. Jurisdiction, Etc.(a) Each of the parties hereto hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or federal court of the United States of America sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or the Notes, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in any such New York State court or, to the extent permitted by law, in such federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that any party may otherwise have to bring any action or proceeding relating to this Agreement or the Notes in the courts of any jurisdiction. (b) Each of the parties hereto irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or the Notes in any New York State or federal court. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. SECTION 8.11.1. USA Patriot Act Notification. Each Lender hereby notifies the Borrower that pursuant to the requirements of the USA Act (Title III of Pub. L. 107-56 (signed into law on October 26, 2001) (the "Act"), it is required to obtain, verify and record information that identifies the Borrower, which information includes the name and address of the Borrower and other information that will allow such Lender to identify the Borrower in accordance with the Act. The Borrower agrees to cooperate with each Lender and provide true, accurate and complete information to such Lender in response to any such request, to the extent such Lender shall reasonably determine that such information is required to be provided pursuant to the Act. 38 SECTION 8.12. Waiver of Jury Trial. Each of the Borrower, the Agent and the Lenders hereby irrevocably waives all right to trial by jury in any action, proceeding or counterclaim (whether based on contract, tort or otherwise) arising out of or relating to this Agreement or the Notes or the actions of the Agent or any Lender in the negotiation, administration, performance or enforcement thereof. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. MONSANTO COMPANY By /s/ Robert A. Paley -------------------------------- Name: Robert A. Paley Title: Vice President and Treasurer CITIBANK, N.A., as Agent By /s/ Wajeeh Faheem --------------------------------- Name: Wajeeh Faheem Title: Vice President 39 Initial Lenders --------------- $115,000,000 CITIBANK, N.A. By____________________________ Title: $115,000,000 JPMORGAN CHASE BANK By____________________________ Title: $85,000,000 ABN AMRO BANK, N.V. By____________________________ Title: $85,000,000 BANK OF AMERICA, N.A. By____________________________ Title: $85,000,000 THE BANK OF TOKYO-MITSUBISHI, LTD., CHICAGO BRANCH By____________________________ Title: $50,000,000 BARCLAYS BANK PLC By____________________________ Title: $50,000,000 CALYON NEW YORK BRANCH By____________________________ Title: 40 $50,000,000 COMMERZBANK AG, NEW YORK AND GRAND CAYMAN BRANCHES By____________________________ Title: By____________________________ Title: $50,000,000 KBC BANK N.V. By____________________________ Title: $50,000,000 THE NORTHERN TRUST COMPANY By____________________________ Title: $50,000,000 THE ROYAL BANK OF SCOTLAND PLC By____________________________ Title: $50,000,000 SOCIETE GENERALE By____________________________ Title: $30,000,000 BANCO BILBAO VIZCAYA ARGENTARIA SA, NEW YORK BRANCH By____________________________ Title: $30,000,000 THE BANK OF NEW YORK By_____________________________ Title: $30,000,000 COBANK, ACB By_____________________________ Title: 41 $30,000,000 MELLON BANK, N.A. By____________________________ Title: $30,000,000 COOPERATIEVE CENTRALE RAIFFEISEN-BOERENLEENBANK B.A., "RABOBANK INTERNATIONAL" NEW YORK BRANCH By____________________________ Title: By____________________________ Title: $15,000,000 COMMERCE BANK NATIONAL ASSOCIATION By_____________________________ Title: $1,000,000,000 Total of the Commitments 42 SCHEDULE 3.01(b) DISCLOSED LITIGATION - UPDATES None EXHIBIT A-1 - FORM OF REVOLVING CREDIT PROMISSORY NOTE U.S.$_______________ Dated: _______________, 200_ FOR VALUE RECEIVED, the undersigned, Monsanto Company, a Delaware corporation (the "Borrower"), HEREBY PROMISES TO PAY to the order of ____________________ (the "Lender") for the account of its Applicable Lending Office on the Termination Date (as defined in the Credit Agreement referred to below) the principal sum of U.S.