-----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, WyAh7ymrVPNCpWOEOdr9ZvR+UPrpcSm3TEOtqNRR2RjnaNiJP3YhJQsVjr1u+S9k nv9wGIlpMhhfGbiwgFvbkg== 0001068800-00-000014.txt : 20000202 0001068800-00-000014.hdr.sgml : 20000202 ACCESSION NUMBER: 0001068800-00-000014 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 20000121 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-K/A SEC ACT: SEC FILE NUMBER: 001-02516 FILM NUMBER: 511110 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-K/A 1 MONSANTO COMPANY FORM 10-K/A 1998 ============================================================================ FORM 10-K/A SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 ----------------- 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) Registrant's telephone number, including area code (314) 694-1000 -------------- Securities Registered Pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- --------------------- Common Stock $2 par value New York Stock Exchange Preferred Stock Purchase Rights New York Stock Exchange Adjustable Conversion-Rate Equity Security Units New York Stock Exchange Securities Registered Pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] State the aggregate market value of the voting stock held by nonaffiliates of the registrant: approximately $29.0 billion as of the close of business on February 26, 1999. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: 628,044,729 shares of Common Stock, $2 par value, outstanding at February 26, 1999. Documents Incorporated by Reference Portions of Monsanto Company Notice of Annual Meeting and Proxy Statement dated March 15, 1999. (Part III of Form 10-K.) ============================================================================ PART I ITEM 1. BUSINESS. Monsanto Company is a life sciences company, committed to finding solutions to the growing global needs for food and health by applying common forms of science and technology among agriculture, nutrition and health. Monsanto makes, researches and markets high-value agricultural products, pharmaceuticals and nutrition-based health products. Monsanto Company was incorporated in 1933 under Delaware law and is the successor to a Missouri corporation, Monsanto Chemical Works, organized in 1901. "Monsanto" and the "Company" are used interchangeably to refer to Monsanto Company or to Monsanto Company and its subsidiaries, as appropriate to the context. Trademarks and service marks owned or licensed by Monsanto and its subsidiaries are indicated by special type. For 1998, Monsanto reported its business under four segments: Agricultural Products, Nutrition and Consumer Products, Pharmaceuticals, and Corporate and Other. In 1999, Monsanto announced its intention to sell the artificial sweetener and biogum businesses. The results of operations, financial position, and cash flows of these businesses, and of the alginates and Ortho(R) lawn-and-garden products businesses the divestiture of which was approved by Monsanto's Board of Directors in 1998, have been reclassified as discontinued operations; and, for all periods presented, the consolidated financial statements and notes have been reclassified to conform to this presentation. The Company expects to sell these businesses for a gain by July 2000. In addition, Monsanto transferred the Roundup(R) lawn-and-garden and nutrition research operations of the former Nutrition and Consumer Products segment to the Agricultural Products and Corporate and Other segments, respectively The four paragraphs appearing under "Definitions" on page 1, the tabular and narrative information appearing under "Geographic Data" on page 14, and the tabular and narrative information appearing under "Segment Data" on page 15 and the top of page 16, appearing in Exhibit 99 of this Report, are incorporated herein by reference. PRINCIPAL PRODUCTS Monsanto's principal products for 1998, categorized by segments reclassified as described above, include the following: - -------------------------------------------------------------------------------------------------- AGRICULTURAL PRODUCTS - --------------------------------------------------------------------------------------------------
MAJOR PRODUCTS END-USE PRODUCTS AND APPLICATIONS - -------------------------------------------------------------------------------------------------- Roundup(R) herbicide and other glyphosate-based Nonselective agricultural and industrial herbicides applications - -------------------------------------------------------------------------------------------------- Roundup(R) herbicide Residential lawn and garden applications Previously reported in Nutrition and Consumer Products segment - -------------------------------------------------------------------------------------------------- 2 - -------------------------------------------------------------------------------------------------- Lasso(R) and Harness(R) herbicides and other Corn, soybean, peanut and milo (sorghum) acetanilide-based herbicides crops Corn only - -------------------------------------------------------------------------------------------------- Avadex(R) BW herbicide, Far-Go(R) herbicide Wheat crops - -------------------------------------------------------------------------------------------------- Machete(R) herbicide Rice crops - -------------------------------------------------------------------------------------------------- Permit(R), Manage(R) and Sempra(R) herbicides Postemergence control of sedges and broadleaf weeds in corn and grain sorghum, turf and sugarcane crops - -------------------------------------------------------------------------------------------------- Roundup Ready(R) canola, Crops tolerant of Roundup(R) herbicide Roundup Ready(R) cotton, Roundup Ready(R) soybeans Roundup Ready(R) corn - -------------------------------------------------------------------------------------------------- Bollgard(R) insect-protected cotton, Crops protected against certain insect pests NewLeaf(R) insect-protected potatoes, YieldGard(R) insect-protected corn - -------------------------------------------------------------------------------------------------- AgriPro(R), Agroceres(TM), Asgrow(R), Cargill(R), Corn hybrids, soybean varieties, alfalfa, DEKALB(R), Hartz(R), Hybritech(R), Monsoy(TM) and grain sorghum and forage varieties, Stoneville(R) branded seeds; Holden's(TM) and sunflowers, oilseed rape and barley PBi(R) foundation seed varieties, cotton varieties, wheat varieties and hybrids The Company has sold this business. - -------------------------------------------------------------------------------------------------- Posilac(R) bovine somatotropin Increase efficiency of milk production in dairy cows - -------------------------------------------------------------------------------------------------- PHARMACEUTICALS - -------------------------------------------------------------------------------------------------- MAJOR PRODUCTS END-USE PRODUCTS AND APPLICATIONS - -------------------------------------------------------------------------------------------------- Daypro(R) (oxaprozin), Anti-inflammatory Arthrotec(R) (misoprostol/diclofenac) - -------------------------------------------------------------------------------------------------- Aldactone(R) (spironolactone), Cardiovascular Aldactazide(R) (spironolactone/ hydrochlorothiazide), Calan(R) formulations and Covera-HS(R) (verapamil hydrochloride) - -------------------------------------------------------------------------------------------------- Ambien(R) (zolpidem tartrate) Central nervous system (sleep) - -------------------------------------------------------------------------------------------------- Cytotec(R) (misoprostol), Gastrointestinal Lomotil(R) (diphenoxylate hydrochloride) - -------------------------------------------------------------------------------------------------- Demulen(R) (ethynodiol diacetate), Women's health Flagyl(R) formulations (metronidazole), Synarel(R) (nafarelin acetate) - -------------------------------------------------------------------------------------------------- CORPORATE AND OTHER - -------------------------------------------------------------------------------------------------- MAJOR PRODUCTS END-USE PRODUCTS AND APPLICATIONS - -------------------------------------------------------------------------------------------------- Enviro-Chem(R) engineering and construction Processing plants for fertilizer producers, management services for processing plants using basic metals production, oil refining sulfuric acid; proprietary equipment and air pollution control systems - --------------------------------------------------------------------------------------------------
The businesses related to the following products were formerly classified within the Nutrition & Consumer Products segment and are now classified as discontinued operations. Monsanto has sold the algins business and announced its intention to sell the other businesses. 3
- -------------------------------------------------------------------------------------------------- MAJOR PRODUCTS END-USE PRODUCTS AND APPLICATIONS - -------------------------------------------------------------------------------------------------- NutraSweet(R) brand sweetener High-intensity sweetener used primarily in beverages and food products - -------------------------------------------------------------------------------------------------- Alginate products, under various tradenames Soups, sauces, gravies, dressings, beverages, such as Keltone(R) and Manugel(R) sodium snack foods, breadings, batters, bakery alginates, and Kelcoloid(R) propylene glycol products, dairy products, pet foods alginate; Xanthan gum products under various tradenames such as Keltrol(R); Kelcogel(R) gellan gum - -------------------------------------------------------------------------------------------------- Equal(R), Canderel(R), NutraSweet(R), Tabletop sweeteners SweetMate(R), Chuker(R), Misura(R) and other tabletop sweeteners - -------------------------------------------------------------------------------------------------- Alginate products, under various tradenames Cleaners, textile printing, paper sizings and such as Manutex(R) and Kelgin(R) sodium alginates; coatings, firefighting foams Xanthan gum products, under various tradenames such as Kelzan(R) AR - -------------------------------------------------------------------------------------------------- Xanthan gum products, under various Oil and gas well drilling applications tradenames such as Kelzan(R) and Xanvis(R); Biozan(R) welan gum - --------------------------------------------------------------------------------------------------
On December 31, 1998, G. D. Searle & Co. ("Searle"), a subsidiary of the Company, received approval from the U.S. Food and Drug Administration ("FDA") to market Celebrex(R), a new arthritis treatment for the signs and symptoms of osteoarthritis and adult rheumatoid arthritis. Celebrex(R) was launched in the United States in February 1999. PRINCIPAL EQUITY AFFILIATES Monsanto participates in a number of joint ventures in which it shares management control with other companies. For example, aspartame is manufactured and sold in Europe by fifty percent-owned joint ventures; and Monsanto has a 60% ownership interest in a joint venture with Solutia Inc., from which it purchases elemental phosphorus. In addition, on January 7, 1999, Monsanto and Cargill Incorporated formed Renessen LLC, a worldwide joint venture in which Monsanto has a 50% interest, to create and market new products enhanced through biotechnology for the crop processing and animal feed markets. SALE OF PRODUCTS Monsanto's products are sold directly to customers in various industries, to wholesalers and other distributors, to retailers and to the ultimate user or consumer, principally by its own sales force, or, in some cases, through third parties. With respect to pharmaceuticals, such sales force concentrates on detailing to physicians and managed health care providers. The Pharmaceuticals segment's new anti-arthritis product Celebrex(R) will be co-promoted with Yamanouchi Pharmaceutical Co. Ltd. in Japan and with Pfizer Inc. in most other countries of the world. Monsanto's net income has been historically higher during the first half of the year, primarily because of the concentration of generally more profitable sales of the Agricultural Products segment during that part of the year. Monsanto's marketing and distribution practices do not result in unusual working capital requirements on a consolidated basis, 4 although the seasonality of sales of the Agricultural Products segment results in short-term borrowings to finance customer accounts receivable and inventories. Inventories of finished goods, goods in process and raw materials are maintained to meet customer requirements and Monsanto's scheduled production. In general, Monsanto does not manufacture its products against a backlog of firm orders; production is geared primarily to the level of incoming orders and to projections of future demand. Monsanto generally is not dependent upon one or a group of customers and Monsanto has no material contracts with the government of the United States or any state, local or foreign government. However, pursuant to contracts executed under U.S. federal and state laws, the Pharmaceuticals segment pays rebates to state governments for pharmaceuticals sold under state Medicaid programs and under state- funded programs for the indigent. The Pharmaceuticals segment also grants discounts to certain managed health care providers. Sales through managed health care providers constitute an increasing percentage of that segment's sales. Introduction of new products by the Agricultural Products and Pharmaceuticals segments typically is, and introduction of new products by other segments may be, subject to prior review and approval by the FDA, the U.S. Environmental Protection Agency and/or the U.S. Department of Agriculture (or comparable agencies of governments outside the United States) before they can be sold. Such reviews are often time- consuming and costly. These agencies also have continuing jurisdiction over many existing products of these segments. Governmental actions may also affect or determine the pricing of certain products, particularly in the Pharmaceuticals segment. RAW MATERIALS AND ENERGY RESOURCES Monsanto is both a producer and significant purchaser of a wide spectrum of its basic and intermediate raw material requirements. Major requirements for key raw materials and fuels are typically purchased pursuant to long-term contracts. Monsanto is not dependent on any one supplier for a material amount of its raw materials or fuel requirements, but certain important raw materials are obtained from a few major suppliers. Monsanto purchases its North American supply, and has the option to purchase its ex-North American supplies, of elemental phosphorus, a key raw material for the production of Roundup(R) brand herbicides, from P4 Production, L.L.C., a joint venture between the Company and Solutia Inc. In general, where Monsanto has limited sources of raw materials, it has developed contingency plans to minimize the effect of any interruption or reduction in supply. While temporary shortages of raw materials and fuels may occasionally occur, these items are generally sufficiently available to cover current and projected requirements. However, their continuing availability and price are subject to unscheduled plant interruptions occurring during periods of high demand, or due to domestic and world market and political conditions, as well as to the direct or indirect effect of U.S. and other countries' government regulations. The impact of any future raw material and energy shortages on Monsanto's business as a whole or in specific world areas cannot be accurately predicted. Operations and products may, at times, be adversely affected by legislation, shortages or international or domestic events. 5 PATENTS, TRADEMARKS, LICENSES, FRANCHISES AND CONCESSIONS Monsanto owns a large number of patents which relate to a wide variety of products and processes and has pending a substantial number of patent applications. In addition, Monsanto holds a number of licenses granted by other parties, some of which may be significant. Also, Monsanto owns a considerable number of established trademarks in many countries under which it markets its products. Monsanto's patents and trademarks in the aggregate are of material importance in the operation of its business, particularly in the Agricultural Products and Pharmaceuticals segments and with respect to NutraSweet(R) brand sweetener. Certain proprietary products such as Roundup(R) herbicide are covered by patents. Certain of Monsanto's patents and licenses are currently the subject of litigation; see "Legal Proceedings" below. Although patents protecting Roundup(R) herbicide have expired in most countries, compound per se patent protection for the active ingredient in Roundup(R) herbicide continues in the United States until September 20, 2000. Monsanto's insect-resistant plant products (including NewLeaf(R) potato, YieldGard(R) corn and Bollgard(R) cotton) are protected by patents which extend until at least 2013. Monsanto's herbicide-resistant plant products, Roundup Ready(R) cotton, corn, canola and soybeans, are protected by patents which extend until at least 2014. Posilac(R) bovine somatotropin is protected by a United States patent that expires in 2008, and by corresponding patents in other countries, most of which expire in 2005. Other patents protect various aspects of bovine somatotropin manufacture in the United States and expire as late as 2012; corresponding patents in other countries have varying terms. Calan(R) SR, an antihypertensive pharmaceutical, is licensed through the year 2004 to Searle by a third party, which has retained co-marketing rights. The product no longer has patent protection nor non-patent regulatory exclusivity conferred by the Waxman-Hatch amendments to the U.S. Food, Drug and Cosmetics Act. Cytotec(R) ulcer preventive drug is protected by a U.S. composition patent until July 29, 2000. Ambien(R) short-term treatment for insomnia is licensed to a joint venture, of which Searle is a general partner for the duration of the venture. Pursuant to the joint venture agreement, the other partner will purchase Searle's interest and thereby terminate the venture in April 2002. Ambien(R) is protected by a U.S. patent until October 21, 2006. Daypro(R) once-a-day arthritis treatment is licensed to Searle until January 5, 2003 in the U.S. and varying dates in other countries. This product is protected by a U.S. process patent that expires on February 26, 2002, and by non-patent regulatory exclusivity extending to October 29, 1999. Arthrotec(R) an arthritis treatment is protected by a U.S. patent until February 11, 2014. Celebrex(R), a COX-2 inhibitor for the treatment of osteoarthritis and rheumatoid arthritis is protected by a U.S. patent to November 30, 2013 and by regulatory exclusivity under the Waxman-Hatch Act to December 31, 2003. COMPETITION Monsanto encounters substantial competition in each of its industry segments. This competition, from other manufacturers of the same products and from manufacturers of different products designed for the same uses, is expected to continue in both U.S. and ex-U.S. markets. 6 Depending on the product involved, various types of competition are encountered, including price, delivery, service, performance, product innovation, product recognition and quality. The number of Monsanto's principal competitors varies from product to product. It is not practical to discuss Monsanto's numerous competitors because of the large variety of Monsanto's products, the markets served and the worldwide business interests of Monsanto. Overall, however, Monsanto regards its principal product groups to be competitive with many other products of other producers and believes that it is an important producer of many of such product groups. RESEARCH AND DEVELOPMENT Research and development constitute an important part of Monsanto's activities. See "Review of Consolidated Results of Operations--Development and Commercialization of New Products Remain Priorities," "Agricultural Products--Outlook," "Pharmaceutical Products" and "Notes to Financial Statements--Supplemental Data" on pages 10, 18- 19, 20-22 and 63, respectively, appearing in Exhibit 99 of this Report and incorporated herein by reference. ENVIRONMENTAL MATTERS Monsanto remains strongly committed to complying with various laws and government regulations concerning environmental matters and employee safety and health in the United States and other countries. Monsanto is dedicated to long-term environmental protection and compliance programs that reduce and monitor emissions of hazardous materials into the environment, as well as to the remediation of identified existing environmental concerns. While the costs of compliance with environmental laws and regulations cannot be predicted with certainty, Monsanto does not expect such costs to have a material adverse effect upon its capital expenditures, earnings, or competitive position. See information regarding remediation of waste disposal sites appearing under "Notes to Financial Statements--Commitments and Contingencies" on pages 61 and 62 appearing in Exhibit 99 of this Report and incorporated herein by reference. EMPLOYEE RELATIONS As of December 31, 1998, Monsanto had approximately 31,800 employees worldwide. Satisfactory relations have prevailed between Monsanto and its employees. INTERNATIONAL OPERATIONS Monsanto and affiliated companies are engaged in manufacturing, sales and/or research and development in the United States, Europe, Canada, Latin America, Australia, Asia and Africa. A number of products are manufactured abroad. Ex-U.S. operations are potentially subject to a number of unique risks and limitations, including: fluctuations in currency values; exchange control regulations; import and trade restrictions, including embargoes; governmental instability; economic conditions in other countries; and other potentially detrimental domestic and foreign governmental practices or policies affecting 7 U.S. companies doing business abroad. See "Geographic Data" on page 14 appearing in Exhibit 99 of this Report and incorporated herein by reference. 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 in any one year, as applicable. In 1974, Searle introduced in the United States an intrauterine contraceptive product, commonly referred to as an intrauterine device ("IUD"), under the name Cu-7(R). Following extensive testing by Searle and review by the FDA, the Cu-7(R) was approved for sale as a prescription drug in the United States. It was marketed internationally as the Gravigard(R). Searle has been named as a defendant in a number of product liability lawsuits alleging that this IUD caused personal injury resulting from pelvic inflammatory disease, perforation, pregnancy or ectopic pregnancy. As of October 28, 1999, there remains 1 case pending in the United States, and approximately 270 cases filed outside the United States (the vast majority in Australia). On February 22, 1999, Searle received a defense verdict after a trial of the nine lead Australian plaintiffs. Though not technically a class action, these nine individuals are considered representative of the entire group of Australian plaintiffs. Plaintiffs' are appealing that verdict. The lawsuits seek damages in varying amounts, including compensatory and punitive damages, with most suits seeking at least $50,000 in damages. Searle believes it has meritorious defenses and is vigorously defending each of these lawsuits. On January 31, 1986, Searle voluntarily discontinued the sale of the Cu-7(R) in the United States, citing the cost of defending such litigation. Ex-U.S. sales were discontinued in 1990. 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 8 price fixing charges against the manufacturers as well as the wholesalers. The court reversed the trial judge on one discrete issue involving the Consumer Price Index. Petitions for a rehearing on that issue have been denied. Cases relating to the chain pharmacies that had opted out of the class are in the final stages of discovery. In addition, consumers and a number of retail pharmacies have filed suit in various state courts throughout the country alleging violations of state antitrust and pricing laws. While many of these suits have been settled, suits remain pending in a number of states including California, Alabama and North Dakota. On December 14, 1999, suit was filed against the Company in the United States District Court for the District of Columbia (Cause No. 1:99CV03337) by six farmers as representative of a putative class action alleging that purchasers of genetically modified soybean and corn seed may assert antitrust and other claims against Monsanto. The suit alleges that Monsanto has violated various antitrust laws and unspecified international laws through its patent license agreements and has breached an implied warranty of merchantability by offering for sale genetically modified seed. Nine other companies are accused in the lawsuit of participating in an international cartel to violate the antitrust laws but Monsanto is the only named defendant. The suit claims anti-competitive behavior and monopolistic practices by artificially inflating the prices of genetically modified seed and imposing excessive technology fees, prohibiting the reuse of modified seed, or requiring the use of specified herbicides with the seed. The suit claims that despite governmental approval for the sale of the genetically modified products there are uncertain risks posed by the technology which subjects the Company to liability regardless of the actual safety of the products. Plaintiffs seek declaratory and injunctive relief in addition to antitrust, treble, compensatory and punitive damages and attorneys' fees. On November 8, 1999, a similar lawsuit was filed (Cause No. 2:99CV218-P-B) by a single plaintiff in Federal District Court for the Northern District of Mississippi alleging to represent a putative class of soybean farmers who have purchased genetically-modified soybeans which contain Monsanto's patented technology. The complaint asserts claims under the Racketeer Influenced and Corrupt Organizations Act (RICO) and various antitrust acts and also asserts claims for breach of contract. The suit seeks an award of antitrust damages, treble damages and compensatory damages and attorneys' fees. Monsanto has meritorious defenses to all claims in the lawsuits including: failure to state any claim under existing law, no breach of any legal duty, lack of damage, legal authorization to extend technology licenses under the patent laws and other defenses. Monsanto will maintain in the litigation that its products are safe, approved for sale by regulatory authorities and that its actions have been pro- competitive under the antitrust laws and protected under the patent laws. Monsanto is vigorously defending both of these lawsuits. In 1996 the Company was the first to commercially introduce cotton containing a gene encoding for Bacillus thuringiensis ("Bt") endotoxin. Monsanto is a leader in this scientific field and has engaged in Bt research and biotechnology development over many years and owns a number of present and pending patents which relate to this technology. On October 22, 1996, Mycogen Corporation ("Mycogen") filed suit in U.S. District Court in Delaware seeking damages and injunctive relief against the Company, DEKALB Genetics Corporation ("DEKALB") (subsequently acquired by Monsanto) and Delta & Pine Land Company alleging infringement of Bt related U.S. Patent Nos. 5,567,600 and 5,567,862 issued to Mycogen on that date. Jury trial in this matter concluded on February 3, 1998 9 with a verdict in favor of all defendants. The patents of Mycogen were found invalid on the basis that Monsanto was a prior inventor. On September 8, 1999, the District Court issued a revised order which upheld the jury verdict and also ruled that Mycogen's patents were invalid due to their lack of enablement. Mycogen's appeal was filed in the Court of Appeals for the Federal Circuit on December 6, 1999, as appeal number 00-1001-1051. Monsanto has meritorious legal positions and will continue to vigorously oppose Mycogen's claims in the appeal. On May 19, 1995, Mycogen initiated suit in U.S. District Court in California against the Company alleging infringement of U.S. Patent No. 5,380,831 involving synthetic Bt genes and seeking damages and injunctive relief. On November 10, 1999, the District Court granted summary judgment in Monsanto's favor dismissing all of Mycogen's patent claims and finding the patent invalid on the basis of prior invention by Monsanto. Previously, the District Court had also held that products containing Bt genes made prior to January 1995 did not infringe the patent. Mycogen has filed an appeal with the Court of Appeals for the Federal Circuit (Appeal Number 00-1127) seeking to overturn the dismissal. Monsanto has various meritorious defenses against all claims of Mycogen including non-infringement, lack of validity, prior invention and collateral estoppel as a result of the outcome in the jury trial in which Mycogen's related patents were found invalid. Monsanto will continue to vigorously oppose the claims of Mycogen in the litigation. The Company is also a party in interference proceedings against Mycogen in the U.S. Patent and Trademark Office to determine the first party to invent certain inventions related to Bt technology and has requested a stay of the interference pending determination of the appeals. In all of the foregoing actions the Company has meritorious legal positions which it is vigorously litigating to establish that the final judgment in the Delaware litigation is dispositive of Mycogen's claims and that all Mycogen Bt patents are invalid as a result of prior judicial determinations. On December 22, 1999, Mycogen Plant Science, Inc., filed a patent suit in the Federal Court of Australia, Victoria District Registry as Cause No. V746 of 1999, against Monsanto Australia Limited and DeltaPine Australia Limited. The suit alleges that the respondents have infringed certain claims of two Australian patents (574101 and 623429) associated with Bt technology. These patents are Australian counterparts to patents and inventions found invalid in other jurisdictions. Monsanto has meritorious defenses against the lawsuit, including patent invalidity due to lack of enablement, prior art and obviousness. The Company will vigorously defend against Mycogen Plant Science Inc's. claims in the action. In 1997 the Company commercially introduced corn containing a gene encoding for Bt endotoxin. Monsanto is a leader in this scientific field and has engaged in Bt research and biotechnology development over many years and owns a number of present and pending patents which relate to this technology. On January 21, 1997, Novartis Seeds, Inc. ("Novartis") filed suits in U.S. District Court in Delaware seeking damages and injunctive relief against the Company and DEKALB, alleging infringement of Bt related U.S. Patent No. 5,595,733 issued to Ciba-Geigy Corporation (Seed Division) and now held by Novartis. The cases of Monsanto and DeKalb were consolidated and tried to jury verdict in favor of defendants on November 9, 1998. The jury determined that the Novartis patent was invalid and not enabled. As part of a settlement of all pending litigation between the Company and Novartis, in November 1999 the parties stipulated to the entry of final 10 judgment on the jury verdict. Claims by or against Novartis or Novartis entities in other lawsuits (USDC MN CA 97-2925; USDC MO 4:98CV00286CDP; and the "Rockford Litigation" described herein) were also part of the settlement. Under the settlement, various royalty- bearing licenses were extended to Novartis for Bt corn technology, genetic transformation of corn and gluphosinate herbicide tolerance in addition to the other consideration to be provided by Novartis, which will include licenses to certain Novartis corn transformation technology and monetary payment for prior infringement of patents owned by the Company. All of the claims specified herein which were filed by or against Novartis were settled and dismissed on or about November 12, 1999, pursuant to the agreement between Novartis and Monsanto. The Company and/or DEKALB are involved in various legal actions involving Bt technology, herbicide-resistant and/or insect-resistant transgenic corn, or corn transformation patents. (a) The DEKALB patents involved in the most significant DEKALB-initiated transactions are: U.S. Patent No. 5,484,956 covering fertile, transgenic corn plants expressing genes encoding Bacillus thuringiensis (Bt) insecticidal proteins; U.S. Patent No. 5,489,520 covering the microprojectile method for producing fertile, transgenic corn plants covering a bar or pat gene, as well as the production and breeding of progeny of such plants; U.S. Patent Nos. 5,538,880 and 5,538,877 directed to methods of producing either herbicide-resistant or insect-resistant transgenic corn; and U.S. Patent No. 5,550,318 directed to transgenic corn plants containing a bar or pat gene (all lawsuits related to this patent have been stayed pending resolution of an interference proceeding at the U.S. Patent and Trademark Office). In each case DEKALB has asked the court to determine that infringement has occurred, to enjoin further infringement and to award unspecified compensatory and exemplary damages. Most of these actions have been filed in U.S. District Court for the Northern District of Illinois (the "Rockford Litigation"). By order dated June 30, 1999, a special master appointed in the Rockford Litigation construed the patent claims in a manner largely in accord with the position of DEKALB. The judge has adopted the findings of the special master and appointed a settlement mediator to conduct discussions among the parties. The actions in the Rockford Litigation were initially filed on April 30, 1996, against Pioneer Hi-Bred International, Inc. ("Pioneer"), Mycogen Corporation (and two of its subsidiaries) and Ciba-Geigy Corporation (a Novartis entity). Additional actions were filed in the Rockford Litigation against: Northrup King Co. (a Novartis entity) on June 10, 1996 and several Hoechst Schering AgrEvo GmbH entities on August 27, 1996. On July 2, 1999, DEKALB sued Pioneer in a patent interference action to declare that DEKALB was the first inventor of the microprojectile method of producing fertile transgenic corn; on July 30, 1999, DEKALB moved to consolidate the new suit with the remainder of the Rockford Litigation for purposes of trial but the consolidation request has been provisionally denied. On November 23, 1999, Pioneer was issued United States Patent No. 5,990,387 pertaining to microprojectile transformation of corn and Pioneer sued Monsanto, DEKALB and Novartis Seeds Inc. in USDC in Iowa (Cause No 4-99-CV00988) for alleged infringment of the new patent. Suit was also filed by DEKALB (CA 99-C-50385) on the same date in the federal court responsible for the Rockford Litigation. The DEKALB suit seeks an interference action to declare that DEKALB was the first inventor of the microprojectile method of producing fertile transgenic corn. 