-----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, I7LzIoZo7VNPTloI6U7NPI8Mq3FH8MsqX9UixvVg9IQuKAFWf7AzMlVgGTJ+dmer faimkmKTiyg4k9A3vN30xA== 0000067686-99-000050.txt : 19990817 0000067686-99-000050.hdr.sgml : 19990817 ACCESSION NUMBER: 0000067686-99-000050 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MONSANTO CO CENTRAL INDEX KEY: 0000067686 STANDARD INDUSTRIAL CLASSIFICATION: CHEMICALS & ALLIED PRODUCTS [2800] IRS NUMBER: 430420020 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-02516 FILM NUMBER: 99692291 BUSINESS ADDRESS: STREET 1: 800 N LINDBERGH BLVD CITY: ST LOUIS STATE: MO ZIP: 63167 BUSINESS PHONE: 3146941000 MAIL ADDRESS: STREET 1: 800 NORTH LINDBERGH BLVD CITY: ST LOUIS STATE: MO ZIP: 63167 FORMER COMPANY: FORMER CONFORMED NAME: MONSANTO CHEMICAL CO DATE OF NAME CHANGE: 19711003 10-Q 1 MONSANTO COMPANY FORM 10Q ================================================================================ 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 June 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-2516 MONSANTO COMPANY ---------------- (Exact name of registrant as specified in its charter) DELAWARE 43-0420020 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 800 NORTH LINDBERGH BLVD., ST. LOUIS, MO 63167 ---------------------------------------------- (Address of principal executive offices) (Zip Code) (314) 694-1000 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Outstanding at Class June 30, 1999 ----- -------------- Common Stock, $2 par value 633,709,156 shares ================================================================================ PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS The Statement of Consolidated Income of Monsanto Company and subsidiaries for the three months and six months ended June 30, 1999 and the three months and six months ended June 30, 1998, the Statement of Consolidated Financial Position as of June 30, 1999 and December 31, 1998, the Statement of Consolidated Cash Flow for the six months ended June 30, 1999 and six months ended June 30, 1998, and related Notes to Financial Statements follow. In the opinion of management, these unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position, results of operations and cash flows for the interim periods reported. This Quarterly Report on Form 10-Q should be read in conjunction with Monsanto's 1998 Annual Report on Form 10-K and Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1999. Unless otherwise indicated, "Monsanto" and "the company" are used interchangeably to refer to Monsanto Company or to Monsanto Company and consolidated subsidiaries, as appropriate to the context. Unless otherwise indicated, "earnings per share" and "per share" means diluted earnings per share. In tables, all dollars are in millions, except per share data. Throughout this quarterly filing, "EBITDA (excluding unusual items)" is net earnings (loss) before income taxes, interest expense, depreciation expense, amortization expense, and excludes the effects of unusual items. There have been no unusual items in 1999; however, net income and income from continuing operations for the second quarter of 1998 included an aftertax net charge of $13 million for the cost of exiting the company's optical products business, partially offset by a restructuring reserve reversal. EBITDA (excluding unusual items) may not be directly comparable to EBITDA performance measures reported by other companies because it excludes unusual items. Although EBITDA (excluding unusual items) is a financial performance measure commonly used in the financial community, it is not a measure of financial performance under accounting principles generally accepted in the United States. The presentation of EBITDA (excluding unusual items) in this quarterly report is intended to supplement investors' understanding of Monsanto's operating performance and not to replace net income, cash flows, financial position nor comprehensive income as determined in accordance with accounting principles generally accepted in the United States. EBITDA (excluding unusual items) excludes the effects of intangible amortization and interest expense. For this reason, the increases in these two elements of the financial statements resulting from the 1998 acquisitions will not be reflected in EBITDA (excluding unusual items), but will impact net income in future periods. 1 MONSANTO COMPANY AND SUBSIDIARIES STATEMENT OF CONSOLIDATED INCOME (Dollars in millions, except per share) Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 ------- ------ ------ ------ Net Sales $2,586 $2,098 $4,896 $3,817 Costs and Expenses: Cost of Goods Sold 850 842 1,721 1,492 Selling, General and Administrative Expenses 726 546 1,393 1,011 Technological Expenses 316 317 669 585 Amortization of Intangible Assets 84 70 167 116 Restructuring and Other Special Charges - Net (35) (35) Interest Expense 108 51 204 95 Interest Income (7) (12) (14) (20) Other Income (Expense) - Net (24) (2) 14 1 --------- --------- -------- --------- Income from Continuing Operations Before Income Taxes 533 321 742 572 Income Taxes 207 97 296 182 ------- -------- ------- ------- Income from Continuing Operations 326 224 446 390 Income from Discontinued Operations, net of taxes of $8, $17, $15, and $32 million, respectively 18 33 30 63 -------- -------- -------- -------- Net Income $ 344 $ 257 $ 476 $ 453 ------ ------ ------ ------ Basic Earnings per Share: Continuing Operations $ 0.51 $ 0.37 $ 0.70 $ 0.65 Discontinued Operations 0.03 0.06 0.05 0.11 ------- ------- ------- ------- Net Income $ 0.54 $ 0.43 $ 0.75 $ 0.76 ------ ------ ------ ------ Diluted Earnings per Share: Continuing Operations $ 0.50 $ 0.36 $ 0.69 $ 0.63 Discontinued Operations 0.03 0.05 0.04 0.10 ------- ------- ------- ------- Net Income $ 0.53 $ 0.41 $ 0.73 $ 0.73 ------ ------ ------ ------ Dividends per Share $ 0.03 $ 0.03 $ 0.06 $ 0.06 ------ ------ ------ ------ The accompanying notes are an integral part of the financial statements.
2 MONSANTO COMPANY AND SUBSIDIARIES STATEMENT OF CONSOLIDATED FINANCIAL POSITION (Dollars in millions, except per share) June 30, December 31, 1999 1998 ------- ------- ASSETS Current Assets: Cash and cash equivalents $ 102 $ 78 Receivables, net of allowances of $143 in 1999 and $87 in 1998 3,347 2,119 Miscellaneous receivables and prepaid expenses 738 777 Deferred income tax benefit 478 475 Inventories 1,474 1,702 --------- --------- Total Current Assets 6,139 5,151 --------- --------- Property, Plant and Equipment 5,298 5,185 Less Accumulated Depreciation 2,316 2,320 --------- --------- Net Property, Plant and Equipment 2,982 2,865 --------- --------- Intangible Assets, net of accumulated amortization 4,914 5,281 Other Assets 1,155 1,120 Net Assets of Discontinued Operations 1,605 1,847 --------- --------- Total Assets $ 16,795 $ 16,264 -------- -------- LIABILITIES AND SHAREOWNERS' EQUITY Current Liabilities: Accounts payable $ 453 $ 821 Accrued liabilities 2,054 1,845 Short-term debt 1,743 1,058 ---------- --------- Total Current Liabilities 4,250 3,724 ---------- --------- Long-Term Debt 6,130 6,259 Postretirement Liabilities 836 784 Other Liabilities 344 511 Shareowners' Equity: Common stock (authorized: 1,000,000,000 shares, par value $2) Issued: 846,927,220 shares in 1999 and 1998 1,694 1,694 Additional contributed capital 1,451 1,389 Treasury stock, at cost (213,218,064 shares in 1999 and 217,632,240 shares in 1998) (2,459) (2,508) Reinvested earnings 5,090 4,652 Reserve for ESOP debt retirement (95) (106) Accumulated other comprehensive loss (446) (135) ----------- ----------- Total Shareowners' Equity 5,235 4,986 ---------- ----------- Total Liabilities and Shareowners' Equity $ 16,795 $ 16,264 -------- -------- The accompanying notes are an integral part of the financial statements.
3 MONSANTO COMPANY AND SUBSIDIARIES STATEMENT OF CONSOLIDATED CASH FLOW (Dollars in millions) Six Months Ended June 30, ---------------- 1999 1998 ---- ---- Increase (Decrease) in Cash and Cash Equivalents Operating Activities: Income from continuing operations $ 446 $ 390 Add income taxes - continuing operations 296 182 ----- ------- Income from continuing operations before income taxes 742 572 Adjustments to reconcile to Cash Used in Continuing Operations: Income tax refunds (payments) (45) (21) Items that did not use (provide) cash: Depreciation and amortization 342 231 Restructuring expense (income) (35) Bad debt expense and other 77 89 Working capital changes that provided (used) cash: Accounts receivable (1,347) (1,273) Inventories 152 11 Accounts payable and accrued liabilities (352) 63 Other 31 (134) Pharmaceutical licensing and product rights sales 207 Other items (44) 107 -------- --------- Cash Used in Continuing Operations (444) (183) Cash Used in Discontinued Operations (102) (111) -------- -------- Total Cash Used in Operations (546) (294) -------- -------- Investing Activities: Property, plant and equipment purchases (392) (363) Acquisition of seed companies (50) (68) Acquisition and investment payments (9) (60) Investment and property disposal proceeds 116 126 Discontinued Operations 314 (14) ------ --------- Cash Used in Investing Activities (21) (379) -------- -------- Financing Activities: Net change in short-term financing 685 456 Long-term debt proceeds 22 223 Long-term debt reductions (150) (68) Dividend payments (38) (36) Common stock issued under employee stock plans 72 96 -------- -------- Cash Provided by Financing Activities 591 671 ------- ------ Increase (Decrease) in Cash and Cash Equivalents 24 (2) Cash and cash equivalents beginning of year 78 116 ------- -------- Cash and cash equivalents at end of period $ 102 $ 114 ----- ------- The effect of exchange rate changes on cash and cash equivalents was not material. Cash payments for interest (net of amounts capitalized) were $192 million as of June 30, 1999, and $114 million as of June 30, 1998. The accompanying notes are an integral part of the financial statements.
4 MONSANTO COMPANY AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS 1. In 1998, Monsanto announced that it had entered into a definitive agreement with Delta and Pine Land Company ("D&PL") to merge it with Monsanto. Under terms of the agreement, D&PL shareowners would be entitled to receive 0.8625 shares of Monsanto's common stock in exchange for each share of D&PL they hold. Approximately 33 million shares of Monsanto common stock would be issued to D&PL shareowners. Based on Monsanto's closing stock price of $53 1/2 per common share on May 8, 1998, the date of the merger agreement, this would result in a purchase price of approximately $1.8 billion. The merger, already approved by D&PL shareowners, is subject to regulatory approvals and other customary conditions. This transaction will be accounted for as a purchase. Also during 1998, Monsanto completed its acquisition of DEKALB Genetics Corporation. ("DEKALB") and acquired Plant Breeding International Cambridge Limited (PBIC) and certain international seed operations of Cargill Incorporated (Cargill). Monsanto accounted for these acquisitions as purchases. The purchase price allocations were based on preliminary assumptions and are subject to revision during 1999, pending final appraisal and valuation studies. Significant components of the current purchase price allocation for the principal acquisitions made during 1998 were to goodwill, $2,997 million; germplasm and core technology, $324 million; trademarks, $206 million; in-process research and development, $402 million; exit costs and employee termination liabilities, ($78) million; inventories and other individually insignificant tangible assets and liabilities, $374 million. The company is continuing to obtain additional information related to intangible assets (primarily germplasm and trademarks), litigation, costs to complete the exit plan for certain activities of the acquired businesses, and inventories. The information necessary to complete the allocation of purchase price is expected to be obtained by the end of the third quarter of 1999. Near the end of the second quarter of 1999, Monsanto and Cargill reached an agreement that resolves outstanding issues related to Monsanto's purchase of certain international seed operations of Cargill. As a result, final estimates related to the purchase price allocation to goodwill, inventories and other individually insignificant tangible assets are expected to be completed and adjusted in the third quarter 1999. Any other adjustment to the purchase price allocation for the businesses acquired is not expected to materially impact Monsanto's financial position, results of operations or cash flows. 2. Comprehensive income (loss) includes all non-shareowner changes in equity and consists of net income, foreign currency translation adjustments, unrealized gains and losses on available-for-sale securities, and minimum pension liability adjustments. Total comprehensive income (loss) for the three months and six months ended June 30, 1999 and June 30, 1998, were as follows: Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 ------- ------ ------ ------ Net Income $ 344 $ 257 $ 476 $ 453 ----- ----- ----- ----- Other Comprehensive Income (Loss): Foreign Currency Translation Adjustments (41) (27) (317) (52) Unrealized Investment Gains (Losses) 9 (14) 6 7 --------- ------- --------- ---------- Total Other Comprehensive (Loss) (32) (41) (311) (45) ------- ------- ------- ------- Total Comprehensive Income $ 312 $ 216 $ 165 $ 408 ------ ----- ------ -------
5 MONSANTO COMPANY AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (continued) 3. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"). FAS 133 requires all derivatives to be recognized as assets or liabilities on the balance sheet and measured at fair value. Changes in the fair value of derivatives should be recognized in either Net Income or Other Comprehensive Income, depending on the designated purpose of the derivative. This statement is effective for Monsanto Jan. 1, 2001. Because of the effect of recent acquisitions, Monsanto is reassessing its position and has not yet determined the effect this statement will have on its consolidated financial position or results of operations. 4. Basic earnings per share (EPS) from continuing operations were computed using the weighted average number of common shares outstanding each period (632 million in 1999 and 599 million in 1998). Diluted EPS from continuing operations were computed taking into account the effect of dilutive potential common shares (16.4 million in 1999 and 25.3 million in 1998). Dilutive potential common shares consist of outstanding stock options. Certain common share equivalents were not included in the computation of diluted earnings per share, because the effect of their exercise or conversion is not dilutive, when based on the average market price of Monsanto common stock for the period. These included approximately 55.3 million of outstanding stock options, which expire through 2008, and 17.5 million Adjustable Conversion-rate Equity Securities (ACES) that include stock purchase contracts exercisable in November 2001. 5. Monsanto's 1998 restructuring plan resulted in the recognition of a reserve liability totaling $280 million (current and long-term) at December 31, 1998. During the second quarter of 1999, 280 employees were severed at a cost of approximately $14 million. Year-to-date severances for 1999 total 810 employees at a cost of $54 million. Cash outflows associated with these separations were charged against the restructuring liability. In addition, Monsanto completed a portion of the facility closures in the first six months of 1999, reducing the restructuring liability by another $18 million. Work force reductions and facility closures were behind expectations as of June 30, 1999; however, Monsanto expects to complete the remaining restructuring actions within the originally planned time frame. Work force Facility Reduction Closures Total ---------- -------- ----- 1998 restructuring reserve balance as of December 31, 1998 $ 219 $ 61 $ 280 Costs charged against reserves (54) (18) (72) -------- -------- ------ 1998 restructuring reserve balance as of June 30, 1999 $ 165 $ 43 $ 208 ------ ------- ------ 6. Components of inventories as of June 30, 1999 and Dec. 31, 1998 were as follows: June 30, Dec. 31, 1999 1998 ---- ---- Finished goods $ 673 $ 855 Goods in process 336 366 Raw materials and supplies 498 516 --------- --------- Inventories, at FIFO cost 1,507 1,737 Excess of FIFO over LIFO cost (33) (35) ----------- --------- Total $ 1,474 $ 1,702 -------- --------
6 7. During 1998, a jury verdict was returned against Monsanto in a lawsuit filed in the California Superior Court. The lawsuit was brought by Mycogen Corp., Agrigenetics Inc., and Mycogen Plant Sciences Inc., claiming that Monsanto delayed providing access to certain gene technology under a 1989 agreement with Lubrizol Genetics Inc., a company which Mycogen Corp. subsequently purchased. The jury awarded $174.9 million in damages. Monsanto has filed an appeal of the verdict, has meritorious defenses and grounds to overturn the award, and intends to vigorously pursue all available means to have this verdict set aside. No provision has been made in Monsanto's consolidated financial statements with respect to this verdict. In April 1999, a jury verdict was returned against DEKALB Genetics Corporation (which became a wholly-owned subsidiary of Monsanto during December 1998), in a lawsuit filed in U.S. District Court in North Carolina. The lawsuit was brought by Rhone Poulenc Agrochimie S.A., claiming that a 1994 license agreement was induced by fraud stemming from DEKALB's nondisclosure of relevant information and that DEKALB did not have the right to license, make or sell products using Rhone Poulenc's technology for glyphosate resistance under this agreement. The jury verdict included an award of $50 million in punitive damages. DEKALB has filed a motion to have the damage award set aside and has filed a Motion for Judgment as a Matter of Law to overturn the verdict. DEKALB has meritorious grounds to overturn the verdict and intends to vigorously pursue all available means to have the verdict overturned. No provision has been made in Monsanto's consolidated financial statements with respect to the award for punitive damages. Monsanto is party to a number of lawsuits and claims, which it is vigorously defending. Such matters arise in the normal course of business and relate to a variety of issues. Certain of the lawsuits and claims seek damages in very large amounts or seek to restrict Monsanto's business activities. Although the results of litigation cannot be predicted with certainty, management's belief is that the final outcome of such litigation will not have a material adverse effect on Monsanto's consolidated financial position, profitability or liquidity in any one year. 7 8. On January 13, 1999, Monsanto announced its intent to sell its alginates business and on July 1, 1999, Monsanto announced its intent to sell its artificial sweetener and biogum businesses. As a result, these businesses have been reclassified as discontinued operations. The company expects to sell these businesses for a gain within the next twelve months. In addition, Monsanto transferred the remaining Roundup(R) lawn-and-garden and nutrition research operations of the former Nutrition and Consumer Products segment to the Agricultural Products and Corporate and Other segments, respectively. Accordingly, the Nutrition and Consumer Products segment is no longer reported and, for all periods presented, the consolidated financial statements and notes have been reclassified to conform to this presentation. Net sales, income and net assets from discontinued operations are as follows: Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 ------- ------ ------ ------ Net Sales $ 234 $ 372 $ 469 $ 697 Income from Discontinued Operations, Before Tax 26 50 45 95 Discontinued Operations Income Tax 8 17 15 32 -------- -------- ------ ------ Income from Discontinued Operations $ 18 $ 33 $ 30 $ 63 ------ ----- ----- ----- Net Assets of Discontinued Operations: As of June 30, 1999 As of December 31, 1998 -------------------- ----------------------- Current Assets $ 650 $1,039 Non-Current Assets 1,290 1,268 ------- ------- Total Assets $1,940 $2,307 ------ ------ Current Liabilities $ 189 $328 Non-Current Liabilities 146 132 -------- ------ Total Liabilities $ 335 $460 ------- ------- Net Assets of Discontinued Operations $1,605 $ 1,847 ------ ------- On August 6, 1999, Monsanto announced the signing of a definitive agreement to sell Stoneville Pedigree Seed Company to an affiliate of Hicks, Muse, Tate & Furst, Inc.