$[amount of the Lender's Commitment in figures] or, if less, the aggregate principal amount of the Revolving Credit Advances made by the Lender to the Borrower pursuant to the Five-Year Credit Agreement dated as of June 4, 2004 among the Borrower, the Lender and certain other lenders parties thereto, Citibank, N.A., as Agent for the Lender and such other lenders, Citigroup Global Markets Inc. and J.P. Morgan Securities Inc., as joint lead arrangers and co-bookrunners, JPMorgan Chase Bank, as syndication agent, and ABN AMRO Bank N.V., The Bank of Tokyo-Mitsubishi, Ltd. and Bank of America, N.A., as co-documentation agents (as amended or modified from time to time, the "Credit Agreement"; the terms defined therein being used herein as therein defined), outstanding on such date. The Borrower promises to pay interest on the unpaid principal amount of each Revolving Credit Advance from the date of such Revolving Credit Advance until such principal amount is paid in full, at such interest rates, and payable at such times, as are specified in the Credit Agreement. Both principal and interest are payable in lawful money of the United States of America to Citibank, N.A., as Agent, at 388 Greenwich Street, New York, New York 10013, in same day funds. Each Revolving Credit Advance owing to the Lender by the Borrower pursuant to the Credit Agreement, and all payments made on account of principal thereof, shall be recorded by the Lender and, prior to any transfer hereof, endorsed on the grid attached hereto which is part of this Promissory Note. This Promissory Note is one of the Revolving Credit Notes referred to in, and is entitled to the benefits of, the Credit Agreement. The Credit Agreement, among other things, (i) provides for the making of Revolving Credit Advances by the Lender to the Borrower from time to time in an aggregate amount not to exceed at any time outstanding the U.S. dollar amount first above mentioned, the indebtedness of the Borrower resulting from each such Revolving Credit Advance being evidenced by this Promissory Note, and (ii) contains provisions for acceleration of the maturity hereof upon the happening of certain stated events and also for prepayments on account of principal hereof prior to the maturity hereof upon the terms and conditions therein specified. MONSANTO COMPANY By____________________________ Title: By____________________________ Title: ADVANCES AND PAYMENTS OF PRINCIPAL
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EXHIBIT A-2 - FORM OF COMPETITIVE BID PROMISSORY NOTE U.S.$_______________ Dated: _______________, 200_ FOR VALUE RECEIVED, the undersigned, MONSANTO COMPANY, a Delaware corporation (the "Borrower"), HEREBY PROMISES TO PAY to the order of _________________________ (the "Lender") for the account of its Applicable Lending Office (as defined in the Five-Year Credit Agreement dated as of June 4, 2004 among the Borrower, the Lender and certain other lenders parties thereto, Citibank, N.A., as Agent for the Lender and such other lenders, Citigroup Global Markets Inc. and J.P. Morgan Securities Inc., as joint lead arrangers and co-bookrunners, JPMorgan Chase Bank, as syndication agent, and ABN AMRO Bank N.V., The Bank of Tokyo-Mitsubishi, Ltd. and Bank of America, N.A., as co-documentation agents (as amended or modified from time to time, the "Credit Agreement"; the terms defined therein being used herein as therein defined)), on _______________, 200_, the principal amount of U.S.$_______________. The Borrower promises to pay interest on the unpaid principal amount hereof from the date hereof until such principal amount is paid in full, at the interest rate and payable on the interest payment date or dates provided below: Interest Rate: _____% per annum (calculated on the basis of a year of _____ days for the actual number of days elapsed). Both principal and interest are payable in lawful money of the United States of America to Citibank, N.A., as Agent, for the account of the Lender at the office of Citibank, N.A., at 388 Greenwich Street, New York, New York 10013 in same day funds. This Promissory Note is one of the Competitive Bid Notes referred to in, and is entitled to the benefits of, the Credit Agreement. The Credit Agreement, among other things, contains provisions for acceleration of the maturity hereof upon the happening of certain stated events. The Borrower hereby waives presentment, demand, protest and notice of any kind. No failure to exercise, and no delay in exercising, any rights hereunder on the part of the holder hereof shall operate as a waiver of such rights. This Promissory Note shall be governed by, and construed in accordance with, the laws of the State of New York. MONSANTO COMPANY By____________________________ Title: By____________________________ Title: EXHIBIT B-1 - FORM OF NOTICE OF REVOLVING CREDIT BORROWING Citibank, N.A., as Agent for the Lenders parties to the Credit Agreement referred to below Two Penns Way New Castle, Delaware 19720 [Date] Attention: Bank Loans Syndications Department Ladies and Gentlemen: The undersigned, Monsanto