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 11 awaiting decision on the Rockford Litigation. (b) On March 19, 1996, Monsanto was issued U.S. Patent No. 5,500,365 and filed suit in U.S. District Court in Delaware seeking damages and injunctive relief against Mycogen Plant Science, Inc., Agrigenetics, Inc. and Ciba-Geigy Corporation (Seed Division) (now Novartis Seeds, Inc.) for infringement of that patent. Trial of this matter ended June 30, 1998, with a jury verdict that while the patent was literally infringed by defendants, the patent was not enforceable due to a finding of prior invention (now owned by Monsanto) by another party, and not infringed due to the defense of the reverse doctrine of equivalents. On September 8, 1999 the District Court affirmed in part the jury's verdict on the issue of prior invention but overturned the finding of non-infringment on the reverse doctrine of equivalents. The matter remains pending on appeal and Monsanto is continuing to litigate vigorously its position on appeal. In November 1999, all claims by Monsanto and DEKALB against Novartis were dismissed, in recognition of patent license agreements among those parties. Pioneer Hi-Bred International Inc. filed an action against Monsanto which is now pending in U.S. District Court for the Eastern District of Missouri (4:97CV01609-ERW). In the lawsuit, Pioneer alleged that it was entitled to obtain via Monsanto a license to the corn transformation patents of DEKALB which were being enforced against Pioneer in the Rockford Litigation. Pioneer's license claims all have been denied by the District Court and Pioneer's claims have been dismissed. The litigation remains pending only to consider Monsanto's counterclaim to terminate the 1993 license to Pioneer pertaining to Bt corn technology, including the Yieldgard(R) corn product which is currently sold by Pioneer. Monsanto's counterclaims allege that Pioneer's actions breached the contract. All of Pioneer's summary judgment motions have been denied. Compensatory damages and equitable relief to terminate Pioneer's existing rights under the 1993 license for Yieldgard(R) Bt corn product and technology are sought by Monsanto in the litigation. The case is set for jury trial commencing in August 2000. On November 30, 1999, Monsanto filed suit against Pioneer Hi-Bred International Inc. (4:99CV0917-LOD) in U.S. District Court for the Eastern District of Missouri to terminate a technology license for glyphosate tolerant soybeans and canola which had been previously extended to Pioneer and was assigned by Pioneer in connection with its merger with E.I. DuPont DeNemours. The lawsuit alleges that the assignment resulted in unauthorized sales of herbicide tolerant soybeans and canola and thereby infringed Monsanto patents and violated certain of its trademark rights. Monsanto seeks injunctive relief and is vigorously pursuing its claims against Pioneer in the lawsuit. In 1997 Monsanto 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 12 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 it remains 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 it has other meritorious defenses to the patent and trade secret allegations, including patent invalidity and absence of trade secret status due to Rhone Poulenc's own public disclosure of the alleged trade secret. On July 16, 1999, a hearing occurred on all post-trial motions including the request by Rhone Poulenc for injunctive relief against future sales of DEKALB-brand RoundupReady(R) corn products if the material was not currently in inventory or within the scope of the prior damage verdict. No ruling has occurred on the post-trial motions. Pursuant to an agreement between the Company and Rhone Poulenc, certain RoundupReady(R) corn products are being sold under a royalty bearing arrangement. DEKALB will vigorously appeal the verdict to the Federal Circuit and will assert its meritorious defenses to all remaining claims in the litigation and will vigorously seek to avoid further claims of liability, the possible entry of injunctive relief and will seek to overturn by appeal any judgment entered in the lawsuit. In June 1996, Mycogen Corporation, Agrigenetics Inc. and Mycogen Plant Sciences, Inc. filed suit against Monsanto in California State Superior Court in San Diego, alleging damage by an alleged failure of Monsanto to license, under an option agreement, technology relating to Bt corn and to glyphosate resistant corn, cotton and canola. On September 9, 1996, Monsanto successfully demurred to all claims but plaintiffs were permitted to amend to file a damage claim seeking recovery under a theory of continuing breach. On October 20, 1997, the court construed the contract as involving only a license to receive genes rather than a license to receive germplasm. Jury trial of the remaining damage claim for lost future profits from the alleged delay in performance ended March 20, 1998, with a verdict against the Company awarding damages totaling $174.9 million. The case is now on appeal as Appeal No. D031336 before the California Court of Appeal for the Fourth Appellate District. Mycogen and Agrigenetics Inc. have filed a cross appeal seeking to reinstate claims for damages that were dismissed prior to trial. This cross appeal has 13 been consolidated for all purposes on appeal. The Company has numerous meritorious defenses and grounds to overturn the award, including the speculative nature of the damages for lost future profits, improper splitting of the causes of action, lack of continuing breach, and trial error in directing a verdict against the Company on the issue of liability. Mycogen is also seeking to overturn an award of sanctions against it in connection with this litigation and to obtain a determination that the contract entititles Mycogen to a license to germplasm not genes from Monsanto. The Company will continue to vigorously litigate its position on appeal. On October 28, 1998, two related lawsuits were filed in U.S. District Court in Iowa: one against Asgrow Seed Company, L.L.C. ("Asgrow"), 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. On October 8, 1999, Pioneer added the prior owners of Asgrow and DEKALB (The Upjohn Company and Pfizer Inc.) and Monsanto as defendants in the litigation. In addition to claims under Iowa state law for trade secret misappropriation, Pioneer alleges violations of the Lanham Act and the patent law. 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 without prejudice defendants' motions to dismiss the initial trade secret claims. On January 4, 2000, the District Court allowed Pioneer to amend its claims in the litigation to assert claims that the defendants infringed numerous patents. As a consequence of the new claims the prior trial date has been vacated and no trial date has been assigned. The defendants have meritorious defenses including non-infringement of patents, lack of validity of the patents on numerous grounds, preemption, laches, statute of limitations, lack of trade secrets, ownership of the germplasm, bona fide purchaser status and other defenses. The defendants will vigorously defend against Pioneer's claims in the litigation. Following the announcement on May 11, 1998, of the merger agreement between Monsanto and Delta and Pine Land Company ("Delta and Pine Land"), five alleged holders of Delta and Pine Land common stock filed suits, now consolidated (the "Delta and Pine Land Suit"), in the Delaware Court of Chancery in and for New Castle County against Monsanto, Delta and Pine Land, and members of the Delta and Pine Land Board of Directors (the "Delta and Pine Land Board"). Seeking to represent a purported class of Delta and Pine Land shareowners, plaintiffs in the Delta and Pine Land Suit allege that the consideration to be received by holders of Delta and Pine Land common stock in the merger is unfair and inadequate, that the members of the Delta and Pine Land Board have breached their fiduciary duties by approving the transaction and that Monsanto has aided and abetted such breaches. Plaintiffs in the Delta and Pine Land Suit seek judgment declaring that each Delaware Action is maintainable as a class action, preliminarily and permanently enjoining consummation of the merger or rescinding the transaction in the event that it is consummated, awarding unspecified compensatory damages against defendants, and awarding plaintiffs their attorneys' fees and expenses. On December 30, 1999, a derivative and class action lawsuit was filed, as Civil Action 17707, by two alleged holders of Delta and Pine Land common stock, in the Delaware Court of Chancery. Defendants include Monsanto, Delta and Pine Land and members of the Delta and Pine Land Board. The suit seeks a declaration that the individual defendants have violated 14 their fiduciary duties and to direct the individual defendants to take certain actions to maximize shareholder value. The suit also requests compensatory damages, costs, disbursements and fees. The suit relates to Monsanto's withdrawal of its filing for U.S. antitrust clearance of its proposed merger with Delta and Pine Land in light of the U.S. Department of Justice's unwillingness to approve the transaction on commercially reasonable terms. The Delaware lawsuit alleges that Delta and Pine Land has been harmed by the termination of the effort to complete the transaction and that the individual defendants have a continuing duty to seek a value-maximizing transaction for the shareholders. On January 3, 2000, Monsanto paid Delta and Pine Land $80 million in cash, equal to the amount of a termination fee set forth in the merger agreement, plus reimbursement of $1 million in expenses. On January 18, 2000, suit was filed against Monsanto by Delta and Pine Land (Cause No. 2000-2) in Circuit Court of the First Judicial District of Bolivar County, Mississippi, seeking compensatory and punitive damages allegedly as a result of the failure to complete the acquisition pursuant to the exercise of reasonable efforts. Monsanto did exercise commercially reasonable efforts to complete the transaction and has meritorious defenses to the claims in the lawsuits and will vigorously defend the actions. On April 15, 1996, one hundred ten (110) current and former employees of Fisher Controls International, Inc. ("Fisher"), a former subsidiary of Monsanto, filed suit against the Company in the District Court of Brazoria County, Texas, 149th Judicial District (Cause No. 96M0975), alleging breach of contract, breach of a duty of good faith and fair dealing, and fraud. Plaintiffs challenged Monsanto's decision, pursuant to the terms of the stock option plans in effect, to curtail the duration of plaintiffs' options to purchase common stock of Monsanto following the divestiture of Fisher from the Monsanto corporate family in 1992. On June 24, 1997, the trial court granted Monsanto's motion for summary judgment and dismissed the case with prejudice. Plaintiffs appealed the judgment to the Court of Appeals for the First District of Texas (No. 01-97-01142-CV). On September 7, 1999, the Court of Appeals issued an opinion reversing the summary judgment and remanding the case to the trial court for further proceedings. On October 1, 1999, Monsanto filed a motion for rehearing or, in the alternative, for rehearing en banc and the motion was denied on January 4, 2000. Monsanto believes that the decision of the trial court was correct and that its actions regarding the Fisher employees were in accordance with the terms of the stock option plans and entitled to substantial deference under Delaware law. Monsanto intends to pursue its efforts to overturn the decision of the Court of Appeals and will continue to vigorously defend against all claims of plaintiffs. RISK MANAGEMENT Monsanto continually evaluates risk retention and insurance levels for product liability, property damage and other potential areas of risk. Monsanto devotes significant effort to maintaining and improving safety and internal control programs, which reduce its exposure to certain risks. Management decides the amount of insurance coverage to purchase from unaffiliated companies and the appropriate amount of risk to retain, based on the cost and availability of insurance and the likelihood of a loss. Since 1986, Monsanto's liability insurance has been on the "claims made" policy form. Management believes that the current levels of risk retention are consistent with those of other companies in the various industries in which Monsanto operates and are reasonable for 15 Monsanto. There can be no assurance that Monsanto will not incur losses beyond the limits of, or outside the coverage of, its insurance. Monsanto's liquidity, financial position and profitability are not expected to be affected materially by the levels of risk retention that the Company accepts. CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION Information regarding forward-looking statements, and factors that could cause actual performance or results to differ materially from those described, are set forth under the heading "Cautionary Statements Regarding Forward-Looking Information" in Exhibit 99, accompanying this Report and incorporated herein by reference. ITEM 2. PROPERTIES. The General Offices of the Company are located on a 285-acre tract of land in St. Louis County, Missouri. The Company also owns a 210-acre tract in St. Louis County on which additional research facilities are located. In addition, Monsanto and its subsidiaries own or lease manufacturing facilities, laboratories, agricultural facilities, office space, warehouses, and other land parcels in North America, South America, Europe, Asia, Australia and Africa. In addition to the facilities in St. Louis County, Missouri, Monsanto's principal properties include the following locations, serving the sectors noted: Alvin, Texas (Agricultural Products); Antwerp, Belgium (Agricultural Products); Augusta, Georgia (Agricultural Products, Pharmaceuticals); Barceloneta, Puerto Rico (Pharmaceuticals); Caguas, Puerto Rico (Pharmaceuticals); Fayetteville, North Carolina (Agricultural Products); Feucht, Germany (Pharmaceuticals); Luling, Louisiana (Agricultural Products); Mt. Prospect, Illinois (Pharmaceuticals); Morpeth, United Kingdom (Pharmaceuticals); Muscatine, Iowa (Agricultural Products); Sao Jose dos Campos, Brazil (Agricultural Products); Skokie (Old Orchard), Illinois (Pharmaceuticals, Corporate and Other); Skokie (Searle Parkway), Illinois (Pharmaceuticals); and Zarate, Argentina (Agricultural Products). All of these properties are manufacturing facilities, except for the research buildings in Mt. Prospect, Illinois and Skokie (Searle Parkway), Illinois, and the office building in Skokie (Old Orchard), Illinois. Monsanto's principal properties are suitable and adequate for their use. Utilization of these facilities may vary with seasonal, economic and other business conditions, but none of the principal properties is substantially idle. The facilities generally have sufficient capacity for existing needs and expected near-term growth, and expansion projects are undertaken as necessary to meet future needs. Most of these properties are owned in fee. However, the Company leases the land underlying facilities that it owns at Alvin, Texas. In certain instances, Monsanto has granted leases on portions of plant sites not required for current operations. 16 ITEM 3. LEGAL PROCEEDINGS. For information concerning certain legal proceedings involving Monsanto, see "Business--Environmental Matters", "Business--Legal Proceedings" and "Business--Disclosure of Forward-Looking Statements" in Item 1 of this Report. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to the security holders during the fourth quarter of 1998. EXECUTIVE OFFICERS OF THE REGISTRANT. Information regarding executive officers is contained in Item 10 of Part III of this Report (General Instruction G) and is incorporated herein by reference. 17 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The narrative information appearing under "Review of Cash Flow-- Dividend Policy is Unchanged" on page 29, and the tabular information regarding Dividends Per Share and Common Stock Price (for the years 1997 and 1998) appearing under "Quarterly Data" on page 36, all appearing in Exhibit 99 of this Report, are incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA. The following information, appearing on the pages indicated of Exhibit 99 of this Report, are incorporated herein by reference: the four paragraphs under "Definitions" on page 1; and the tabular information under "Financial Summary--Operating Results, Earnings (Loss) per Share and Year-End Financial Position" and the amounts of Dividends per Share, all for the years 1994 through 1998, on page 70. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. The following information, appearing on the pages indicated of Exhibit 99 of this Report, is incorporated herein by reference: (a) the four paragraphs under "Definitions" on page 1; (b) the tabular and narrative information appearing under "Review of Consolidated Results of Operations" on pages 4 through 12, "Review of Consolidated Results of Operations--Analysis of Change in Earnings (Loss) Per Share from Continuing Operations" on page 13, "Segment Data" and information regarding segments on pages 15 through 24, "Review of Changes in Financial Position" on page 26, "Review of Cash Flow" on page 29 and "Additional Financial Information" on pages 30 through 32; and (c) the narrative information appearing under "Geographic Data" on page 14 and "Cautionary Statements Regarding Forward-Looking Information" on pages 65 through 69. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS. The tabular and narrative information appearing under "Financial Instruments" on pages 33 -34 of Exhibit 99 of this Report is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The following information, appearing on the pages indicated of Exhibit 99 of this Report, is incorporated herein by reference: (a) the four paragraphs under "Definitions" on page 1; (b) the consolidated financial statements of Monsanto appearing on pages 3, 25, 28, 30, 35, and 38 through 63; (c) the Independent Auditors' Report appearing on page 2; and (d) the tabular and narrative information appearing under "Quarterly Data" on pages 36 -37. 18 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 19 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information regarding directors and executive officers appearing under "Election of Directors" on pages 2 through 4, and "Other Information Regarding Management--Section 16(a) Beneficial Ownership Reporting Compliance" on pages 18-19, of the Monsanto Company Notice of Annual Meeting and Proxy Statement (the "1999 Proxy Statement") dated March 15, 1999, is incorporated herein by reference. The following information with respect to the Executive Officers of the Company on March 1, 1999, is included pursuant to Instruction 3 of Item 401(b) of Regulation S-K:
Year First Became an Present Position Executive Name--Age with Registrant Officer Other Business Experience since January 1, 1994 --------- ---------------- --------- ----------------------------------------------- Bruce P. Bickner, 55 Co-President, Global Seed 1999 Chairman and Chief Executive Officer - DEKALB Group - Monsanto Company Energy Co., 1986; Chairman and Chief Executive Officer - DEKALB Genetics Corporation,1988 to present. Martin E. Blaylock, 58 Vice President, 1999 Director, Manufacturing Operations - Monsanto Manufacturing Operations - Company, 1993; and present position, 1995. Monsanto Company Gary L. Crittenden, 45 Senior Vice President, Chief 1998 Executive Vice President and Chief Financial Financial Officer - Monsanto Officer - Melville Corp., 1994; Executive Vice Company President, Strategy and Business Development - Sears Roebuck & Co., 1996; President, Hardware Stores Division - Sears Roebuck & Co., 1996; Executive Vice President and Chief Financial Officer - Sears Roebuck & Co., 1998; and present position, 1998. Richard U. De Schutter, 57 Vice Chairman - Monsanto 1995 President and Chief Operating Officer - G.D. Company; Chairman, Chief Searle & Co., 1993; Chairman, Chief Executive Executive Officer and Officer and President - G.D. Searle & Co.; President - G.D. Searle & Co. Advisory Director-Monsanto Company, 1995; and present position, 1997. Arnold W. Donald, 44 Senior Vice President; Co- 1998 Group Vice President North America Division - President, Nutrition and Monsanto Company, 1993; Group Vice President and Consumer Products - General Manager - Monsanto Company, 1994; Monsanto Company President, Crop Protection -Monsanto Company, 1995; Co-President, Agricultural Sector - Monsanto Company, 1997; Senior Vice President - Monsanto Company, 1998; and present position, 1999. 20 Year First Became an Present Position Executive Name--Age with Registrant Officer Other Business Experience since January 1, 1994 --------- ---------------- --------- ----------------------------------------------- Steven L. Engelberg, 55 Senior Vice President - 1995 Partner-in-Charge, Keck, Mahin & Cate Washington, Monsanto Company D.C. office, 1986; Chief of Staff of Office of the United States Trade Representative (on leave from Keck, Mahin & Cate until May 1993), 1993; Vice President, Worldwide Government Affairs - Monsanto Company, 1994; and present position, 1996. Patrick J. Fortune, 50 Vice President and Chief 1997 Corporate Vice President, Information Management - Knowledge Officer - Monsanto Bristol-Myers Squibb, 1991; President and Chief Company Operation Officer - Coram Healthcare Corporation, 1994; Vice President, Information Technology - Monsanto Company, 1995; Vice President and Chief Information Officer - Monsanto Company, 1997; and present position, 1998. Robert Fraley, 46 Co-President, Agricultural 1999 Group Vice President and General Manager, New Sector - Monsanto Company Products Division - Monsanto Company, 1993; President, Ceregen-Monsanto Company, 1995; and present position, 1997. Hugh Grant, 40 Co-President, Agricultural 1999 Director, Global Roundup(R) Product Strategy - Sector - Monsanto Company Monsanto Company, 1994; General Manager, Agricultural Sector for Southeast Asia, Australia, New Zealand & South Korea - Monsanto Company, 1995; and present position, 1998. Alan L. Heller, 45 Chief Operating Officer-G.D. 1999 Vice President, Sales - G.D. Searle & Co., 1992; Searle & Co. Vice President, Finance - G.D. Searle & Co. 1994; President, Americas, G.D. Searle & Co.; 1995; and present position, 1997. R. William Ide III, 58 Senior Vice President, 1996 President, American Bar Association, 1993-1994; General Counsel and partner, Long, Aldridge & Norman, 1993; and Secretary - Monsanto present position, 1996. Company Madonna A. Kindl, 40 Vice President, Human 1996 Director of Human Resources, Staff of the Vice Resources - Monsanto Chairman - Monsanto Company, 1993; Director, Company Human Resources, Crop Protection Business Unit - Monsanto Company, 1995; and present position, 1996. 21 Year First Became an Present Position Executive Name--Age with Registrant Officer Other Business Experience since January 1, 1994 --------- ---------------- --------- ----------------------------------------------- Ganesh M. Kishore, 45 Co-President, Nutrition and 1999 Director of Technology, Agricultural Sector - Consumer Products - Monsanto Company, 1994; Director of Technology, Monsanto Company Ceregen-Monsanto Company, 1995; Director of Crop Enhancement, Ceregen-Monsanto Company, 1996; Distinguished Science Fellow - Monsanto Company, 1996; and present position, 1997. Philip Needleman, 60 Senior Vice President, 1991 Vice President, Research and Development; Advisory Research and Development Director - Monsanto Company; President, Research and Chief Scientist; Co- and Development-G.D. Searle & Co., 1992; Senior President, Pharmaceuticals Vice President, Research and Development and Chief Sector-Monsanto Company Scientist-Monsanto Company; President, Research and Development- G.D. Searle & Co., 1993; and present position, 1996. Robert W. Reynolds, 54 Vice Chairman - Monsanto 1994 Vice President and Managing Director, Latin Company America World Area - Monsanto Company, 1992; Vice President, International Operations and Development - Monsanto Company, 1995; and present position, 1997. Nicholas E. Rosa, 47 Co-President, Nutrition and 1999 President - NutraSweet Europe, 1991; Executive Consumer Products Vice President - The NutraSweet Company, 1994; President, Benevia-Monsanto Company, 1996; President, Nutrition and Consumer Products - Monsanto Company, 1997; and present position, 1999. Robert B. Shapiro, 60 Director; Chairman and Chief 1987 Director, President and Chief Operating Officer - Executive Officer - Monsanto Monsanto Company, 1993; Director, Chairman, Chief Company Executive Officer and President - Monsanto Company, 1995; and present position, 1997. Hendrik A. Verfaillie, 53 President - Monsanto Company 1993 Vice President and Advisory Director - Monsanto Company; President - The Agricultural Group - Monsanto Company, 1993; Vice President and Advisory Director - Monsanto Company, 1995; Executive Vice President and Advisory Director - Monsanto Company, 1995; and present position, 1997.
Effective April 9, 1999, Patrick J. Fortune is no longer an executive officer of Monsanto Company. Effective April 23, 1999, Madonna A. Kindl and Nicholas E. Rosa were elected Senior Vice Presidents of Monsanto Company. Effective April 30, 1999, Robert W. Reynolds retired as an employee and 22 officer of Monsanto Company. Effective June 25, 1999: Richard U. De Schutter was elected Chief Administrative Officer and a Director of Monsanto Company, in addition to his other responsibilities; Hendrik A. Verfaillie was elected Chief Operating Officer and a Director of Monsanto Company, in addition to his duties as President; and Alan L. Heller was elected Co-President of G. D. Searle & Co. Effective August 1, 1999, David L. Morley, Senior Vice President of Monsanto Company, became an executive officer. Mr. Morley initially became an executive officer of Monsanto Company in 1998. His prior positions with Monsanto (comprising his other business experience since January 1,1994) were: Group Vice President and General Manager, Global Strategies and Operations - The Agricultural Group, 1993; Group Vice President and General Manager, Americas Division, Crop Protection Business Unit, 1995; President, Nutrition and Consumer Products, 1997; and present position, 1998. Effective November 1, 1999, Joan H. Walker, became Senior Vice President of Monsanto Company and an executive officer. Her prior positions since January 1, 1994 include: President and Chief Executive Officer - Bozell Public Relations, 1993 to August 1996; and Senior Vice President, Corporate Communications - Ameritech Corporation, August 1996 to November 1999. 23 ITEM 11. EXECUTIVE COMPENSATION. Information appearing under "Directors' Fees and Other Arrangements" on pages 8-9, and under "Executive Compensation" beginning on page 15 and continuing through "Certain Agreements" on page 18 of the 1999 Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information appearing under "Stock Ownership of Management and Certain Beneficial Owners" on pages 5 and 6 of the 1999 Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information appearing under "Other Information Regarding Management--Transactions and Relationships" and "--Indebtedness" on pages 18 through 20 of the 1999 Proxy Statement is incorporated herein by reference. 24 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) Documents filed as part of this Report: 1. The financial statements set forth at pages 3, 25, 28, 30, 35, and 38 through 63 of Exhibit 99 to this Report 2. Financial Statement Schedules None required 3. Exhibits--See the Exhibit Index beginning at page 28 of this Report. For a listing of all management contracts and compensatory plans or arrangements required to be filed as exhibits to this Form 10-K, see the Exhibits listed under Exhibit No. 10, items 4 through 32 on pages 29 through 32 of the Exhibit Index. The following Exhibits listed in the Exhibit Index are filed with this Report: 3 2. By-Laws of the Company, as amended effective December 10, 1999 10 24. 1999 Form of Employment Agreement for Executive Officers 23 Consent of Independent Auditors 24 2. Powers of attorney submitted by Richard U. De Schutter and Hendrik A. Verfaillie. 27 Financial Data Schedule (part of electronic submission only) 99 Amended Financial Information for Fiscal Year Ended December 31, 1998 (b) Reports on Form 8-K during the quarter ended December 31, 1998: The following reports on Form 8-K were filed by the Company on the dates indicated: October 13, 1998 (termination of merger agreement with American Home Products Corporation); October 19, 1998 (information presented to the financial community); October 30, 1998 (financial information for quarter ended September 30, 1998); November 13 and 16, 1998; (announcement of financing plans); November 27, 1998 (offerings of common stock and Adjustable Conversion-rate Equity Security Units); December 8, 1998 (acquisition of DEKALB Genetics Corporation); and December 14, 1998 (closings of financings and filing of related documents). 25 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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) By ------------------------------ Richard B. Clark Vice President and Controller (Principal Accounting Officer) Date: January 21, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, the Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- _________________________ Chairman _______, 2000 (Robert B. Shapiro) President and Director (Principal Executive Officer) _________________________ Vice Chairman, Chief _______, 2000 (Richard U. De Schutter) Administrative Officer, and Director _________________________ Director _______, 2000 (Michael Kantor) _________________________ Director _______, 2000 (Gwendolyn S. King) _________________________ Director _______, 2000 (Philip Leder) _________________________ Director _______, 2000 (Jacobus F. M. Peters) _________________________ Director _______, 2000 (John S. Reed) _________________________ Director _______, 2000 (John E. Robson) _________________________ Director _______, 2000 (William D. Ruckelshaus) 26 _________________________ Senior Vice President, _______, 2000 (Gary L. Crittenden) Chief Financial Officer (Principal Financial Officer) _________________________ President, Chief Operating _______, 2000 (Hendrik A. Verfaillie) Officer and Director _________________________ Vice President and _______, 2000 (Richard B. Clark) Controller (Principal Accounting Officer) ____________, by signing his or her name hereto, does sign this document on behalf of the above noted individuals, pursuant to powers of attorney duly executed by such individuals which have been filed as an Exhibit to this Report.