8 9. Business segment data for the three months and six months ended June 30, 1999 and the three months and six months ended June 30, 1998 were as follows for net sales, EBIT (earnings before interest expense and income taxes) and EBITDA (earnings before interest expense, income taxes, depreciation and amortization). Segment EBIT and EBITDA exclude unusual items and are indicated as "EBIT (excluding unusual items)" and "EBITDA (excluding unusual items)". Total Monsanto consolidated EBIT includes the effects of unusual items. There have been no unusual items in 1999; however, net income and income from continuing operations for the second quarter of 1998 included an aftertax net charge of $13 million for the cost of exiting the company's optical products business, partially offset by a restructuring reserve reversal. Net Sales Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 ------- ------ ------ ------ Agricultural Products $1,612 $1,439 $3,069 $2,572 Pharmaceuticals 937 607 1,762 1,139 Corporate and Other 37 52 65 106 --------- --------- --------- -------- Total Net Sales $2,586 $2,098 $4,896 $3,817 ------ ------ ------ ------ EBIT Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 ------- ------ ------ ------ Segment EBIT (excluding unusual items) from Continuing Operations: Agricultural Products $ 505 $ 483 $ 803 $ 818 Pharmaceuticals 212 (15) 290 (2) Corporate and Other (76) (83) (147) (136) --------- -------- ------- ------- Total segment EBIT (excluding unusual items) 641 385 946 680 -------- ------- ------- -------- Restructuring and Other Unusual Items - Net (13) (13) --------- -------- --------- --------- Total EBIT from Continuing Operations $ 641 $ 372 $ 946 $ 667 ----- ------ ------ ------- EBITDA (excluding unusual items) from Continuing Operations: Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 ------- ------ ------ ------ Agricultural Products $ 618 $ 555 $1,030 $ 969 Pharmaceuticals 256 15 369 56 Corporate and Other (57) (87) (111) (138) ------- ------- -------- ------ Total EBITDA from Continuing Operations (excluding unusual items) 817 483 1,288 887 ------- ------- ------ ------ Interest Expense 108 51 204 95 Income Taxes 207 97 296 182 Amortization Expense 84 46 167 92 Depreciation 92 52 175 115 Restructuring and Other Unusual Items - Net (13) (13) ---------- -------- ---------- ---------- Income from Continuing Operations $ 326 $ 224 $ 446 $ 390 ------ ------- ------ ------ Financial information for the second quarter or first half should not be annualized. Monsanto's sales and operating income are historically higher during the first half of the year, primarily because of the concentration of sales from the Agricultural Products segment in the first half of the year.
9 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Recent Events - ------------- On January 13, 1999, Monsanto announced its intent to sell the alginates business and on July 1, 1999, Monsanto announced its intent to sell the artificial sweetener and biogum businesses. As a result, these businesses have been reclassified as discontinued operations. The company expects to sell these businesses for a gain within the next twelve months. In addition, Monsanto transferred the remaining Roundup(R) lawn-and-garden and nutrition research operations of the former Nutrition and Consumer Products segment to the Agricultural Products and Corporate and Other segments, respectively. Accordingly, the Nutrition and Consumer Products segment is no longer reported and, for all periods presented, the consolidated financial statements and notes have been reclassified to conform to this presentation. Results from Continuing Operations - Second Quarter 1999 Compared with Second - ----------------------------------------------------------------------------- Quarter 1998 - ------------ Net income for Monsanto totaled $344 million, or $0.53 per share, in the second quarter of 1999 compared with net income of $257 million, or $0.41 per share for the second quarter of 1998. Monsanto recorded income from continuing operations for the second quarter of 1999 of $326 million, or $.50 per share compared with income from continuing operations of $224 million, or $0.36 per share for the prior year quarter. There have been no unusual items in 1999; however, net income and income from continuing operations for the second quarter of 1998 included an aftertax net charge of $13 million, or $0.02 per share, for the cost of exiting the company's optical products business, partially offset by a restructuring reserve reversal. Excluding unusual items in the second quarter of 1998, net income was $270 million, or $0.43 per share, and income from continuing operations was $237 million, or $0.38 per share for the quarter. Consolidated earnings before interest expense and taxes (EBIT) from continuing operations increased 72 percent to $641 million in the second quarter of 1999, compared with EBIT from continuing operations of $372 million in the second quarter of 1998. Net sales grew to a record $2,586 million in the second quarter of 1999, compared with net sales of $2,098 million for the same period a year ago. Gross profit increased 38% in the second quarter of 1999 compared with the second quarter 1998, primarily because of the strong performance of the Pharmaceuticals segment. Selling, general and administrative ("SG&A" ) expenses increased to $726 million in the second quarter of 1999 compared with prior year quarter SG&A expenses of $546 million. The inclusion in 1999 of SG&A expenses from acquired seed companies and profit sharing expenses associated with the co-promotion alliance for Celebrex(R) arthritis treatment were the primary reasons for the increase. Technological expense in the second quarter of 1999 remained flat when compared with technological expense in the second quarter of 1998 because of planned timing of 1999 technological expenditures. Amortization of intangible assets increased in the second quarter of 1999 principally because of the increase in intangible assets related to the seed company acquisitions made in 1998. Monsanto financed the 1998 seed company acquisitions primarily with long-term borrowings which created a higher debt level in 1999. As a result, interest expense increased $57 million in the second quarter 1999 when compared to the same period a year ago. Other income increased $22 million in the second quarter of 1999 vs. the prior year second quarter primarily because of a pretax gain of $40 million recorded on the sale of the NSC Technologies, LLC business in the second quarter of 1999. 10 MONSANTO COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) Business segment data for the three months and six months ended June 30, 1999 and June 30, 1998, were as follows: Net Sales Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 ------- ------ ------ ------ Agricultural Products $1,612 $1,439 $3,069 $2,572 Pharmaceuticals 937 607 1,762 1,139 Corporate and Other 37 52 65 106 --------- --------- --------- -------- Total Net Sales $2,586 $2,098 $4,896 $3,817 ------ ------ ------ ------ EBIT Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 ------- ------ ------ ------ Segment EBIT (excluding unusual items) from Continuing Operations: Agricultural Products $ 505 $ 483 $ 803 $ 818 Pharmaceuticals 212 (15) 290 (2) Corporate and Other (76) (83) (147) (136) --------- -------- ------- ------- Total segment EBIT (excluding unusual items) 641 385 946 680 -------- ------- ------- -------- Restructuring and Other Unusual Items - Net (13) (13) --------- -------- --------- --------- Total EBIT from Continuing Operations $ 641 $ 372 $ 946 $ 667 ----- ------ ------ -------
Agricultural Products Segment Agricultural Products segment EBIT (excluding unusual items) increased $22 million, or 5 percent, in the second quarter of 1999 to $505 million, compared with $483 million in the second quarter of 1998. The impact of record sales was partially offset by increases in SG&A, technological expenses and amortization costs. The inclusion in the second quarter of 1999 of the acquired seed companies and increased spending on crop biotechnology initiatives were primarily responsible for the increase in SG&A and technological expenses when compared with the second quarter of 1998. The continued unfavorable economic conditions in certain Latin American and eastern European countries caused an increase in bad debt expense in the second quarter of 1999. An increase in amortization of intangible assets in the second quarter of 1999 compared with the second quarter of 1998 was principally because of the acquisition of seed companies. Net sales for the Agricultural Products segment increased to $1,612 million in the second quarter of 1999 compared with net sales of $1,439 million in the second quarter of 1998, a 12 percent increase. The inclusion of sales from seed companies acquired in 1998 accounted for most of the increase. In addition, higher licensing revenues from crops developed through biotechnology, and record sales for the quarter for the family of Roundup(R) herbicides, partially offset by lower sales of other herbicides including Harness(R) and Lasso(R), contributed to the increase. Biotechnology licensing revenues increased 80 percent in the second quarter of 1999 compared with licensing fees in the same period a year ago, led by RoundupReady(R) seed traits in soybean, corn, cotton and canola. Sales for the family of Roundup(R) herbicides in the second quarter of 1999 were higher when compared with sales in the second quarter of 1998, fueled by higher sales volumes, primarily in North America, Australia/New Zealand and China. Roundup(R) herbicide volumes increased by 18 percent in the second quarter of 1999 compared with the second quarter of 1998, as both conservation tillage and post-emergent markets continued to grow. Sales associated with these volume increases were largely offset by lower overall prices of Roundup(R) herbicides and lower sales of Roundup(R) herbicides in Latin America. Favorable weather conditions contributed to the quarterly increase in Roundup(R) sales volumes, as sales that were expected to occur later in the year occurred in the second quarter of 1999. The favorable weather is expected to affect the timing of third and fourth quarter 1999 sales, but not the overall volume for the year. The recovery in certain southeast Asian economies also positively affected sales volumes of Roundup(R) herbicides; however, this was offset by a decline in Latin America because of weak economic conditions. 11 Pharmaceuticals Segment EBIT (excluding unusual items) for the Pharmaceuticals segment was $212 million in the second quarter of 1999, compared with a loss of $15 million in EBIT (excluding unusual items) in the second quarter of 1998. The strong product sales of Celebrex(R) arthritis treatment were the primary reason for the increase. SG&A expenses rose because of increased spending associated with the marketing of Celebrex(R), which included co-promotion payments for the second quarter of 1999. Technological expenses were lower when compared to the year-ago quarter primarily because of planned timing of second quarter 1999 technological expenditures. The Pharmaceuticals segment recorded net sales of $937 million in the second quarter of 1999, compared with net sales of $607 million during the same period in 1998, a 54 percent increase. The strong product sales of Celebrex(R) were primarily responsible for the increase. Sales of Arthrotec(R) arthritis treatment also were higher in the second quarter of 1999, despite market share shifts toward Celebrex(R). Sales of Ambien(R) short-term treatment for insomnia slightly increased in the second quarter of 1999, as new and refill prescription rates continued to grow. Corporate and Other Segment Corporate and Other segment EBIT (excluding unusual items) increased 8 percent in the second quarter of 1999 when compared with the second quarter of the prior year because 1998 included losses from business divestitures. The disposal of the Orcolite(R) and Diamonex(R) optical products businesses during the second quarter 1998 contributed to the decreases in net sales and SG&A expenses of $15 million and $27 million, respectively. Segment EBITDA (excluding unusual items) - ---------------------------------------- Business segment earnings before interest expense, taxes, depreciation and amortization (EBITDA) excluding unusual items for the three months and six months ended June 30, 1999 and June 30, 1998, were as follows: EBITDA (excluding unusual items) from Continuing Operations: Three Months Ended Six Months Ended June 30, June 30, 1999 1998 1999 1998 ----- ----- ----- ----- Agricultural Products $ 618 $ 555 $1,030 $ 969 Pharmaceuticals 256 15 369 56 Corporate and Other (57) (87) (111) (138) ------- ------- -------- ------ Total EBITDA from Continuing Operations (excluding unusual items) 817 483 1,288 887 ------- ------- ------ ------ Interest Expense 108 51 204 95 Income Taxes 207 97 296 182 Amortization Expense 84 46 167 92 Depreciation 92 52 175 115 Restructuring and Other Unusual Items - Net (13) (13) ---------- -------- ---------- ---------- Income from Continuing Operations $ 326 $ 224 $ 446 $ 390 ------ ------- ------ ------
Monsanto's EBITDA (excluding unusual items) in the second quarter of 1999 was $817 million, compared with EBITDA (excluding unusual items) of $483 million in the second quarter of 1998, an increase of 69 percent. The increase reflects increased net sales in the second quarter of 1999 compared with net sales in the second quarter of 1998, partially offset by increased SG&A expenses and technological expenses. On a segment basis, Monsanto's Agricultural Products segment EBITDA (excluding unusual items) increased to $618 million in the second quarter of 1999 compared with EBITDA (excluding unusual items) of $555 million in the second quarter of 1998, an 11 percent increase. Inclusion of sales from the seed companies acquired in 1998 and higher licensing revenues from crops developed through biotechnology drove the growth in EBITDA (excluding unusual items). On a quarter-to-quarter basis, Monsanto's Pharmaceuticals segment EBITDA (excluding unusual items) improved to $256 million in the second quarter of 1999 12 from EBITDA of $15 million in the second quarter of 1998 primarily because of the strong product sales of Celebrex(R) arthritis treatment which was launched in first quarter 1999. Financial information for the second quarter or first half of 1999 should not be annualized. Monsanto's sales and operating income are historically higher during the first half of the year, primarily because of the concentration of sales from the Agricultural Products segment in the first half of the year. Results from Continuing Operations - First Six Months of 1999 Compared with - --------------------------------------------------------------------------- First Six Months of 1998 - ------------------------ Net income for Monsanto totaled $476 million, or $0.73 per share, for the first six months of 1999 compared with net income of $453 million, or $0.73 per share for the first six months of 1998. Monsanto earned income from continuing operations for the first six months of 1999 of $446 million, or $0.69 per share compared with income from continuing operations of $390 million, or $0.63 per share for the same period in 1998. There have been no unusual items in 1999; however, results for second quarter of 1998 included an aftertax net charge of $13 million, or $0.02 per share, for the cost of exiting the company's optical products business partially offset by a restructuring reserve reversal. Excluding unusual items in 1998, net income was $466 million, or $0.75 per share and income from continuing operations was $403 million, or $0.65 per share. Consolidated earnings before interest expense and taxes (EBIT) from continuing operations increased 42 percent to $946 million for the first six months of 1999, compared with EBIT from continuing operations of $667 million for the first six months of 1998. Sales for the first six months of 1999 grew to a record $4,896 million while gross profit increased 37 percent, primarily because of the strong performance of the Pharmaceuticals segment. Selling, general and administrative (SG&A ) expenses increased to $1,393 million in the first half of 1999 compared with SG&A expenses of $1,011 million in the first-half of 1998. Inclusion in the first half of 1999 of SG&A expenses from acquired seed companies and continued spending associated with the launch of Celebrex(R) arthritis treatment were principally responsible for the increase. Technological expenses rose 14 percent in the first half of 1999 compared with the first half of 1998, driven by higher expenses in the Agricultural Products segment and the Pharmaceuticals segment. Continued spending on crop biotechnology initiatives was responsible for the increase in the Agricultural Products segment. Technological expenses for the Pharmaceuticals segment increased to support several late-stage new product candidates combined with close-out expenses associated with discontinuation of clinical trials for the fibans research program. Amortization of intangible assets increased 44 percent for the first six months of 1999 compared with the first six months of 1998, principally because of the increase in intangible assets related to seed company acquisitions in 1998. Interest expense increased $109 million for the first six months of 1999 primarily due to higher debt levels when compared to the same period a year ago. The higher debt level in 1999 was required as Monsanto financed the 1998 seed company acquisitions primarily with long-term borrowings. The decline in other income of $13 million was primarily because 1999 six months results no longer include the equity income of DEKALB, which is now included in Monsanto's consolidated results. Agricultural Products Segment Agricultural Products segment EBIT (excluding unusual items) was $803 million in the first six months of 1999 compared with EBIT (excluding unusual items) of $818 million for the first six months of 1998, a 2 percent decrease. The impact of increased sales for the Agricultural Products segment in the first half of 1999 compared with the first half of 1998 was more than offset by increases in SG&A and technological expenses, and amortization costs. The inclusion in 1999 of the acquired seed companies and spending on crop biotechnology initiatives caused an increase in SG&A and technological expenses in the first six months of 1999. Continued unfavorable economic conditions in certain Latin American and eastern European countries caused an increase in bad debt expense in the first six months of 1999 compared with the same period a year ago. An increase in intangible assets related to seed company acquisitions in 1998 caused higher amortization expense in the first half of 1999 compared with the first half of 1998. Net sales for the Agricultural Products segment increased $497 million, or 19 percent, in the first six months of 1999, primarily because of the inclusion of sales from seed companies acquired in 1998. In addition, higher licensing revenues from crops developed through biotechnology, and strong sales for the family of Roundup(R) herbicides, partially offset by lower sales of other herbicides including Harness(R) and Lasso(R), contributed to the increase. Biotechnology licensing revenues increased 50 percent in the first six months of 1999 from licensing fees in the same period in 1998. 