Company, refers to the Five-Year Credit Agreement, dated as of June 4, 2004 (as amended or modified from time to time, the "Credit Agreement", the terms defined therein being used herein as therein defined), among the undersigned, certain Lenders parties thereto, Citibank, N.A., as Agent for said Lenders, Citigroup Global Markets Inc. and J.P. Morgan Securities Inc., as joint lead arrangers and co-bookrunners, JPMorgan Chase Bank, as syndication agent, and ABN AMRO Bank N.V., The Bank of Tokyo-Mitsubishi, Ltd. and Bank of America, N.A., as co-documentation agents, and hereby gives you notice, irrevocably, pursuant to Section 2.02 of the Credit Agreement that the undersigned hereby requests a Revolving Credit Borrowing under the Credit Agreement, and in that connection sets forth below the information relating to such Revolving Credit Borrowing (the "Proposed Revolving Credit Borrowing") as required by Section 2.02(a) of the Credit Agreement: (i) The Business Day of the Proposed Revolving Credit Borrowing is _______________, 200_. (ii) The Type of Advances comprising the Proposed Revolving Credit Borrowing is [Base Rate Advances] [Eurodollar Rate Advances]. (iii) The aggregate amount of the Proposed Revolving Credit Borrowing is $_______________. [(iv) The initial Interest Period for each Eurodollar Rate Advance made as part of the Proposed Revolving Credit Borrowing is __________ month[s].] The undersigned hereby certifies that the following statements are true on the date hereof, and will be true on the date of the Proposed Borrowing: (A) the representations and warranties contained in Section 4.01 of the Credit Agreement (except the representations set forth in the last sentence of subsection (e) thereof and in subsection (f)(i) thereof) are correct, before and after giving effect to the Proposed Revolving Credit Borrowing and to the application of the proceeds therefrom, as though made on and as of such date; and (B) no event has occurred and is continuing, or would result from such Proposed Borrowing Revolving Credit or from the application of the proceeds therefrom, that constitutes a Default. Very truly yours, MONSANTO COMPANY By____________________________ Title: By____________________________ Title: 2 EXHIBIT B-2 - FORM OF NOTICE OF COMPETITIVE BID BORROWING Citibank, N.A., as Agent for the Lenders parties to the Credit Agreement referred to below Two Penns Way New Castle, Delaware 19720 [Date] Attention: Bank Loan Syndications Department Ladies and Gentlemen: The undersigned, Monsanto Company, refers to the Five-Year Credit Agreement, dated as of June 4, 2004 (as amended or modified from time to time, the "Credit Agreement", the terms defined therein being used herein as therein defined), among the undersigned, certain Lenders parties thereto, Citibank, N.A., as Agent for the Lender and such other lenders, Citigroup Global Markets Inc. and J.P. Morgan Securities Inc., as joint lead arrangers and co-bookrunners, JPMorgan Chase Bank, as syndication agent, and ABN AMRO Bank N.V., The Bank of Tokyo-Mitsubishi, Ltd. and Bank of America, N.A., as co-documentation agents, and hereby gives you notice, irrevocably, pursuant to Section 2.03 of the Credit Agreement that the undersigned hereby requests a Competitive Bid Borrowing under the Credit Agreement, and in that connection sets forth the terms on which such Competitive Bid Borrowing (the "Proposed Competitive Bid Borrowing") is requested to be made: (A) Date of Competitive Bid Borrowing ________________________ (B) Amount of Competitive Bid Borrowing ________________________ (C) [Maturity Date] [Interest Period] ________________________ (D) Interest Rate Basis ________________________ (E) Interest Payment Date(s) ________________________ (F) ___________________ ________________________ (G) ___________________ ________________________ (H) ___________________ ________________________ The undersigned hereby certifies that the following statements are true on the date hereof, and will be true on the date of the Proposed Competitive Bid Borrowing: (a) the representations and warranties contained in Section 4.01 of the Credit Agreement (except the representations set forth in the last sentence of subsection (e) thereof and in subsection (f)(i) thereof) are correct, before and after giving effect to the Proposed Competitive Bid Borrowing and to the application of the proceeds therefrom, as though made on and as of such date; (b) no event has occurred and is continuing, or would result from the Proposed Competitive Bid Borrowing or from the application of the proceeds therefrom, that constitutes a Default; (c) no event has occurred and no circumstance exists as a result