_____________________________ Attorney-in-Fact 27 EXHIBIT INDEX These Exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K. EXHIBIT NO. DESCRIPTION - ----------- ----------- 2 Omitted--Inapplicable 3 1. Restated Certificate of Incorporation of the Company as of October 28, 1997 (incorporated herein by reference to Exhibit 3(i) of the Company's Form 10- Q for the quarter ended September 30, 1997) 2. By-Laws of the Company, as amended effective December 10, 1999 4 1. Form of Rights Agreement, dated as of January 26, 1990 between the Company and First Chicago Trust Company as successor to The First National Bank of Boston (incorporated herein by reference to Form 8-A filed on January 31, 1990) 2. Form of Rights Agreement, dated as of December 19, 1999 between the Company and EquiServe Trust Company N.A., First Chicago Trust Company as successor to The First National Bank of Boston (incorporated herein by reference to Form 8-A filed on December 30, 1999) 3. Master Unit Agreement, dated as of November 30, 1998, by and between the Company and The First National Bank of Chicago, as Unit Agent (incorporated herein by reference to Exhibit 4.2 of the Company's Form 8-K filed on December 14, 1998) 4. Call Option Agreement, dated as of November 30, 1998, by and between Goldman, Sachs & Co., as Call Option Holder, and The First National Bank of Chicago, as Unit Agent and as Attorney-In- Fact (incorporated herein by reference to Exhibit 4.3 of the Company's Form 8-K filed on December 14, 1998) 5. Pledge Agreement, dated as of November 30, 1998, by and among the Company, Goldman, Sachs & Co., as Call Option Holder, First Union National Bank, as Collateral Agent and Securities Intermediary, and The First National Bank of Chicago, as Unit Agent and as Attorney-In-Fact (incorporated herein by reference to Exhibit 4.4 of the Company's Form 8-K filed on December 14, 1998) 6. Registrant agrees to furnish to the Securities and Exchange Commission upon request copies of instruments defining the rights of holders of certain long-term debt not being registered of the registrant and all subsidiaries for which consolidated or unconsolidated financial statements are required to be filed. 28 9 Omitted--Inapplicable 10 1. Distribution Agreement by and between Monsanto Company and Solutia Inc., as of September 1, 1997, plus identification of contents of omitted schedules and exhibits and agreement to furnish supplementally a copy of any omitted schedule or exhibit to the Securities and Exchange Commission upon request (incorporated herein by reference to Exhibit 2.1 of the Company's Form 8-K filed September 16, 1997) 2. Employee Benefits and Compensation Allocation Agreement between Monsanto Company and Solutia Inc., dated as of September 1, 1997 (incorporated herein by reference to Exhibit 99.1 of the Company's Form 8-K filed September 16, 1997) 3. Tax Sharing and Indemnification Agreement dated as of September 1, 1997, by and between Monsanto Company and Solutia Inc. (incorporated herein by reference to Exhibit 99.2 of the Company's Form 8-K filed September 16, 1997) 4. Monsanto Company Non-Employee Director Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.3 of the Company's Form 10-Q for the quarter ended September 30, 1997) 5. Monsanto Company Non-Employee Director Equity Incentive Compensation Plan (incorporated herein by reference to Exhibit 10.4 of the Company's Form 10-Q for the quarter ended September 30, 1997) 6. Non-Employee Directors Stock Plan, as amended in 1991 (incorporated herein by reference to Exhibit 19(ii)1 of the Company's Form 10-Q for the quarter ended June 30, 1991) 7. Amendment to Non-Employee Directors Stock Plan (incorporated herein by reference to Exhibit 10.8 of the Company's Form 10-Q for the quarter ended June 30, 1997) 8. Charitable Contribution Program effective April 1, 1992 (incorporated herein by reference to Exhibit 19(i)1 of the Company's Form 10-K for the year ended December 31, 1991) 9. Deferred Compensation Plan for Non-Employee Directors, as amended in 1983 and 1991 (incorporated herein by reference to Exhibit 19(ii)1 of the Company's Form 10-K for the year ended December 31, 1991) 29 10. Excerpt of Resolutions of Monsanto Company Board of Directors Regarding Directors' Compensation, adopted by Unanimous Consent effective August 4, 1997 (incorporated herein by reference to Exhibit 10.5 of the Company's Form 10-Q for the quarter ended September 30, 1997) 11. Consulting Agreement between the Company and Philip Leder dated January 17, 1990 (incorporated herein by reference to Exhibit 19(i)3 of the Company's Form 10-K for the year ended December 31, 1989) 12. Monsanto Management Incentive Plan of 1988/I, as amended in 1988, 1989, 1991, 1992, April 1997, July 1997, and 1999 (incorporated herein by reference to Exhibit 10.2 of the Company's Form 10-Q for the quarter ended September 30, 1999) 13. Monsanto Management Incentive Plan of 1988/II, as amended in 1989, 1991, 1992, April 1997, July 1997, and 1999 (incorporated herein by reference to Exhibit 10.3 of the Company's Form 10-Q for the quarter ended September 30, 1999) 14. Monsanto Management Incentive Plan of 1994, as amended in April 1997, July 1997, and 1999 (incorporated herein by reference to Exhibit 10.4 of the Company's Form 10-Q for the quarter ended September 30, 1999) 15. Monsanto Management Incentive Plan of 1996 as amended April 25, 1997, July 25, 1997, August 18, 1997, February 26, 1998, September 25, 1998, April 23, 1999, and October 22, 1999, and as Adjusted to Reflect Stock Split as of May 15, 1996 and Spinoff as of September 1, 1997 (incorporated herein by reference to Exhibit 10.1 of the Company's Form 10-Q for the quarter ended September 30, 1999) 16. Monsanto Executive Stock Purchase Incentive Plan (incorporated herein by reference to Appendix B of the Monsanto Company Notice of Annual Meeting and Proxy Statement dated March 14, 1996) 17. Form of Non-Qualified Purchased and Year 2000 Premium Stock Option Certificate (incorporated herein by reference to Exhibit 10 of the Company's Form 10-Q for the quarter ended March 31,1999) 18. Form of Non-Qualified Premium Stock Option Certificate (incorporated herein by reference to Exhibit 10.2 of the Company's Form 10-Q for the quarter ended June 30, 1998) 30 19. Form of Monsanto Company 1999 Non-Qualified Premium Stock Option Certificate (incorporated herein by reference to Exhibit 10.5 of the Company's Form 10- Q for the quarter ended September 30, 1999) 20. Annual Incentive Program for Executive Officers (incorporated herein by reference to the description on pages 25-26 of the Monsanto Company Notice of Annual Meeting and Proxy Statement dated March 15, 1999) 21. Long-Term Incentive Program and Premium Option Purchase Program for Executive Officers (incorporated herein by reference to the description on pages 12-13 of the Monsanto Company Notice of Annual Meeting and Proxy Statement dated March 15, 1999) 22. Split-dollar Life Insurance Plan (incorporated herein by reference to Exhibit 10(iii)19 of the Company's Form 10-K for the year ended December 31, 1987) 23. Form of Employment Agreement for Executive Officers (incorporated herein by reference to Exhibit 10.7 of the Company's Form 10-Q for the quarter ended September 30, 1997) 24. 1999 Form of Employment Agreement for Executive Officers 25. Letter Agreement between the Company and Robert B. Shapiro entered into as of July 23, 1990 (incorporated herein by reference to Exhibit 19(i)3 of the Company's Form 10-Q for the quarter ended September 30, 1990) 26. Amendment to Letter Agreement between the Company and Robert B. Shapiro entered into as of July 23, 1990 (incorporated herein by reference to Exhibit 10.23 of the Company's Form 10-K for the year ended December 31, 1996) 27. Letter Agreement between the Company and Hendrik A. Verfaillie entered into as of June 27, 1988 (incorporated herein by reference to Exhibit 10.20 of the Company's Form 10-K for the year ended December 31, 1996) 28. Supplemental Retirement Plan regarding Richard U. De Schutter (incorporated herein by reference to Exhibit 10.26 of the Company's Form 10-K for the year ended December 31, 1996) 29. Letter Agreement between the Company and Richard U. De Schutter, dated February 7, 1997 (incorporated herein by reference to Exhibit 10.2 of the Company's Form 10-Q for the quarter ended June 30, 1999) 31 30. Searle/Monsanto Stock Plan of 1994, as amended in 1995, April 1997 and July 1997 (incorporated herein by reference to Exhibit 10.6 of the Company's Form 10-Q for the quarter ended June 30, 1997) 31. G. D. Searle & Co. Split Dollar Life Insurance Plan, as amended in 1989 (incorporated herein by reference to Exhibit 19(ii)3 of the Company's Form 10- Q for the quarter ended June 30, 1989) 32. G. D. Searle & Co. Legal/Tax/Financial Counseling Plan (incorporated herein by reference to Exhibit 19(i)8 of the Company's Form 10-Q for the quarter ended June 30, 1988) 11 Omitted--Inapplicable; see "Earnings per Share" on page 61 of Exhibit 99 to this Report 13 Omitted -- Inapplicable 18 Omitted--Inapplicable 21 Subsidiaries of the registrant (incorporated by reference to Exhibit 24.1 of the Company's Form 10-K for the year ended December 31, 1998) 22 Omitted--Inapplicable 23 Consent of Independent Auditors 24 1. Powers of attorney submitted by Gwendolyn S. King, Philip Leder, Jacobus F.M. Peters, John S. Reed, John E. Robson, William D. Ruckelshaus, Robert B. Shapiro Gary L. Crittenden and Richard B. Clark (incorporated by reference to Exhibit 24.1 of the Company's Form 10- K for the year ended December 31, 1998) 2. Powers of attorney submitted by Richard U. De Schutter and Hendrik A.Verfaillie 3. Certified copy of Board resolution authorizing Form 10-K filing utilizing powers of attorney (incorporated by reference to Exhibit 24.1 of the Company's Form 10-K for the year ended December 31, 1998) 27 Financial Data Schedule (part of electronic submission only) 99 Amended Financial Information for Fiscal Year Ended December 31, 1998 _____________ Only Exhibits Nos. 23 and 99 have been included in the printed copy of this Report. 32 EX-3.2 2 BY LAWS OF THE COMPANY EXHIBIT 3.2 MONSANTO COMPANY BY-LAWS As adopted December 10, 1999 OFFICES ------- 1. Registered The name of the registered agent of the Company is The Corporation Trust Company and the registered office of the Company shall be located in the City of Wilmington, County of New Castle, State of Delaware. 2. Other The Company shall have its General Offices in the County of St. Louis, State of Missouri, and may also have offices at such other places both within or without the State of Delaware as the Board of Directors may from time to time designate or the business of the Company may require. STOCKHOLDERS' MEETINGS ---------------------- 3. Annual Meeting An annual meeting of stockholders shall be held on such day and at such time as may be designated by the Board of Directors for the purpose of electing Directors and for the transaction of such other business as properly may come before such meeting. Any previously scheduled annual meeting of the stockholders may be postponed by resolution of the Board of Directors upon public notice given on or prior to the date previously scheduled for such annual meeting of stockholders. 4. Business to be Conducted at Annual Meeting (a) At an annual meeting of stockholders, only such business shall be conducted as shall have been brought before the meeting (i) pursuant to the Company's notice of the meeting, (ii) by or at the direction of the Board of Directors or (iii) by any stockholder of the Company who is a stockholder of record at the time of giving of the notice provided for in this By-Law, who shall be entitled to vote at such meeting and who shall have complied with the notice procedures set forth in this By-Law. (b) For business to be properly brought before an annual meeting by a stockholder pursuant to Section (a)(iii) of this By-Law, notice in writing must be delivered or mailed to the Secretary and received at the General Offices of the Company, not less than 90 days nor more than 120 days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date, notice by the stockholder must be received not earlier than the 120th day prior to such annual meeting and not later than the close of business on the later of the 90th day prior to such annual meeting or the tenth day following the day on which public announcement of the date of the annual meeting is first made. Such stockholder's notice shall set forth as to each matter the stockholder proposes to bring before the annual meeting (i) a brief description of the business to be brought before the annual meeting and the reasons for conducting such business at such meeting; (ii) the name and address, as they appear on the Company's books, of the stockholder proposing such business, and the name and address of the beneficial owner, if any, on whose behalf the proposal is made; (iii) the class and number of shares of the Company's stock which are beneficially owned by the stockholder, and by the beneficial owner, if any, on whose behalf the proposal is made; and (iv) any material interest of the stockholder, and of the beneficial owner, if any, on whose behalf the proposal is made, in such business. For purposes of these By-Laws, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable news service or in a document publicly filed by the Company with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(b) of the Securities Exchange Act of 1934, as amended. (c) Notwithstanding anything in these By-Laws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this By-Law. The chairman of the meeting may, if the facts warrant, determine that the business was not properly brought before the meeting in accordance with the provisions of this By-Law; and if the chairman should so determine, the chairman shall so declare to the meeting, and any such business not properly brought before the meeting shall not be transacted. Notwithstanding the foregoing provisions of this By-Law, a stockholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, (the "Exchange Act") and the rules and regulations thereunder with respect to the matters set forth in this By-Law. Nothing in this By-Law shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Company's proxy statement pursuant to Rule 14a-8 under the Exchange Act. The provision of this Section 4 shall also govern what constitutes timely notice for purposes of Rule 14a-4(c) of the Exchange Act. 5. Special Meetings Special meetings of stockholders, unless otherwise provided by the law of Delaware, may be called by the Chairman of the Board or the President, or pursuant to resolution of the Board of Directors, and such person calling the meeting shall have the sole right to determine the proper purpose or purposes of such meeting. Business transacted at a special meeting of stockholders shall be confined to the purpose or 2 purposes of the meeting as stated in the notice of such meeting. Any previously scheduled special meeting of the stockholders may be postponed by resolution of the Board of Directors upon notice by public announcement given on or prior to the date previously scheduled for such special meeting of stockholders. 6. Place of Meetings All meetings of stockholders shall be held at the General Offices of the Company in the County of St. Louis, State of Missouri, unless otherwise determined by resolution of the Board of Directors. 7. Notice of Meetings Except as otherwise required by the law of Delaware, notice of each meeting of the stockholders, whether annual or special, shall, at least ten days but not more than sixty days before the date of the meeting, be given to each stockholder of record entitled to vote at the meeting by mailing such notice in the United States mail, postage prepaid, addressed to such stockholder at such stockholder's address as the same appears on the records of the Company. Such notice shall state the place, date and hour of the meeting, and in the case of a special meeting, shall also state the purpose or purposes thereof. 8. Nominations of Directors (a) Only persons who are nominated in accordance with the procedures set forth in these By-Laws shall be eligible for election as Directors. Nominations of persons for election to the Board of Directors may be made at a meeting of stockholders (i) by or at the direction of the Board of Directors or (ii) by any stockholder of the Company who is a stockholder of record at the time of giving of the notice provided for in this By-Law, who shall be entitled to vote for the election of Directors at the meeting and who complies with the notice procedures set forth in this By-Law. (b) Nominations by stockholders shall be made pursuant to notice in writing, delivered or mailed to the Secretary and received at the General Offices of the Company (i) in the case of an annual meeting, not less than 60 days nor more than 90 days prior to the first anniversary of the preceding year's annual meeting, provided, however, that in the event that the date of the meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date, notice by the stockholder must be received not earlier than the 90th day prior to such annual meeting and not later than the close of business on the later of the 60th day prior to such annual meeting or the tenth day following the day on which public announcement of the date of the meeting is first made; or (ii) in the case of a special meeting at which directors are to be elected, not earlier than the 90th day prior to such special meeting and not later than the close of business on the later of the 60th 3 day prior to such special meeting or the tenth day following the day on which public announcement of the date of the meeting and of the nominees proposed by the Board of Directors to be elected at such meeting is first made. In the case of a special meeting of stockholders at which Directors are to be elected, stockholders may nominate a person or persons (as the case may be) for election only to such position(s) as are specified in the Company's notice of meeting as being up for election at such meeting. Such stockholder's notice shall set forth (i) as to each person whom the stockholder proposes to nominate for election or reelection as a Director, all information relating to such person that would be required to be disclosed in solicitations of proxies for election of Directors, or is otherwise required, in each case pursuant to Regulation 14A under the Exchange Act (including such person's written consent to being named as a nominee and to serving as a Director if elected); (ii) as to the stockholder giving the notice, the name and address, as they appear on the Company's books, of such stockholder and the class and number of shares of the Company's stock which are beneficially owned by such stockholder; and (iii) as to any beneficial owner on whose behalf the nomination is made, the name and address of such person and the class and number of shares of the Company's stock which are beneficially owned by such person. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a Director shall furnish to the Secretary that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. Notwithstanding anything in this By-Law to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Company is increased and there is no public statement naming all the nominees for Director or specifying the size of the increased Board of Directors made by the Company at least 70 days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this By-Law shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the General Offices of the Company not later than the close of business on the 10th day following the day on which such public announcement is first made by the Company. (c) No person shall be eligible for election as a Director of the Company unless nominated in accordance with the procedures set forth in these By-Laws. The chairman of the meeting may, if the facts warrant, determine that a nomination was not made in accordance with the procedures prescribed in this By-Law; and if the chairman should so determine, the chairman shall so declare to the meeting, and the defective nomination shall be disregarded. Notwithstanding the foregoing provisions of this By-Law, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this By-Law. 9. List of Stockholders (a) The Secretary of the Company shall prepare, at least ten days before each meeting of stockholders, a complete list of the stockholders entitled to vote at the 4 meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. (b) The stock ledger of the Company shall be the only evidence as to the identity of the stockholders entitled (i) to vote in person or by proxy at any meeting of stockholders, or (ii) to exercise the rights in accordance with Delaware law to examine the stock ledger, the list required by this By-Law or the books and records of the Company. 10. Quorum The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum for the transaction of any business at all meetings of the stockholders, except as otherwise provided by the law of Delaware, by the Certificate of Incorporation or by these By-Laws. The stockholders present at any duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of sufficient stockholders to render the remaining stockholders less than a quorum. Whether or not a quorum is present, either the Chairman of the meeting or a majority of the stockholders entitled to vote thereat, present in person or by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. At such adjourned meeting at which the requisite amount of voting stock shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. 11. Voting and Required Vote Subject to the provisions of the Certificate of Incorporation, each stockholder shall, at every meeting of stockholders, be entitled to one vote for each share of capital stock held by such stockholder. Subject to the provisions of the Certificate of Incorporation and Delaware law, Directors shall be chosen by the vote of a plurality of the shares present in person or represented by proxy at the meeting; and all other questions shall be determined by the affirmative vote of the majority of shares present in person or represented by proxy at the meeting. In all matters, votes cast in any method adopted by the Company shall be valid so long as such method is permitted under Delaware law. 5 12. Proxies Each stockholder entitled to vote at a meeting of stockholders may authorize another person or persons to act for such stockholder by proxy, provided the instrument authorizing such proxy to act shall have been executed in writing in the manner prescribed by law. No proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. 13. Inspectors of Election; Polls Before each meeting of stockholders, the Chairman of the Board or another officer of the Company designated by resolution of the Board of Directors shall appoint one or more inspectors of election for the meeting and may appoint one or more inspectors to replace any inspector unable to act. If any of the inspectors appointed shall fail to attend, or refuse or be unable to serve, substitutes shall be appointed by the Chairman of the meeting. Each inspector shall have such duties as are provided by law, and shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of such person's ability. The Chairman of the meeting shall fix and announce at the meeting the date and time of the opening and closing of the polls for each matter upon which the stockholders will vote at the meeting. 14. Organization The Chairman of the Board of Directors, or in the Chairman's absence, (i) the President, if a member of the Board of Directors, (ii) one of the Vice Chairmen of the Board who is a member of the Board of Directors, if any, in such order as may be designated by the Chairman of the Board, in that order, or (iii) in the absence of each of them, a chairman chosen by a majority of the Directors present, shall act as chairman of the meetings of the stockholders. The order of business and the procedure at any meeting of stockholders shall be determined by the chairman of the meeting. 15. No Stockholder Action by Written Consent Any action required or permitted to be taken by the stockholders of the Company must be effected at a duly called annual or special meeting of stockholders of the Company and may not be effected by any consent in writing in lieu of a meeting of such stockholders. 6 BOARD OF DIRECTORS ------------------ 16. General Powers, Number, Term of Office The business of the Company shall be managed under the direction of its Board of Directors. Subject to the rights of the holders of any series of preferred stock, without par value, of the Company ("Preferred Stock") to elect additional directors under specified circumstances, the number of directors of the Company which shall constitute the whole Board shall be not less than five nor more than 20. The exact number of directors within the minimum and maximum limitation specified in the preceding sentence shall be fixed from time to time exclusively by resolution of a majority of the whole Board. The Directors, other than those who may be elected by the holders of any series of Preferred Stock, shall be divided into three classes, as nearly equal in number as possible. One class of directors shall have a term expiring at the annual meeting of stockholders to be held in 1998, another class shall have a term expiring at the annual meeting of stockholders to be held in 1999, and another class shall have a term expiring at the annual meeting of stockholders to be held in 2000. Members of each class shall hold office until their successors are elected and qualified. At each annual meeting of the stockholders of the Company commencing with the 1998 annual meeting, (1) directors elected to succeed those directors whose terms then expire shall be elected to hold office for a term expiring at the third succeeding annual meeting of stockholders after their election, with each director to hold office until his or her successor shall have been duly elected and qualified, and (2) only if authorized by a resolution of the Board of Directors, directors may be elected to fill any vacancy on the Board of Directors, regardless of how such vacancy shall have been created. Directors need not be stockholders of the Company or residents of the State of Delaware. 17. Vacancies Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, and unless the Board of Directors otherwise determines, vacancies resulting from death, resignation, retirement, disqualification, removal from office or other cause, and newly created directorships resulting from any increase in the authorized number of directors, may be filled only by the affirmative vote of a majority of the remaining directors, though less than a quorum of the Board of Directors, or by a sole remaining director, and directors so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of office of the class to which they have been elected expires and until such director's successor shall have been duly elected and qualified. No decrease in the number of authorized directors constituting the Board of Directors shall shorten the term of any incumbent director. 7 18. Regular Meetings Following the annual meeting of stockholders, the first meeting of each newly elected Board of Directors may be held, without notice, on the same day and at the same place as such stockholders' meeting. The Board of Directors by resolution may provide for the holding of regular meetings and may fix the times and places at which such meetings shall be held. Notice of regular meetings shall not be required provided that whenever the time or place of regular meetings shall be fixed or changed, notice of such action shall be given promptly to each director, as provided in Section 19 below, who was not present at the meeting at which such action was taken. 19. Special Meetings Special meetings of the Board of Directors shall be held whenever called by the Chairman of the Board of Directors or the President, or in the absence of each of them, by any Vice Chairman of the Board, in such order as may be designated by the Chairman of the Board, or by the Secretary at the written request of a majority of the Directors. 20. Notices Notice of any special meeting of the Board of Directors shall be addressed to each Director at such Director's residence or business address and shall be sent to such Director by mail, electronic mail, telecopier, telegram or telex or telephoned or delivered to such Director personally. If such notice is sent by mail, it shall be sent not later than three days before the day on which the meeting is to be held. If such notice is sent by electronic mail, telecopier, telegram or telex, it shall be sent not later than 12 hours before the time at which the meeting is to be held. If such notice is telephoned or delivered personally, it shall be received not later than 12 hours before the time at which the meeting is to be held. Such notice shall state the time, place and purpose or purposes of the meeting. 21. Quorum One-third of the total number of Directors constituting the whole Board, but not less than two, shall constitute a quorum for the transaction of business at any meeting of the Board of Directors, but if less than such required number of Directors for a quorum is present at a meeting, a majority of the Directors present may adjourn the meeting from time to time without further notice. Except as otherwise specifically provided by the law of Delaware, the Certificate of Incorporation or these By-Laws, the act of a majority of the Directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. 8 22. Organization At each meeting of the Board of Directors, the Chairman of the Board or, in the Chairman's absence, (i) the President, if a member of the Board of Directors, (ii) one of the Vice Chairmen of the Board who is a member of the Board of Directors, if any, in such order as may be designated by the Chairman of the Board, in that order, or (iii) in the absence of each of them, a chairman chosen by a majority of the Directors present, shall act as chairman of the meeting, and the Secretary or, in the Secretary's absence, an Assistant Secretary or any employee of the Company appointed by the chairman of the meeting, shall act as secretary of the meeting. 23. Resignations Any Director may resign at any time by giving written notice to the Chairman of the Board, the President or the Secretary of the Company. Such resignation shall take effect upon receipt thereof or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. 24. Removal Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, any director may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of at least 80 percent of the voting power of the then outstanding Voting Stock, voting together as a single class. For purposes of these By-Laws, "Voting Stock" shall mean the outstanding shares of capital stock of the Company entitled to vote generally in the election of directors. 25. Action Without a Meeting Unless otherwise restricted by the Certificate of Incorporation or these By-Laws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. 26. Location of Books Except as otherwise provided by resolution of the Board of Directors and subject to the law of Delaware, the books of the Company may be kept at the General Offices of the Company and at such other places as may be necessary or convenient for the business of the Company. 9 27. Dividends Subject to the provisions of the Certificate of Incorporation and the law of Delaware, dividends upon the capital stock of the Company may be declared by the Board of Directors at any regular or special meeting. Dividends may be paid in cash, in property, or in shares of the Company's capital stock. 28. Compensation of Directors Directors shall receive such compensation and benefits as may be determined by resolution of the Board for their services as members of the Board and committees. Directors shall also be reimbursed for their expenses of attending Board and committee meetings. Nothing contained herein shall preclude any Director from serving the Company in any other capacity and receiving compensation therefor. 29. Additional Powers In addition to the powers and authorities by these By-Laws expressly conferred upon it, the Board of Directors may exercise all such powers of the Company and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these By-Laws directed or required to be exercised or done by the stockholders. COMMITTEES OF DIRECTORS ----------------------- 30. Designation, Power, Alternate Members The Board of Directors may, by resolution or resolutions passed by a majority of the whole Board, designate an Executive Committee and one or more additional committees, each committee to consist of two or more of the Directors of the Company. Any such committee, to the extent provided in said resolution or resolutions and subject to any limitations provided by law, shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the Company. The Board of Directors may designate one or more Directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. If at a meeting of any committee one or more of the members thereof is absent or disqualified, and if either the Board of Directors has not so designated any alternate member or members, or the number of absent or disqualified members exceeds the number of alternate members who are present at such meeting, then the member or members of such committee (including alternates) present at any meeting and not disqualified from voting, whether or not they constitute a quorum, may unanimously appoint another Director to act at the meeting in the place of such absent or disqualified member. The term of office of the members of each committee shall be as fixed from time to time by the Board; provided, however, that any committee member who ceases to be a member of the Board shall automatically cease to be a committee member. 