13 The increase in sales volume for the family of Roundup(R) herbicides was primarily driven by increased usage in conservation tillage and over the top of RoundupReady(R) crop applications. Sales volumes rose in many world areas, especially North America, Australia/New Zealand and China. Sales associated with these volume increases were largely offset by lower overall prices of Roundup(R) herbicides and lower sales of Roundup(R) herbicides in Latin America. Sales volumes and prices were lower in Latin America due to the weakened economy. Favorable weather conditions contributed to the first six months of 1999 increase in Roundup(R) sales volumes, as sales that would have been expected to occur later in the year occurred earlier in the year. The favorable weather is expected to affect the timing of third and fourth quarter 1999 sales, but not the overall volume for the year. Pharmaceuticals Segment EBIT (excluding unusual items) for the Pharmaceuticals segment increased to $290 million for the first six months of 1999 compared with a loss of $2 million for the first six months of 1998, which included $100 million of revenue related to the co-promotion of Celebrex(R) arthritis treatment. The strong EBIT(excluding unusual items) performance for the first six months of 1999 can primarily be attributed to the strong product launch and continued sales of Celebrex(R) arthritis treatment. SG&A expenses increased $279 million, or 42 percent primarily because of increased spending associated with the Celebrex(R) product launch. Technological expenses increased $33 million when compared to the same period a year ago primarily to support several late stage new product candidates, clinical studies for launched products, and close-out expenses associated with the discontinuation of clinical trials for the fibans research program. Net sales for the Pharmaceuticals segment rose to $1,762 million in the first six months of 1999 compared with net sales of $1,139 million in the same period of 1998, an increase of 55 percent. The successful launch and continued strong sales of Celebrex(R) arthritis treatment drove the increase. In addition, segment sales for the first six months of 1999 reflect significant increases in sales volumes of Arthrotec(R) and Daypro(R) arthritis treatments when compared to sales volumes in the same period in 1998, despite market share shifts towards Celebrex(R) arthritis treatment. Corporate and Other Segment Corporate and Other segment EBIT (excluding unusual items) decreased $11 million, or 8 percent, for the first six months of 1999 when compared with the same period a year ago primarily because 1998 included losses on business divestitures. The disposal of the Orcolite(R) and Diamonex(R) optical products businesses during the second quarter of 1998 contributed to the decreased net sales and SG&A expenses of $41 million and $27 million, respectively. Results from Discontinued Operations - ------------------------------------ Net sales in the second quarter of 1999 were $234 million compared with net sales of $372 million in the same period of 1998. The decline was primarily because of the January 1999 divestiture of the Ortho(R) lawn-and-garden products business. Income from discontinued operations was $18 million in the second quarter of 1999 compared with income from discontinued operations in the second quarter 1998 of $33 million. Income from discontinued operations for the second quarter of 1999 and the second quarter of 1998 is net of tax expense of $8 million and $17 million, respectively. Net sales for the first six months of 1999 were $469 million, down 33 percent compared with $697 million in the prior year primarily because of the divestiture of the Ortho(R) lawn-and-garden products business. Income from discontinued operations for the first six months of 1999 was $30 million compared with $63 million in the prior year. Income from discontinued operations for the first six months of 1999 and first six months of 1998 is net of tax expense of $15 million and $32 million, respectively. Changes in Financial Condition -- June 30, 1999 Compared with Dec. 31, 1998 - --------------------------------------------------------------------------- Working capital as of June 30, 1999 increased to $1,889 million from $1,427 million as of December 31, 1998, primarily because of a seasonal increase in the Agricultural Products segment's trade receivables partially offset by inventory decrease of $228 million. The current ratio was 1.4 at June 30, 1999 and year-end 1998. Accounts payable decreased by $368 million, or 45 percent, primarily because of payments made to seed growers in the first half of 1999. 14 Short-term debt increased $685 million when compared to the year-end balance. The restructuring liability of $280 million established in 1998 was reduced by $72 million in the first six months of 1999 to cover the cost for employees severed and facility closures. Work force reductions and facility closures were behind expectations as of June 30, 1999, however, Monsanto expects to complete the remaining restructuring actions within the originally planned time frame. The percent of total debt to total capitalization increased to 60 percent as of June 30, 1999 compared with 59 percent as of December 31, 1998 because of the increase in short-term debt to fund the seasonal needs of the Agricultural Products segment and the Pharmaceutical segment's launch of Celebrex(R) arthritis treatment. Operating activities from continuing operations used a net $444 million of cash in the first six months of 1999, compared with $183 million of net cash used in operations during the same period in 1998. The increase in cash used in operations resulted primarily from the seasonal working capital requirements of the Agricultural Products segment and the Pharmaceuticals segment product launch of Celebrex(R) arthritis treatment. For comparative purposes, cash used in operations for the first six months of 1998 included the collection of $207 million of miscellaneous receivables related to 1997 Pharmaceuticals licensing and product rights sales. Investing activities in the first six months of 1999 used $21 million of cash compared with a use of cash of $379 million in the first six months of 1998. Investing activities for the 1999 period included the proceeds from the divestment of the Ortho(R) lawn-and-garden business for $340 million. Financing activities for the first six months of 1999 provided $591 million of cash compared with $671 million in the first six months of 1998. Financing activities for the first six months of 1999 include the net increase in short-term financing of $685 million, which was primarily used to fund Agricultural Product's higher seasonal working capital levels and Pharmaceuticals' launch and marketing of Celebrex(R). The company had previously announced its plan to divest certain businesses that are no longer critical to its life sciences strategy. These divestitures, including those recently completed or announced, are currently expected to generate proceeds of at least $1.5 billion to $2 billion pretax. On June 4, 1999, Monsanto announced that the interest rate on $2.5 billion of senior unsecured debt, issued in a private placement in late 1998, would increase 25 basis points beginning June 8, 1999. These debt securities were to be registered with the Securities and Exchange Commission ("SEC") by June 7, 1999. As one of roughly 150 companies originally contacted by the SEC regarding certain accounting issues, Monsanto is currently in discussions with the SEC. The registration statement for these securities, which was filed in March 1999, will not be declared effective until the discussions are concluded. This interest rate increase is temporary, and will be discontinued when the SEC declares the company's registration statement effective and other conditions are met. Near the end of the second quarter of 1999, Monsanto and Cargill reached an agreement that resolves outstanding issues related to Monsanto's purchase of certain international seed operations of Cargill. As a result, final estimates related to the purchase price allocation to goodwill, inventories and other individually insignificant tangible assets are expected to be completed and adjusted in the third quarter 1999. Any other adjustment to the purchase price allocation for the businesses acquired is not expected to materially impact Monsanto's financial position, results of operations or cash flows. In 1998, Monsanto announced that it had entered into a definitive agreement with Delta and Pine Land Company ("D&PL") to merge it with Monsanto. Under terms of the agreement, D&PL shareowners would be entitled to receive 0.8625 shares of Monsanto's common stock in exchange for each share of D&PL they hold. Approximately 33 million shares of Monsanto common stock would be issued to D&PL shareowners. Based on Monsanto's closing stock price of $53 1/2 per common share on May 8, 1998, the date of the merger agreement, this would result in a purchase price of approximately $1.8 billion. The merger, already approved by D&PL shareowners, is subject to regulatory approvals and other customary conditions. This transaction will be accounted for as a purchase. Outlook for Agricultural Products - Update Worldwide agricultural economic conditions continue to be challenging to the industry. Monsanto is monitoring the effect on the business of low commodity prices and reduced farmer margins. On August 12, a Judge of the 6th Federal Court's Section, Brasilia, issued a decision requiring Monsanto to submit an environmental impact report in order to obtain approval for the commercial planting of RoundupReady (R) soybeans in Brazil. The decision makes final the injunction issued by the same Court on June 18, 1999, which is currently on appeal by Monsanto. Monsanto had received approval for commercial planting of RoundupReady(R) soybeans in Brazil on September 29, 1998 from CTNBio, the agency which oversees products developed 15 through biotechnology. CTNBio previously had waived the requirement for an environmental impact report. The decision means that prior to commercialization of RoundupReady(R) Soybeans in Brazil, either an environmental impact report must be approved by the appropriate environmental regulatory authorities in Brazil, or the decision of the 6th Federal Court's Section must be overturned or modified. Monsanto intends to pursue all available legal procedures to overturn the decision. In addition, Monsanto intends to continue, within the bounds of the Court's decision, working with the regulatory authorities in Brazil to obtain all approvals necessary for the commercial planting of RoundupReady(R) soybeans. On August 6, 1999, Monsanto announced the signing of a definitive agreement to sell Stoneville Pedigreed Seed Company to an affiliate of Hicks, Muse, Tate & Furst, Inc. Company Prepares for Year 2000 - ------------------------------ Beginning in 1996, the company initiated the Global Year 2000 Program (the "Y2K Program") to ensure that its business would not be adversely affected by the inability of many existing computer systems to distinguish between the year 1900 and the year 2000. The Y2K Program covers all company sites in all world areas. Description and Status of the Y2K Program Internal Systems. The company's Y2K Program encompasses all areas of the company's internal systems including conventional information technology ("IT") business applications, IT infrastructure, and embedded systems. Embedded systems include process control/manufacturing, laboratory automation systems, and site-specific facility management systems such as elevators and heating and cooling systems. The remediation process applied to each area consists of four-steps: Identification of the systems or components that need to be replaced or fixed; assessment of the extent of the work required (internal investigation or research with vendor or manufacturer); prioritization of the work; and successful completion of the required remediation activity. As part of the overall remediation activity still underway, two major initiatives specifically address two significant remaining areas of compliance: IT Infrastructure (specifically PC compliance); and overall Y2K readiness in Monsanto's recently acquired seed businesses. Both initiatives have aggressive milestones and are scheduled to complete by end of third quarter, 1999. The company is on track to achieve the target date for completion of all other material remediation work for internal systems by the end of the third quarter of 1999. The following summarizes the status of the Y2K Program with respect to internal systems: IT Applications Portfolio: At Jun. 30, 1999 At Mar. 31, 1999 ---------------- ---------------- Number of applications identified 1,676 1,309 Applications assessed for Y2K compliance 100 percent 100 percent Applications compliant 82 percent 66 percent Applications to be remediated through replacements and upgrades 11 percent 17 percent Anticipated retirements 1 percent 3 percent Applications at various stages of renovation, redevelopment or 6 percent 14 percent testing 16 IT Infrastructure Products: At Jun. 30, 1999 At Mar. 31, 1999 ---------------- ---------------- Number of IT infrastructure products identified 531 531 Products successfully researched for compliance 100 percent 100 percent Number of IT infrastructure items in use 38,919 N/A Items compliant, remediated, or risk eliminated 38 percent N/A Embedded Systems: At Jun. 30, 1999 At Mar. 31, 1999 ---------------- ---------------- Number of process control products identified 7,733 7,631 Products successfully researched for compliance 100 percent 99 percent Number of process control items in use 16,529 16,209 Items compliant, remediated, or risk eliminated 93 percent 69 percent Number of laboratory automation products identified 5,487 5,383 Products successfully researched for compliance 75 percent 74 percent Number of laboratory automation items in use 14,378 14,250 Items compliant, remediated, or risk eliminated 81 percent 72 percent Number of site facilities products identified 792 696 Products successfully researched for compliance 98 percent 100 percent Number of site facilities items in use 1,213 1,086 Items compliant, remediated, or risk eliminated 78 percent 71 percent Number of products in newly acquired businesses 5,856 3,489 Products successfully researched for compliance 56 percent 40 percent Number of items in use 10,463 8,858 Items compliant, remediated, or risk eliminated 46 percent 37 percent