of which the information concerning the undersigned that has been provided to the Agent and each Lender by the undersigned in connection with the Credit Agreement would include an untrue statement of a material fact or omit to state any material fact or any fact necessary to make the statements contained therein, in the light of the circumstances under which they were made, not misleading; and (d) the aggregate amount of the Proposed Competitive Bid Borrowing and all other Borrowings to be made on the same day under the Credit Agreement is within the aggregate amount of the unused Commitments of the Lenders. The undersigned hereby confirms that the Proposed Competitive Bid Borrowing is to be made available to it in accordance with Section 2.03(a)(v) of the Credit Agreement. Very truly yours, MONSANTO COMPANY By____________________________ Title: By____________________________ Title: 2 EXHIBIT C - FORM OF ASSIGNMENT AND ACCEPTANCE Reference is made to the Five-Year Credit Agreement dated as of June 4, 2004 (as amended or modified from time to time, the "Credit Agreement") among Monsanto Company, a Delaware corporation (the "Borrower"), the Lenders (as defined in the Credit Agreement), Citibank, N.A., as agent for the Lenders (the "Agent), Citigroup Global Markets Inc. and J.P. Morgan Securities Inc., as joint lead arrangers and co-bookrunners, JPMorgan Chase Bank, as syndication agent, and ABN AMRO Bank N.V., The Bank of Tokyo-Mitsubishi, Ltd. and Bank of America, N.A., as co-documentation agents. Terms defined in the Credit Agreement are used herein with the same meaning. The "Assignor" and the "Assignee" referred to on Schedule I hereto agree as follows: 1. The Assignor hereby sells and assigns to the Assignee, without recourse, and the Assignee hereby purchases and assumes from the Assignor, an interest in and to the Assignor's rights and obligations under the Credit Agreement as of the date hereof (other than in respect of Competitive Bid Advances and Competitive Bid Notes) equal to the percentage interest specified on Schedule 1 hereto of all outstanding rights and obligations under the Credit Agreement (other than in respect of Competitive Bid Advances and Competitive Bid Notes). After giving effect to such sale and assignment, the Assignee's Commitment and the amount of the Advances owing to the Assignee will be as set forth on Schedule 1 hereto. 2. The Assignor (i) represents and warrants that it is the legal and beneficial owner of the interest being assigned by it hereunder and that such interest is free and clear of any adverse claim; (ii) makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Credit Agreement or the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Credit Agreement or any other instrument or document furnished pursuant thereto; (iii) makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or the performance or observance by the Borrower of any of its obligations under the Credit Agreement or any other instrument or document furnished pursuant thereto; and (iv) attaches the Revolving Credit Note, if any, held by the Assignor [and requests that the Agent exchange such Revolving Credit Note for a new Revolving Credit Note payable to the order of the Assignor in an amount equal to the Commitment retained by the Assignor under the Credit Agreement, as specified on Schedule 1 hereto]. 3. The Assignee (i) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements referred to in Section 4.01 thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance; (ii) agrees that it will, independently and without reliance upon the Agent, the Assignor or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement; (iii) confirms that it is an Eligible Assignee; (iv) appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers and discretion under the Credit Agreement as are delegated to the Agent by the terms thereof, together with such powers and discretion as are reasonably incidental thereto; (v) agrees that it will perform in accordance with their terms all of the obligations that by the terms of the Credit Agreement are required to be performed by it as a Lender; (vi) attaches any U.S. Internal Revenue Service forms required under Section 2.14 of the Credit Agreement; and (vii) makes the representation and warranty set forth in Section 4.02 of the Credit Agreement. 4. Following the execution of this Assignment and Acceptance, it will be delivered to the Agent for acceptance and recording by the Agent. The effective date for this Assignment and Acceptance (the "Effective Date") shall be the date of acceptance hereof by the Agent, unless otherwise specified on Schedule 1 hereto. 