10 31. Quorum, Manner of Acting At any meeting of a committee, the presence of one-third, but not less than two, of its members then in office shall constitute a quorum for the transaction of business; and the act of a majority of the members present at a meeting at which a quorum is present shall be the act of the committee; provided that in the event that any member or members of the committee is or are in any way interested in or connected with any other party to a contract or transaction being approved at such meeting, or are themselves parties to such contract or transaction, the act of a majority of the members present who are not so interested or connected, or are not such parties, shall be the act of the committee. Each committee may provide for the holding of regular meetings, make provision for the calling of special meetings and, except as otherwise provided in these By-Laws or by resolution of the Board of Directors, make rules for the conduct of its business. 32. Minutes The committees shall keep minutes of their proceedings and report the same to the Board of Directors when required; but failure to keep such minutes shall not affect the validity of any acts of the committee or committees. ADVISORY DIRECTORS ------------------ 33. Advisory Directors The Board of Directors may, by resolution adopted by a majority of the whole Board, appoint such number of senior executives of the Company as Advisory Directors as the Board may from time to time determine. The Advisory Directors shall have such advisory responsibilities as the Chairman of the Board may designate and the term of office of such Advisory Directors shall be as fixed by the Board. OFFICERS -------- 34. Designation The officers of the Company shall be a Chairman of the Board, and a President, one of whom shall be designated by the Board of Directors as the Chief Executive Officer, one or more Vice Presidents, a Secretary, a Treasurer and a Controller. The Board of Directors may also elect one or more Vice Chairmen of the Board, one or more Vice Chairmen of the Company, one or more Executive Vice Presidents, Senior Vice Presidents, Group Vice Presidents, a Chief Financial Officer, Deputy and Assistant Secretaries, Deputy and Assistant Treasurers, 11 Deputy and Assistant Controllers and such other officers as it shall deem necessary. Any number of offices may be held by the same person. The Chairman of the Board of Directors shall be chosen from among the Directors. 35. Election and Term At least annually, the Board of Directors of the Company shall elect the officers of the Company and at any time thereafter the Board may elect additional officers of the Company and each such officer shall hold office until the officer's successor is elected and qualified or until the officer's earlier death, resignation, termination of employment or removal. 36. Removal Any officer shall be subject to removal or suspension at any time, for or without cause, by the affirmative vote of a majority of the whole Board of Directors. 37. Resignations Any officer may resign at any time by giving written notice to the Chairman of the Board, the President or to the Secretary. Such resignation shall take effect upon receipt thereof or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. 38. Vacancies A vacancy in any office because of death, resignation, removal or any other cause may be filled for the unexpired portion of the term by the Board of Directors. 39. Compensation The People Committee of the Board of Directors shall fix the salaries of all employees of the Company who are subject to the reporting requirements of Section 16(a) of the Securities Exchange Act of 1934 or any successor statute, rule or provision, and other members of executive management designated by such committee. 40. Chairman of the Board The Chairman of the Board shall preside at all meetings of the stockholders and of the Board of Directors, except as may be otherwise required under the law of Delaware. The Chairman shall act in an advisory capacity with respect to matters of policy and other matters of importance pertaining to the affairs of the Company. The Chairman, alone or with the President, one or more of the Vice Chairmen of the 12 Board, and/or the Secretary shall sign and send out reports and other messages which are to be sent to stockholders from time to time. The Chairman shall also perform such other duties as may be assigned to the Chairman by these By-Laws, the Board of Directors or, if applicable, the Chief Executive Officer. 41. President The President, if a member of the Board of Directors, shall, in the absence of the Chairman of the Board, preside at all meetings of the stockholders and of the Board of Directors. The President shall perform such other duties as may be assigned to the President by these By-Laws, the Board of Directors or, if applicable, the Chief Executive Officer. 42. Chief Executive Officer The Chief Executive Officer shall have the general and active management and supervision of the business of the Company. The Chief Executive Officer shall see that all orders and resolutions of the Board of Directors are carried into effect. The Chief Executive Officer shall also perform such other duties as may be assigned to the Chief Executive Officer by these By-Laws or the Board of Directors. The Chief Executive Officer shall designate who shall perform the duties of the Chief Executive Officer in the Chief Executive Officer's absence. 43. Vice Chairmen of the Board; Vice Chairmen The Vice Chairmen of the Board, if a member of the Board of Directors, shall, in the absence of the Chairman of the Board and the President, and in such order as may be designated by the Chairman of the Board, preside at all meetings of the stockholders and of the Board of Directors. The Vice Chairmen of the Board and the Vice Chairmen shall perform such other duties as may be assigned to them by these By-Laws, the Board of Directors or the Chief Executive Officer. 44. Executive, Senior, Group and other Vice Presidents Each Executive Vice President, Senior Vice President, Group Vice President and each other Vice President shall perform the duties and functions and exercise the powers assigned to such officer by the Board of Directors or the Chief Executive Officer. 45. Chief Financial Officer The Chief Financial Officer (if any) shall act in an executive financial capacity. The Chief Financial Officer shall assist the Chairman of the Board and the President in the general supervision of the Company's financial policies and affairs. 13 46. Secretary The Secretary shall attend all meetings of the Board of Directors and of the stockholders and record all votes and the minutes of all proceedings in a book to be kept for that purpose. The Secretary shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors and, when appropriate, shall cause the corporate seal to be affixed to any instruments executed on behalf of the Company. The Secretary shall also perform all duties incident to the office of Secretary and such other duties as may be assigned to the Secretary by these By-Laws, the Board of Directors, the Chairman of the Board or the Chief Executive Officer. 47. Assistant Secretaries The Assistant Secretaries shall, during the absence of the Secretary, perform the duties and functions and exercise the powers of the Secretary. Each Assistant Secretary shall perform such other duties as may be assigned to such Assistant Secretary by the Board of Directors, the Chairman of the Board, the Chief Executive Officer or the Secretary. 48. Treasurer The Treasurer shall have the custody of the funds and securities of the Company and shall deposit them in the name and to the credit of the Company in such depositories as may be designated by the Board of Directors or by any officer or officers authorized by the Board of Directors to designate such depositories; disburse funds of the Company when properly authorized by vouchers prepared and approved by the Controller; and invest funds of the Company when authorized by the Board of Directors or a committee thereof. The Treasurer shall render to the Board of Directors, the Chief Executive Officer, the Senior Vice President-Finance or the Vice President-Finance, whenever requested, an account of all transactions as Treasurer and shall also perform all duties incident to the office of Treasurer and such other duties as may be assigned to the Treasurer by these By-Laws, the Board of Directors, the Chief Executive Officer, the Senior Vice President-Finance or the Vice President-Finance. 49. Assistant Treasurers The Assistant Treasurers shall, during the absence of the Treasurer, perform the duties and functions and exercise the powers of the Treasurer. Each Assistant Treasurer shall perform such other duties as may be assigned to the Assistant Treasurer by the Board of Directors, the Chief Executive Officer, the Senior Vice President-Finance, the Vice President-Finance or the Treasurer. 14 50. Controller The Controller shall serve as the principal accounting officer of the Company and shall keep full and accurate account of receipts and disbursements in books of the Company and render to the Board of Directors, the Chief Executive Officer, the Senior Vice President-Finance or the Vice President-Finance, whenever requested, an account of all transactions as Controller and of the financial condition of the Company. The Controller shall also perform all duties incident to the office of Controller and such other duties as may be assigned to the Controller by these By-Laws, the Board of Directors, the Chief Executive Officer, the Senior Vice President-Finance or the Vice President-Finance. 51. Assistant Controllers The Assistant Controllers shall, during the absence of the Controller, perform the duties and functions and exercise the powers of the Controller. Each Assistant Controller shall perform such other duties as may be assigned to such officer by the Board of Directors, the Chief Executive Officer, the Senior Vice President-Finance, the Vice President-Finance or the Controller. COMPANY CHECKS, DRAFTS AND PROXIES ---------------------------------- 52. Checks, Drafts All checks, drafts or other orders for the payment of money by the Company shall be signed by such person or persons as from time to time may be designated by the Board of Directors or by any officer or officers authorized by the Board of Directors to designate such signers; and the Board of Directors or such officer or officers may determine that the signature of any such authorized signer may be facsimile. 53. Proxies Except as otherwise provided by resolution of the Board of Directors, the Chairman of the Board, the President, any Vice Chairman of the Board, any Vice President, the Treasurer and any Assistant Treasurer, the Controller and any Assistant Controller, the Secretary and any Assistant Secretary of the Company, shall each have full power and authority, in behalf of the Company, to exercise any and all rights of the Company with respect to any meeting of stockholders of any corporation in which the Company holds stock, including the execution and delivery of proxies therefor, and to consent in writing to action by such corporation without a meeting. 15 CAPITAL STOCK ------------- 54. Stock Certificates Each holder of stock in the Company shall be entitled to have a certificate signed by, or in the name of the Company by, the Chairman of the Board, the President, any Vice Chairman of the Board, any Executive Vice President, any Senior Vice President, any Group Vice President or any other Vice President, and by the Secretary or any Assistant Secretary of the Company, certifying the number of shares owned by such holder in the Company. Any of or all the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Company with the same effect as if such person were such officer, transfer agent or registrar at the date of issue. 55. Record Ownership The Company shall be entitled to treat the person in whose name any share, right or option is registered as the owner thereof, for all purposes, and shall not be bound to recognize any equitable or other claim to or interest in such share, right or option on the part of any other person, whether or not the Company shall have notice thereof, except as otherwise provided by the law of Delaware. 56. Record Dates In order that the Company may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix a record date, which shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors and which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. 57. Transfer of Stock Transfers of shares of stock of the Company shall be made only on the books of the Company by the registered holder thereof, or by the registered holder's attorney thereunto authorized by power of attorney duly executed and filed with the Secretary or a transfer agent of the Company, and on surrender of the certificate or certificates for such shares properly endorsed and the payment of all taxes thereon. 16 58. Lost, Stolen or Destroyed Certificates The Board of Directors may authorize a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Company alleged to have been lost, stolen or destroyed, upon the making of an affidavit of the fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or the owner's legal representative, to give the Company a bond sufficient to indemnify it against any claim that may be made against the Company on account of the alleged loss, theft or destruction of such certificate or the issuance of such new certificate. 59. Terms of Preferred Stock The provisions of these By-Laws, including those pertaining to voting rights, election of Directors and calling of special meetings of stockholders, are subject to the terms, preferences, rights and privileges of any then outstanding class or series of Preferred Stock as set forth in the Certificate of Incorporation and in any resolutions of the Board of Directors providing for the issuance of such class or series of Preferred Stock; provided, however, that the provisions of any such Preferred Stock shall not affect or limit the authority of the Board of Directors to fix, from time to time, the number of Directors which shall constitute the whole Board as provided in Section 16 above, subject to the right of the holders of any class or series of Preferred Stock to elect additional Directors as and to the extent specifically provided by the provisions of such Preferred Stock. INDEMNIFICATION --------------- 60. Indemnification (a) The Company shall indemnify and hold harmless, to the fullest extent permitted by applicable law as it presently exists or may hereafter be amended, any person who was or is made or is threatened to be made a party or is otherwise involved in any claim, action, suit, or proceeding, whether civil, criminal, administrative or investigative (a "proceeding") by reason of the fact that the person, or a person for whom he or she is the legal representative, is or was a Director, officer, employee or agent of the Company or is or was serving at the request of the Company as a director, officer, employee, fiduciary or agent of another corporation or of a partnership, joint venture, trust, non-profit entity, or other enterprise, including service with respect to employee benefit plans, against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person. The right to indemnification conferred in this By-Law shall be a contract right. Except as provided in paragraph (c) of this By-Law with respect to proceedings 17 seeking to enforce rights to indemnification, the Company shall indemnify a person in connection with a proceeding initiated by such person or a claim made by such person against the Company only if such proceeding or claim was authorized by the Board of Directors of the Company. (b) The Company shall pay the expenses incurred in defending any proceeding in advance of its final disposition, provided, however, that if and to the extent required by law the payment of expenses incurred by any person covered hereunder in advance of the final disposition of the proceeding shall be made only upon receipt of an undertaking by or on behalf of the affected person to repay all amounts advanced if it should ultimately be determined that such person is not entitled to be indem- nified under this By-Law or otherwise. (c) If a claim for indemnification or payment of expenses under this By-Law is not paid in full within thirty days, or such other period as might be provided pursuant to contract, after a written claim therefor has been received by the Company, the claimant may file suit to recover the unpaid amount of such claim or may seek whatever other remedy might be provided pursuant to contract. In any such action the Company shall have the burden of proving that the claimant was not entitled to the requested indemnification or payment of expenses under applicable law. If successful in whole or in part, claimant shall be entitled to be paid the expense of prosecuting such claim. Neither the failure of the Company (including its Directors, independent legal counsel or stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because the claimant has met the applicable standard of conduct set forth in the General Corporation Law of the State of Delaware, nor an actual determination by the Company (including its Directors, independent legal counsel or stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. (d) Any determination regarding whether indemnification of any person is proper in the circumstances because such person has met the applicable standard of conduct set forth in the General Corporation Law of the State of Delaware shall be made by independent legal counsel selected by such person with the consent of the Company (which consent shall not unreasonably be withheld). (e) The rights conferred on any person by this By-Law shall not be exclusive of any other rights which such person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, these By-Laws, agreement, vote of stockholders or disinterested Directors or otherwise. (f) Any repeal or modification of the foregoing provisions of this By-Law 60 shall not adversely affect any right or protection hereunder of any person with respect to any act or omission occurring prior to or at the time of such repeal or modification. 18 MISCELLANEOUS ------------- 61. Corporate Seal The seal of the Company shall be circular in form, containing the words "Monsanto Company" and the word "Delaware" on the circumference surrounding the word "Seal". Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. 62. Fiscal Year The fiscal year of the Company shall begin on the first day of January in each year. 63. Auditors The Board of Directors shall select certified public accountants to audit the books of account and other appropriate corporate records of the Company annually and at such other times as the Board shall determine by resolution. 64. Waiver of Notice Whenever notice is required to be given pursuant to the law of Delaware, the Certificate of Incorporation or these By-Laws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting of stockholders or the Board of Directors or a committee thereof shall constitute a waiver of notice of such meeting, except when the stockholder or Director attends such meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders or the Board of Directors or committee thereof need be specified in any written waiver of notice unless so required by the Certificate of Incorporation or by these By-Laws. AMENDMENT TO BY-LAWS -------------------- 65. Amendments Notwithstanding any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any series of Preferred Stock of the Corporation required by law, the Certificate of Incorporation or any Preferred Stock designation, the affirmative vote of the holders of at least 80 percent of the voting power of all of the then-outstanding Voting Stock (as defined in the Certificate of Incorporation), voting together as a single class, shall be required 19 for the stockholders to amend or repeal the By-Laws or to adopt new By- Laws. The By-Laws may also be amended or repealed and new By-Laws may be adopted by the affirmative vote of a majority of the whole Board of Directors at any regular or special meeting of the Board of Directors. ---------------------------- EMERGENCY BY-LAWS ----------------- These Emergency By-Laws, notwithstanding any different provision in the Certificate of Incorporation or By-Laws, shall be operative during any emergency resulting from an attack on the United States or on a locality in which the Company conducts its business or customarily holds meetings of the Board of Directors or its stockholders, or during any nuclear or atomic disaster, or during the existence of any catastrophe, or other similar emergency condition, as a result of which a quorum of the Board of Directors or a committee thereof cannot be readily convened for action. These Emergency By-Laws shall cease to be operative upon termination of such emergency. During any such emergency: (a) A meeting of the Board of Directors or a committee thereof may be called by any officer or Director. Notice of the time and place of the meeting shall be given by the person calling the meeting to only such of the Directors as it may be feasible to reach at the time and by such means as may be feasible at the time. Such notice shall be given at such time in advance of the meeting as circumstances permit in the judgment of the person calling the meeting. (b) The officers or other persons designated on a list approved by the Board of Directors before the emergency, all in such order or priority and subject to such conditions and for such period of time (not longer than reasonably necessary after the termination of the emergency) as may be provided in the resolution approving the list, shall, to the extent required to constitute a quorum at any meeting of the Board of Directors during the emergency, be deemed Directors for such meeting. If at the time of the emergency the Board of Directors has not approved such a list of persons, then to the extent required to constitute a quorum at any meeting of the Board of Directors during the emergency, the officers of the Company who are present shall be deemed, in order of rank and within the same rank in order of seniority, Directors for such meeting. Two Directors (including persons deemed to be Directors) in attendance at the meeting shall constitute a quorum. (c) The Board of Directors, either before or during any such emergency, may provide, and from time to time modify, lines of succession in the event that during such an emergency any or all officers or agents of the Company shall for any reason be rendered incapable of discharging their duties. 20 (d) The Board of Directors, either before or during any such emergency, may, effective in the emergency, change the General Offices or designate several alternative General Offices or regional offices, or authorize an officer, or officers, so to do. No officer, Director or employee acting in accordance with these Emergency By-Laws shall be liable except for willful misconduct. These Emergency By-Laws shall be subject to repeal or change by further action of the Board of Directors or by action of the stockholders, but no such repeal or change shall modify the provisions of the next preceding paragraph with regard to action taken prior to the time of such repeal or change. Any amendment of these Emergency By-Laws may make any further or different provision that may be practical and necessary for the circumstances of the emergency. 21 EX-10.24 3 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT -------------------- AGREEMENT by and between Monsanto Company, a Delaware corporation (the "Company"), and ___________________ (the "Executive"), dated as of the _____ day of ___________, _______. The Board of Directors of the Company (the "Board"), has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of the Company. The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive's full attention and dedication to the Company currently and in the event of any threatened or pending Change of Control, and to provide the Executive with compensation and benefits arrangements upon a Change of Control which ensure that the compensation and benefits expectations of the Executive will be satisfied and which are competitive with those of other corporations. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Certain Definitions. (a) The "Effective Date" shall ------------------- mean the first date during the Change of Control Period (as defined in Section 1(b)) on which a Change of Control (as defined in Section 2) occurs. Anything in this Agreement to the contrary notwithstanding, if a Change of Control occurs and if the Executive's employment with the Company is terminated by the Company prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change of Control or (ii) otherwise arose in connection with or anticipation of a Change of Control, then for all purposes of this Agreement the "Effective Date" shall mean the date immediately prior to the date of such termination of employment. (b) The "Change of Control Period" shall mean the period commencing on the date hereof and ending on May 31, 2002; provided, however, that commencing on May 31, 2000, and on each May 31 thereafter, the Change of Control Period shall be automatically extended so as to terminate on the third anniversary of such May 31, unless the Company shall give notice to the Executive before the immediately preceding April 1 that the Change of Control Period shall not be so extended. (c) An "Alternative Change of Control" shall mean a Change of Control as defined in Section 2, except that the references in such definition to "20%" shall be deemed to be references to "50%." 2. Change of Control. For the purpose of this ----------------- Agreement, a "Change of Control" shall mean: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that, for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 2; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Consummation by the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets or stock of another corporation (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting -2- securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. 3. Employment Period. The Company hereby agrees to ----------------- continue the Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company subject to the terms and conditions of this Agreement, for the period (the "Employment Period") commencing on the Effective Date and ending on the earlier of the third anniversary of such date and the first day of the month following the month in which the executive attains age 65 (the Executive's "Normal Retirement Date"). 4. Terms of Employment. (a) Position and Duties. (i) ------------------- ------------------- During the Employment Period, (A) the Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned to the Executive at any time during the 120-day period immediately preceding the Effective Date and (B) the Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date or any office or location less than 35 miles from such location, unless the Executive is on international assignment on the Effective Date and is relocated as a result of the Executive's being repatriated pursuant to the terms of his international assignment agreement as in effect before the Effective Date. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) Compensation. (i) Base Salary. During the ------------ ----------- Employment Period, the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid at a monthly rate, at least equal to twelve times the highest monthly base salary paid or payable, -3- including any base salary which has been earned but deferred, to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. During the Employment Period, the Annual Base Salary shall be reviewed no more than 12 months after the last salary increase awarded to the Executive prior to the Effective Date and thereafter at least annually. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (ii) Bonuses. In addition to Annual Base Salary, ------- the Executive shall be awarded the following bonuses. For each fiscal year ending during the Employment Period, the Executive shall be awarded an annual bonus (the "Annual Bonus") in cash at least equal to the average of the Executive's bonuses under the Company's Annual Incentive Program, or any comparable bonus under any predecessor or successor plan(s), for the last three full fiscal years prior to the Effective Date (annualized in the event that the Executive was not employed by the Company for the whole of such fiscal year) (the "Recent Annual Bonus"). Each such Annual Bonus shall be paid no later than the end of the third month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus. In addition, during the Employment Period, the Executive shall be entitled to participate in all long-term and other incentive plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable) less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 120-day period immediately preceding the Effective Date or if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. Without limiting the generality of the foregoing, the Executive shall be entitled to receive long-term incentive compensation (whether in cash, equity awards, or a combination thereof) having a value, on an annualized basis, at least equal to the annualized value of the long-term incentive compensation component of the Executive's total compensation, as established by the People Committee of the Board most recently before the Effective Date (such value, the "Recent Long-Term Incentive Value"). (iii) Savings and Retirement Plans. During the ---------------------------- Employment Period, the Executive shall be entitled to participate in all savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 120-day period immediately preceding the Effective Date or if more favorable to the Executive, those provided generally at any time after the Effective Date to other -4- peer executives of the Company and its affiliated companies. Without limiting the generality of the foregoing, the Company and its affiliated companies shall continue to honor any individual agreements between any of them and the Executive regarding the provision of supplemental retirement benefits such as (but not limited to) post-retirement income and/or welfare benefits (each of which is hereafter referred to as an "Individual SERP") (iv) Welfare Benefit Plans. During the Employment --------------------- Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, salary continuance, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (v) Expenses. During the Employment Period, the -------- Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vi) Fringe Benefits. During the Employment Period, --------------- the Executive shall be entitled to fringe benefits, including, without limitation, tax and financial planning services, payment of club dues, and, if applicable, use of an automobile and payment of related expenses, in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vii) Office and Support Staff. During the ------------------------ Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (viii) Vacation. During the Employment Period, the -------- Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and -5- practices of the Company and its affiliated companies as in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. 5. Termination of Employment. (a) Death or ------------------------- --------- Disability. The Executive's employment shall terminate automatically - ---------- upon the Executive's death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 12(b) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the Executive's long-term disability for purposes of any reasonable occupation as determined under the Company's disability plan that is applicable to the Executive. (b) Cause. The Company may terminate the Executive's ----- employment during the Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean: (i) the willful and continued failure of the Executive to perform substantially the Executive's duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Board or the Chief Executive Officer of the Company which specifically identifies the manner in which the Board or Chief Executive Officer believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is -6- guilty of the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail. (c) Good Reason. The Executive's employment may be ----------- terminated by the Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean: (i) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 4(a) of this Agreement, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (ii) any failure by the Company to comply with any of the provisions of Section 4(b) of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location other than as provided in Section 4(a)(i)(B) hereof or the Company's requiring the Executive to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date, unless the Executive is on international assignment on the Effective Date and the relocation is as a result of the Executive's being repatriated pursuant to the terms of his international assignment agreement as in effect before the Effective Date; (iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or (v) any failure by the Company to comply with and satisfy Section 11(c) of this Agreement. For purposes of this Section 5(c), any good faith determination of "Good Reason" made by the Executive shall be conclusive. Anything in this Agreement to the contrary notwithstanding, a termination by the Executive for any reason during the 30-day period immediately following the first anniversary of an Alternative Change of Control shall be deemed to be a termination for Good Reason for all purposes of this Agreement. (d) Notice of Termination. Any termination by the --------------------- Company for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 12(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as -7- defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (e) Date of Termination. "Date of Termination" means (i) ------------------- if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination and (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. 