Suppliers. The company has contacted its major suppliers to assess their preparations for the Year 2000. More than 650 key corporate suppliers have been identified and contacted in addition to numerous suppliers critical to individual locations. Approximately 70 percent of the company's key corporate suppliers have been identified as likely to be Y2K compliant. The status of the remaining 30 percent of these key suppliers is of concern and further action is being taken by managers responsible for these suppliers or supplier contracts. Where appropriate, company representatives may conduct an in-depth investigation of a particular supplier's ability to be compliant and site visits may be made. Contingency Plans. The company's contingency plans are continuously evolving as it proceeds with the Y2K Program. The company began a major initiative in November 1998 in this area with the establishment of the Y2K Business Continuity Team. Continuity plans have been prepared in critical functional areas throughout the company and have been consolidated into comprehensive plans around key business sectors. These plans include cost analysis, testing, failure response, safety, procedures, communications, among other items. Senior management periodically reviews these business-level continuity plans to ensure Monsanto's supply chain has identified relevant risks and have planned accordingly. Where a supplier's performance is in doubt, the company's contingency plans include, when appropriate, the stockpiling of raw materials or a switch to a different supplier. The company will increase testing of pharmaceutical and nutrition products as the Year 2000 nears and may also increase production of critical product inventory. Costs The company continues to evaluate the estimated costs associated with Y2K compliance based on actual experience. The total cost is currently projected at about $35 million, with approximately $27.4 million expended through Jun. 30, 1999. Such costs encompass only the company's Y2K remediation efforts and do not include expenses such as overtime wages, additional warehouse space or increased finance costs which may be incurred upon implementation of the company's contingency plans. The company does not expect the costs associated with its Year 2000 efforts to be materially adverse to the company's business operations, financial position, profitability or liquidity. Risks The company believes that the Y2K Program follows both prudent and best demonstrated practices (including contingency planning) and makes use of appropriate internal and external skills at the proper level and in the proper amount to minimize the impact of any failures. However, since the Year 2000 problem is unprecedented in scope or complexity, no complete assurance of risk avoidance can be given. In the company's case, failure to correct a material Year 2000 problem could result in lost profits or breach of contract claims in the event the company is unable to deliver its products pursuant to the terms of its agreements or such products fail to meet contract specifications as well as claims for personal injury or property damage at its facilities. The company may also experience lost revenues in the event any of its customers experience Y2K problems which cause them to order less product from the company or which cause financial difficulties resulting in a breach of their payment obligations to the company. 17 Readers are cautioned that forward-looking statements contained in this section should be read in conjunction with the company's disclosures under the heading "Disclosure of Forward-Looking Statements." Euro Conversion - --------------- On Jan. 1, 1999, more than two-thirds of the member countries of the European Union established fixed conversion rates between their existing sovereign currencies and the euro as common legal currency. During the transition period from Jan. 1, 1999 until June 30, 2002, both the existing sovereign currencies of the participating countries and the euro will be legal currency. Beginning July 1, 2002, the existing sovereign currencies of the participating countries will no longer be legal tender for any transactions. In Sept. 1997, Monsanto formed a cross-functional team which has been addressing issues associated with the euro conversion. Since Jan. 1, 1999, the company has been able to engage in euro-denominated transactions and is legally compliant with respect to the euro. Monsanto expects to have all affected information systems fully converted by Apr. 2001. Monsanto does not expect the euro conversion to have a material effect on its competitive position, business operations, financial position or results of operations. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Monsanto is exposed to market risk, including changes in interest rates, currency exchange rates and commodity prices. To manage the volatility relating to these exposures, the company enters into various derivative transactions. Monsanto does not hold or issue derivative financial instruments for trading purposes. For more information about how Monsanto manages specific risk exposures, see the currency translation note, the inventory valuation note, and the long-term debt note in Notes to Financial Statements in Monsanto's annual report for the year ended December 31, 1998 ("1998 Annual Report"), incorporated by reference in Monsanto's Annual Report on Form 10-K for the year ended December 31, 1998 ("1998 Form 10-K"). The tables under Market Risk Management in the Management's Discussion and Analysis section of the 1998 Annual Report, incorporated by reference in the 1998 Form 10-K, provide information about the company's derivative instruments and other financial instruments that are sensitive to changes in interest rates, currency exchange rates and commodity prices. There have been no material changes to the information provided in the tables in the 1998 Annual Report and Form 10-K except as noted below. Significant interest rate risk sensitive instruments as of June 30, 1999 were: Expected Maturity Date 1999 2000 2001 2002 2003 Thereafter TOTAL ------- ------ ------ ------ ------ ---------- ----- Long-Term Debt: Fixed Rate ($US) Principal Amount $ 161 533 $ 19 $ 738 $ 2, 797 $ 4,248 Average Interest Rate 6.1% 5.6% 8.3% 6.1% 6.7% 6.5% Fixed Rate (Japanese Yen) $ 82 $ 82 Average Interest Rate 5.6% 5.6% Variable Rate ($US) Principal Amount (1) $ 60 1,063 $ 72 $ 365 $ 208 $ 1,769 Average Interest Rate 4.4% 4.9% 4.3% 4.5% 4.0% 4.7% Short-Term Debt: Fixed Rate ($US) Principal Amount $ 148 $ 148 Average Interest Rate 7.7% 7.7% Variable Rate ($US) Principal Amount (2) $ 1,429 $ 1,429 Average Interest Rate 5.0% 5.0%
18 (1) Includes $1.0 billion of commercial paper that is assumed to be renewed through 2001, when the company's $1.0 billion credit facility expires. (2) Average variable rates are based on the variable rates on June 30, 1999. Actual rates may be higher or lower. The instruments in the table of significant currency exchange rate risk sensitive instruments that appeared in the 1998 Annual Report and Form 10-K were no longer outstanding at June 30, 1999. At June 30, 1999, the following significant forward contracts were outstanding (all expected to mature by June 30, 2000): sales of Brazilian real with a notional amount of $15 million and an average exchange rate of 1.805 Brazilian real per U.S. dollar; sales of Canadian dollars with a notional amount of $97 million and an average exchange rate of 1.4663 Canadian dollars per U.S. dollar; sales of British pounds with a notional amount of $385 million and an average exchange rate of 0.6256 British pounds per U.S. dollar; sales of Australian dollars with a notional amount of $41 million and an average exchange rate of 1.5184 Australian dollars per U.S. dollar; sales of Polish zlotys with a notional amount of $27 million and an average exchange rate of 3.9634 Polish zlotys per U.S. dollar; purchases of Japanese yen with a notional amount of $30 million and an average exchange rate of 120.85 Japanese yen per U.S. dollar; sales of South African rand with a notional amount of $32 million and an average exchange rate of 6.0960 South African rand per U.S. dollar; sales of Czech koruna with a notional amount of $7 million and an average exchange rate of 35.5652 Czech koruna per U.S. dollar; sales of Mexican pesos with a notional amount of $11 million and an average exchange rate of 9.6825 Mexican pesos per U.S. dollar; and sales of European euros with a notional amount of $246 million and an average exchange rate of 0.9594 European euros per U.S. dollar. The fair market values of these contracts approximated the notional amounts at June 30, 1999. The instruments in the table of significant commodity price risk sensitive instruments that appeared in the 1998 Annual Report and Form 10-K were no longer outstanding at June 30, 1999. At June 30, 1999, the following significant commodity price risk sensitive instruments were outstanding: purchased soybean futures contracts totaling $101.2 million (18.5 million bushels at a weighted average price per bushel of $5.48) with a fair value of $85.4 million, purchased corn futures contracts totaling $20.2 million (8.6 million bushels at a weighted average price per bushel of $2.34) with a fair value of $19.6 million, and sold lean hogs futures contracts totaling $13.0 million (0.2 million CWT with a weighted average price per CWT of $54.92) with a fair value of $10.5 million. PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS Because of the size and nature of its business, Monsanto is a party to numerous legal proceedings. Most of these proceedings have arisen in the ordinary course of business and involve claims for money damages or seek to restrict the company's business activities. While the results of litigation cannot be predicted with certainty, Monsanto does not believe these matters or their ultimate disposition will have a material adverse effect on Monsanto's financial position, profitability or liquidity, as applicable. As described in the company's Annual Report on Form 10-K for the year ended December 31, 1998, and in its Report on Form 10-Q for the quarter ended March 31, 1999, Searle has been named, together with numerous other prescription pharmaceutical manufacturers and in some cases wholesalers or distributors, as a defendant in a large number of related actions brought in federal and/or state court, based on the practice of providing discounts or rebates to managed care organizations and certain other large purchasers. The federal cases have been consolidated for pre-trial proceedings in the Northern District of Illinois. The federal suits include a certified class action on behalf of retail pharmacies representing the majority of retail pharmacy sales in the United States. The class plaintiffs alleged an industry-wide agreement in violation of the Sherman Act to deny favorable pricing on sales of brand-name prescription pharmaceuticals to certain retail pharmacies in the United States. The other federal suits, brought as individual claims by several thousand pharmacies, allege price discrimination in violation of the Robinson-Patman Act as well as Sherman Act claims. Several defendants, not including Searle, settled the federal class action case. Trial of the federal class action case commenced on September 14, 1998. On November 30, 1998, Searle and its co-defendants received a verdict for the defense and all claims were dismissed. On January 4, 1999, the class plaintiffs filed a notice of appeal with the U. S. Court of Appeals for the Seventh Circuit. Following oral arguments in June 1999, the Seventh Circuit Court of Appeals ruled on July 13, 1999. The opinion upheld most of the lower court's decision to throw out price fixing charges against the manufacturers as well as the wholesalers. The court reversed the trial judge on one discrete issue involving the Consumer Price Index and that is currently the subject of a petition for a re-hearing by the appellate court. In addition, consumers and a number of retail pharmacies have filed suit in various state courts throughout 19 the country alleging violations of state antitrust and pricing laws. While many of these suits have been settled, suits remain pending in a number of states including California, Alabama and North Dakota. As described in the company's Annual Report on Form 10-K for the year ended December 31, 1998, and in its Report on Form 10-Q for the quarter ended March 31, 1999, in 1997 the company commercially introduced corn containing a gene providing glyphosate resistance. On November 20, 1997, Rhone Poulenc Agrochimie S. A. ("Rhone Poulenc") filed suit in the U. S. District Court in North Carolina (Charlotte) against the company and DEKALB (now a subsidiary of the company) alleging that a 1994 license agreement (the "1994 Agreement") between DEKALB and Rhone Poulenc was induced by fraud stemming from DEKALB's nondisclosure of a research report involving testing of plants to determine glyphosate tolerance. Rhone Poulenc also alleged that neither DEKALB nor Monsanto has a right to license, make or sell products using Rhone Poulenc technology for glyphosate resistance under the terms of the 1994 Agreement. On April 5, 1999, the trial court rejected Rhone Poulenc's claim that the contract language did not convey a license but found that a disputed issue of fact existed as to whether the contract was obtained by fraud. Jury trial of the fraud claims ended April 22, 1999, with a verdict for Rhone Poulenc and against DEKALB. Monsanto was dismissed from the trial prior to verdict since it was not involved in the inducement allegation and was involved in the case only due to the fact that in 1996, DEKALB sublicensed to Monsanto certain technology previously licensed by Rhone Poulenc. The jury awarded $15 million in actual damages for "unjust enrichment" and $50 million in punitive damages. DEKALB has filed motions with the trial court to set aside the damage award. DEKALB has meritorious grounds to overturn the jury verdict and has filed a Motion for Judgment as a Matter of Law to overturn the jury verdict. The trial was bifurcated to allow claims against DEKALB and Monsanto for patent infringement and misappropriation of trade secrets to be tried before a different jury. On May 6, 1999, the District Court dismissed Monsanto from all remaining claims and granted Monsanto's motion for summary judgment holding that Monsanto was a bona fide purchaser which retained all license rights to the Rhone Poulenc technology notwithstanding the prior verdict against DEKALB. The Court concurred that Monsanto was not liable for trade secret or patent infringement claims since Monsanto obtained its license from DEKALB without any knowledge of the claims that allegedly gave rise to the jury verdict against DEKALB. Jury trial of the patent infringement and misappropriation claims ended June 3, 1999, with a verdict for Rhone Poulenc and against DEKALB. DEKALB is continuing to defend the litigation and maintains that they remain licensed to use the Rhone Poulenc technology notwithstanding the verdict or any subsequent action that may occur to rescind the 1994 license between Rhone Poulenc and DEKALB. In addition to the claim of license, DEKALB believes that they have other meritorious defenses to the patent and trade secret allegations, including patent invalidity and absence of trade secret status due to Rhone Poulenc's own public disclosure of the alleged trade secret. On July 16, 1999, a hearing occurred on all post-trial motions including the request by Rhone Poulenc for injunctive relief against future sales of DEKALB-brand RoundupReady(R) corn products if the material was not currently in inventory or within the scope of the prior damage verdict. No ruling has occurred on the post-trial motions. DEKALB will vigorously appeal the verdict to the Federal Circuit and will assert its meritorious defenses to all remaining claims in the litigation and will vigorously seek to avoid further claims of liability, the possible entry of injunctive relief and will seek to overturn by appeal any judgment entered in the lawsuit. As described in the company's Annual Report on Form 10-K for the year ended Dec. 31, 1998, the company and/ or DEKALB is the plaintiff in various legal actions involving Bt technology, herbicide-resistant and/or insect-resistant transgenic corn, or corn transformation patents. (a) The DEKALB patents involved in the most significant DEKALB-initiated transactions are: U.S. Patent No. 5,484,956 covering fertile, transgenic corn plants expressing genes encoding Bacillus thuringiensis (Bt) insecticidal proteins; U.S. Patent No. 5,489,520 covering the microprojectile method for producing fertile, transgenic corn plants covering a bar or pat gene, as well as the production and breeding of progeny of such plants; U.S. Patent Nos. 5,538,880 and 5,538,877 directed to methods of producing either herbicide-resistant or insect-resistant transgenic corn; and U.S. Patent No. 5,550,318 directed to transgenic corn plants containing a bar or pat gene (all lawsuits related to this patent have been stayed pending resolution of an interference proceeding at the U.S. Patent and Trademark Office). In each case DEKALB has asked the court to determine that infringement has occurred, to enjoin further infringement and to award unspecified compensatory and exemplary damages. Most of these actions have been filed in U.S. District Court for the Northern District of Illinois (the "Rockford Litigation"). By order dated June 30, 1999, the special master in the Rockford Litigation construed the patent claims in a manner largely in accord with the position of DEKALB. No trial date has been established in the Rockford Litigation. The actions in the Rockford Litigation were initially filed on April 30, 1996, against Pioneer Hi-Bred International, Inc. ("Pioneer"), Mycogen Corporation (and two of its subsidiaries) and Ciba-Geigy Corporation. Additional actions were filed in the Rockford Litigation against: Northrup King Co. on June 10, 1996; and several Hoechst Schering AgrEvo GmbH entities on August 27, 1996. On July 2, 1999, DEKALB sued Pioneer in a patent interference action to declare that DEKALB was the first inventor of the microprojectile method of producing fertile transgenic corn; on July 30, 1999, DEKALB moved to consolidate the new 20 suit with the remainder of the Rockford Litigation for purposes of trial. In addition to the Rockford Litigation, DEKALB sued Beck's Hybrids, Inc. and Countrymark Cooperative, Inc. on July 23, 1996, in U. S. District Court for the Northern District of Indiana (Indianapolis Division); this action has been stayed awaiting decision on the Rockford Litigation. (b) On March 19, 1996, Monsanto was issued U.S. Patent No. 5,500,365 and filed suit in U.S. District Court in Delaware seeking damages and injunctive relief against Mycogen Plant Science, Inc., Agrigenetics, Inc. and Ciba-Geigy Corporation (Seed Division) (now Novartis Seeds, Inc.) for infringement of that patent. Trial of this matter ended June 30, 1998, with a jury verdict that while the patent was literally infringed by defendants the patent was not enforceable due to a finding of prior invention (now owned by Monsanto) by another party, and not infringed due to the defense of the reverse doctrine of equivalents. Monsanto has filed a motion for judgment as a matter of law to overturn the jury verdict and will continue to litigate vigorously its position in the matter. As described in the company's Annual Report on Form 10-K for the year ended December 31, 1998, and in its Report on Form 10-Q for the quarter ended March 31, 1999, on February 4, 1999, Pioneer Hi-Bred International Inc. ("Pioneer") filed suit against Monsanto company, (Civil Action No. 4-99-CV-90063) in U.S. District Court for the Southern District of Iowa. The suit seeks equitable relief and jury trial, and alleges that Monsanto misappropriated trade secrets through the acquisition and purchase of certain international seed operations of Cargill International ("Cargill"). Pioneer alleges that Cargill's employees misappropriated (via theft) germplasm belonging to Pioneer's corn seed business and then bred the Pioneer germplasm into the corn lines of Cargill. A related lawsuit, Civil Action No. 4-98-CV-90576 has been filed by Pioneer against Cargill. On February 2, 1999, a joint statement issued by Pioneer and Cargill indicated that a former Cargill employee may have misappropriated technology of Pioneer and that efforts were underway between those companies to resolve this issue. Monsanto and Cargill have resolved issues arising from the purchase of the Cargill seed operations pursuant to the warranty and representation of Cargill's parent that all intellectual property and seed lines were the property of the business and not any third party. Monsanto has denied that it is liable to Pioneer for damages from its unknowing acquisition of the business and has numerous meritorious defenses against liability including its status as a bona fide purchaser and will vigorously defend this action. In the lawsuit, Pioneer seeks the return of its alleged trade secrets, injunction against Monsanto's further use of the material, an accounting and damages for any sales of the misappropriated material and other relief. On October 28, 1998, two related lawsuits were filed in U.S. District Court in Iowa: one against Asgrow Seed company, L.L.C., a subsidiary of the company (No. 4-98-CV-70577); and the other against DEKALB (since acquired by the company) (No. 4-98-CV-90578). The lawsuits allege that defendants misappropriated trade secrets of Pioneer in their corn breeding programs. In addition to claims under Iowa state law for trade secret misappropriation, Pioneer alleges violations of the Lanham Act. Actual and exemplary damages and injunctive relief are sought. Pioneer also asserts that defendants have violated an unspecified contractual obligation not to breed with Pioneer germplasm. On July 17, 1999, the court denied defendants' motions to dismiss on the basis that the claims of Pioneer are preempted by federal law (the Plant Variety Protection Act) which expressly permits the activities of breeding and research with germplasm sold in commerce. The defendants have other meritorious defenses including preemption, laches, statute of limitations, lack of trade secrets, ownership of the germplasm, bona fide purchaser status and other defenses. Trial of the Asgrow and DEKALB cases is scheduled for April 2000. Other information with respect to legal proceedings appears in the company's Report on Form 10-K for the year ended December 31, 1998, and the company's Report on Form 10-Q for the quarter ended March 31, 1999. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS At the company's Annual Meeting of Shareowners on April 23, 1999, five matters were submitted to a vote of shareowners. 1. The following directors were elected, each to hold office until the Annual Meeting to be held in 2002 or until a successor is elected and has qualified or until his or her earlier death, resignation or removal. Votes were cast as follows: Votes Votes Name "For" "Withhold Authority" ----- ------- -------------------- J. F. M. Peters 518,429,744 15,397,281 R. B. Shapiro 516,660,924 17,166,101 21 The following directors are continuing current terms expiring at the 2000 Annual Meeting: Michael Kantor, Gwendolyn S. King and John S. Reed. The following directors are continuing current terms expiring at the 2001 Annual Meeting: Philip Leder, John E. Robson and William D. Ruckelshaus. 2. A proposal to amend the Management Incentive Plan to increase shares available for grants to 87,605,350 was submitted to a vote of shareowners. The Board recommended a vote for the proposal. A total of 329,726,441 votes were cast in favor of this proposal, a total of 198,767,675 votes were cast against it, 5,332,909 votes were counted as abstentions. 3. The approval of the Annual Incentive Program was submitted to a vote of shareowners. The Board recommended a vote for the proposal. A total of 487,943,760 votes were cast in favor, a total of 40,390,487 votes were cast against it and 5,492,778 were counted as abstentions. 4. The appointment by the Board of Directors of Deloitte & Touche LLP as principal independent auditors for the year 1999 was ratified by the shareowners. A total of 527,392,757 votes were cast in favor of ratification, 3,816,351 votes were cast against it, and 2,617,917 votes were counted as abstentions. 5. A proposal by a certain shareowner relating to cumulative voting was submitted to a vote of shareowners. The Board recommended a vote against the proposal. A total of 142,033,838 votes were cast in favor of this proposal, a total of 272,826,300 votes were cast against it, 22,304,517 votes were counted as abstentions, and 96,662,370 votes were counted as broker non-votes. Brokers were permitted to vote on the following items in the absence of instructions from street-name holders and, therefore, broker non-votes did not occur in those matters: the election of directors; the amendment of the Management Incentive Plan; the approval of the Annual Incentive Plan; and the ratification of auditors. Item 5. OTHER INFORMATION DISCLOSURE REGARDING FORWARD LOOKING INFORMATION Under the Private Securities Litigation Reform Act of 1995, companies are provided with a "safe harbor" for making forward-looking statements about the potential risks and rewards of their strategies. Monsanto believes it's in the best interest of its shareowners to use these provisions in discussing future events. Forward-looking statements include Monsanto's plans for growth; the potential for the development, regulatory approval, and public acceptance of new products; and other factors that could affect Monsanto's future operations or financial position. Such statements often include the words "believes," "expects," "anticipates," "intends," "plans," "estimates," or similar expressions. Monsanto's ability to achieve its goals depends on many known and unknown risks and uncertainties, including changes in general economic and business conditions. These factors could cause the anticipated performance and results of the company to differ materially from those described or implied in forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below. Factors Affecting the Agricultural Products Segment Roundup Generic Competition: The family of Roundup(R) herbicides is a major product line for Monsanto's Agricultural Products segment. These herbicides are likely to face increasing competition from generic products. Patents protecting Roundup(R) in several countries expired in 1991. Compound per se patent protection for the active ingredient in Roundup(R) herbicide expires in the United States in Sept. 2000. Monsanto believes that it can compensate for increased generic competition both within and outside the United States and continue to increase revenues and profits from Roundup(R) through a combination of (1) marketing strategy, (2) pricing strategy, and (3) decreased production costs. Marketing Strategy. Monsanto expects to increase Roundup(R) sales by focusing on brand premiums, providing unique formulations and services, offering integrated seed and biotech solutions through cross selling and the growth and introduction of RoundupReady(R) crops, and continuing to encourage the practice of conservation tillage. In addition, Monsanto will seek to enter into strategic agreements to supply glyphosate to other herbicide producers. The success of the 22 company's Roundup(R) marketing strategy will depend on the continued expansion of conservation tillage practices and the company's ability to realize and promote cost and production benefits of its product packages, introduce new RoundupReady(R) crops and economically produce glyphosate in sufficient quantities to allow it to market to such producers. Pricing Strategy. Monsanto significantly reduced the sales price of Roundup(R) in the United States. This price elasticity strategy is designed to increase demand for Roundup(R) in the United States by making Roundup(R) more economical, encouraging both new uses of the product and expansion of the number of acres treated. Monsanto's experience in numerous markets worldwide has been that price reductions have stimulated volume growth. However, the volume increases in the other countries also may have been influenced by a variety of other factors, such as weather; the increased use of conservation tillage practices; development of other new markets or applications for Roundup(R); launch of new products including Roundup Ready(R) crops; competitive products and practices; and an increase in agricultural acres planted. Conditions, and therefore volume trends in one country may or may not be duplicated in other world areas. As a result, Monsanto's experience with price elasticity in markets outside the United States may or may not be replicated in the United States. Production Cost Decreases. Monsanto also believes that increased volumes and technological innovations will lead to efficiencies that will reduce the production cost of glyphosate. Such cost reductions will depend on realizing such increased volumes and innovations, and securing the resources required to expand production of Roundup(R). Realization and Introduction of New Biotech Products: The company's ability to develop and introduce to market new agricultural biotech products, including new Roundup Ready(R) crops, will be dependent, among other things, upon the availability of sufficient financial resources to fund research and development needs, demonstrated product effectiveness, the company's ability to develop, purchase or license required technology, the existence of sufficient distribution channels and the acceptance and competition factors discussed below. Governmental and Consumer Acceptance: The commercial success of agricultural and food products developed through biotechnology will depend in part on government and public acceptance of their cultivation, distribution and consumption. Monsanto continues to work with consumers, customers and regulatory bodies to encourage understanding of nutritional and agricultural biotechnology products. However, public attitudes may be influenced by claims that genetically modified plant products are unsafe for consumption or pose unknown risks to the environment or to traditional social or economic practices. For instance, consumer groups have brought lawsuits in various countries seeking to halt industry activities with respect to products developed through biotechnology. Securing governmental approvals for, and consumer confidence in, such products poses numerous challenges, particularly outside the United States. Some countries also have labeling requirements. In some markets, because these crops are not yet approved for import, growers in other countries may be restricted from introducing or selling their grain. In these cases, the grower may have to arrange to sell the grain only in the domestic market or to use the grain for feed on his or her farm. The market success of Monsanto's products developed through biotechnology could be delayed or impaired in certain geographical areas because of such factors. Technological Change and Competition: A number of companies are engaged in plant biotechnology research. Technological advances by others could render Monsanto's products less competitive. In addition, the ability to be first to market a new product can result in a significant competitive advantage. Monsanto believes that competition will intensify, not only from agricultural biotechnology firms but from major agrichemical, seed and food companies with biotechnology laboratories. Some of Monsanto's agricultural competitors have substantially greater financial, technical and marketing resources than Monsanto does. Successful Integration of Recent Transactions: Monsanto has made significant acquisitions, mergers and joint ventures involving seed, agricultural biotechnology and grain processing companies. These transactions are designed to strengthen Monsanto's capability to bring important new life sciences products to customers worldwide, and to contribute to the company's long-term growth. The Delta and Pine Land Co. (D&PL) transaction is subject to regulatory approval and other customary conditions. It is anticipated that the pending D&PL transaction, when final, and the recently completed acquisitions of DEKALB Genetics Corp., Plant Breeding International Cambridge, and certain international seed operations of Cargill Inc., will significantly dilute Monsanto's financial results for the next several years. Long term, Monsanto must integrate these companies into its business to realize projected synergies and to provide the distribution channels necessary to quickly and efficiently launch new products. It must also fit such acquisitions, mergers and joint ventures into its growth strategy to generate sufficient value to justify their cost. Mergers, acquisitions, and joint ventures also present other challenges, including 23 geographical coordination, personnel integration, and the reconciliation of corporate cultures. This integration could cause a temporary interruption of or loss of momentum in Monsanto's business and the loss of key personnel from the acquired company. There can be no assurance that the diversion of management's attention to such matters or the delays or difficulties encountered in connection with integrating these operations will not have an adverse effect on Monsanto's business, results of operations, or financial condition. Planting Decisions and Weather: The company's agricultural products business is highly seasonal. It is subject to weather conditions and natural disasters that affect commodity prices, seed yields, and decisions by growers regarding purchases of seed and herbicides. Commodity prices for several crops have decreased significantly in the last several months and there can be no assurance that this trend will not continue. These lower commodity prices affect growers' decisions about the types and amounts of crops to plant and may negatively influence sales of Monsanto's herbicide and seed products. Factors Affecting the Pharmaceuticals Segment Ability to Realize Potential of Existing Pipeline Products: Pharmaceutical research and development (R&D) is subject to inherent uncertainty, difficulties and delays. These include, but are not limited to, successful completion of clinical trials and the ability to obtain regulatory approval for the compounds worldwide. Failure to receive government approvals as anticipated could preclude or substantially delay commercialization of products in the company's R&D programs. Development and Commercialization of New Products and Expansion of Existing Product Uses: The Pharmaceuticals Segment's long-term success will depend in great part on its ability to commercialize new products (including second generation products) and to expand the use of its existing products by developing new indications for such products. Such efforts require substantial funding of R&D and, in the case of new products, launch expenses. If Monsanto is unable to earn or borrow sufficient resources to fund such expenses, its ability to develop new products and expand uses of existing products will suffer. Further, the outcome of R&D is inherently difficult to predict. Anticipated results may never materialize, or they may not be promising enough. Even when new pharmaceutical products are marketed, there can be no guarantees of their commercial success. Consumer demand and competitive factors, including the availability and price of treatment alternatives influence sales. In addition, timing is crucial. The results of R&D of new pharmaceutical products are difficult to forecast, and new products must be carefully deployed, with resources sufficient to realize the full value of the products. Product Liability and Consumer Acceptance: The sale of pharmaceutical products always involves a risk of product liability claims and associated adverse publicity. Substantial damage awards for injuries allegedly caused by the use of pharmaceuticals have been made against certain companies in past years. In addition, unexpected safety or efficacy concerns can arise with respect to marketed products. Whether or not they are scientifically justified, such concerns could lead to product recalls, withdrawals, or declining sales. Competition: Pharmaceutical research is intense and highly competitive. It is characterized by rapid technological change. Depending on the product involved, competition may be encountered in price, delivery, service, performance, innovation, brand recognition and quality. Many of Monsanto's pharmaceutical competitors have greater research, financial, marketing and other resources than Monsanto does. Some of Monsanto's trademarked pharmaceutical products also face increasing pressures from producers of lower-priced generic products and from new products entering the marketplace. Finally, as the company introduces new products intended for use in the treatment of the same conditions as existing Monsanto products, sales of such existing products may suffer. Pricing: Managed care groups, health care organizations and government agencies worldwide actively seek discounts and lower prices on pharmaceutical products. Monsanto's challenge is to provide overall economic benefits to health care providers and negotiate prices for specific products that will allow it to profit at acceptable levels. Factors Affecting All Segments Financial Requirements: Monsanto's recent acquisitions will require a significant commitment of the company's financial resources. In addition, new technological innovations generally require a significant investment for R&D and product launch. Lack of funds for investment in these areas could hinder the company's ability to make technological innovations and to introduce and distribute new products. Monsanto expects to generate the required capital by increasing the revenues of its core businesses, by seeking sufficient outside 24 financing and by containing costs. The company's ability to do so will depend upon a variety of specific factors listed elsewhere in this report and upon capital market conditions generally. Intellectual Property: Monsanto has devoted significant resources to obtaining and maintaining patent protection worldwide for its products. It seeks to preserve its trade secrets and to operate without infringing the proprietary rights of third parties. Monsanto's patents and trademarks are of material importance in the operation of its business, particularly in the Agricultural Products and Pharmaceuticals segments. Intellectual property positions are becoming increasingly important within the agricultural biotechnology and