5. Upon such acceptance and recording by the Agent, as of the Effective Date, (i) the Assignee shall be a party to the Credit Agreement and, to the extent provided in this Assignment and Acceptance, have the rights and obligations of a Lender thereunder and (ii) the Assignor shall, to the extent provided in this Assignment and Acceptance, relinquish its rights and be released from its obligations under the Credit Agreement. 6. Upon such acceptance and recording by the Agent, from and after the Effective Date, the Agent shall make all payments under the Credit Agreement and the Revolving Credit Notes in respect of the interest assigned hereby (including, without limitation, all payments of principal, interest and facility fees with respect thereto) to the Assignee. The Assignor and Assignee shall make all appropriate adjustments in payments under the Credit Agreement and the Revolving Credit Notes for periods prior to the Effective Date directly between themselves. 7. This Assignment and Acceptance shall be governed by, and construed in accordance with, the laws of the State of New York. 8. This Assignment and Acceptance may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of Schedule 1 to this Assignment and Acceptance by telecopier shall be effective as delivery of a manually executed counterpart of this Assignment and Acceptance. IN WITNESS WHEREOF, the Assignor and the Assignee have caused Schedule 1 to this Assignment and Acceptance to be executed by their officers thereunto duly authorized as of the date specified thereon. 2 Schedule 1 to Assignment and Acceptance Percentage interest assigned: _____% Amount of Commitment assigned: $_______________ Assignee's Commitment: $_______________ Aggregate outstanding principal amount of Revolving Credit Advances assigned: $_______________ Effective Date*: _______________, 200_ [NAME OF ASSIGNOR], as Assignor By ------------------------------ Title: Dated: _______________, 200_ [NAME OF ASSIGNEE], as Assignee By ------------------------------ Title: Domestic Lending Office: [Address] Eurodollar Lending Office: [Address] Accepted [and Approved]** this __________ day of _______________, 200_ CITIBANK, N.A., as Agent By Title: [Approved this __________ day of _______________, 200_ * This date should be no earlier than five Business Days after the delivery of this Assignment and Acceptance to the Agent. ** Required if the Assignee is an Eligible Assignee solely by reason of clause (iii) of the definition of "Eligible Assignee". 3 MONSANTO COMPANY By____________________________ Title: By____________________________ Title: 4 EXHIBIT D- FORM OF ASSUMPTION AGREEMENT Dated: Monsanto Company 800 North Lindbergh Boulevard St. Louis, Missouri 63167 Attention: Chief Financial Officer Citibank, N.A., as Agent 399 Park Avenue New York, New York 10043 Attention: __________________ Ladies and Gentlemen: Reference is made to the Five Year Credit Agreement dated as of June 4, 2004 (as amended or modified from time to time, the "Credit Agreement") among Monsanto Company, a Delaware corporation (the "Borrower"), the Lenders (as defined in the Credit Agreement), Citibank, N.A., as agent for the Lenders (the "Agent), Citigroup Global Markets Inc. and J.P. Morgan Securities Inc., as joint lead arrangers and co-bookrunners, JPMorgan Chase Bank, as syndication agent, and ABN AMRO Bank N.V., The Bank of Tokyo-Mitsubishi, Ltd. and Bank of America, N.A., as co-documentation agents. Terms defined in the Credit Agreement are used herein with the same meaning. The undersigned proposes to become an Assuming Bank pursuant to Section 2.17 of the Credit Agreement and, in that connection, hereby agrees that it shall become a Lender for purposes of the Credit Agreement on [insert applicable Increase Date] and that its Commitment shall as of such date be $ . The undersigned (the "Assuming Bank") (i) confirms that it has received a copy of the Credit Agreement, together with copies of the financial statements referred to in Section 5.01(f) thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assumption Agreement; (ii) agrees that it will, independently and without reliance upon the Agent or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement; (iii) appoints and authorizes the Agent to take such action as agent on its behalf and to exercise such powers under the Credit Agreement as are delegated to the Agent by the terms thereof, together with such powers as are reasonably incidental thereto; (iv) agrees that it will perform in accordance with their terms all of the obligations that by the terms of the Credit Agreement are required to be performed by it as a Lender; (v) confirms that it is an Eligible