6. Obligations of the Company upon Termination. ------------------------------------------- (a) Good Reason; Other Than for Cause, Death or Disability. If, ------------------------------------------------------ during the Employment Period, the Company shall terminate the Executive's employment other than for Cause or Disability or the Executive shall terminate employment for Good Reason: (i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: A. the sum of (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, (2) the product of (x) the higher of (I) the Recent Annual Bonus and (II) the Annual Bonus paid or payable, including any bonus or portion thereof which has been earned but deferred (and annualized for any fiscal year consisting of less than twelve full months or during which the Executive was employed for less than twelve full months), for the most recently completed fiscal year during the Employment Period, if any (such higher amount being referred to as the "Highest Annual Bonus") and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365, and (3) any accrued vacation pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1), (2) and (3) shall be hereinafter referred to as the "Accrued Obligations"); and B. the amount equal to the product of (1) the lesser of three and the number of years and fractions thereof remaining between the Date of Termination and the Executive's Normal Retirement Date (such lesser number, the "Multiplier") and (2) the sum of (w) the Executive's Annual Base Salary, (x) the Highest Annual Bonus, (y) the higher of (I) the Recent Long-Term Incentive Value and (II) the highest value, on an annualized basis, of the Executive's long-term incentive compensation (whether in cash, equity awards, or a combination thereof) in -8- effect following the Effective Date, and (z) the amount of the employer matching contributions (not including any performance contribution) made to the Executive's account in the Company's Savings and Investment Plan and the Savings and Investment Parity Plan or any successor to either of them with respect to the most recent plan year that ended before the Effective Date or, if higher, for the most recent plan year that ended after the Effective Date (in either case annualized to the extent such plan year consisted of less than 12 months and/or the Executive was not eligible to participate in such plan for the full plan year); and C. an amount equal to the difference between (a) the aggregate benefit under the Monsanto Pension Plan and any successor thereto, and any other qualified defined benefit retirement plans of the Company and its affiliated companies in which the Executive participates (collectively, the "Retirement Plan") and the Monsanto Company ERISA Parity Pension Plan, the Monsanto Company Supplemental Retirement Plan, and any successors thereto, any other "top hat," excess or supplemental defined benefit retirement plans of the Company and its affiliated companies in which the Executive participates, and any Individual SERP (collectively, the "SERP") which the Executive would have accrued (whether or not vested) if the Executive's employment had continued for a number of years after the Date of Termination equal to the Multiplier, and (b) the actual vested benefit, if any, of the Executive under the Retirement Plan and the SERP, determined as of the Date of Termination (with the foregoing amounts to be computed on an actuarial present value basis, based on the assumption that the Executive's compensation during such period of deemed continued employment after the Date of Termination was that required by Section 4(b)(i) and Section 4(b)(ii), and using actuarial assumptions no less favorable to the Executive than the most favorable of those in effect for purposes of computing benefit entitlements under the Retirement Plan and the SERP at any time from the day before the Effective Date) through the Date of Termination; (ii) for a number of years after the Executive's Date of Termination equal to the Multiplier, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy (such number of years or longer period, the "Welfare Benefits Continuation Period"), the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 4(b)(iv) of this Agreement if the Executive's employment had not been terminated or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families, provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan during the Welfare Benefits Continuation Period, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility; and for purposes of determining eligibility of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until the end of the Welfare Benefits -9- Continuation Period and to have retired on the last day of such period; and provided, further, that if the Executive has reached age 50 as of the Date of Termination, then the Executive shall be fully vested in, and shall be entitled to receive, beginning at the end of the Welfare Benefits Continuation Period, lifetime retiree medical benefits at least as favorable as those to which the Executive would have been entitled if the Executive had retired with full eligibility for benefits under the retiree medical benefit plans and programs of the Company and its Affiliated Companies in effect as of the Effective Date; (iii) the Company shall, at its sole expense as incurred, provide the Executive with outplacement services the scope and provider of which shall be selected by the Executive in the Executive's sole discretion; and (iv) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). (b) Death. If the Executive's employment is terminated ----- by reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(b) shall include, without limitation, and the Executive's estate and/or beneficiaries shall be entitled to receive, benefits at least equal to the most favorable benefits provided by the Company and affiliated companies to the estates and beneficiaries of peer executives of the Company and such affiliated companies under such plans, programs, practices and policies relating to death benefits, if any, as in effect with respect to other peer executives and their beneficiaries at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive's estate and/or the Executive's beneficiaries, as in effect on the date of the Executive's death with respect to other peer executives of the Company and its affiliated companies and their beneficiaries. (c) Disability. If the Executive's employment is ---------- terminated by reason of the Executive's Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(c) shall include, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits at least equal to the most favorable of those generally provided by the Company and its affiliated companies to disabled executives and/or their families in accordance with such plans, programs, practices and policies relating to disability, if any, as in effect generally with respect to other peer executives and their families at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive's family, as -10- in effect at any time thereafter generally with respect to other peer executives of the Company and its affiliated companies and their families. (d) Cause; Other than for Good Reason. If the --------------------------------- Executive's employment shall be terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive (x) the Annual Base Salary through the Date of Termination, (y) the amount of any compensation previously deferred by the Executive, and (z) Other Benefits, in each case to the extent theretofore unpaid. If the Executive voluntarily terminates employment during the Employment Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to the Executive, other than for Accrued Obligations and the timely payment or provision of Other Benefits. In such case, all Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. 7. Non-exclusivity of Rights. Nothing in this Agreement ------------------------- shall prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies for which the Executive may qualify, nor, subject to Section 12(f), shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. Notwithstanding the foregoing, from and after the Effective Date, the compensation and benefits provided for pursuant to Sections 5, 8 and 9 hereof shall be in lieu of any severance or separation pay or benefits to which the Executive might otherwise be entitled under any plan, program, policy or arrangement of the Company and its affiliates. 8. Full Settlement; Legal Fees. The Company's --------------------------- obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and except as specifically provided in Section 6(a)(ii), such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (whether such contest is between the Company and the Executive or between either of them and any third party, and including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). -11- 9. Certain Additional Payments by the Company. ------------------------------------------ (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 9) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section 9(a), if it shall be determined that the Executive is entitled to a Gross-Up Payment, but that the Payments do not exceed 110% of the greatest amount (the "Reduced Amount") that could be paid to the Executive such that the receipt of Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to the Executive and the Payments, in the aggregate, shall be reduced to the Reduced Amount. Such reduction shall be carried out in such a manner as to maximize the value of the Payments received by the Executive while still reducing them to the Reduced Amount. (b) Subject to the provisions of Section 9(c), all determinations required to be made under this Section 9, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment, whether and in what manner any Payments are to be reduced to the Reduced Amount, and the assumptions to be utilized in arriving at such determinations, shall be made by the certified public accounting firm that was serving as the Company's auditors immediately before the Effective Date (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 9(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has -12- occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which the Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 9(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such -13- contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 9(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 10. Confidential Information. As used herein, ------------------------ "Confidential Information" means all technical and business information of the Company and its Subsidiaries, whether patentable or not, which is of a confidential, trade secret and/or proprietary character and which is either developed by the Executive (alone or with others) or to which the Executive has had access during the Executive's employment. "Confidential Information" shall also include confidential evaluations of, and the confidential use or non-use by the Company or any Subsidiary of, technical or business information in the public domain. The Executive shall use the Executive's best efforts and diligence both during and after employment by the Company to protect the confidential, trade secret and/or proprietary character of all Confidential Information. The Executive shall not, directly or indirectly, use (for the Executive or another) or disclose any Confidential Information, for so long as it shall remain proprietary or protectible as confidential or trade secret information, except as may be necessary for the performance of the Executive's duties with the Company. The Executive shall deliver promptly to the Company, at the termination of the Executive's employment, or at any other time at the Company's request, without retaining any copies, all documents and other material in the Executive's possession relating, directly or indirectly, to any Confidential Information. Each of the Executive's obligations in this Section shall also apply to the confidential, trade secret and proprietary information learned or acquired by the Executive during the Executive's employment from others with whom the Company or any Subsidiary has a business relationship. The Executive understands that the Executive is not to disclose to the Company or any Subsidiary, or use for its benefit, any of the confidential, trade secret or proprietary information of others, including any of the Executive's former employers. In no event shall an asserted -14- violation of the provisions of this Section 10 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 11. Successors. (a) This Agreement is personal to the ---------- Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 12. Miscellaneous. (a) This Agreement shall be governed ------------- by and construed in accordance with the laws of the State of Delaware, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: ------------------- 800 North Lindbergh Boulevard St. Louis, Missouri 63167 If to the Company: ----------------- 800 North Lindbergh Boulevard St. Louis, Missouri 63167 Attention: General Counsel or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. -15- (d) The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) The Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (f) The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is "at will" and, subject to Section 1(a) hereof, prior to the Effective Date, the Executive's employment and/or this Agreement may be terminated by either the Executive or the Company at any time prior to the Effective Date, in which case the Executive shall have no further rights under this Agreement. Upon its execution by both parties hereto, this Agreement shall supersede the Key Executive Employment Agreement previously entered into by the Executive and the Company (the "Key Executive Agreement"). From and after the Effective Date this Agreement shall supersede any prior employment agreement between the parties, but shall have no effect on any Individual SERP or on the Executive's rights under any plan, program, policy or practice provided by the Company or any of its affiliated companies except as specifically provided in Section 7 above; provided, that from and after the execution of this Agreement, references in any individual SERP Letter to "Termination of Employment" or "Terminate Employment" as defined in the Key Executive Agreement shall be deemed amended to refer to termination of the Executive's employment by the Executive for Good Reason and termination of the Executive's employment by the Company for Cause, in each case as defined in this Agreement, and references in any individual SERP Letter to "Change of Control" as defined in the Key Executive Agreement shall be deemed amended to refer to "Change of Control" as defined in this Agreement. -16- IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. ------------------------------- [NAME OF EXECUTIVE] MONSANTO COMPANY By ----------------------------- Title: ------------------------- -17- EX-23 4 CONSENT OF EXPERT EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in Monsanto Company's Registration Statements on Form S-8 (Nos. 2-36636, 2-76696, 2-90152, 33-13197, 33-21030, 33-39704, 33-39705, 33-39706, 33-39707, 33-49717, 33-53363, 33-53365, 33-53367, 333-02783, 333-02961, 333-02963, 333-33531, 333-38599, 333-45341 and 333-76653) and Registration Statements on Form S-4 (Nos. 333-66175 and 333-73233) of our report dated February 26, 1999 (December 29, 1999 as to the Subsequent Events and Discontinued Operations Notes), incorporated by reference in this amended annual report on Form 10-K/A of Monsanto Company for the year ended December 31, 1998. /s/ DELOITTE & TOUCHE LLP St. Louis, Missouri January 21, 2000 EX-24.2 5 POWER OF ATTORNEY EXHIBIT 24.2 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That each person whose signature appears below, as a Director or Officer of Monsanto Company (the "Company"), a Delaware corporation with its general offices in the County of St. Louis, Missouri, does hereby make, constitute and appoint R. WILLIAM IDE III, BARBARA L. BLACKFORD, SONYA M. DAVIS or JANET L. HORGAN, or any one of them acting alone, his or her true and lawful attorneys, with full power of substitution and resubstitution, in his or her name, place and stead in any and all capacities, to execute and sign the Annual Report on Form 10-K and any and all Amendments thereto, and documents in connection therewith, all to be filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, giving and granting unto said attorneys full power and authority to do and perform such actions as fully as they might have done or could do if personally present and executing any of said documents. Dated and effective as of the 1st day of November, 1999. /s/ Richard U. De Schutter /s/ Hendrik A. Verfaillie - ------------------------------------ -------------------------------- Richard U. De Schutter, Director Hendrik A. Verfaillie EX-27 6 FINANCIAL DATA SCHEDULE I
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENT OF CONSOLIDATED INCOME OF MONSANTO COMPANY AND SUBSIDIARIES FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999, AND THE STATEMENT OF CONSOLIDATED FINANCIAL POSITION AS OF SEPTEMBER 30, 1999. SUCH INFORMATION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS. 1,000,000 12-MOS DEC-31-1998 DEC-31-1998 89 0 2,119 0 1,722 5,195 5,185 2,320 16,385 3,780 6,259 0 1,694 0 3,292 16,385 7,237 7,237 2,912 2,912 0 0 210 (85) 46 (131) (119) 0 0 (250) (.41) (.41)
EX-99 7 AMENDED FINANCIAL INFORMATION EXHIBIT 99 AMENDED FINANCIAL INFORMATION FOR FISCAL YEAR ENDED DECEMBER 31, 1998 - --------------------------------------------------------------------- Definitions: "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" means diluted earnings per share. In tables, all dollars are in millions, except per share data. EBIT (earnings before interest expense and income taxes) and EBITDA (earnings before interest expense, income taxes, depreciation and amortization, and excluding unusual charges) are used as financial performance measures throughout this publication. For Monsanto's business segments, EBIT also excludes the effects of unusual charges. Throughout this annual report EBITDA (excluding unusual items) is net earnings (loss) before income taxes, interest expense, depreciation expense, amortization expense, and excluding the effects of unusual items. Unusual items comprise restructuring charges, write-offs of in-process research and development (R&D) related to acquisitions, and the cancellation of DEKALB stock options. EBITDA (excluding unusual items) may not be directly comparable to other companies' EBITDA performance measures 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 annual report is intended to supplement investors' understanding of Monsanto's operating performance and not to replace net income, cash flows, financial position, or comprehensive income, 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 anticipated increase in these two elements of the financial statements resulting from the recent acquisitions of DEKALB Genetics Corporation, Plant Breeding International Cambridge, and the international seed businesses of Cargill, will not be reflected in EBITDA (excluding unusual items) but will impact net income in future periods. Investors and other users of the financial statements should refer to management's discussion and analysis for a description of events that have impacted EBITDA (excluding unusual items) and net income during each of the three years ended December 31, 1998. 1 INDEPENDENT AUDITORS' REPORT To the shareowners of Monsanto Company: We have audited the accompanying statement of consolidated financial position of Monsanto Company and subsidiaries as of Dec. 31, 1998 and 1997, and the related statements of consolidated income (loss), cash flow, shareowners' equity and comprehensive income (loss) for each of the three years in the period ended Dec. 31, 1998. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Monsanto Company and subsidiaries as of Dec. 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended Dec. 31, 1998, in conformity with generally accepted accounting principles. /S/ Deloitte & Touche LLP Deloitte & Touche LLP St. Louis, Missouri Feb. 26, 1999 (December 29, 1999 as to the Subsequent Events and Discontinued Operations Notes). 2 Statement of Consolidated INCOME (LOSS) - ---------------------------------------------------------------------------------------------------
(Dollars in millions, except per share amounts) Year Ended Dec. 31, - --------------------------------------------------------------------------------------------------- 1998 1997 1996 - --------------------------------------------------------------------------------------------------- NET SALES $7,237 $6,058 $4,862 Costs, expenses and other: Cost of goods sold 2,912 2,382 1,953 Selling, general and administrative expenses 2,129 1,745 1,540 Technological expenses 1,308 1,049 657 Acquired in-process research and development 402 633 Amortization and adjustment of intangible assets 286 121 98 Restructuring and special charges 153 312 Interest expense 210 135 83 Interest income (47) (45) (51) Other expense (income) -- net (31) (89) (86) - --------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (85) 127 356 Income taxes expense (benefit) 46 (22) 77 - --------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM CONTINUING OPERATIONS (131) 149 279 - --------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM DISCONTINUED OPERATIONS, net of tax (119) 321 106 - --------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $ (250) $ 470 $ 385 =================================================================================================== BASIC EARNINGS (LOSS) PER SHARE: Continuing operations $(0.22) $ 0.26 $ 0.48 Discontinued operations (0.19) 0.54 0.18 - --------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $(0.41) $ 0.80 $ 0.66 =================================================================================================== DILUTED EARNINGS (LOSS) PER SHARE: Continuing operations $(0.22) $ 0.24 $ 0.47 Discontinued operations (0.19) 0.53 0.17 - --------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $(0.41) $ 0.77 $ 0.64 =================================================================================================== KEY FINANCIAL STATISTICS (Unaudited) 1998 1997 1996 - --------------------------------------------------------------------------------------------------- AS A PERCENT OF NET SALES: Selling, General and Administrative Expenses 29% 29% 32% Technological Expenses 18 17 14 Research and Development Expenses 17 16 13 Income from Continuing Operations 2 6 =================================================================================================== The above statement should be read in conjunction with Notes to Financial Statements of this report. Research and development expenses are included in total technological expenses. This financial statistic is not meaningful for 1998 because Monsanto reported a loss from continuing operations.
3 Review of Consolidated RESULTS OF OPERATIONS - ----------------------------------------------------------------------- Subsequent to the date of these consolidated financial statements (December 31, 1998), but prior to the date of this amended 10-K/A, Monsanto announced its intention to sell the artificial sweetener and biogum businesses. The results of operations, financial position, and cash flows of these businesses, and of the alginates and Ortho(R) lawn- and-garden products businesses, the divestiture of which was approved by Monsanto's Board of Directors in 1998, have been reclassified as discontinued operations; and, for all periods presented, the consolidated financial statements and notes have been reclassified to conform to this presentation. The Company expects to sell these businesses for a gain by July 2000. In addition, Monsanto transferred the Roundup(R) lawn-and-garden and nutrition research operations of the former Nutrition and Consumer Products segment to the Agricultural Products and Corporate and Other segments, respectively (see Notes to Financial Statements, DISCONTINUED OPERATIONS disclosure for further details). MONSANTO ACHIEVES RECORD SALES, BUT INCOME EXCLUDING UNUSUAL CHARGES DECLINES In 1998, Monsanto completed several critical steps in its life sciences strategy. The company acquired three major seed companies - Plant Breeding International Cambridge Limited (PBIC), a leading European plant breeder with an emphasis in wheat; certain international seed operations of Cargill(R) Inc., which includes germplasm, and a broad marketing and distribution network; and DEKALB(R) Genetics Corp., a worldwide leader in agricultural genetics and biotechnology for corn and soybeans. In addition, the company announced an agreement to merge Delta and Pine Land Co. (D&PL), a leading breeder, producer and marketer of cotton seed, with Monsanto. In December 1998, Monsanto's board of directors approved a restructuring plan to continue the commitment to life sciences, to exit from nonstrategic businesses and to reduce costs. The company also issued debt and equity of approximately $4.5 billion in 1998. Sales reached a record in 1998, as sales of key products continued to grow. However, the company recorded a loss from continuing operations of $131 million, or $0.22 per share. Those results included aftertax charges of $610 million, or $1.01 per share, for restructuring charges, write-offs of in-process research and development (R&D) related to acquisitions, and other unusual charges. If these unusual charges were excluded, income from continuing operations would have totaled $479 million, or $0.76 per share. Income from continuing operations totaled $149 million, or $0.24 per share, in 1997. Excluding unusual aftertax charges of $404 million, or $0.66 per share, for write-offs of in- process R&D, income from continuing operations in 1997 would have been $553 million, or $0.91 per share. Without the unusual items in 1998 and 1997, income from continuing operations would have declined $74 million. The decrease in income from continuing operations, excluding unusual items, was caused by increased selling, general and administrative (SG&A) expenses, technological expenses and interest costs, which more than offset the 19 percent increase in net sales. SALES BOOSTED BY AGRICULTURAL AND PHARMACEUTICAL BUSINESSES Net sales reached a record $7.24 billion in 1998, surpassing last year's net sales of $6.06 billion. The sales increase came primarily from continued strong performances by the Agricultural Products and Pharmaceuticals segments. Net sales for Agricultural Products set a record in 1998, led by significant sales volume increases for the family of Roundup(R) herbicides. Volume gains for Roundup (R) of more than 20 percent were driven by increased use of Roundup(R) for conservation tillage and other applications, including the use of Roundup(R) over the top of Roundup Ready(R) soybeans, canola, corn and cotton. The increase in 1998 net sales for the Agricultural Products segment also reflected higher technology fee revenues from crops developed through biotechnology. Demand for Roundup Ready(R), soybeans, cotton, and canola, Bollgard(R) insect-protected 4 cotton, and Yieldgard(R) insect-protected corn rose substantially in 1998. In addition, record sales volumes of Posilac(R) bovine somatotropin and the successful introduction of Roundup Ready(R) corn in the United States in 1998 contributed to the sales increase. An increase in seed sales was driven by higher sales at the company's Asgrow subsidiary and by the inclusion of sales from seed companies Monsanto acquired in 1998 and late 1997. Net sales for the Pharmaceuticals segment also grew to record levels, increasing $448 million, or 19 percent, from 1997 net sales. The increase was driven by significantly higher sales volumes of Arthrotec(R) arthritis treatment, which was launched in the United States and France in 1998. With Arthrotec(R) and Daypro(R) arthritis treatments, Searle ended the year as the No. 1 provider of branded prescription arthritis treatments in the United States. Sales of Ambien(R) short-term treatment for insomnia also grew, holding 52 percent of the total U.S. prescription market share at the end of 1998. Higher segment sales year-to-year also came from increased licensing revenues from several collaborative alliances. Lower sales of verapamil calcium channel blockers and Cytotec(R) ulcer preventive drug partially offset these increases. Monsanto's net sales in markets outside the United States represented 44 percent of net sales in both 1998 and 1997. An analysis of the company's sales change, along with comparative data, follows:
SALES ANALYSIS 1998 1997 - ----------------------------------------------------------------------------------- Selling prices (1)% (4)% Sales volumes and mix 18 14 Acquisitions 1 14 Pharmaceutical licensing revenues 4 1 Exchange rates (3) -- - ----------------------------------------------------------------------------------- TOTAL CHANGE 19% 25% ===================================================================================
5 EVENTS AFFECT COMPARABILITY As part of the overall strategy to reduce costs and continue the commitment to the core life sciences businesses, in December 1998, the board of directors approved a plan to exit nonstrategic businesses, close or rationalize certain facilities, and reduce the current work force. Rationalization entails the consolidation, shutdown, or movement of facilities to achieve more efficient operations. The activities Monsanto plans to exit in connection with this plan principally comprise a tomato business, in which Monsanto has been attempting to develop tomatoes improved through genetic engineering techniques; and a business involved in the operation of membership-based health and wellness centers. This plan also contemplates exiting several small, embryonic business activities, none of which had a significant impact on restructuring reserve. The company recorded pretax restructuring charges and other unusual items of $327 million ($226 million aftertax) in continuing operations to cover the costs associated with these actions, which were recorded in the Statement of Consolidated Income (Loss) in the following categories:
WORK FORCE FACILITY ASSET REDUCTIONS CLOSURES IMPAIRMENTS OTHER TOTAL - -------------------------------------------------------------------------------------------------- Cost of Goods Sold $ 6 $ 48 $ 54 Amortization and adjustment of intangible assets $ 3 39 $ 42 Restructuring and special charges $103 90 $(5) $188 Other expense (income) - net 43 $ 43 - -------------------------------------------------------------------------------------------------- TOTAL INCREASE IN LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES $103 $99 $130 $(5) $327 ==================================================================================================