pharmaceutical industries, as products developed through biotechnology become a larger part of the product landscape. Monsanto generally relies upon patent and trademark laws worldwide to establish and maintain its proprietary rights in its technology and products. There is some uncertainty about the value of available patent protection in certain countries outside the United States. Moreover, the patent positions of biotechnology and pharmaceutical companies involve complex legal and factual questions. Rapid technological advances and the number of companies performing such research can create an uncertain environment. Patent applications in the United States are kept secret: outside the United States, patent applications are published 18 months after filing. Accordingly, competitors may be issued patents from time to time without any prior warning to the company. That could decrease the value of similar technologies under development at Monsanto. Because of this rapid pace of change, some of the company's products may unknowingly rely on key technologies developed by others. If that occurs, the company must obtain licenses to such technologies in order to continue to use them. Certain of Monsanto's germplasm and other genetic material, patents, and licenses are currently the subject of litigation and additional future litigation is anticipated. Although the outcome of such litigation cannot be predicted with certainty, Monsanto will continue to defend and litigate its positions vigorously. The company believes it has meritorious defenses and claims in the pending suits. Markets Outside the United States: Sales outside the United States made up approximately 45 percent of the company's 1998 revenues and Monsanto intends to continue to actively explore international sales opportunities. Challenges the company may face in international markets include changes in foreign currency exchange rates, changes in a specific country's or region's political or economic conditions, trade protection measures, import or export licensing requirements, and unexpected changes in regulatory requirements. In particular, the decline in certain Latin American economies may, if not reversed, adversely affect future income. Also, future sales may decrease because the decline in such economies could cause customers to purchase fewer goods in general, and also because imported Monsanto products could become more expensive for customers to purchase in their local currency. Joint Ventures and Alliances: The company plans to continue to frequently explore the potential benefits of possible strategic alliances and joint ventures. Such arrangements can help speed the development and commercialization of new products or assist in product distribution and marketing. However, despite its efforts, the company may be unable to reach agreement with third parties with whom it desires to enter into a joint venture or other alliance. Restructuring: Monsanto has announced an aggressive plan to restructure its business, including the elimination of a number of employment positions and the divestiture of certain non-strategic assets. The inherent uncertainty related to a restructuring, and the resulting increased demands on certain employees, could cause a temporary interruption of or loss of momentum in Monsanto's business. In addition, the success of the company's divestiture plan will depend on its ability to negotiate acceptable sales prices for such assets which is in turn largely dependent on the long-term prospects and strategic value of the divested businesses and the availability of a buyer with sufficient financial resources. Year 2000 Readiness: The dates on which Monsanto believes the Year 2000 (Y2K) Program will be completed are based on management's best estimates, which include numerous assumptions about future events. There can be no guarantee that these estimates will be achieved, or that there will not be a delay in, or increased costs associated with, the implementation of the Y2K Program. Factors that may cause delays in the Y2K Program or increased costs in connection with it include, but are not limited to, the continued availability and cost of experts trained in these areas, the ability to locate and correct all relevant computer code and embedded systems, and the success of similar programs conducted by suppliers and other third parties. 25 Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - See the Exhibit Index. (b) Reports on Form 8-K during the quarter ended June 30, 1999: A Form 8-K was filed May 4, 1999, in connection with a press release announcing certain financial information presented to financial analysts and investors. 26 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 -------------------- Vice President and Controller (On behalf of the Registrant and as Principal Accounting Officer) Date: August 16, 1999 27 EXHIBIT INDEX Exhibit Number Description - ------- ----------- 2 Omitted - Inapplicable 3 By-Laws of the Company, as amended effective June 25, 1999 (incorporated herein by reference to exhibit 3.2 of Amendment No. 2 to the Company's Registration Statement on Form S-4 filed July 28, 1999) 4 Omitted - Inapplicable 10 1. Monsanto Management Incentive Plan of 1996, as amended April 25, 1997, July 25, 1997, August 18, 1997, February 26, 1998, September 25, 1998 and April 23, 1999 and as Adjusted to Reflect Stock Split as of May 15, 1996 and Spin-off as of September 1, 1997 2. Letter Agreement between the Company and Richard U. De Schutter, dated February 7, 1997 11 Omitted - Inapplicable; see Note 4 of Notes to Financial Statements 15 Omitted - Inapplicable 18 Omitted - Inapplicable 19 Omitted - Inapplicable 22 Omitted - Inapplicable 23 Omitted - Inapplicable 24 Omitted - Inapplicable 27 Financial Data Schedule 28 EX-10.1 2 MONSANTO MANAGEMENT INCENTIVE PLAN OF 1996 MONSANTO MANAGEMENT INCENTIVE PLAN OF 1996 As Amended April 25, 1997, July 25, 1997, August 18, 1997 February 26, 1998, September 25, 1998 and April 23, 1999 and As Adjusted to Reflect Stock Split as of May 15, 1996 and Spin-off as of September 1, 1997 I. GENERAL PROVISIONS 1. PURPOSES The Monsanto Management Incentive Plan of 1996 is designed to: o focus management on business performance that creates stockholder value, o encourage innovative approaches to the business of the Company, o reward for results, o encourage ownership of Monsanto common stock by management, and o encourage taking higher risks with an opportunity for higher reward. This Incentive Plan shall be effective April 15, 1996 ("Effective Date"), subject to the approval of this Incentive Plan by the stockholders of the Company. 2. DEFINITIONS Except where the context otherwise indicates, the following definitions apply: "Associated Company" means any corporation (or partnership, joint venture, or other enterprise), of which the Company owns or controls, directly or indirectly, 10% or more, but less than 50% of the outstanding shares of stock normally entitled to vote for the election of directors (or comparable equity participation and voting power). "Award" means any Stock Option, Stock Appreciation Right, Restricted Share, unrestricted Share, dividend equivalent unit or other award granted under this Incentive Plan. "Board" means Board of Directors of the Company. "Committee" means the People Committee, or its permitted delegate. "Compensation Committee" means one or more committees appointed by the People Committee composed of one or more senior managers of the Company or a Subsidiary to whom the People Committee may delegate its powers (or a portion thereof) to administer this Incentive Plan pursuant to Section 3(a) of this Article I. "People Committee" means the People Committee of the Board or such other committee consisting of two or more members of the Board as may be appointed by the Board to administer this Incentive Plan pursuant to Section 3(a) of this Article I. "Company" means Monsanto Company, a Delaware corporation. "Eligible Participant" means any officer or other salaried employee (including a director who is a salaried employee) of the Company, a Subsidiary, or an Associated Company. A-1 "Incentive Plan" means the Monsanto Management Incentive Plan of 1996, set forth herein. "Fair Market Value" shall mean, with respect to any given day, the average of the highest and lowest sales prices of the Shares reported as the New York Stock Exchange-Composite Transactions for such day, or if the Shares were not traded on the New York Stock Exchange on such day, then on the next preceding day on which the Shares were traded, all as reported by The Wall Street Journal, mid-west edition, under the heading New York Stock Exchange-Composite Transactions or by such other source as the Committee may select. "Incentive Stock Option" or "Incentive Option" means an option meeting the definition of that term as set forth in Section 3 of Article II of this Incentive Plan. "1984 Plan" means the Monsanto Management Incentive Plan of 1984, as amended. "1986 Plan" means the Searle Monsanto Stock Option Plan of 1986, as amended. "1988/I Plan" means the Monsanto Management Incentive Plan of 1988/I, as amended. "1988/II Plan" means the Monsanto Management Incentive Plan of 1988/II, as amended. "1991 Plan" means the NutraSweet/Monsanto Stock Plan of 1991, as amended. "1994 NutraSweet/Monsanto Plan" means the NutraSweet/Monsanto Stock Plan of 1994, as amended. "1994 Plan" means the Monsanto Management Incentive Plan of 1994, as amended. "1994 Searle/Monsanto Plan" means the Searle/Monsanto Stock Plan of 1994, as amended. "Non-Qualified Stock Option" or "Non-Qualified Option" means an option referred to in Section 4 of Article II of this Incentive Plan. "Participant" means an Eligible Participant to whom a Stock Option or a Stock Appreciation Right has been granted, a bonus commitment made or a bonus awarded pursuant to this Incentive Plan. "Reporting Person" means a person subject to the reporting requirements of Section 16(a) of the Securities Exchange Act of 1934 (or any law, rule, regulation or other provision that may replace such statute) with respect to Shares. "Restricted Shares" means Shares that were made subject to restrictions in accordance with Section 6 of Article II of this Incentive Plan. "Shares" means shares of common stock of the Company and any shares of stock or other securities received as a result of a Share adjustment as set forth in Section 4 of this Article I. "Stock Appreciation Right" means a right referred to in Section 5 of Article II of this Incentive Plan. "Stock Appreciation Right Fair Market Value" or "SAR Fair Market Value" shall mean a value established by the Committee for the exercise of a Stock A-2 Appreciation Right. If such exercise occurs during any quarterly "window period" as specified by Rule 16b-3 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended from time to time, or any law, rule, regulation or other provision that may hereafter replace such Rule, the Committee may establish a common value for exercises during such window period. "Stock Option" or "Option" shall mean Incentive Stock Options and/or Non-Qualified Stock Options. "Subsidiary" means: (i) for the purpose of an Incentive Stock Option, any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if, at the time of the granting of the Option, each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain; and (ii) for the purposes of a Non-Qualified Stock Option, a Stock Appreciation Right or an Award of Shares (restricted or not), any corporation (or partnership, joint venture, or other enterprise) of which the Company owns or controls, directly or indirectly, 50% or more of the outstanding shares of stock normally entitled to vote for the election of directors (or comparable equity participation and voting power). "Termination of Employment" means the discontinuance of employment of a Participant for any reason other than a Transfer. "Transfer" means: (i) for the purpose of an Incentive Stock Option, a change of employment of a Participant within the group consisting of the Company and its Subsidiaries; and (ii) for the purpose of a Non-Qualified Stock Option, a Stock Appreciation Right or an Award of Shares (restricted or not), a change of employment of a Participant within the group consisting of the Company and its Subsidiaries, or, if the Committee so determines, a change of employment of a Participant within the group consisting of the Company, its Subsidiaries and Associated Companies. 3. ADMINISTRATION (a) This Incentive Plan shall be administered by the People Committee, except to the extent the People Committee delegates administration pursuant to this paragraph. The People Committee may delegate all or a portion of the administration of this Incentive Plan to one or more Compensation Committees or to senior managers of the Company or its Subsidiaries; provided that determinations regarding the timing, pricing, amount and terms of any Award to a Reporting Person shall be made only by the People Committee. No person shall be eligible for the grant of an Award under this Incentive Plan while serving as a Member of the People Committee. (b) The Committee shall have the exclusive right to interpret this Incentive Plan, to select the persons who are to receive Awards, and to act in all matters pertaining to the granting of Awards under this Incentive Plan including, without limitation, the timing, pricing, amount and terms of any Award and the amendment thereof consistent with the provisions of this Incentive Plan. No Eligible Participant shall have any right to be considered for or to receive any Awards. All acts and decisions of the Committee with respect to any questions arising in connection with the administration and interpretation of this Incentive Plan, including the severability of any and all of the provisions thereof, shall be conclusive, final and binding upon all Eligible Participants. (c) The Committee may adopt and amend from time to time rules and regulations of general application for the administration of this Incentive Plan. A-3 (d) Without limiting the foregoing Sections 3(a), (b)and (c) of this Article I (and notwithstanding any other provisions of this Incentive Plan), the Committee is authorized to take such action as it determines to be necessary or advisable, and fair and equitable to Participants, with respect to Awards in the event of: a merger of the Company with, consolidation of the Company into, or the acquisition of the Company by, another corporation; a sale or transfer of all or substantially all of the assets of the Company to another corporation or any other person or entity; a separation from the Company, including any spin-off or other distribution to stockholders other than an ordinary cash dividend; a tender or exchange offer for Shares made by any corporation, person or entity (other than the Company); or other reorganization in which the Company will not survive as an independent, publicly-owned corporation. Such action may include (but shall not be limited to) establishing, amending or waiving the forms, terms, conditions and duration of Stock Options, Stock Appreciation Rights, Awards of Restricted Shares and other Awards so as to provide for earlier, later, extended or additional times for exercise or payments, differing methods for calculating payments, alternate forms and amounts of payment, accelerated release of restrictions or other modifications. The Committee may take such actions pursuant to this Section 3(d) by adopting rules and regulations of general applicability to all Participants or to certain categories of Participants, by including, amending or waiving terms and conditions in Awards (including, without limitation, agreements with respect to Restricted Shares), or by taking action with respect to individual Participants. The Committee may take such actions as part of the Awards, or before or after the public announcement of any such merger, consolidation, acquisition, sale or transfer of assets, separation, tender or exchange offer or other reorganization. 