Assignee; [and] (vi) specifies as its Domestic Lending Office (and address for notices) and Eurodollar Lending Office the offices set forth beneath its name on the signature pages hereof; [and (vii) attaches any U.S. Internal Revenue Service forms required under Section 2.14] of the Credit Agreement](1)and [(vii)][(viii)] makes the representation and warranty set forth in Section 4.02 of the Credit Agreement. The effective date for this Assumption Agreement shall be [insert applicable Increase Date]. Upon delivery of this Assumption Agreement to the Borrower and the Agent and acceptance and recording of this Assumption Agreement by the Agent, as of [date specified above], the Assuming Bank shall be a party to the Credit Agreement and have the rights and obligations of a Lender thereunder. As of [date specified above], the Agent shall make all payments under the Credit Agreement in respect of the interest assumed hereby (including, without limitation, all payments of principal, interest and facility fees) to the Assuming Bank. - -------- (1) If the Assuming Bank is organized under the laws of a jurisdiction outside the United States. 1 This Assumption Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of this Assumption Agreement by telecopier shall be effective as delivery of a manually executed counterpart of this Assumption Agreement. This Assumption Agreement shall be governed by, and construed in accordance with, the laws of the State of New York. Very truly yours, [NAME OF ASSUMING BANK] By ---------------------------- Name: Title: Domestic Lending Office (and address for notices): [Address] Eurodollar Lending Office: [Address]: Above Acknowledged and Agreed to: MONSANTO COMPANY By____________________________ Title: By____________________________ Title: 2 EX-10 4 c10q2004ex1016.txt TERMS & CONDITIONS OF RESTRI. STOCK GRANT Exhibit 10.16.2 FORM OF NON-EMPLOYEE DIRECTOR RESTRICTED SHARE GRANT UNDER THE MONSANTO COMPANY LONG-TERM INCENTIVE PLAN Terms and Conditions Restricted Shares Grant to _______________ You have received an Award of Restricted Shares (the "Restricted Shares") under the Monsanto Company Long-Term Incentive Plan (the "Plan"). The Grant Date and the number of Restricted Shares covered by this Award are set forth in the document you have received entitled "Restricted Shares Statement." The Restricted Shares Statement and these Terms and Conditions collectively constitute the Award Certificate for the Restricted Shares, and describe the provisions applicable to the Restricted Shares. 1. Definitions. Each capitalized term not otherwise defined herein has the meaning set forth in the Plan or, if not defined in the Plan, in the attached Restricted Shares Statement. The "Company" means Monsanto Company, a Delaware corporation incorporated February 9, 2000. 2. Delivery of Restricted Shares. (a) As of the Grant Date, the Restricted Shares have been registered in your name in a book-entry account maintained by Mellon Investor Services, the Company's transfer agent. This registration constitutes delivery of the Restricted Shares to you for all purposes. This book-entry account indicates that the Restricted Shares are subject to these Terms and Conditions. (b) Until such time (if any) as the Restricted Shares vest, you may not sell, assign, transfer, pledge, hypothecate, give away, or otherwise dispose of them. Any attempt on your part to dispose of the Restricted Shares will result in their being forfeited. However, you shall have all other rights of a common stockholder of the Company with respect to the Restricted Shares, including the right to vote such stock at any meeting of the common stockholders of the Company and the right to receive all dividends and other distributions declared and paid with respect to the Restricted Shares ("Dividends"). If any of the Restricted Shares are forfeited before vesting, then (i) you shall not be entitled to any Dividends for which the record date is after the day after such forfeiture occurs, and (ii) from and after the day after such forfeiture occurs, you shall no longer have any other rights as a stockholder with respect to the Restricted Shares. 3. Vesting. The Restricted Shares shall vest on the third anniversary of the Grant Date, subject to Sections 4 and 5 below. 