Approximately 1,400 jobs are expected to be eliminated by these actions by the end of 1999, primarily in manufacturing and administrative functions. Included in these actions are approximately 190 positions that had been part of the 1996 restructuring plan. The affected employees are entitled to receive severance benefits based on established severance policies or by governmentally mandated employment regulations. The charges also reflect pretax amounts for asset impairments, primarily for property, plant and equipment; intangible assets; and certain investments, totaling $130 million. The asset impairments were recorded primarily because of the company's decision to sell certain nonstrategic businesses. As a result, the net assets of these businesses have been classified as assets held for sale and are carried at their net realizable value, estimated to be approximately $36 million ($33 million in the agricultural Products segment, and $3 million in the Corporate and Other segment). These businesses are expected to be sold by the end of 1999. They produced net income of $3 million in 1998, a net loss of $7 million in 1997, and a net loss of $31 million in 1996. The aftertax effect of suspending depreciation on assets held for sale was not material. Other impairment charges totaling $40 million were recorded because of management's decision, driven by adverse business developments of the investee, to exit certain long-term investments. Fair values of the impaired assets and the businesses held for sale were recorded at their current market values or at estimated sales proceeds, based on either discounted cash flows or sales contracts. The December restructuring amounts also included pretax charges of $99 million for the shutdown or rationalization of certain production and administrative facilities. Approximately 80 facilities, located primarily in the U.S., Europe and Latin America, will be impacted by these actions. Charges for these shutdowns included $21 million for property, plant and equipment, $15 million for intangible assets, $26 million for miscellaneous investments, and $6 6 million for inventories. Leasehold termination costs of $13 million and various facility closure costs of $18 million, principally for facilities shutdown costs, equipment dismantling and contract cancellation payments, are also included in the shutdown charges. The closure or rationalization of these facilities is expected to be completed by the end of 1999. Cash payments to implement the plan are expected to be approximately $220 million through March 2000. These cash payments will be funded from operations and are not expected to significantly impact Monsanto's liquidity. The restructuring actions are expected to result in annual pre-tax cash savings of $150 million. In May 1998, the board of directors approved a decision to exit Monsanto's optical products business, which included the Orcolite(R) and Diamonex(R) optical products businesses and the Diamonex(R) performance products business (both reported in the Corporate and Other segment), and recorded net pretax charges of $48 million ($34 million aftertax). Monsanto recognized a $20 million pretax gain on the sale of the Orcolite(R) business and recorded pretax charges of $68 million for the rationalization of the Diamonex(R) business, primarily for severance costs and the write-off of manufacturing facilities and intangible assets. In connection with this rationalization, certain Diamonex(R) product lines were sold, and others were shut down. In connection with the shutdown of the Diamonex(R) business approximately 200 jobs, primarily in manufacturing and administrative functions, were eliminated at a total cost of $6 million. These actions, including work force reductions and payment of severance, were substantially complete by Dec. 31, 1998. The sale of the remaining assets, which are classified as assets held for sale and carried at their net realizable value of $7 million, is expected to be completed during 1999. Fair values of the impaired assets and the businesses held for sale were recorded at their current market values, based on estimated cash flows, or appraisals. Net income generated by the optical products businesses in 1998, 1997 and 1996 totaled $2 million, $5 million and $2 million, respectively. Also during the second quarter of 1998, Monsanto recognized a pretax gain of $35 million ($21 million aftertax) primarily related to the reversal of a restructuring reserve based on a decision not to rationalize a European pharmaceutical production facility. There were approximately 70 jobs scheduled to be eliminated as part of this rationalization plan. The decision was driven by changes in the business and regulatory environment, and successes in the R&D pipeline. The net result of the actions was a pretax charge of $13 million (also $13 million aftertax) in the second quarter of 1998, recorded in the Statement of Consolidated Income (Loss) in the following categories: 7
WORK FORCE FACILITY ASSET REDUCTIONS CLOSURES IMPAIRMENTS OTHER TOTAL - ----------------------------------------------------------------------------------------------- Cost of Goods Sold $6 $ 2 $36 $ 44 Amortization and adjustment of intangible assets 24 24 Restructuring and special charges (26) $ (9) (35) Other expense (income) - net (20) (20) - ----------------------------------------------------------------------------------------------- TOTAL INCREASE IN LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES $6 $(24) $60 $ (29) $ 13 ===============================================================================================
Also in 1998, Monsanto acquired several seed companies, including PBIC, DEKALB, and certain international seed operations of Cargill, which are included in the Agricultural Products segment. Monsanto recorded pretax charges of $422 million ($371 million aftertax) related to these acquisitions, of which $402 million related to the write-off of acquired in-process R&D and $20 million related to the cancellation of DEKALB stock options associated with that acquisition. Management believes that the technological feasibility of the acquired in-process R&D has not been established and that the research has no alternative future uses. Accordingly, the amounts allocated to in-process R&D are required to be expensed immediately under generally accepted accounting principles. The acquired in-process R&D was valued using a discounted cash flow method with risk-adjusted discount rates generally ranging from 12 percent to 20 percent, which took into account the stage of completion and development cycle of each in-process R&D category. See further discussion under Agricultural Products and in the Principal Acquisitions and Divestitures footnote to the financial statements. During 1997, Monsanto acquired several seed companies that specialize in various stages of seed production. These acquisitions included the Asgrow Agronomics seed business, a global leader in soybean research and seeds; Holden's Foundation Seeds Inc., a global leader in the development and growth of corn germplasm and a supplier of parent seed to retail seed companies; Corn States Hybrid Service Inc., the exclusive marketer and distributor for Holden's products; and Sementes Agroceres S.A., the leading seed corn company in Brazil. Monsanto also acquired the remaining interest in Calgene Inc., which has done significant biotechnology research in cotton and produce. The company recorded pretax charges of $633 million ($404 million aftertax)for the write-off of acquired in-process R&D related to these acquisitions. As part of restructuring actions approved prior to 1996, Monsanto reorganized U.S. staff operations, closed 7 production and administrative facilities in the U.S., 3 production facilities in Europe, 2 administrative in Latin America and completed the exit of a joint venture in Asia. During 1996, these actions eliminated approximately 510 positions. During 1997, a production facility was closed in Canada, a production facility was closed in Europe and a research facility was closed in Japan. These actions eliminated approximately 120 positions. During 1998, final payments were made to complete contractual commitments as part of a U.S. production facility shutdown. 8 COST SAVINGS CONTINUE In prior years, Monsanto took steps to make its worldwide operations more focused, productive and cost-effective. The effect of these actions benefited EBIT by more than $380 million in 1998. The company invested the savings in its core businesses, new product development, and strategic acquisitions and investments to enhance its long-term profitability. These savings are in line with management's original expectations, and are expected to continue. These initiatives will continue as Monsanto responds to increased global competition and higher customer expectations. ACQUISITIONS AND PRODUCT LAUNCH PREPARATIONS DRIVE EXPENSES HIGHER, EBIT LOWER EBIT was $125 million in 1998 compared with $262 million in 1997. EBIT for 1998 included $762 million of restructuring and special charges, write-offs for acquired in-process R&D, and charges for cancellation of DEKALB(R) stock options, as summarized in the following table:
============================================================================================================================= WRITE-OFFS FOR CANCELLATION ACQUIRED IN- OF DEKALB WORK FORCE FACILITY ASSET PROCESS R&D STOCK REDUCTIONS CLOSURES IMPAIRMENTS OPTIONS OTHER TOTAL - ----------------------------------------------------------------------------------------------------------------------------- Cost of Goods Sold $ 6 $ 8 $ 84 $ 98 Acquired In-Process R&D $402 402 Amortization and Adjustment of intangible assets 3 63 66 Restructuring and special charges 103 64 $(14) 153 Other expense (income) 43 $ 20 (20) 43 - ----------------------------------------------------------------------------------------------------------------------------- TOTAL INCREASE IN LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES $109 $ 75 $190 $402 $ 20 $(34) $762 =============================================================================================================================
EBIT for 1997 included unusual charges of $633 million for in- process R&D write-offs. Excluding these unusual charges, EBIT would have been $887 million in 1998, vs. $895 million in 1997. The $8 million decrease in EBIT excluding unusual items was caused by increased SG&A expenses, technological costs, and amortization expense, partially offset by the aforementioned growth in sales. EBITDA (excluding unusual items) grew to $1.41 billion in 1998, a $132 million, or 10 percent, increase from EBITDA (excluding unusual items) of $1.27 billion in 1997. Total SG&A expenses increased $384 million, or 22 percent, in 1998 compared with expenses in 1997, principally because of increased spending in the Agricultural Products and Pharmaceuticals segments. SG&A expenses for Agricultural Products rose primarily because of the inclusion in 1998 of SG&A expenses from the acquired seed companies, and were partially offset by the effect of licensing fees for technical data on glyphosate. SG&A expenses for Pharmaceuticals increased as Searle expanded its sales infrastructure to accommodate the launch of Arthrotec(R) in 1998 and the launch of Celebrex(R) arthritis treatment in early 1999. Total technological expenses in 1998 grew $259 million, or 25 percent, compared with those in 1997, primarily because of higher expenses in the Agricultural Products and Pharmaceuticals segments. Technological expenses for the Agricultural Products segment rose principally because of higher spending on genomics and crop biotechnology initiatives, and the inclusion of expenses from the acquired seed companies. Searle's technological expenses increased markedly, as several product candidates in the pipeline advanced through the later, more expensive phases of development. Expenses for amortization and adjustment of intangible assets, which are included in income from continuing operations and EBIT, increased year-to-year because of the increase in intangible assets related to seed company 9 acquisitions made in 1998 and late 1997, and because of the write-offs of goodwill related to the company's exit from noncore businesses. The non-core business goodwill write-offs reduced EBIT(excluding unusual items) of the Agricultural Products segment by $38 million and the Corporate and Other segment by $26 million. Interest expense -- included in income (loss) from continuing operations -- rose as the amount of debt outstanding increased during 1998. In 1998, other income of $31 million decreased significantly over prior year other income of $89 million. The decrease of $58 million was primarily because of $40 million of losses on common stock investments and $35 million of losses from equity affiliates in 1998, compared with $6 million of income from equity affiliates in the prior year. This decrease of other income was partially offset by lower foreign currency losses of $22 million, primarily in the Asia Pacific region, compared with $52 million in 1997 and slightly higher gains from the sale of product rights of $124 million in 1998 compared with gains of $120 million in 1997. Income tax expense for 1998 of $46 million increased from income tax benefit for 1997 of $22 million, primarily because of $402 million of non-deductible in-process R & D charges and $46 million of non-deductible Goodwill charges principally related to the PBIC, Cargill, and DEKALB acquisitions. If unusual items in 1998 and 1997 were excluded, the effective tax rate would have been 29 percent in 1998 and 27 percent in 1997. DEVELOPMENT AND COMMERCIALIZATION OF NEW PRODUCTS REMAIN PRIORITIES New product discovery, development and commercialization continue to be strategic priorities for Monsanto. Recent efforts include insect- protected and herbicide-tolerant crops; and Celebrex(R), a new arthritis treatment; currently under development. Monsanto's R&D expenditures were $1.24 billion in 1998, or 17 percent of net sales, a level that reflects management's strong long-term commitment to research. The discovery and development of pharmaceutical, agricultural and science-based nutritional products continue to be the focus of most of these expenditures. Significant research and development activity in existing product technologies and new product applications also continues across all business sectors. Genomics is a critical enabling technology for this effort, especially for agricultural and nutritional products. Additionally, Monsanto's research program includes new technologies and proprietary information obtained through licensing and strategic acquisitions. As a result, Monsanto has more than four dozen products in the R&D pipeline and expects many of them to be commercialized in the next few years. PRIOR YEAR REVIEW Income from continuing operations in 1997 totaled $149 million, or $0.24 per share, vs. $279 million, or $0.47 per share, in 1996. Both years' results, however, were affected by unusual items. Results for 1997 included pretax charges of $633 million ($404 million aftertax, or $0.66 per share) for the write-off of acquired in-process R&D related to the acquisition of several seed companies, including Asgrow, Holden's, Corn States, and Agroceres, and the remaining interest in Calgene. In December 1996, Monsanto approved a restructuring plan and recorded pretax charges associated with the closure or rationalization of certain facilities and asset write-offs totaling $327 million ($226 million aftertax or $0.38 per share). The activities Monsanto planned to close or rationalize in connection with this restructuring plan principally comprised production at certain U.S. and European pharmaceutical facilities and the consolidation of certain pharmaceutical and administrative facilities. This plan also included several individually insignificant office and plant consolidations. 10 The 1996 restructuring and unusual charges were recorded in the Statement of Consolidated Income (Loss) in the following categories:
=============================================================================================== WORK FORCE FACILITY ASSET REDUCTIONS CLOSURES IMPAIRMENTS OTHER TOTAL - ----------------------------------------------------------------------------------------------- Cost of goods sold $28 $ 28 Amortization and adjustment of intangible assets 23 23 Restructuring and special charges $224 $88 312 Other expense (income) $(36) (36) - ----------------------------------------------------------------------------------------------- TOTAL $224 $88 $51 $(36) $327 ===============================================================================================
Approximately 1,400 jobs, primarily in manufacturing and administrative functions, were expected to be eliminated by these actions at a cost of $224 million. The affected employees were entitled to receive severance benefits based on established severance policies or by governmentally mandated employment regulations. As of June 30, 1998, the company had eliminated approximately 900 jobs associated with these actions. The original plan approved by senior management called for completion of substantially all of the work force reductions by the second quarter of 1998. However, implementation of the plan was delayed in the second half of 1998 due to Monsanto's contemplated merger with American Home Products Corp. (AHP), announced on June 1, 1998, and the anticipated organizational changes required to integrate these two companies. Following the termination of the proposed merger agreement with AHP on Oct. 13, 1998, management reconsidered the remaining actions originally contemplated in the December 1996 plan, and resumed implementation of the plan with approximately 190 jobs to be eliminated by the end of 1999. In addition, approximately 140 jobs to be eliminated in the original plan were accomplished through attrition during 1997 and 1998. In the fourth quarter of 1998, $33 million of restructuring reserves were reversed due to changes in estimates; principally reflecting the decrease of approximately 120 positions from the original 1996 estimates in the number of jobs to be eliminated combined with a decline in the expected costs of completing the job elimination actions. Included in the facility closure charges for 1996 were charges of $42 million to property, plant and equipment, $20 million of costs associated with the legal reorganization of ex-U.S. corporate entities, $11 million in payments to discontinue a phantom stock program, leasehold termination costs of $2 million, dismantling costs of $5 million, $4 million to exit a joint venture and other shutdown costs of $4 million. Pretax charges for asset impairments of $51 million were related to intangible assets for products to be discontinued and for certain rights to production capacity to be eliminated. Assets were adjusted to their estimated fair values, using appropriate discounted cash flows and discount rates. Other income of $36 million relates to $15 million of minority interest in the losses incurred by Calgene, and a reduction of $21 million in the amount of costs expected to be incurred in connection with the Company's decision to dispose of its plastics business. Without the unusual items in 1997 and 1996, income from continuing operations would have been $553 million for 1997 compared with $505 million for the prior year, an increase of 10 percent. Earnings per share from continuing operations would have been $0.91 in 1997, a 8 percent increase from comparable 1996 results of $0.84 per share. The increases were driven by higher sales, which more than offset increased expenses. Sales grew primarily because of higher sales volumes, and licensing revenues. These increases were partially offset by increased SG&A expenses, higher technological spending, additional intangible amortization expense, and increased interest expense. EBIT totaled $262 million in 1997, compared with $439 million in 1996. EBIT for 1997 included pretax unusual charges of $633 million for in-process R&D write-offs. EBIT for 1996 included pretax unusual charges of $327 million for restructuring and other unusual items. EBITDA(excluding unusual items) totaled $1.27 billion in 1997 vs. $1.06 billion in 1996, an increase of 20 percent. Net sales were $6.06 billion in 1997, up $1.20 billion, or 25 percent, from sales in 1996. The increase came primarily from continued strong performances by the 11 Agricultural Products and Pharmaceuticals segments. The $727 million increase in net sales for the Agricultural Products segment was driven by significant sales volume increases for the family of Roundup(R) herbicides; the inclusion of sales from Asgrow; higher sales volumes of Posilac(R) bovine somatotropin and Harness(R) herbicide; and increased demand for crops developed through biotechnology -- including Roundup Ready(R) soybeans, cotton and canola; Bollgard(R) insect-protected cotton; and Yieldgard(R) insect-protected corn. Net sales for the Pharmaceuticals segment in 1997 increased $369 million, or 19 percent, from 1996 net sales. The increase was attributable primarily to higher sales volumes of Ambien (R) short-term treatment for insomnia and Daypro(R) and Arthrotec(R) arthritis treatments. Sales of these key growth products grew 26 percent from sales in the prior year. Sales also benefited from licensing revenues of $75 million related to a collaborative alliance, partially offset by lower sales of verapamil calcium channel blockers. Total SG&A expenses increased $205 million, or 13 percent, in 1997 compared with expenses in 1996, principally because of spending increases in the Agricultural Products and Pharmaceuticals segments. Total technological expenses increased $392 million, or 60 percent, compared with those in 1996. Technological expenses increased in all segments because of new product development. Amortization and adjustment of intangible assets increased in 1997 compared with amortization in the prior year, principally because of the increase in intangible assets related to seed company acquisitions. The increase in interest expense from that in 1996 was caused by a greater amount of debt outstanding during 1997. In 1997, other income of $89 million was relatively flat when compared with other income of $86 million in 1996. The slight increase of $3 million of other income was primarily because of gains on the sale of product rights of $120 million and $6 million of equity income in 1997 compared with gains from the sale of product rights of $61 million and $22 million of loss from equity affiliates in the prior year. This increase in other income of $87 million was primarily offset by foreign currency losses of $52 million, largely in the Asia Pacific region, combined with $26 million of minority interest expense compared with foreign currency losses of $2 million and minority interest expense of $6 million in the prior year. In 1997, a tax benefit of $22 million was recorded compared with tax expense of $77 million in 1996, primarily because of the decrease in pretax income. If the unusual items in 1997 and 1996 were excluded, the effective tax rate would have been 27 percent in 1997 vs. 26 percent in 1996. 12 ANALYSIS OF CHANGE IN EARNINGS (LOSS) PER SHARE FROM CONTINUING OPERATIONS
BETTER (WORSE) ------------------------ 1998 VS. 1997 VS. 1997 1996 - ----------------------------------------------------------------------------------------------- SALES-RELATED FACTORS: Selling prices $(0.10) $(0.23) Sales volumes and mix 0.88 0.77 Pharmaceutical licensing revenues 0.32 0.07 - ----------------------------------------------------------------------------------------------- TOTAL SALES-RELATED FACTORS 1.10 0.61 =============================================================================================== COST-RELATED FACTORS: Raw material and manufacturing costs (0.05) (0.07) Selling, general and administrative expenses (0.44) (0.09) Technological expenses (0.28) (0.40) Amortization of intangible assets (0.08) -- - ----------------------------------------------------------------------------------------------- TOTAL COST-RELATED FACTORS (0.85) (0.56) =============================================================================================== OTHER FACTORS: Change in shares outstanding, taxes (0.02) (0.04) Exchange rates (0.17) -- Acquisitions and divestitures (0.14) -- Other expenses -- net (0.04) 0.05 - ----------------------------------------------------------------------------------------------- TOTAL OTHER FACTORS (0.37) 0.01 =============================================================================================== Change in earnings (loss) per share before unusual items (0.12) 0.06 UNUSUAL ITEMS: Restructuring and special charges (0.45) 0.37 Acquired in-process research and development 0.14 (0.66) Other unusual items (0.03) -- - ----------------------------------------------------------------------------------------------- TOTAL UNUSUAL ITEMS (0.34) (0.29) =============================================================================================== - ----------------------------------------------------------------------------------------------- CHANGE IN EARNINGS (LOSS) PER SHARE FROM CONTINUING OPERATIONS $(0.46) $(0.23) ===============================================================================================
13 GEOGRAPHIC DATA
NET SALES TO UNAFFILIATED CUSTOMERS (Excluding Interarea Sales) TOTAL ASSETS --------------------------------------------------------------- 1998 1997 1996 1998 1997 - ------------------------------------------------------------------------------------------ United States $4,020 $3,352 $2,545 $10,335 $ 7,093 Europe-Africa 1,371 1,185 1,116 2,725 1,781 Asia-Pacific 556 589 511 544 443 Canada 297 247 231 210 152 Latin America 993 685 459 2,571 1,048 - ------------------------------------------------------------------------------------------ TOTAL $7,237 $6,058 $4,862 $16,385 $10,517 ==========================================================================================
The data above are prepared on an "entity basis," which means that net sales, and assets of each legal entity are assigned to the geographic area where that legal entity is located. For example, a sale from the United States to Latin America is reported as a U.S. export sale. Direct export sales from the United States to third-party customers outside the United States were $245 million for 1998, $200 million for 1997, and $177 million for 1996. Net sales and assets attributable to an individual country, other than the United States, were not material for disclosure. The Brazilian economy continued to experience lower inflation rates during 1997 and 1998. Monsanto designated the Brazilian economy as non-hyperinflationary as of Jan. 1, 1998, and established the Brazilian real as the functional currency for Monsanto's Brazilian operations. In January 1999, Brazil devalued the real due to worsening economic conditions. A continuing decline in value of the Brazilian real may adversely affect future income. Monsanto could experience additional foreign currency transactional losses from the area. Also, future sales may decrease because the decline in the Brazilian economy could cause customers to purchase fewer goods in general, and also because the company's products may become more expensive for customers in that region to purchase in their local currency. In addition, the economic conditions could increase Monsanto's credit risk in Brazil. 14 SEGMENT Data - -----------------------------------------------------------------------------------------------------------------------------
NET SALES EBIT EBITDA ----------------------------------------------------------------------------------------- 1998 1997 1996 1998 1997 1996 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------- Agricultural Products $4,264 $3,470 $2,743 $ 868 $ 827 $ 786 $1,223 $1,035 $ 935 Pharmaceuticals 2,771 2,323 1,954 309 286 253 451 422 383 Corporate and Other 202 265 165 (290) (218) (273) (269) (184) (254) Unusual Items (762) (633) (327) - ----------------------------------------------------------------------------------------------------------------------------- TOTAL $7,237 $6,058 $4,862 $ 125 $ 262 $ 439 $1,405 $1,273 $1,064 ============================================================================================================================= DEPRECIATION TOTAL ASSETS CAPITAL EXPENDITURES AND AMORTIZATION --------------------------------------------------------------------------------------- 1998 1997 1998 1997 1996 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------- Agricultural Products $10,401 $ 4,433 $469 $316 $266 $355 $208 $149 Pharmaceuticals 2,778 2,668 236 175 81 142 136 130 Corporate and Other 1,282 1,311 154 92 65 21 34 19 Discontinued Operations (1) 1,924 2,105 - ----------------------------------------------------------------------------------------------------------------------------- TOTAL $16,385 $10,517 $859 $583 $412 $518 $378 $298 ============================================================================================================================= Discontinued operations assets include net offset effect of liabilities of $339 million for 1998 and $257 million for 1997. Reconciliation of EBIT to income (loss) from continuing operations follows: 1998 1997 1996 ---------------------------------------------------------------------------------------------- EBIT $ 125 $ 262 $ 439 Less: Interest expense (210) (135) (83) Income taxes (46) 22 (77) ---------------------------------------------------------------------------------------------- Income (Loss) from Continuing Operations $(131) $ 149 $ 279 ============================================================================================== The unusual charges in 1998, 1997 and 1996 included restructuring and special charges, write-offs for acquired in-process research and development, and charges for the cancellation of DEKALB(R) stock options. The net total unusual items by segment were as follows: INCOME (EXPENSE) --------------------------------------------- SEGMENT 1998 1997 1996 ---------------------------------------------------------------------------------------------- Agricultural Products $(588) $(633) $(159) Pharmaceuticals (29) (149) Corporate and Other (145) (19) ---------------------------------------------------------------------------------------------- TOTAL $(762) $(633) $(327) ==============================================================================================
In 1998, Monsanto changed its publicly reported measure of segment profitability from operating income to EBIT (excluding unusual items) as a result of adopting Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information." In addition, various smaller businesses were transferred between segments. Segment information for 1997 and 1996 has been restated to conform to the current presentation. Although inflation is relatively low in most of Monsanto's major markets, it continues to affect operating results. To mitigate the effect of inflation, Monsanto has implemented measures to control costs, to improve productivity, to manage new fixed and working capital, and to raise selling prices when government regulations and competitive conditions permit. In addition, the current costs of replacing certain assets are estimated to be greater than the historical costs presented in the financial statements. Accordingly, the depreciation expense reported in the Statement of Consolidated Income (Loss) would be greater if it were stated on a current-cost basis. Sales between segments were not significant. Certain corporate expenses, primarily those related to the overall management of Monsanto, were not allocated to the segments or geographic areas. Corporate assets are primarily investments in affiliates. 15 The principal factors that accounted for the segments' performances in 1998 and 1997, along with the factors that are expected to affect operating results in the near term, are described on the following pages. AGRICULTURAL Products - ---------------------------------------------------------------------------
1998 1997 1996 - ---------------------------------------------------------------------------- Net Sales $4,264 $3,470 $2,743 EBIT (excluding unusual charges) 868 827 786 EBITDA (excluding unusual charges) 1,223 1,035 935 Capital Expenditures 469 316 266 Depreciation and Amortization 355 208 149 - ---------------------------------------------------------------------------- AGRICULTURAL Products - ---------------------------------------------------------------------------