4. SHARE ADJUSTMENTS In the event that at any time or from time to time a stock dividend, stock split, recapitalization, merger, consolidation, or other change in capitalization, or a sale by the Company of all or part of its assets, or a separation from the Company, including any spin-off or other distribution to stockholders other than an ordinary cash dividend, results in (a) the outstanding Shares, or any securities exchanged therefor or received in their place, being exchanged for a different number or class of shares of stock or other securities of the Company, or for shares of stock or other securities of any other corporation; or (b) new, different or additional shares or other securities of the Company or of any other corporation being received by the holders of outstanding Shares, then: (i) the total number of Shares authorized for Awards under this Incentive Plan; (ii) the number and class of Shares (A) that may be subject to Stock Options or Stock Appreciation Rights, (B) which have not been issued or transferred under outstanding Stock Options or Stock Appreciation Rights, and (C) which have been awarded but are undelivered under this Incentive Plan; and (iii) the purchase price to be paid per Share under outstanding Stock Options and the number of Shares to be transferred in settlement of outstanding Stock Appreciation Rights; A-4 shall in each case be appropriately adjusted by the Committee in its discretion; provided, however, that all adjustments made as the result of the foregoing in respect of each Stock Option which is granted as an Incentive Stock Option shall be made so that such Stock Option shall continue to be an Incentive Stock Option as defined in Section 422 of the Internal Revenue Code of 1986, as may be amended from time to time. 5. SHARES AUTHORIZED The total number of Shares for which awards may be granted under this Incentive Plan shall not exceed 87,605,350 Shares. Notwithstanding the foregoing, the total number of Shares that shall be available for Awards of Restricted or unrestricted Shares shall be 1/2 of 1% of the total number of Shares outstanding. The limitations in this Section 5 are subject to the adjustments provided for in Section 4 of this Article I; the provisions of Section 1(b) of Article II of this Incentive Plan; and the provisions of Section 3(d) of Article III of this Incentive Plan. The total number of Shares for which Awards may be granted under this Incentive Plan to any one Eligible Participant shall not exceed in any three-year period 15% of the total number of Shares for which Awards may be made under this Incentive Plan, subject to the adjustments provided for in Section 4 of this Article I. II. AWARDS 1. SHARES USED FOR AWARDS (a) The Shares for which Options may be granted under this Option Plan may be authorized but unissued Shares, or treasury Shares, or both. (b) In the event that any unexercised Stock Option granted hereunder lapses or ceases to be exercisable for any reason other than a surrender of the Option pursuant to Section l(c) of this Article II or the exercise of a Stock Appreciation Right under Section 5 of this Article II, the Shares subject to such Option shall again be available for Option grants under this Option Plan without again being charged against the authorized Shares set forth in Section 5 of Article I if not prohibited by Rule 16b-3 under the Securities Exchange Act of 1934 (or any successor rule or provision). Any amendment of any Option or Stock Appreciation Right by the Committee pursuant to Article I, Section 3 of this Incentive Plan shall not be considered the grant of a new Option for the purpose of Section 5 of Article I. (c) In the event of death or total and permanent disability as determined by the Committee, the Committee may, with the consent of the Participant, his legal representative, or in the event of death, a beneficiary designated in writing by the Participant during his lifetime, authorize payment, in cash or in Shares, or partly in cash and partly in Shares, as the Committee may direct, of an amount equal to the difference at the time between the Fair Market Value of the Shares subject to an Option and the Option price in consideration of the surrender of the Option. In such an event the Shares subject to the Option so surrendered shall be charged against the limitations set forth in Section 5 of Article I. (d) In the event that any Award or installment thereof ceases to be payable for any reason, the Shares subject to such Award shall again be available for Award without again being charged against the limitations on the number of Shares set forth in Section 5 of Article I if not prohibited by Rule 16b-3 under the Securities Exchange Act of 1934 (or any successor rule or provision). A-5 2. INCIDENTS OF OPTIONS AND STOCK APPRECIATION RIGHTS (a) An Award of Stock Options or Stock Appreciation Rights may be made at such time or times determined by the Committee following the Effective Date to any Eligible Participant, except that Incentive Options may not be awarded to employees of Associated Companies. Each Stock Option and Stock Appreciation Right shall be granted subject to such terms and conditions, if any, not inconsistent with this Incentive Plan, as shall be determined by the Committee, including any provisions as to continued employment as consideration for the grant or exercise of such Option or Stock Appreciation Right, provisions as to performance conditions and any provisions which may be advisable to comply with applicable laws, regulations or rulings of any governmental authority. (b) An Incentive Stock Option or Stock Appreciation Right shall not be transferable by the Participant otherwise than by will, by the laws of descent and distribution, or pursuant to a written beneficiary designation, and shall be exercisable during the lifetime of the Participant only by him or by his guardian or legal representative. A Non-Qualified Stock Option or Stock Appreciation Right shall not be transferable except by will, by the laws of descent and distribution, pursuant to a written beneficiary designation, pursuant to a qualified domestic relations order as defined by the Internal Revenue Code of 1986, as amended, or Title I of the Employee Retirement Income Security Act or the rules thereunder, or in such circumstances as would not result in the failure to comply with Rule 16b-3 under the Securities Exchange Act of 1934 (or any successor rule or provision) if the transferor were a Reporting Person. (c) Shares purchased upon exercise of a Stock Option shall be paid for in such amounts, at such times and upon such terms as shall be determined by the Committee and specified in the grant of the Option. Without limiting the foregoing, the Committee may establish payment terms for the exercise of Stock Options which permit the Participant to deliver Shares (or other evidence of ownership of Shares satisfactory to the Company), including, at the Committee's option, Restricted Shares, with a Fair Market Value equal to the Option price as payment. (d) The Option price per share shall be established by the grant and shall not be decreased thereafter except pursuant to Section 4 of Article I of this Incentive Plan. (e) The Committee, in its discretion, may provide for the escalation of the Option price per Share over all or part of the term of the Option. (f) The Committee, in its discretion, may offer Participants the opportunity to elect to receive an Option grant in lieu of a salary increase or a bonus or may offer Participants the opportunity to purchase Options for cash or such other consideration as the Committee in its discretion determines. 3. INCENTIVE OPTIONS An Incentive Option shall be an "Incentive Stock Option" as that term is defined in Section 422 of the Internal Revenue Code of 1986, as may be amended from time to time, as in effect at the time of the grant of any such Option, or any statutory provision that may be enacted to replace such Section. Each provision of this Incentive Plan and of each Incentive Stock Option granted hereunder shall be construed so that each such Option shall be an Incentive Stock Option, A-6 and any provision thereof that cannot be so construed shall be disregarded. Incentive Stock Options shall be granted only to purchase unrestricted Shares and only to Eligible Participants, each of whom may be granted one or more such Options at such time or times determined by the Committee following the Effective Date until April 14, 2006, subject to the following conditions: (a) The Option price per Share shall be set by the grant but shall not be less than 100% of the Fair Market Value at the time of the grant. (b) The Option and its related Stock Appreciation Right, if any, may be exercised in full or in part from time to time within ten (10) years from the date of the grant, or such shorter period as may be specified by the Committee in the grant, provided that in any event each shall lapse and cease to be exercisable upon, or within such period following, Termination of Employment as shall have been determined by the Committee and as specified in the Option or Stock Appreciation Right; provided, however, that such period following Termination of Employment shall not exceed twelve months unless employment shall have terminated: (i)as a result of retirement as defined by the Committee or total and permanent disability as determined by the Committee, in which event such period shall not exceed-- (A) in the case of an Option, the original term of the Option; and (B) in the case of a Stock Appreciation Right, one year after such retirement or disability or after resignation as an officer or director of the Company, whichever shall last occur (unless earlier terminated pursuant to Section 5(b) of this Article II); or (ii)as a result of death, or death shall have occurred following Termination of Employment and while the Option or Stock Appreciation Right was still exercisable; and provided, further, that such period following Termination of Employment shall in no event extend the original exercise period of the Option or related Stock Appreciation Right, if any. (c) The aggregate Fair Market Value (determined at the time the Option is granted) of the Shares with respect to which Incentive Stock Options are first exercisable during any calendar year by any Eligible Participant shall not exceed $100,000; however, if the Fair Market Value of Incentive Stock Option Shares (at date of grant) exceeds $100,000 in the calendar year in which Incentive Stock Options are first exercisable, Shares with a Fair Market Value at date of grant exceeding $100,000 shall not be deemed to be Incentive Stock Options. (d) Incentive Stock Options shall be granted only to an Eligible Participant who, at the time the Option is granted, does not own stock possessing more than 10% of the total combined voting power of all classes of stock of the Company. (e) Any other terms and conditions which the Committee determines, upon advice of counsel, should be imposed for the Option to qualify as an Incentive Stock Option and any other terms and conditions not inconsistent with this Incentive Plan as determined by the Committee; including provisions making the Shares subject to such Option Restricted Shares or provisions making vesting or the ability to exercise subject to performance conditions. A-7 4. NON-QUALIFIED OPTIONS One or more Options may be granted as Non-Qualified Options to purchase unrestricted Shares or Restricted Shares to an Eligible Participant at such time or times determined by the Committee, following the Effective Date, subject to the following terms and conditions: (a) The Option price per Share shall be established by the grant but shall not be less than 100% of the Fair Market Value at the time of the grant (or such later date as the Committee shall determine to be the grant date). (b) The Option and its related Stock Appreciation Right, if any, may be exercised in full or in part from time to time within ten (10) years from the date of the grant, or such shorter period as may be specified by the Committee in the grant, provided that in any event each shall lapse and cease to be exercisable upon, or within such period following Termination of Employment as shall have been determined by the Committee and as specified in the Option or Stock Appreciation Right; provided, however, that such period following Termination of Employment shall not exceed twelve months unless employment shall have terminated: (i) as a result of retirement as defined by the Committee or total and permanent disability as determined by the Committee, in which event such period shall not exceed-- (A) in the case of an Option, the original term of the Option; and (B) in the case of a Stock Appreciation Right, one year after such retirement or disability or after resignation as an officer or director of the Company, whichever shall last occur (unless earlier terminated pursuant to Section 5(b) of this Article II); or (ii) as a result of death, or death shall have occurred following Termination of Employment and while the Option or Stock Appreciation Right was still exercisable; and provided, further, that such period following Termination of Employment shall in no event extend the original exercise period of the Option or related Stock Appreciation Right, if any. (c) The Option grant may include any other terms and conditions not inconsistent with this Incentive Plan as determined by the Committee, including provisions making the Shares subject to such Option Restricted Shares or provisions making vesting or the ability to exercise subject to the satisfaction of performance conditions. 5. STOCK APPRECIATION RIGHTS A Stock Appreciation Right may be granted to an Eligible Participant in connection with (and only in connection with) an Incentive Stock Option or a Non-Qualified Option granted under this Incentive Plan, or under any other incentive plan of the Company or its Subsidiaries which was approved by the stockholders, subject to the following terms and conditions: A-8 (a) Such Stock Appreciation Right shall entitle a holder of an Option within the period specified for the exercise of the Option in the related Option grant to surrender the unexercised Option (or a portion thereof) and to receive in exchange therefor a payment in cash or Shares having an aggregate value equal to the product of (i) the amount by which (A) the SAR Fair Market Value of each Share exceeds (B) the Option price per Share, times (ii) the number of Shares under the Option, or portion thereof, which is surrendered. (b) Except as expressly provided herein, each Stock Appreciation Right granted hereunder shall be subject to the same terms and conditions as the related Option. It shall be exercisable only to the extent such Option is exercisable and shall terminate or lapse and cease to be exercisable when the related Option terminates or lapses. The Committee may grant Stock Appreciation Rights concurrently with grants of Options or in connection with previously granted Options under this Incentive Plan, or under any other incentive plan of the Company or its Subsidiaries which was approved by the stockholders, which are unexercised and have not terminated or lapsed. With respect to Stock Appreciation Rights granted in connection with such previously granted Options, the Committee shall provide that such Stock Appreciation Rights shall not be exercisable until the holder completes six (6) months (or such longer period as the Committee shall determine) of service with the Company, a Subsidiary, or an Associated Company immediately following the date of the grant of such Stock Appreciation Rights. (c) The Committee shall have sole discretion to determine in each case whether the payment will be in the form of all cash, all Shares (which may, at the Committee's discretion, be Restricted Shares), or any combination thereof. If payment is to be made in Shares, the number of Shares shall be determined as follows: the amount payable in Shares shall be divided by the SAR Fair Market Value of Shares. The payments to be made, in whole or in part, in cash upon the exercise of Stock Appreciation Rights by any officer of the Company shall be made in accordance with the provisions relating to the exercise of stock appreciation rights of Rule 16b-3 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect at the time of such exercise, or any law, rule, regulation or other provision that may hereafter replace such Rule. (d) Upon exercise of a Stock Appreciation Right, the number of Shares subject to exercise under the related Option shall automatically be reduced by the number of Shares represented by the Option or portion thereof which is surrendered. To the extent that a Stock Appreciation Right shall be exercised, any Shares transferred upon such exercise shall not be charged against the maximum limitations upon the grant of Options set forth in this Incentive Plan under which such Option shall have been granted but the Option in connection with which a Stock Appreciation Right shall have been granted shall be deemed to have been exercised for the purpose of such maximum limitations. (e) The Committee shall have sole discretion as to the timing of any payment made in cash, Shares, or a combination thereof upon exercise of Stock Appreciation Rights hereunder, whether in a lump sum, in annual installments or otherwise deferred and the Committee shall have sole discretion to determine whether such payments may bear amounts equivalent to interest or cash dividends. (f) For purposes of this paragraph 5(f) of Article II: A-9 (i)"Unrelated Party" means any party or group of parties acting together other than (A) the Company, its directors and officers, or (B) any nominee holder for any stock exchange; (ii)"Offer" means any tender or exchange offer made by an Unrelated Party for the Shares and shall be deemed to occur upon the first purchase or exchange of such Shares; (iii) "Change of Control" means any acquisition, beneficially or otherwise, by any Unrelated Party of 25% or more of the combined voting power of the common and preferred stock of the Company and shall be deemed to occur upon the date that the Unrelated Party attains control of said 25% or more of the combined voting power; (iv)"Change of Control Market Value" of the Shares means the higher of-- (A) the value for which such Shares may be exchanged or offered under any Offer pursuant to which Shares are actually exchanged or purchased; or (B) the Fair Market Value of such Shares on the date of exercise of a Stock Appreciation Right. Notwithstanding the foregoing provisions of this Section 5 of Article II and without limiting the provisions of Section 3 of Article I of this Incentive Plan, in the event of an Offer or Change of Control, a Participant holding an unexercised Stock Appreciation Right may exercise such Stock Appreciation Right and elect to be paid solely in cash in an amount equal to the difference between the Option price and the Change of Control Market Value of the Shares, unless within five (5) business days after receipt of notification of such election by the Secretary of the Company, the Committee acts to disapprove the cash election. Unless it acts to disapprove, the Committee's consent shall be deemed to be given at the close of business on the fifth business day after the Secretary's receipt of notification of such election and payment shall be made as soon as practicable after expiration of such five (5) business day period. The election provided herein shall apply only: (x) during the thirty (30) day period following the first exchange or purchase of Shares pursuant to an Offer; or (y) during the thirty (30) day period following the date on which sufficient Shares are acquired to constitute a Change of Control. (g) For purposes of this paragraph 5(g) of Article II: (i) "Unrelated Party" means any party or group of parties acting together other than (A) the Company, its directors and officers, or (B) any nominee holder for any stock exchange; (ii) "Alternate Change of Control" means any acquisition, beneficially or otherwise, by any Unrelated Party of a percentage of the combined voting power of the common and preferred stock of the Company specified by the Committee (but not less than 10%) and shall be deemed to occur upon the date that the Unrelated Party attains control of said percentage of the combined voting power; (iii)"Change of Control Termination of Employment" means the termination of employment of a Participant by the Company, the Subsidiaries or the Associated Companies without cause (as defined by the Committee) or by the Participant for good reason (as A-10 defined by the Committee) within a period of time specified by the Committee following an Alternate Change of Control; (iv) "Alternate Change of Control Market Value" of the Shares means the Fair Market Value of such Shares on the date of exercise of a Stock Appreciation Right. Notwithstanding the foregoing provisions of this Section 5 of Article II and without limiting the provisions of Section 3 of Article I of this Incentive Plan, in the event of an Alternate Change of Control and a Change of Control Termination of Employment, a Participant holding an unexercised Stock Appreciation Right who is selected by the Committee may exercise such Stock Appreciation Right and elect to be paid solely in cash in an amount equal to the difference between the Option price and the Alternate Change of Control Market Value of the Shares, unless within five (5) business days after receipt of notification of such election by the Secretary of the Company, the Committee acts to disapprove the cash election. Unless it acts to disapprove, the Committee's consent shall be deemed to be given at the close of business on the fifth business day after the Secretary's receipt of notification of such election and payment shall be made as soon as practicable after expiration of such five (5) business day period. The election provided herein shall apply only during the thirty (30) day period following a Change of Control Termination of Employment. 