4. Retirement, Death, Disability or Other Termination of Service. (a) If you experience a Termination of Service for any reason before the first anniversary of the Grant Date, the Restricted Shares shall be forfeited. If you experience a Termination of Service after the first anniversary of the Grant Date, including, without limitation, by reason of Retirement, death, or Disability, the Restricted Shares shall be forfeited except to the extent otherwise provided in the Plan or this Section 4. For purposes of this Section 4, the "15th Day" means the 15th day of any calendar month. (b) Retirement. If you experience a Termination of Service as a result of Retirement after the first anniversary of the Grant Date, then if such Termination of Service occurs at a time when the Restricted Shares have not yet vested, the Restricted Shares shall become vested as to a percentage of the total number of Restricted Shares, equal to (A) the number of months included in the period from first 15th Day occurring on or following the Grant Date through the 15th Day that occurs on, or immediately precedes, the date of your Termination of Service, (B) divided by 36. For purposes of this Award Certificate and the Plan, "Retirement" means that your Termination of Service occurs on or after your 50th birthday. (c) Death or Disability. If you experience a Termination of Service after the first anniversary of the Grant Date, as a result of death or Disability as determined by the Committee, then (i) if such Termination of Service occurs at a time when the Restricted Shares have not yet become vested with respect to all of the Shares covered by the Restricted Shares, the Restricted Shares shall become vested as to a percentage of the total number of Restricted Shares, equal to (A) the number of months included in the period from first 15th Day occurring on or following the Grant Date through the 15th Day that occurs on, or immediately precedes, the date of your Termination of Service, (B) divided by 36. (d) Termination for Cause. If you experience a Termination for Cause, the Restricted Shares, whether vested or not, shall immediately be forfeited. (e) Voluntary Termination. If you experience a voluntary Termination of Service other than on account of Retirement, at a time when all of the Restricted Shares have not yet become vested, all of the Restricted Shares that have not yet vested and any rights you may have under this Award Certificate shall immediately be forfeited. (f) Involuntary Termination Other Than for Cause. If you experience an involuntary Termination of Service, other than a Termination for Cause or on account of death or Disability, then (i) if such Termination of Service occurs at a time when the Restricted Shares have not yet become vested, the Restricted Shares shall become vested as to a percentage of the total number of Restricted Shares, equal to (A) the number of months included in the period from first 15th Day occurring on or following the Grant Date through the 15th Day that occurs on, or immediately precedes, the date of your Termination of Service, (B) divided by 36. (g) Change of Control. If, prior to the third anniversary of the Grant Date, you cease to serve as a member of the Board following a Change of Control, then upon such termination of service the Restricted Shares shall become fully vested. 5. Withholding. (a) In order for Restricted Shares to be released from restrictions when they vest, you must make arrangements satisfactory to the Company for the payment of any taxes that are required to be paid or withheld in 2 connection with the vesting of the Restricted Shares. If you make an election under Section 83(b) of the Code to be taxed on the Restricted Shares upon receiving them, you must notify the Company within 10 days after making such election, and you must make arrangements satisfactory to the Company for the payment of any taxes that are required to be paid or withheld as a result of your election. If you fail to comply with the preceding sentence, then notwithstanding any other provision of this Award Certificate, you will forfeit a number of the Restricted Shares sufficient to satisfy the minimum required withholding, as determined by the Committee in its sole discretion. (b) While the Company reserves the right to modify the methods of tax withholding that it deems acceptable, as of the time that this Award Certificate is being delivered to you, tax withholding may be satisfied by (i) cash or check, (ii) delivery of previously owned Shares, or (iii) retention, sale to a third party or cancellation by the Company of Restricted Shares that are vesting. No more than the minimum required withholding will be permitted using Shares. 6. No Right to Continued Service. This Award Certificate shall not limit or restrict the right of the Company or any Affiliate to terminate your service at any time or for any reason. 