THE AGRICULTURAL PRODUCTS SEGMENT IS A LEADING DEVELOPER, PRODUCER AND MARKETER OF CROP PROTECTION PRODUCTS AND SEEDS. THIS GROUP ALSO DEVELOPS AND MARKETS PRODUCTS ENHANCED BY BIOTECHNOLOGY. THESE PRODUCTS IMPROVE THE EFFICIENCY OF FOOD PRODUCTION AND PRESERVE ENVIRONMENTAL QUALITY FOR AGRICULTURAL AND INDUSTRIAL USES. MORE THAN HALF OF THE UNIT'S HERBICIDE NET SALES ARE MADE OUTSIDE THE UNITED STATES. WEATHER CONDITIONS IN AGRICULTURAL MARKETS WORLDWIDE AFFECT SALES VOLUMES. Net sales for Agricultural Products set a record at $4.26 billion, an increase of 23 percent vs. the previous sales record set in 1997. The increase in net sales was led by the family of Roundup(R) herbicides, which delivered volume growth in 1998 above the historical 20 percent trendline. The United States, Argentina, Brazil and Australia posted record sales volumes of Roundup(R). The large gains in volumes of Roundup(R) were driven by continued adoption of conservation tillage (the practice of substituting the judicious use of herbicides for mechanical tillage), new applications, and increased use of Roundup(R) over the top of Roundup Ready(R) canola, corn, cotton and soybeans. Declines in the U.S. dollar value of local currencies in Indonesia, Australia and Malaysia negatively impacted the translation to U.S. dollars of local currency-denominated operating results in 1998 compared to 1997, primarily in the Agricultural Products segment. Poor economic conditions in Asia limited liquidity and lessened the demand for herbicides, especially in Southeast Asia, where volumes of Roundup(R) declined in 1998. Lower selling prices, principally outside the United States, made Roundup(R) more cost effective in a wide range of crop and industrial uses. The effect of generic competition, especially in certain markets outside the United States, dampened selling prices modestly. However, the effect of lower selling prices was more than offset by the increased sales volumes. Increased demand for crops developed through biotechnology -- especially Roundup Ready(R) soybeans, canola and cotton, and Yieldgard(R) insect-protected corn -- drove technology fee revenues from these crops substantially higher. In addition, Roundup Ready(R) corn sold out in its introductory year in the United States. Seed sales also were higher in 1998 as the company's Asgrow seed business enjoyed a strong year, particularly with seed lines containing the Roundup Ready(R) gene. Sales from Sementes Agroceres S.A. and Holden's Foundation Seeds Inc., which both were acquired in late 1997, also added to revenues. Net sales for the Agricultural Products segment also benefited from record sales of Posilac(R) bovine somatotropin, which increased 26 percent from sales in the prior year. Revenues from the lawn-and-garden products business rose 18 percent to $232 million in 1998 compared with revenues of $197 million in 1997. The increase in revenues is primarily because of $32 million in payments associated with an agreement signed with The Scotts Company to be the marketing partner for 16 Roundup(R) herbicide. (See Notes to Financial Statements, SUBSEQUENT EVENTS disclosure for further details.) In 1999, Roundup(R) for residential use will be marketed through Scotts along with its broad line of residential lawn-and-garden products. Under the agreement Scotts receives a commission for its services as agent based on a varying percentage of the earnings before interest and taxes (EBIT) for the Roundup(R) lawn and garden business. Scotts is also responsible for contributing annually towards the expenses of the Roundup(R) lawn and garden business. Monsanto plans to recognize the amounts due to and from Scotts within marketing expense when incurred. EBIT (excluding unusual items) for the Agricultural Products segment in 1998 increased $41 million compared with 1997 EBIT (excluding unusual items), while EBITDA (excluding unusual items) increased $188 million, or 18 percent, from EBITDA (excluding unusual items) in 1997. EBIT (excluding unusual items) totaled $868 million in 1998, compared with $827 million in 1997, as the growth in net sales was nearly offset by increased operating expenses. Selling, general and administrative (SG&A) expenses rose primarily because of a full-year of inclusion of SG&A costs from the seed companies acquired in 1997, and higher global development costs, including higher information technology expenses. These increases were partially offset by $36 million of licensing fees for technical data on glyphosate. Technological expenses grew principally because of higher spending on crop biotechnology development initiatives, inclusion of recently acquired seed company technological spending, and additional genomics research. Depreciation and amortization increased by $147 million, or 71 percent, primarily because of the completion of additional manufacturing capacity for Roundup(R) and because of 1997 seed company acquisitions. Pretax unusual items in 1998 included: charges of $402 million for the write-off of in-process research and development (R&D); a $20 million charge for the cancellation of stock options in exchange for cash related to the acquisition of DEKALB Genetics Corp.; and a charge of $166 million for restructuring and other actions, principally related to the cost of work force reductions ($52 million) and asset impairments ($81 million). The in-process R&D charges were primarily associated with the acquisitions of DEKALB, Plant Breeding International Cambridge (PBIC) and certain international seed operations of Cargill Inc. In 1997, the unusual items included $633 million of pretax charges for in-process R&D write-offs associated with several seed company acquisitions. In-process R&D charges for the seed company acquisitions cover numerous seed breeding projects, no single one of which was significant, as is typical in the seed breeding industry. These projects consist of conventional breeding programs for corn, wheat and other hybrids; conventional breeding for soybean varieties; and the development of transgenic crops. In-process R&D projects for the 1997 acquisition of Calgene Inc. included a project to develop naturally colored cotton fiber. The in-process R&D projects were valued using a discounted cash flow method with risk-adjusted discount rates generally ranging from 12 to 20 percent, which took into account the stage of completion and the appropriate development cycle of each in-process R&D category. Successful commercialization of products developed through these projects is expected to occur five to nine years after program initiation. Revenues from the cotton fiber project related to the Calgene acquisition are expected to begin in 2001. While there are risks associated with the ultimate completion and commercialization of these research projects (specific risks are discussed under "Cautionary Statements Regarding Forward-Looking Information - Factors Affecting the Agricultural Products Segment" below), the failure of any one project would not materially affect the total value of the overall research programs. The in-process projects were at various stages of completion at the dates of acquisition. During the next nine years, management expects to spend approximately $333 million on biotechnology-related activities and $220 million on conventional breeding activities to complete these in-process R&D projects; $124 million in 1999, $118 million in 2000, $100 million in 2001, $80 million in 2002, $60 million in 2003 and $71 million thereafter. Monsanto intends to fund these costs, consisting primarily of salary and benefit expenses for R&D employees, with cash generated from existing businesses. Revenues from the in-process R&D projects related to the 1997 acquisitions began in 1998. Revenues from the in-process R&D projects 17 related to the 1998 acquisitions are expected to begin in 1999. In-process projects acquired in connection with the 1997 purchases of Asgrow Agronomics, Holden's, Calgene, and Agroceres have been progressing in line with original expectations. PRIOR YEAR REVIEW Net sales were 27 percent higher in 1997 vs. 1996 net sales. The sales increase in 1997 was the result of higher worldwide sales volumes for the family of Roundup(R) herbicides, led by strong sales in Brazil, Argentina, and the United States. Sales volumes of Roundup(R) herbicide were driven to a new high by increases in the use of conservation tillage, increases in planted acres and applications of Roundup(R) on Roundup Ready(R) crops. Selling price reductions, principally in markets outside the United States, made Roundup(R) more cost effective for weed control in a broader range of uses. The effect of generic competition, especially in certain markets outside the United States, dampened selling prices modestly. However, the effect of increased sales volumes more than offset the effect of lower selling prices. Sales from seed companies acquired in 1997, particularly Asgrow, also added to segment sales. Also contributing to sales increases were record sales of Posilac(R) bovine somatotropin; increased demand for crop biotechnology traits, including Roundup Ready(R) soybeans, canola and cotton, Bollgard(R) insect-protected cotton, and Yieldgard(R) insect- protected corn; and higher sales volumes of certain acetanilide-based herbicides, particularly Harness(R). EBIT (excluding unusual items) for the Agricultural Products segment increased by $41 million from 1996 to 1997, and EBITDA (excluding unusual items) grew $100 million in the same period. The effect of sales volumes increases on 1997 EBIT (excluding unusual items) and EBITDA (excluding unusual items) was partially offset by higher technology costs for crop biotechnology initiatives, and by the inclusion of seed company SG&A expenses for the full year. EBIT (excluding unusual items) was also negatively affected by higher amortization costs in 1997, principally from the acquisition of Holden's. In 1997, the unusual charges included $633 million of pretax charges for the write-offs for in-process R&D associated with the acquisition of various seed companies. In 1996, the net unusual items included $159 million of pretax charges for restructuring and other actions, principally related to the cost of work force reductions ($115 million) and asset impairments ($44 million). OUTLOOK AGRICULTURAL PRODUCTS as of March 25, 1999 Monsanto's family of Roundup(R) herbicides continues to face competition from generic producers in certain markets outside the United States. Patents protecting Roundup(R) expired in several countries in 1991. Compound per se patent protection for the active ingredient in Roundup(R) herbicide continues in the United States through September 2000. During 1998, Monsanto further strengthened its branding strategy for Roundup(R) with new service and formulation offerings. The company also amended, or entered into, several agreements to supply the active ingredient in Roundup(R) to third parties. Several manufacturing process enhancements were implemented in 1998 to further lower Monsanto's cost position, and to increase its capacity. In the future, management expects rapidly expanding production capacity and additional technological enhancements in manufacturing and formulations, will continue to improve Monsanto's cost structure and help maintain its leadership position. Significant growth potential remains for Roundup(R) in conservation tillage applications worldwide and in applications over-the-top of crops designed to tolerate Roundup(R). A planned price reduction for Roundup(R) in the United States was implemented in the fall of 1998 to accelerate 18 volume growth, and to competitively position Roundup(R) long term. In numerous markets worldwide during the past 15 years, management believes that price reductions for Roundup(R) were an important factor in volume growth via price elasticity in key market segments. At lower prices in the past, more growers used more Roundup(R) in new applications (such as conservation tillage and preharvest), treated more acres in existing applications, and used higher rates per treated acre as Roundup(R) became more economical. As discussed in the Principal Acquisitions and Divestitures note in the Notes to Financial Statements, Monsanto made several strategic acquisitions of agricultural seed companies during the past two years. In 1997, Monsanto acquired the Asgrow Agronomics seed business, Holden's and Agroceres. In 1998, the company acquired PBIC, DEKALB and certain international seed operations of Cargill. In addition, Monsanto announced an agreement to merge Delta and Pine Land Company (D&PL) with Monsanto in a stock swap transaction. This transaction, already approved by D&PL shareowners, is subject to regulatory approvals and other customary conditions. These acquisitions are expected to result in earnings dilution over the next few years. Monsanto announced in January 1999 its intent to sell its Stoneville Pedigreed Seed Company. These transactions will essentially complete the network Monsanto management believes it needs in major crops to compete successfully in the global agricultural marketplace. No additional major seed company acquisitions are planned. The acquisition and successful integration of these seed companies as members of Monsanto's life sciences business, and partnerships such as the Monsanto/Cargill(R) joint venture -- Renessen LLC -- are expected to enhance the company's ability to bring new products to market by helping Monsanto commercialize and distribute its own agronomic traits, and traits designed to improve the quality of food or feed, as well as traits licensed from other companies. The company marketed more than 10 biotechnology-related plant sciences products during 1998 with its licensing partners, including: Roundup Ready(R) corn, canola, cotton and soybeans; corn, cotton and potatoes protected from certain insects; and cotton that is both insect- protected and Roundup Ready(R). These products were developed by Monsanto either alone or in partnership with biotechnology and seed production companies. Although demand for biotechnology-related plant sciences products remains strong among growers, Monsanto continues to address concerns of consumers, public interest groups, and government regulators, particularly outside the United States. Such concerns are not uncommon as new technologies are commercialized. The company also is involved in intellectual property disputes with several parties. Management expects that such disputes will continue to occur as the agricultural biotechnology industry evolves. 19 PHARMACEUTICAL Products - -----------------------------------------------------------------------
1998 1997 1996 - ----------------------------------------------------------------------- Net Sales $2,771 $2,323 $1,954 EBIT (excluding unusual charges) 309 286 253 EBITDA (excluding unusual charges) 451 422 383 Capital Expenditures 236 175 81 Depreciation and Amortization 142 136 130 - -----------------------------------------------------------------------
THE PHARMACEUTICALS SEGMENT REFLECTS THE OPERATIONS OF SEARLE, WHICH DEVELOPS, PRODUCES AND MARKETS PRESCRIPTION PHARMACEUTICALS. ITS MAJOR PRODUCTS INCLUDE MEDICATIONS TO RELIEVE THE SIGNS AND SYMPTOMS OF ARTHRITIS, TO CONTROL HIGH BLOOD PRESSURE, TO RELIEVE INSOMNIA, TO PREVENT THE FORMATION OF ULCERS, AND TO PROVIDE BETTER HEALTH CARE FOR WOMEN. In 1998, net sales for Pharmaceuticals grew to a record $2.77 billion, $448 million, or 19 percent, higher than 1997 net sales. Sales of Arthrotec(R) arthritis treatment more than tripled to $346 million, aided by launches in the United States and France and increased volume growth in other key countries. Searle ended the year as the No. 1 provider of branded arthritis treatments in the United States, as Arthrotec(R) and Daypro(R) arthritis treatments combined for 13 percent branded market share. Ambien(R) short-term treatment for insomnia grew in market share; by year- end it held 52 percent share of total U.S. prescriptions. Sales increased by 16 percent, to a record $458 million. Segment net sales also benefited from licensing revenues totaling $335 million associated with several collaborative alliances compared with $75 million of licensing revenues in 1997. Partially offsetting these higher revenues were lower sales of verapamil calcium channel blockers and Cytotec(R) ulcer preventive drug. EBIT (excluding unusual items) for the Pharmaceuticals segment totaled $309 million in 1998 compared with $286 million in 1997, an increase of $23 million, or 8 percent. EBITDA (excluding unusual items) totaled $451 million in 1998 vs. EBITDA (excluding unusual items) of $422 million in 1997, an increase of $29 million, or 7 percent. The improvements in EBIT (excluding unusual items)and EBITDA (excluding unusual items) in 1998 resulted primarily from higher volumes of key products and from licensing revenues, partially offset by increased selling, general and administrative (SG&A) and technological expenses. SG&A expenses rose primarily because of the launches of Arthrotec(R) and the preparations for the launch of Celebrex(R) arthritis treatment. Other income of $85 million remained relatively unchanged when compared with $81 million in 1997. Included in other income was the sale of product rights totaling $124 million in 1998 and $120 million in 1997. On Dec. 31, 1998, the U.S. Food and Drug Administration (FDA) approved Celebrex(R) for the treatment of the signs and symptoms of osteoarthritis and adult rheumatoid arthritis. Technological cost increases were driven by late-stage, more expensive clinical trials. Pretax net unusual charges in 1998 totaled $29 million and included a gain of $35 million for the reversal of a prior year restructuring reserve; and $64 million of charges, primarily for asset impairments ($42 million) and work force reductions ($22 million). PRIOR YEAR REVIEW Net sales for the Pharmaceuticals segment in 1997 totaled $2.32 billion, a $369 million, or 19 percent, increase vs. 1996 net sales. The sales growth was fueled by higher sales volumes, led by strong performances from Daypro(R), Arthrotec(R) and Ambien(R). In 1997, sales of these products increased 26 percent from sales in the prior year. Segment sales also benefited 20 from $75 million of licensing revenues associated with a collaborative alliance partially offset by lower sales of verapamil calcium channel blockers. EBIT (excluding unusual items) for the Pharmaceuticals segment in 1997 increased $33 million, or 13 percent, compared with EBIT (excluding unusual items) in 1996. EBITDA (excluding unusual items) totaled $422 million in 1997, an increase of $39 million, or 10 percent, from EBITDA (excluding unusual items) of $383 million in 1996. The improvements in EBIT (excluding unusual items) and EBITDA (excluding unusual items) resulted primarily from the sales increases in key products, which was partially offset by increased technological and selling expenses. Technological expenses increased as new product candidates advanced to later, more expensive phases of development. Selling expenses rose because of expansions in Searle's sales force and new product launch preparations. Other income increased to $81 million in 1997 from $69 million in 1996. The increase in other income is primarily due to $120 million of product right sales in 1997 compared with $61 million in 1996 partially offset by higher foreign currency losses in 1997. In 1996, unusual charges included pretax restructuring charges of $149 million, principally for the cost of work force reductions ($100 million) and facility rationalizations ($49 million). OUTLOOK PHARMACEUTICALS as of March 25, 1999 On Dec. 31, 1998, Searle received clearance from the FDA to market Celebrex(R) for the signs and symptoms of osteoarthritis and adult rheumatoid arthritis. Celebrex(R) was launched in the United States in February 1999. It is expected to be launched in more than a dozen other countries during 1999. In early 1999, Searle also received approval to market the drug in Brazil and Mexico. Registration applications are being submitted in various European and Asia-Pacific markets. Searle and Pfizer Inc. will co-promote Celebrex(R) in all countries except Japan, where Searle has formed an alliance with Yamanouchi Pharmaceutical Co. Ltd. to develop and commercialize the drug. The addition of Celebrex(R) further strengthens the company's presence in the arthritis market, which was built on products such as Daypro(R), and Arthrotec(R) and Condrotec-- two therapies that each combine a nonsteroidal anti- inflammatory drug(NSAID) and an ulcer preventive drug. Ambien(R) continues as the leader in the U.S. hypnotic market with a 52 percent share of total prescriptions. Ambien(R) is licensed to a joint venture in which Searle is a general partner. Under the joint venture agreement amended in 1998, Searle's share of profits will be gradually reduced from 90 percent in 1998 to 51 percent in early 2002. The partner is expected to purchase Searle's interest in the joint venture in April 2002. Searle has Phase III product candidates in each of its four therapeutic areas: arthritis/pain and inflammation, cardiovascular disease, women's health care, and oncology. The Phase III arthritis/ pain and inflammation candidates are valdecoxib, which is being developed for the management of pain and arthritis; and parecoxib, which is an injectable COX-2 inhibitor for the management of acute pain. COX-2 is an enzyme which plays a role in pain and inflammation. In cardiovascular Phase III trials, eplerenone is being developed for the treatment of congestive heart failure and high blood pressure. In women's health care, Searle is funding and participating in research to develop hormone replacement therapy patches designed to treat menopausal symptoms and to prevent osteoporosis. These multiple product candidates are also in Phase III clinical trials. Searle also has two compounds in its Phase III oncology pipeline. 21 Celecoxib, a COX-2 inhibitor, is in Phase III trials as a preventive drug for certain types of cancer; and leridistim is being developed to stimulate the replenishment of white blood cells and platelets in chemotherapy patients. Searle announced in January 1999 that it was no longer pursuing development of two other cardiovascular candidates -- the anti-platelet aggregation compounds orbofiban and xemilofiban -- because they were not as efficacious in long-term therapy as expected. Searle discontinued development of a second-generation blood cell growth factor, promegapoietin, after a small number of patients on the drug developed low platelet counts during clinical trials. Development of PluriStem (formerly daniplestim), a blood cell growth factor, was discontinued to focus on leridistim and progenipoietin, which are more promising alternatives. Searle's investment in R&D spending increased to 26 percent of segment sales vs. 25 percent of sales in 1997. Management expects technological expenses and selling expenses to increase in the next few years as Searle continues to discover and develop new products and as it commercializes products now in the pipeline. The company expects that new alliances, similar to those forged with Pfizer and Yamanouchi, could offset some of the costs associated with developing and marketing new pharmaceuticals. Such alliances will accelerate development and broaden the geographic reach of Searle products commercialized during the next several years. CORPORATE AND OTHER - ------------------------------------------------------------------------ The Corporate and Other segment comprises various smaller businesses, as well as certain corporate items that are not allocated to the segments. This segment's sales decreased in 1998 from 1997 levels by $63 million. This change was primarily driven by lower sales of Enviro-Chem's environmental abatement products. The divestiture of the Orcolite(R) opthalmics business in the second quarter of 1998 also contributed to the sales decline. Monsanto shut down the Diamonex(R) optical products division in 1998. It also expects to divest its interests in the health and wellness area in the first half of 1999. Additionally, Monsanto transferred the remaining nutrition research operations of the former Nutrition and Consumer Products segment to the Corporate and Other segment. On an EBIT (excluding unusual items) basis, the corporate and other segment recorded a loss of $290 million in 1998 compared with a loss of $218 million in 1997. The segment loss increased principally because of the sales decline in the segment and because of higher selling, general and administrative (SG&A) and technological spending, primarily related to incentive compensation and information technology expenses. The segment's loss, on an EBIT (excluding unusual items) basis, decreased in 1997 from that in 1996 primarily because of increased sales at Enviro-Chem and the opthalmics business. In 1998, unusual charges included pretax restructuring and other special charges of $145 million, principally for the cost of facility shutdowns ($64 million) and asset impairments ($67 million). In 1996, unusual items included pretax restructuring charges of $19 million, primarily for the cost of work force reductions ($9 million) and asset impairments ($7 million). 22 DISCONTINUED OPERATIONS Subsequent to the date of these consolidated financial statements (December 31, 1998), but prior to the date of this amended 10-K/A, Monsanto announced its intention to sell the artificial sweetener and biogum businesses. The results of operations, financial position, and cash flows of these businesses, and of the alginates and Ortho(R) lawn-and-garden products businesses, the divestiture of which was approved by Monsanto's Board of Directors in 1998, have been reclassified as discontinued operations; and, for all periods presented, the consolidated financial statements and notes have been reclassified to conform to this presentation. The Company expects to sell these businesses for a gain by July 2000. In addition, Monsanto transferred the Roundup(R) lawn-and-garden and nutrition research operations of the former Nutrition and Consumer Products segment to the Agricultural Products and Corporate and Other segments, respectively (see Notes to Financial Statements, DISCONTINUED OPERATION disclosure for further details).
- ------------------------------------------------------------------------ 1998 1997 1996 - ------------------------------------------------------------------------ Net Sales $1,288 $3,279 $ 4,339 Income (Loss)from Discontinued Operations Before Income Tax (158) 506 184 Income Tax Expense (Benefit) (39) 185 78 Net Income (Loss) from Discontinued Operations (119) 321 106 - ------------------------------------------------------------------------
DISCONTINUED OPERATIONS IN 1998 INCLUDE THE ALGINATES, ARTIFICIAL SWEETENERS, AND BIOGUMS BUSINESSES. THESE BUSINESSES MANUFACTURE AND MARKET SWEETENERS (INCLUDING NUTRASWEET(R) BRAND SWEETENER AND EQUAL(R) AND CANDEREL(R) TABLETOP SWEETENERS), ALGINS, BIOGUMS AND OTHER FOOD INGREDIENTS. DISCONTINUED OPERATIONS FOR 1997 AND 1996 ALSO INCLUDES THE CHEMICALS BUSINESS WHICH WAS SPUN OFF TO SHAREHOLDERS ON SEPTEMBER 1, 1997. Net sales for discontinued operations decreased in 1998 vs. net sales in 1997 primarily because of the spin off to shareholders of the chemicals business. Sales of NutraSweet(R), the company's trademark aspartame product, decreased 17 percent in 1998 compared with sales in 1997, because of lower sales volumes. Sales of tabletop sweeteners rose modestly in 1998, reflecting market share gains in the United States and higher sales of sweetener products in Latin America. Biogum sales rose from sales of xanthan and gellan gum products to food manufacturers and to industrial customers. In early 1999, the company sold its lawn-and-garden products business, exclusive of Roundup(R), to The Scotts Company. Discontinued operations reported a net loss of $(119) million in 1998 compared with net income of $321 million in 1997. This decrease of $440 million is primarily because results of the chemical company are no longer included in 1998 discontinued operations and unusual charges which included pretax restructuring charges of $298 million, principally for the cost of facility shutdowns ($187 million), workforce reductions ($27 million), and asset impairments ($84 million). Unusual items in 1997 included $51 million of pretax charges for in-process research and development (R&D) related to the acquisition of the Calgene oils business. PRIOR YEAR REVIEW DISCONTINUED OPERATIONS Discontinued operations sales declined 24 percent in 1997 compared with sales in 1996, primarily because 1997 results include only eight months of the chemicals business results which was spun off to shareholders on September 1, 1997. In addition, lower sales volumes of Equal(R) and Canderel(C) tabletop sweeteners, partially offset by higher sales volumes of biogums contributed to 23 the decrease in sales. Sales of NutraSweet(R) aspartame product, were essentially flat compared with sales in the prior year. Income from discontinued operations increased by $215 million in 1997 when compared with income from discontinued operations in 1996. However, both years included unusual charge pretax of $51 million and $389 million in 1997 and 1996, respectively. The pretax charge of $51 million in 1997 was for in-process R&D related to the acquisition of the Calgene oils business, including a $15 million project to control fatty acids in oil seeds. In 1996, the unusual items included pretax restructuring charges of $389 million, principally for the cost of work force reductions ($191 million), the rationalization or closure of facilities ($48 million), asset write-offs ($56 million) and exit cost to separate the chemical business ($84 million). 24 Statement of Consolidated FINANCIAL POSITION - ----------------------------------------------------------------------------------------------
(Dollars in millions, except share amounts) As of Dec. 31, - ---------------------------------------------------------------------------------------------- 1998 1997 - ---------------------------------------------------------------------------------------------- ASSETS - ---------------------------------------------------------------------------------------------- CURRENT ASSETS: Cash and cash equivalents $ 89 $ 134 Trade receivables, net of allowances of $87 in 1998 and $53 in 1997 2,119 1,490 Miscellaneous receivables, prepaid expenses and other 777 661 Deferred income tax asset 488 245 Inventories 1,722 1,055 - ---------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 5,195 3,585 - ---------------------------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT: Land 135 72 Buildings 1,133 815 Machinery and equipment 3,175 2,732 Construction in progress 742 266 - ---------------------------------------------------------------------------------------------- Total property, plant and equipment 5,185 3,885 Less accumulated depreciation 2,320 1,964 - ---------------------------------------------------------------------------------------------- NET PROPERTY, PLANT AND EQUIPMENT 2,865 1,921 - ---------------------------------------------------------------------------------------------- INTANGIBLE ASSETS, net of accumulated amortization of $440 in 1998 and $568 in 1997 5,281 1,781 OTHER ASSETS 1,120 1,125 NET ASSETS FROM DISCONTINUED OPERATIONS 1,924 2,105 - ---------------------------------------------------------------------------------------------- TOTAL ASSETS $16,385 $10,517 ============================================================================================== LIABILITIES AND SHAREOWNERS' EQUITY - ---------------------------------------------------------------------------------------------- CURRENT LIABILITIES: Account payable $ 823 $ 394 Wages and benefits 436 242 Restructuring reserves 222 150 Miscellaneous accruals 1,230 803 Short-term debt 1,069 1,726 - ---------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES $ 3,780 $ 3,315 - ---------------------------------------------------------------------------------------------- LONG-TERM DEBT $ 6,259 $ 1,979 POSTRETIREMENT LIABILITIES 848 735 OTHER LIABILITIES 512 384 SHAREOWNERS' EQUITY: Common stock (authorized: 1,000,000,000 shares, par value $2) Issued: 846,927,220 shares in 1998 and 821,970,970 shares in 1997 1,694 1,644 Additional contributed capital 1,389 321 Treasury stock, at cost (217,632,240 shares in 1998 and 226,686,302 shares in 1997) (2,508) (2,570) Reinvested earnings 4,652 4,973 Reserve for ESOP debt retirement (106) (123) Accumulated other comprehensive loss (135) (141) - ---------------------------------------------------------------------------------------------- TOTAL SHAREOWNERS' EQUITY 4,986 4,104 - ---------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREOWNERS' EQUITY $16,385 $10,517 ============================================================================================== The above statement should be read in conjunction with Notes to Financial Statements of this report. ESOP stands for Employee Stock Ownership Plan.
25 Review of Changes in FINANCIAL POSITION - ------------------------------------------------------------------------ FINANCIAL POSITION REMAINS STRONG During 1998, Monsanto acquired several seed companies at a cost of $4.2 billion. These acquisitions included DEKALB Genetics Corp., Plant Breeding International Cambridge Limited, and certain international seed operations of Cargill Inc. Monsanto issued $944 million of common stock, net of issuance costs, and $3.3 billion of long-term debt in 1998, to fund these acquisitions. Monsanto's financial position remained strong following the debt and common stock issuances, as evidenced by the company's "A" debt rating. The ratio of total debt to total capitalization was 60 percent at year-end 1998, compared with 47 percent at year-end 1997. Various alternatives that the company is considering for several of its nonstrategic businesses may result in cash proceeds to reduce the company's debt. At the end of 1998, working capital was $1.14 billion higher than at the end of 1997, primarily because of increases in inventories, trade receivables, and other current assets, and decreases in short-term debt levels. These were partially offset by increases in other short-term liabilities, primarily accounts payable and miscellaneous accruals. Inventories at year-end 1998 increased, principally in the Agricultural Products segment because of seed company acquisitions. Trade receivables at year-end 1998 increased compared with those at the prior year-end, primarily because of seed company acquisitions, higher sales levels, and changes in credit terms for the Agricultural Products segment. Miscellaneous receivables, prepaid expenses, and other assets increased because the net assets of businesses held for sale from continuing operations at year-end 1998 were classified as a single amount in other current assets rather than in various categories of assets and liabilities at year-end 1997. During 1998, Monsanto refinanced a portion of its short- term debt with long-term debt, which resulted in lower short-term debt outstanding at year-end 1998 than at year-end 1997. The amount of net property, plant and equipment at year-end 1998 was higher than the comparable 1997 amount, as $859 million in capital additions and the effects of acquisitions exceeded 1998 depreciation expense and divestitures. The increase in intangible assets was attributable primarily to the seed acquisitions. Total deferred tax assets, both current and noncurrent, of $818 million at year-end 1998 were related primarily to U.S. operations, which generally have a strong earnings history. Monsanto uses financial markets worldwide for its financing needs. It has available various short- and medium-term bank credit facilities, which are discussed in the Short-Term Debt and Credit Arrangements note under the Notes to Financial Statements. These credit facilities give Monsanto the financing flexibility it needs to satisfy future short- and medium-term funding requirements. To maintain adequate financial flexibility and access to debt markets worldwide, Monsanto management intends to maintain an "A" debt rating. Monsanto's commitments and contingencies are described in the Commitments and Contingencies note under the Notes to Financial Statements. 26
KEY FINANCIAL STATISTICS 1998 1997 - ---------------------------------------------------------------------------------------- CURRENT RATIO (Current assets divided by current liabilities) 1.37 1.08 TRADE RECEIVABLES -- DAYS SALES OUTSTANDING 111 96 (Fourth-quarter trade receivables divided by fourth-quarter net sales times 30 days) INVENTORY TURNOVER RATIO (Cost of goods sold divided by inventory) 1.69 2.26 INTEREST COVERAGE 0.60 1.94 (Income (Loss) from continuing operations before interest expense and income taxes divided by total interest cost) CASH PROVIDED BY CONTINUING OPERATIONS/TOTAL DEBT 4% 6% TOTAL DEBT/TOTAL CAPITALIZATION 60% 47% ========================================================================================= If the effects of the restructuring, in-process research and development (R&D) write-offs, and other unusual charges were excluded in 1998, the interest coverage ratio would have been 4.2. If the effects of the in-process R&D write-offs were excluded in 1997, the interest coverage ratio would have been 6.6. Total capitalization is the sum of short-term debt, long-term debt and shareowners' equity.