6. BONUS SHARES AND RESTRICTED SHARES (a) An Award of Shares or Restricted Shares may be made at such time or times determined by the Committee following the Effective Date to any person who is an Eligible Participant. The Committee shall have full discretion to determine the terms and conditions of payment of any Award, including without limitation, what part of such Award shall be paid in unrestricted Shares or Restricted Shares, the time or times of payment of any Award, and the time or times of the lapse of the restrictions on Restricted Shares. (b) For the purpose of determining the number of Shares to be used in payment of an Award, the amount of the Award payable in Shares shall be divided by the Fair Market Value of the Shares on the date of the determination of the amount of the Award by the Committee, or if the Committee so directs, the date immediately preceding the date the Award is paid. (c) The portion of an Award payable in Restricted Shares shall be paid at the time of the Award either by book-entry registration or by delivering to the Participant, or a custodian or escrow designated by the Committee and the Participant, a certificate or certificates for such Restricted Shares, registered in the name of such Participant. The Participant shall have all of the rights of a stockholder with respect to such Shares, subject to such terms and conditions, including withholding of dividends, forfeitures or resale to the Company, if any, as may be determined by the Committee. The Committee and the Participant may designate the Company or one or more of its employees to act as custodian or escrow for the certificates. (d) Restricted Shares shall be subject to such terms and conditions, including forfeiture, if any, and to such restrictions against sale, transfer or other disposition as may be determined by the Committee at the time a Non-Qualified Option for the purchase of Restricted Shares is granted, at the time a Stock Appreciation Right to be settled with Restricted Shares is A-11 granted or at the time of making a bonus award of Restricted Shares. Any new or additional or different Shares or other securities resulting from any adjustment of such Shares of the type described in Section 4 of Article I shall be subject to the same terms, conditions, and restrictions as the Restricted Shares prior to such adjustment. The Committee may, in its discretion, remove, modify or accelerate the release of restrictions on any Restricted Shares in the event of hardship or disability of the Participant while employed, in the event that the Participant ceases to be an employee of the Company, a Subsidiary or Associated Company, as the result of death or otherwise, in the event of a relocation of a Participant to another country or for such other reasons as the Committee may deem appropriate. In the event of the death of a Participant following the transfer of Restricted Shares to him, the legal representative of the Participant, the beneficiary designated in writing by the Participant during his lifetime, or the person receiving such Shares under his will or under the laws of descent and distribution shall take such Shares subject to the same restrictions, conditions and provisions in effect at the time of his death, to the extent applicable. 7. DIVIDENDS, DIVIDEND EQUIVALENTS AND INTEREST EQUIVALENTS (a) No cash dividends shall be paid on Shares which have been awarded but not registered or delivered. The Committee may provide, however, that a Participant to whom an Option has been awarded which is exercisable in whole or in part at a future time for Shares or a Participant who has been awarded Shares payable in whole or in part at a future time, shall be entitled to receive an amount per Share, equal in value to the cash dividends, if any, paid per Share on issued and outstanding Shares, as of the dividend record dates occurring during the period between the date of the award and the time each such Share is delivered. Such amounts (herein called "dividend equivalents") may, in the discretion of the Committee, be: (i) paid in cash or Shares either from time to time prior to or at the time of the delivery of such Shares or upon expiration of the Option if it shall not have been fully exercised (except that payment of the dividend equivalents on Incentive Options may not be made prior to exercise); or (ii) converted into contingently credited Shares (with respect to which dividend equivalents shall accrue) in such manner, at such value, and deliverable at such time or times, as may be determined by the Committee. Such Shares (whether delivered or contingently credited) shall be charged against the limitations set forth in Section 5 of Article I. (b) The Committee, in its discretion, may authorize payment of interest equivalents on any portion of any Award payable at a future time in cash, and interest equivalents on dividend equivalents which are payable in cash at a future time. (c) The Committee, in its discretion, may provide that dividends paid on restricted Shares shall, during the applicable restricted period, be held by the Company to be paid upon the lapse of restrictions or to be forfeited upon forfeiture of the Shares. A-12 III. MISCELLANEOUS PROVISIONS 1. Neither a Stock Option nor a Stock Appreciation Right shall be transferable except as provided for herein. If any Participant makes such a transfer in violation hereof, any obligation of the Company with respect to such Stock Option or Stock Appreciation Right shall forthwith terminate. 2. Nothing in this Incentive Plan or any booklet or other documen describing or referring to this Incentive Plan shall be deemed to confer on any employee or Participant the right to continue in the employ of his employer or affect the right of his employer to terminate the employment of any such person with or without cause. 3. Nothing contained herein shall require the Company to segregate any monies from its general funds, or to create any trusts, or to make any special deposits for any immediate or deferred amounts payable to any Participant. 4. This Incentive Plan and all actions taken hereunder shall be governed by the laws of the State of Delaware. 5. The Company may make such provisions and take such steps as it may deem necessary or appropriate for the withholding of any taxes which the Company is required by any law or regulation of any governmental authority, whether federal, state or local, domestic or foreign, to withhold in connection with any Stock Option or the exercise thereof, any Stock Appreciation Right or the exercise thereof, or the payment of any bonus award, including, but not limited to, the withholding of cash or Shares which would be paid or delivered pursuant to such exercise or award or another exercise or award under this Incentive Plan until the Participant reimburses the Company for the amount the Company is required to withhold with respect to such taxes, or cancelling any portion of such award or another award under this Incentive Plan in an amount sufficient to reimburse itself for the amount it is required to so withhold, or selling any property contingently credited by the Company for the purpose of paying such award or another award under this Incentive Plan, in order to withhold or reimburse itself for the amount it is required to so withhold. The Committee may permit a Participant (or any beneficiary or other person authorized to act) to elect to pay a portion or all of any amounts required or permitted to be withheld to satisfy federal, state, local or foreign tax obligations by directing the Company to withhold a number of whole Shares which would otherwise be distributed and which have a fair market value sufficient to cover the amount of such required or permitted withholding taxes. 6. The Committee may grant Stock Options to Eligible Participants who are foreign nationals or who are employed by the Company, a Subsidiary, or an Associated Company outside of the United States of America. In order to facilitate the granting of Stock Options, the Committee may provide for special terms and conditions for grants to employees who are foreign nationals or who are employed by the Company, a Subsidiary, or an Associated Company outside of the United States of America, as the Committee may consider necessary or appropriate to accommodate differences in local law, tax policy or custom in other countries in which the Company, a Subsidiary, or an Associated Company operates or has employees. The Committee may also provide for such substitutes for the Stock Options for employees who are foreign A-13 nationals or who are employed by the Company, a Subsidiary, or an Associated Company outside of the United States of America as may be deemed necessary or appropriate by the Committee. Available Information: Each Malaysian Participant may request copies of the Company's most recent audited financial statements available. 7. Notwithstanding any other provision of this Incentive Plan, for purposes of any Award that is outstanding as of the date that the Company spins off the Company's chemical businesses into a new publicly traded company("Chemicals") and is held by a Participant who in connection with such spinoff becomes an employee of Chemicals (or a subsidiary or associated company of Chemicals) rather than an employee of the Company (or a Subsidiary or Associated Company of the Company), such change of employment shall not constitute a Termination of Employment. With respect to any such Award held by such a Participant, Termination of Employment shall mean such Participant's termination of employment with Chemicals other than a Transfer, with Transfer defined as a change of employment of a Participant within the group consisting of Chemicals and its subsidiaries, or, if the Committee so determines, a change of employment of a Participant within the group consisting of Chemicals, its subsidiaries, and its associated companies. For purposes of this section, a subsidiary of Chemicals means any corporation (or partnership, joint venture, or other enterprise) of which Chemicals owns or controls, directly or indirectly, 50% or more of the outstanding shares of stock normally entitled to vote for the election of directors (or comparable equity participation and voting power) and an associated company of Chemicals means any corporation (or partnership, joint venture, or other enterprise), of which Chemicals owns or controls, directly or indirectly, 10% or more, but less than 50% of the outstanding shares of stock normally entitled to vote for the election of directors (or comparable equity participation and voting power). IV. AMENDMENTS 1. The Board, upon recommendation of the Committee but not otherwise, may from time to time amend or modify this Incentive Plan, including, but not limited to, an amendment which would authorize the Committee to make Awards payable in other securities or other forms of property of a kind to be determined by the Committee, and such other amendments as may be necessary or desirable to implement such Awards, or discontinue this Incentive Plan or any provision thereof, provided that no amendments or modifications to this Incentive Plan shall, without the prior approval of the stockholders normally entitled to vote for the election of directors of the Company: (a) permit the Company to decrease the Option price on any outstanding Option; (b) permit any change which would require the approval of stockholders under Section 16 of the Securities Exchange Act of 1934 or the rules thereunder or under Section 422 of the Internal Revenue Code of 1986, or the rules thereunder (or any law, rule, regulation or other provision that may replace such statutes or rules); or A-14 (c) change any of the provisions of this Article IV. 2. No amendment to or discontinuance of this Incentive Plan or any provision thereof by the Board or the stockholders of the Company shall, without the written consent of the Participant, adversely affect any Stock Option or Stock Appreciation Right theretofore granted or bonus commitment or bonus award theretofore made to such Participant under this Incentive Plan. V. INTERPRETATION 1. This Incentive Plan is not intended to and shall not affect any option or stock appreciation right grant or bonus commitment or award under the 1984 Plan, the 1986 Plan, the 1988/I Plan, the 1988/II Plan, the 1991 Plan, the 1994 Plan, the 1994 Searle/Monsanto Plan, or the 1994 NutraSweet/Monsanto Plan (or any other incentive plan of the Company, its Subsidiaries, and Associated Companies). No stock options or stock appreciation rights or Awards of Restricted or unrestricted Shares shall be granted under the 1994 Plan, the 1994 Searle/Monsanto Plan, or the 1994 NutraSweet/Monsanto Plan after April 14, 1996. 2. This Incentive Plan is not intended to and shall not preclude the establishment or operation by the Company or any Subsidiary of (a) any thrift, savings and investment, achievement award, stock purchase, employee recognition or other benefit plan or arrangement for any group of employees, or (b) any other incentive or bonus plan or arrangement for any employees (hereinafter "Other Plan"), and any such Other Plan may be authorized and payments made thereunder independently of this Incentive Plan; provided, however, that no such Other Plan shall provide for the granting of options or stock appreciation rights to purchase or receive the appreciation on the shares of any class of stock of the Company, or the making of bonus commitments or bonus awards payable in any class of stock of the Company, which in either form or substance are comparable to those authorized under this Incentive Plan, unless (i) such Other Plan is established or operated in connection with the assumption by the Company or a Subsidiary of the plans, options, stock appreciation rights, bonus commitments or bonus awards of another corporation, or the substitution of an Other Plan or options, stock appreciation rights, bonus commitments or bonus awards under such Other Plan in lieu of the plans, options, stock appreciation rights, bonus commitments or bonus awards of such other corporation, arising out of a merger or consolidation with, or the acquisition of assets or stock of, such other corporation, or other transaction described in Section 424(a) of the Internal Revenue Code of 1986, as may be amended from time to time, as in effect at the time, or (ii) such Other Plan provides for grants of options, stock appreciation rights, bonus commitments or bonus awards to employees substantially all of whom are not Participants. A-15 EX-10.2 3 LETTER AGREEMENT February 7, 1997 Mr. Richard U. De Schutter Chairman & CEO Searle World Headquarters 5200 Old Orchard Rd. Skokie, IL 60077 Dear Dick: This is to set forth our agreement which results from our various conversations that started based on the letter to you from Peter Baron dated June 1988 and continuing as you considered your role in the Life Sciences organization. Let me start by saying I am very enthusiastic about your acceptance of the organization and your role, and your commitment to what must be done to further the success of the Pharma Sector and the Life Sciences Company. We agreed that all prior agreements are replaced by the following terms: if for whatever reason, other than for cause, you leave the Company within the next five years, you are entitled to a minimum package of one year base and annual incentive at target, and that at the discretion of the Life Sciences internal compensation committee, based on performance, commitment, and attitude, another year can be added. This is in lieu of any other payments or window benefits. We also agreed that at our option, you would allow sufficient time for a proper succession, up to 6 months. This has been approved by the Monsanto internal compensation committee. Please note your acceptance of this agreement on the below signature line. /s/ Nicholas L. Reding Nicholas L. Reding cc: J. B. Bingham R. W. Ide D. A. Kindl R. B. Shapiro I accept the foregoing agreement: Richard U. De Schutter Date: EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENT OF CONSOLIDATED INCOME OF MONSANTO COMPANY AND SUBSIDIARIES FOR THE THREE MONTHS ENDED JUNE 30, 1999, AND THE STATEMENT OF CONSOLIDATED FINANCIAL POSITION AS OF JUNE 30, 1999. SUCH INFORMATION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS. 1,000,000 6-MOS DEC-31-1999 JUN-30-1999 102 0 4,085 0 1,474 6,139 5,298 2,316 16,795 4,250 6,130 1,694 0 0 3,541 16,795 4,896 4,896 1,721 1,721 0 0 204 742 296 446 30 0 0 476 .75 .73
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