7. Effect of Award Certificate; Severability. This Award Certificate shall be binding upon and shall inure to the benefit of any successor of the Company and the person or entity to whom the Restricted Shares may have been transferred by will, the laws of descent and distribution or designation. The invalidity or enforceability of any provision of this Award Certificate shall not affect the validity or enforceability of any other provision of this Award Certificate. 8. Amendment. The terms and conditions of this Award Certificate may not be amended in a manner adverse to you without your consent. 9. Plan Interpretation. This Award Certificate is subject to the provisions of the Plan, and all of the provisions of the Plan are hereby incorporated into this Award Certificate as provisions of the Restricted Shares. If there is a conflict between the provisions of this Award Certificate and the Plan, the provisions of the Plan govern. If there is any ambiguity in this Award Certificate, any term that is not defined in this Award Certificate, or any matters as to which this Award Certificate is silent, the Plan shall govern, including, without limitation, the provisions of the Plan addressing construction, governing law, and the powers of the Committee, among others, to (a) interpret the Plan, (b) prescribe, amend and rescind rules and regulations relating to the Plan, (c) make appropriate adjustments to the Restricted Shares to reflect non-United States laws or customs or in the event of a corporate transaction, and (d) make all other determinations necessary or advisable for the administration of the Plan. 3 EX-31 5 c10q2004ex311.txt CEO EXHIBIT 31.1 CERTIFICATIONS I, Hugh Grant, Chairman, President and Chief Executive Officer of Monsanto Company, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Monsanto Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) [Reserved] c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based upon such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: July 14, 2004 /s/ Hugh Grant - --------------------------- Hugh Grant Chairman, President and Chief Executive Officer Monsanto Company EX-31 6 c10q2004ex312.txt CFO EXHIBIT 31.2 CERTIFICATIONS I, Terrell K. Crews, Executive Vice President and Chief Financial Officer of Monsanto Company, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Monsanto Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) [Reserved] c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based upon such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: July 14, 2004 /s/ Terrell K. Crews - ------------------------------ Terrell K. Crews Executive Vice President and Chief Financial Officer Monsanto Company EX-32 7 c10q2004ex32.txt 906 EXHIBIT 32 CERTIFICATION PURSUANT TO EXCHANGE ACT RULE 13(a)-14(b) AND 18 U.S.C. SECTION 1350 In connection with the report of Monsanto Company (the "Company") on Form 10-Q for the period ended May 31, 2004, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), and pursuant to Exchange Act Rule 13(a)-14(b) and 18 U.S.C. Section 1350, each of the undersigned officers of the Company does hereby certify that, to the best of such officer's knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Hugh Grant ---------------------------------- Hugh Grant President and Chief Executive Officer /s/ Terrell K. Crews ---------------------------------- Terrell K. Crews Executive Vice President and Chief Financial Officer July 14, 2004 EX-99 8 c10q2004ex99.txt RATIO OF EARNINGS TO FIXED CHARGES
Exhibit 99 MONSANTO COMPANY COMPUTATION OF EARNINGS TO FIXED CHARGES (Dollars in millions) Nine Eight Months Months Ended Ended May 31, Aug. 31, Year Ended Dec. 31, 2004 2003 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- ---- ---- Income (Loss) From Continuing Operations Before Income Taxes and Cumulative Effect of Accounting Change $465 $(38) $202 $459 $334 $263 $(60) Add: Fixed charges 84 71 105 147 272 305 140 Less capitalized interest (5) (4) (8) (30) (37) (23) (9) Dividends from affiliated companies 0 0 1 1 1 1 1 Equity affiliate expense-net 26 26 43 41 34 18 31 ---- ---- ---- ---- ---- ---- ---- Earnings available for fixed charges $570 $ 55 $343 $618 $604 $564 $103 ==== ==== ==== ==== ==== ==== ==== Fixed Charges: Interest expense $ 68 $ 57 $ 81 $ 99 $214 $269 $121 Capitalized interest 5 4 8 30 37 23 9 Portion of rents representative of interest factor 11 10 16 18 21 13 10 ---- ---- ---- ---- ---- ---- ---- Fixed Charges $ 84 $ 71 $105 $147 $272 $305 $140 ==== ==== ==== ==== ==== ==== ==== Ratio of Earnings to Fixed Charges 6.79 0.77* 3.27 4.20 2.22 1.85 0.74* ==== ==== ==== ==== ==== ==== ==== * Earnings were inadequate to cover fixed charges by $16 million for the eight months ended Aug. 31, 2003, and by $37 million for the year ended Dec. 31, 1998.
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