27 Statement of Consolidated CASH FLOW - ------------------------------------------------------------------------------------------------
(Dollars in millions) Year Ended Dec. 31, - ------------------------------------------------------------------------------------------------ 1998 1997 1996 - ------------------------------------------------------------------------------------------------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS - ------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES: Income (loss) from continuing operations $ (131) $ 149 $ 279 Add income taxes -- continuing operations 46 (22) 77 - ------------------------------------------------------------------------------------------------ Income (loss) from continuing operations before income taxes (85) 127 356 Adjustments to reconcile to Cash Provided by Continuing Operations: Income tax refunds (payments) 44 (134) (308) Items that did not use cash: Depreciation and amortization 518 378 298 Acquired in-process research and development expenses 402 633 Restructuring and special charges 340 327 Other 49 (27) 87 Working capital changes that provided (used) cash: Accounts receivable (700) (230) (289) Inventories (223) (120) (86) Accounts payable and accrued liabilities (280) (238) 280 Receivables from asset sales and licensing arrangements 180 (232) (9) Other (55) (73) 26 Other items 44 (83) 20 - ------------------------------------------------------------------------------------------------ CASH PROVIDED BY CONTINUING OPERATIONS 234 1 702 CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS 198 215 501 - ------------------------------------------------------------------------------------------------ TOTAL CASH PROVIDED BY OPERATIONS 432 216 1,203 - ------------------------------------------------------------------------------------------------ INVESTING ACTIVITIES: Property, plant and equipment purchases (859) (583) (412) Seed company acquisitions and investments (4,061) (1,325) (470) Other acquisitions and investments (231) (358) 7 Investment and property disposal proceeds 199 88 127 Discontinued operations -- other (143) (365) (507) - ------------------------------------------------------------------------------------------------ CASH USED IN INVESTING ACTIVITIES (5,095) (2,543) (1,255) - ------------------------------------------------------------------------------------------------ FINANCING ACTIVITIES: Net change in short-term financing (282) 2,372 297 Long-term debt proceeds 3,878 208 122 Long-term debt reductions (85) (142) (177) Common stock issuance 944 Treasury stock purchases (253) Dividend payments (73) (294) (343) Common stock issued under employee stock plans 62 91 142 Cash transferred to Solutia Inc. (75) Other financing activities 174 135 133 - ------------------------------------------------------------------------------------------------ CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 4,618 2,295 (79) - ------------------------------------------------------------------------------------------------ DECREASE IN CASH AND CASH EQUIVALENTS (45) (32) (131) CASH AND CASH EQUIVALENTS: Beginning of year 134 166 297 - ------------------------------------------------------------------------------------------------ END OF YEAR $ 89 $ 134 $ 166 ================================================================================================
The above statement should be read in conjunction with Notes to Financial Statements of this report. The effect of exchange rate changes on cash and cash equivalents was not material. Cash payments for interest (net of amounts capitalized) were $331 million in 1998, $210 million in 1997, and $195 million in 1996. 28 Review of CASH FLOW - ----------------------------------------------------------------------------- CASH FLOW REMAINS STRONG Cash provided by continuing operations totaled $234 million in 1998, compared with $1 million in 1997. EBITDA (excluding unusual items) was higher by $132 million in 1998 than in 1997, and cash flow benefited from the collection in 1998 of $180 million related to 1997 Pharmaceutical licensing and product rights sales. Working capital needs were higher in 1998, primarily because of seed company acquisitions, higher sales levels, and changes in credit terms for the Agricultural Products segment. Working capital as a percent of net sales was 20 percent in 1998, compared with 4 percent in 1997. Higher interest payments in 1998 were partially offset by the collection of income tax refunds. Cash provided by continuing operations in 1997 included higher employee incentive payouts for the final payment of certain deferred amounts in a three-year incentive plan. Monsanto's operations have historically generated sufficient cash to fund both its existing businesses and its research and development expenses. In 1998, 1997 and 1996, investment and property disposal proceeds came primarily from sales of nonstrategic properties and investments. Major uses of cash in 1998, 1997 and 1996 included investments, capital expenditures and dividends. Major investments in 1998 included the acquisitions of DEKALB Genetics Corp., Plant Breeding International Cambridge Limited, and certain international seed operations of Cargill Inc. Major investments in 1997 were the acquisitions of the Asgrow Agronomics seed business, Holden's Foundation Seeds Inc., Corn States Hybrid Service Inc., and Sementes Agroceres S.A. seed companies. Major investments in 1996 were an equity investment in DEKALB, and the acquisition of the plant biotechnology assets of Agracetus. Monsanto's capital expenditures, which focused on improved technology and capacity expansions, totaled $859 million in 1998. To the extent the company's cash provided by operations was not sufficient to fund its cash needs during 1998, debt and common stock were issued to finance these requirements. Significant debt issuances included $2.5 billion of long-term debt with various maturities issued in December 1998, and 17,500,000 units of 6.5 percent Adjustable Conversion-rate Equity Security (ACES) units with a public offering price of $40 per unit (stated value), or $700 million total, issued in November 1998. The company issued 25 million shares of common stock for $944 million in November 1998. DIVIDEND POLICY IS UNCHANGED Monsanto has paid quarterly dividends on its common shares without interruption since 1928. Throughout 1998, the quarterly dividend paid was $0.03 per share. The dividend rate reflects a policy set by the board of directors following the spinoff of the company's chemical businesses in 1997. That policy was adopted in order to fund appropriately the company's growth opportunities and to create long-term economic value for shareowners. Monsanto's dividend policy also reflects the company's expectations of future growth, profitability, financial position, the need to finance acquisitions, working and fixed capital needs, scheduled debt repayments, and economic conditions, including inflation. Monsanto's common stock is traded principally on the New York Stock Exchange. The number of shareowners of record as of Feb. 12, 1999, was 63,013. The high and low common stock prices on that date were 48 7/8 and 46 15/16, respectively. 29 Statement of Consolidated COMPREHENSIVE INCOME (LOSS) - -----------------------------------------------------------------------------------------------
(Dollars in millions) Year Ended Dec. 31, - ----------------------------------------------------------------------------------------------- 1998 1997 1996 - ----------------------------------------------------------------------------------------------- NET INCOME (LOSS) $(250) $ 470 $ 385 - ----------------------------------------------------------------------------------------------- Other Comprehensive Income (Loss): Foreign currency translation adjustments 12 (138) (91) Unrealized net gains (losses) on investments: Unrealized net holding gains (losses) arising during period, before tax (1) (12) (37) Related income tax benefit 2 4 14 Reclassification adjustments for losses included in net income 16 Related income tax expense (6) Additional minimum pension liability adjustment, before tax (24) (27) Related income tax benefit 7 11 - ----------------------------------------------------------------------------------------------- TOTAL OTHER COMPREHENSIVE INCOME (LOSS) 6 (162) (114) - ----------------------------------------------------------------------------------------------- COMPREHENSIVE INCOME (LOSS) $(244) $ 308 $ 271 ===============================================================================================
The above statement should be read in conjunction with Notes to Financial Statements of this report. Additional FINANCIAL INFORMATION - ------------------------------------------------------------------------ RISK MANAGEMENT Monsanto continually evaluates risk retention and insurance levels for product liability, property damage and other potential risk areas. The company devotes significant efforts to maintaining and improving safety and internal control programs, which reduce its exposure to certain risks. Management's decision about the amount of insurance coverage to purchase from unaffiliated companies and the appropriate amount of risk to retain is based on the cost and availability of insurance and the likelihood of a loss. Since 1986, Monsanto's liability insurance has been a "claims made" policy form. Management believes that the current levels of risk retention are consistent with those of comparable companies in the various industries in which Monsanto operates, and are reasonable for Monsanto. There can be no assurance that the company will not incur losses beyond the limits of, or outside the coverage of, its insurance. Monsanto's liquidity, financial position and profitability are not expected to be materially affected by the levels of risk retention that the company accepts. COMPANY PREPARES FOR YEAR 2000 Beginning in 1996, the company initiated the Global Year 2000 program (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 more than 100 company sites in 33 countries. DESCRIPTION AND STATUS OF THE Y2K PROGRAM INTERNAL SYSTEMS: The company's Y2K program encompasses all internal systems, including conventional information technology (IT) business applications, IT infrastructure and embedded systems. Embedded systems include process control and manufacturing, and laboratory automation systems, as well as site-specific facility management systems, such as elevator service and heating and cooling equipment. 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 work required, prioritization of the work, and successful completion of the required remediation activity. The target date for completion of all remediation work for internal systems is the third quarter of 1999. 30 The following list summarizes the status of the Y2K program with respect to internal systems: IT APPLICATIONS PORTFOLIO: - --------------------------------------------------------------------------------------------
AS OF DEC. 31, AS OF SEPT. 30, 1998 1998 - -------------------------------------------------------------------------------------------- Number of applications identified 1,280 1,260 Applications assessed for Y2K compliance 100% 100% Applications compliant 55% 43% Applications to be remediated through replacements and upgrades 23% 27% Anticipated retirements 3% 3% Applications at various stages of renovation, redevelopment or testing 19% 27% IT INFRASTRUCTURE PRODUCTS: - -------------------------------------------------------------------------------------------- AS OF DEC. 31, AS OF SEPT. 30, 1998 1998 - -------------------------------------------------------------------------------------------- Number of products identified 530 530 Products researched for compliance 93% 43% Products compliant 56% 18% Products to be remediated with minor upgrades 10% 1% Noncompliant products to be remediated or retired 27% 24% EMBEDDED SYSTEMS: - -------------------------------------------------------------------------------------------- AS OF DEC. 31, AS OF SEPT. 30, 1998 1998 - -------------------------------------------------------------------------------------------- Number of process control products identified 7,600 4,600 Products researched for compliance 66% 31% Products compliant 54% 24% Products application dependent 4% 4% Noncompliant products to be remediated or retired 8% 3% Number of laboratory automation products identified 5,000 3,900 Products researched for compliance 75% 0% Products compliant 52% Products application dependent 10% Noncompliant products to be remediated or retired 13% Number of site facilities products identified 700 300 Products researched for compliance 69% 9% Products compliant 56% 7% Products application dependent 7% 2% Noncompliant products to be remediated or retired 6% - --------------------------------------------------------------------------------------------
SUPPLIERS: Monsanto 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 50 percent of the company's key corporate suppliers have been identified as likely to be Y2K compliant. The status of another 24 percent of these key suppliers is of concern and further action is being taken by managers responsible for these suppliers or supplier contracts. Approximately 26 percent of the key suppliers have not informed the company of their compliance status or plans. Where appropriate, Monsanto representatives will conduct in-depth investigations or make on-site visits to determine the ability of certain suppliers to be Y2K compliant. CONTINGENCY PLANS: The company's contingency plans are evolving as it proceeds with the Y2K program. Monsanto began a major initiative in November 1998 with the establishment of the Y2K business continuity team. The team's assignment is to clearly define critical, global infrastructure components and failure modes; to assume Y2K related 31 failure or a high risk of critical failure; and to draft appropriate contingency plans. The team will expand existing contingency plans as appropriate. Its goal is to have all plans in place no later than the third quarter of 1999. Where a supplier's performance is in doubt, Monsanto's contingency plans may include the stockpiling of raw materials or obtaining supplies from a different vendor. The company will increase the number of tests for pharmaceutical and nutrition products as the year 2000 nears, and it also may increase production of critical product inventory. COSTS The costs associated with Y2K compliance for Monsanto are currently projected at approximately $30.5 million. Through Dec. 31, 1998, the company spent $15.3 million. The remaining estimated costs are expected to be funded from ongoing operations. These 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 that may be incurred upon implementation of the company's contingency plans. Monsanto 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 Monsanto believes that the Y2K program follows both prudent and best demonstrated practices (including contingency planning) and makes use of appropriate internal and external skills to minimize the effect of any failures. However, because the year 2000 problem is unprecedented in scope and complexity, no complete assurance of risk avoidance can be given. Failure to correct a material year 2000 problem could result in lost profits or breach of contract claims if the company is unable to deliver its products pursuant to the terms of its agreements, or if such products fail to meet contract specifications, or if claims for personal injury or property damage at its facilities are made and upheld. Monsanto also may experience lost revenues if any of its customers experience Y2K problems which cause them to order less product, or otherwise causes them financial difficulties that result in a breach of their payment obligations. 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, 11 of the 15 member countries of the European Union established fixed conversion rates between their national currencies and the euro. During the transition period, from Jan. 1, 1999, until June 30, 2002, both the national currencies and the euro will be legal currencies. Beginning July 1, 2002, the national currencies of the participating countries no longer will be legal tender for any transactions. In September 1997, Monsanto formed a cross-functional team and engaged a consultant to prepare for the euro conversion. As of Jan. 1, 1999, Monsanto began to engage in euro-denominated transactions and was legally compliant. Monsanto expects to have all affected information systems fully converted by April 2001. Monsanto does not expect the euro conversion to have a material effect on its competitive position, business operations, financial position or results of operations. 32 FINANCIAL INSTRUMENTS - ------------------------------------------------------------------------ MARKET RISK MANAGEMENT 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 Inventories note, and the Long-Term Debt note in Notes to Financial Statements. The tables below 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. The financial instruments are grouped by market risk exposure category. Instrument denominations are indicated in parentheses. For instruments denominated in currencies other than the U.S. dollar, the information is presented by its equivalent in U.S. dollars, the company's reporting currency. Significant interest rate risk sensitive instruments as of Dec. 31, 1998, were:
EXPECTED MATURITY DATE -------------------------------------------------------------------------------------------- (Dollars in millions, except average interest rate) 1999 2000 2001 2002 2003 THEREAFTER TOTAL FAIR VALUE - --------------------------------------------------------------------------------------------------------------------------------- LONG-TERM DEBT: Fixed rate ($US) Principal amount $164 $ 543 $ 33 $797 $2,813 $4,350 $4,632 Average interest rate 6.1% 5.6% 7.5% 6.1% 6.6% 6.5% Fixed rate (Japanese yen) Principal amount $ 86 $ 86 $ 125 Average interest rate 5.6% 5.6% Variable rate ($US) Principal amount $ 8 $1,009 $ 16 $575 $ 208 $1,816 $1,816 Average interest rate 4.3% 5.3% 4.2% 4.3% 4.4% 4.8% SHORT-TERM DEBT: Fixed rate ($US) Principal amount $276 $ 276 $ 277 Average interest rate 7.5% 7.5% Variable rate ($US) Principal amount $542 $ 542 $ 542 Average interest rate 5.3% 5.3% - --------------------------------------------------------------------------------------------------------------------------------- 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. Average variable rates are based on 1998 year-end variable rates. Actual rates may be higher or lower.
- ------------------------------------------------------------------------------ Significant currency exchange rate risk sensitive instruments as of Dec. 31, 1998 (dollars in millions, except average exchange rate):
AVERAGE NOTIONAL EXCHANGE FAIR EXPECTED MATURITY 1999 AMOUNT RATE VALUE - -------------------------------------------------------------------------------- FORWARD CONTRACTS: Sale of British pound $381 0.600 $379 Sale of Brazilian real 128 1.254 125 Sale of Canadian dollar 64 1.542 64 Sale of Australian dollar 42 1.562 40 Sale of South African rand 30 5.900 29 Sale of Mexican peso 15 10.430 15 Sale of Polish zloty 21 3.532 21 Sale of Czech crown 11 30.130 11 Sale of Philippine peso 4 46.880 5 Purchase of Japanese yen 26 117.560 27 - -------------------------------------------------------------------------------- Average contract exchange rates are stated in currency units per U.S. dollar.
33 Significant commodity price risk sensitive instruments as of Dec. 31, 1998:
EXPECTED MATURITY FAIR 1999 VALUE - -------------------------------------------------------------------------------- CORN FUTURES CONTRACTS: Contract volumes (million bushels) 16.4 Weighted average price (per bushel) $ 2.31 Contract amount ($US in millions) $ 38 $ 35 SOYBEAN FUTURES CONTRACTS: Contract volumes (million bushels) 24.0 Weighted average price (per bushel) $ 5.64 Contract amount ($US in millions) $135 $132 - --------------------------------------------------------------------------------
Contract amounts are used to calculate the contractual payments and quantity of the commodity to be exchanged. 34 Statement of Consolidated SHAREOWNERS' EQUITY - -----------------------------------------------------------------------------------------------------------------------------
(Dollars in millions) Year Ended Dec. 31, - ----------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------- COMMON STOCK: Balance, Jan. 1 $ 1,644 $ 1,644 $ 329 Issuance of shares (24,956,250 shares in 1998) 50 Par value of stock issued in five-for-one stock split 1,315 - ----------------------------------------------------------------------------------------------------------------------------- BALANCE, DEC. 31 $ 1,694 $ 1,644 $ 1,644 - ----------------------------------------------------------------------------------------------------------------------------- ADDITIONAL CONTRIBUTED CAPITAL: Balance, Jan. 1 $ 321 $ 65 $ 902 Employee stock plans and ESOP 174 135 133 Issuance of shares 894 Par value of stock issued in five-for-one stock split (970) Spinoff of chemical businesses 121 - ----------------------------------------------------------------------------------------------------------------------------- BALANCE, DEC. 31 $ 1,389 $ 321 $ 65 - ----------------------------------------------------------------------------------------------------------------------------- TREASURY STOCK: Balance, Jan. 1 $(2,570) $(2,661) $(2,550) Shares purchased (8,244,500 shares in 1996) (253) Net shares issued under employee stock plans (9,054,062 shares in 1998; 10,908,529 shares in 1997; and 15,269,164 shares in 1996) 62 91 142 - ----------------------------------------------------------------------------------------------------------------------------- BALANCE, DEC. 31 $(2,508) $(2,570) $(2,661) - ----------------------------------------------------------------------------------------------------------------------------- REINVESTED EARNINGS: Balance, Jan. 1 $ 4,973 $ 4,795 $ 5,097 Net income (loss) (250) 470 385 Dividends (net of ESOP (1) tax benefits) (71) (292) (342) Par value of stock issued in five-for-one stock split (345) - ----------------------------------------------------------------------------------------------------------------------------- BALANCE, DEC. 31 $ 4,652 $ 4,973 $ 4,795 - ----------------------------------------------------------------------------------------------------------------------------- RESERVE FOR ESOP DEBT RETIREMENT: Balance, Jan. 1 $ (123) $ (174) $ (181) Allocation of ESOP shares 17 20 7 Spinoff of chemical businesses 31 - ----------------------------------------------------------------------------------------------------------------------------- BALANCE, DEC. 31 $ (106) $ (123) $ (174) ============================================================================================================================= ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS): - ----------------------------------------------------------------------------------------------------------------------------- ACCUMULATED CURRENCY ADJUSTMENT: Balance, Jan. 1 $ (128) $ 10 $ 101 Translation adjustments 12 (127) (91) Spinoff of chemical businesses (11) - ----------------------------------------------------------------------------------------------------------------------------- BALANCE, DEC. 31 (116) (128) 10 - ----------------------------------------------------------------------------------------------------------------------------- UNREALIZED NET GAINS ON INVESTMENTS: Balance, Jan. 1 3 11 34 Unrealized net gains (losses) on investments, net of reclassification adjustment 11 (8) (23) - ----------------------------------------------------------------------------------------------------------------------------- BALANCE, DEC. 31 14 3 11 - ----------------------------------------------------------------------------------------------------------------------------- ADDITIONAL MINIMUM PENSION LIABILITY: Balance, Jan. 1 (16) Additional minimum pension liability adjustment (17) (16) - ----------------------------------------------------------------------------------------------------------------------------- BALANCE, DEC. 31 (33) (16) TOTAL ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS): - ----------------------------------------------------------------------------------------------------------------------------- BALANCE, DEC. 31 $ (135) $ (141) $ 21 ============================================================================================================================= The above statement should be read in conjunction with Notes to Financial Statements of this report. ESOP stands for Employee Stock Ownership Plan.
35 QUARTERLY Data (unaudited) - ------------------------------------------------------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL QUARTER QUARTER QUARTER QUARTER YEAR (Dollars in millions, except share amounts) - ------------------------------------------------------------------------------------------------------------------------------ NET SALES ============================================================================================================================== 1998 $1,719 $2,079 $1,706 $1,733 7,237 1997 1,542 1,736 1,369 1,411 6,058 1996 1,281 1,388 1,122 1,071 4,862 INCOME (LOSS) FROM CONTINUING OPERATIONS ============================================================================================================================== 1998 166 223 (111) (409) (131) 1997 164 208 (198) (27) 149 1996 195 268 69 (253) 279 - ------------------------------------------------------------------------------------------------------------------------------ NET INCOME (LOSS) ============================================================================================================================== 1998 196 257 (100) (603) (250) 1997 274 324 (133) 5 470 1996 260 365 170 (410) 385 - ------------------------------------------------------------------------------------------------------------------------------ DILUTED EARNINGS (LOSS) PER SHARE -- CONTINUING OPERATIONS ============================================================================================================================== 1998 0.27 0.36 (0.18) (0.67) (0.22) 1997 0.27 0.34 (0.33) (0.04) 0.24 1996 0.33 0.45 0.12 (0.42) 0.47 - ------------------------------------------------------------------------------------------------------------------------------ DILUTED EARNINGS (LOSS) PER SHARE ============================================================================================================================== 1998 0.32 0.41 (0.17) (1.00) (0.41) 1997 0.45 0.54 (0.23) 0.01 0.77 1996 0.43 0.62 0.28 (0.69) 0.64 - ------------------------------------------------------------------------------------------------------------------------------ DIVIDENDS PER SHARE ============================================================================================================================== 1998 0.030 0.030 0.030 0.030 0.120 1997 0.150 0.160 0.160 0.030 0.500 1996 0.138 0.150 0.150 0.150 0.588 - ------------------------------------------------------------------------------------------------------------------------------ COMMON STOCK PRICE ============================================================================================================================== 1998 HIGH 53 1/16 60 3/8 63 15/16 55 7/8 63 15/16 LOW 38 5/16 51 5/16 50 1/2 33 3/4 33 3/4 - ------------------------------------------------------------------------------------------------------------------------------ 1997 High 42 1/4 46 1/2 52 5/16 45 3/4 52 5/16 Low 34 3/4 37 36 3/8 38 34 3/4 - ------------------------------------------------------------------------------------------------------------------------------ 1996 High 31 3/4 34 1/2 37 7/8 43 1/4 43 1/4 Low 23 28 1/8 26 1/8 36 1/2 23 - ------------------------------------------------------------------------------------------------------------------------------ Because Monsanto reported a loss from continuing operations for the fourth quarter and the year ended Dec. 31, 1998, generally accepted accounting principles require diluted loss per share to be calculated using weighted average common shares outstanding, excluding common stock equivalents. As a result, the quarterly earnings (loss) per share do not total to the full year amount. Stock prices were not restated to reflect the spinoff of the chemical businesses on Sept. 1, 1997.
Historically, Monsanto's income from continuing operations has been higher during the first half of the year, primarily because of the concentration of generally more profitable sales by the Agricultural Products segment during that part of the year. Income from continuing operations for the second quarter of 1998 included a net aftertax charge of $13 million, or $0.02 per share, for the cost of exiting the company's optical products business offset by a restructuring reserve reversal. Income from continuing operations for the third quarter of 1998 included an aftertax charge of $187 million, or $0.30 per share, for the write-off of in-process research and development (R&D) for the acquisition of Plant Breeding International Cambridge Limited (PBIC). Income from continuing operations for the fourth quarter of 1998 included an aftertax charge of $410 million, or $0.65 per share, for restructuring and special charges, write-offs for acquired in-process R&D, and charges for the cancellation of DEKALB stock options. The write-off of in-process R&D in the fourth quarter of 1998 was for the acquisition of DEKALB Genetics Corp. and certain international seed operations of Cargill Inc., net of a revision of the amount of in-process R&D written off in the third quarter related to the PBIC acquisition. A revision in the estimate was made in accordance with the U.S. Securities and Exchange Commission's (SEC) recently clarified guidance on in-process R&D. This revision was made as an adjustment to the initial purchase price allocation, which was 36 not yet finalized because of outstanding information, primarily related to intangible asset valuations and liabilities assumed. Income from continuing operations for each quarter in 1997 was affected by the write-off of in-process R&D from acquisitions. First- quarter 1997 included an aftertax charge of $63 million, or $0.11 per share, principally for the acquisition of the Asgrow Agronomics seed business. Second-quarter 1997 included an aftertax charge of $21 million, or $0.03 per share, for the Calgene Inc. acquisition. Third-quarter 1997 included an aftertax charge of $270 million, or $0.45 per share, for the Holden's Foundation Seeds Inc. acquisition. Fourth-quarter 1997 included $50 million, or $0.08 per share, for the Sementes Agroceres S.A. acquisition. Net income for the fourth quarter of 1996 included an aftertax charge of $500 million, or $0.84 per share, associated with the company's spinoff of the chemical businesses and other unusual items. The aftertax expense related to continuing operations for these actions was $226 million, or $0.38 per share. 37 NOTES TO FINANCIAL STATEMENTS - --------------------------------------------------------------------------- SUBSEQUENT EVENTS Subsequent to the date of these consolidated financial statements (December 31, 1998), but prior to the date of this amended 10-K/A, Monsanto announced its intention to sell the artificial sweetener and biogum businesses. The results of operations, financial position, and cash flows of these businesses, and of the alginates and Ortho(R) lawn-and-garden products businesses, the divestiture of which was approved by Monsanto's Board of Directors in 1998, have been reclassified as discontinued operations; and, for all periods presented, the consolidated financial statements and notes have been reclassified to conform to this presentation. The Company expects to sell these businesses for a gain by July 2000. In addition, Monsanto transferred the Roundup(R) lawn-and-garden and nutrition research operations of the former Nutrition and Consumer Products segment to the Agricultural Products and Corporate and Other segments, respectively (see Discontinued Operations disclosure for further details). In April 1999, a jury verdict was returned against DEKALB Genetics Corporation (which became a wholly-owned subsidiary of Monsanto during December 1998), in a lawsuit filed in U.S. District Court in North Carolina. The lawsuit was brought by Rhone Poulenc Agrochimie S.A., claiming that a 1994 license agreement was induced by fraud stemming from DEKALB's nondisclosure of relevant information and that DEKALB did not have the right to license, make or sell products using Rhone Poulenc's technology for glyphosate resistance under this agreement. The jury awarded $15 million in actual damages for unjust enrichment and $50 million in punitive damages. DEKALB has filed a motion to have the damage award set aside and has filed a Motion for Judgment as a Matter of Law to overturn the verdict. DEKALB has meritorious grounds to overturn the verdict and intends to vigorously pursue all available means to have the verdict overturned. No provision has been made in Monsanto's consolidated financial statements with respect to the award for punitive damages. On October 20, 1999, Monsanto and Cargill, Incorporated (Cargill) announced that they had reached an agreement that resolves outstanding issues related to Monsanto's purchase of certain international seed operations of Cargill. Under terms of the agreement, Cargill made a cash payment of $335 million to Monsanto for the lost use of certain germplasm and damages caused by the delay in integrating certain international seed operations. Additionally, Monsanto and Pioneer Hi-Bred International, Inc. (Pioneer) announced a resolution of the litigation between them stemming from Monsanto's purchase of these Cargill international seed operations. Under terms of this agreement, Monsanto is required to destroy genetic material derived from Pioneer's seed lines and pay damages to Pioneer of $42 million. As a result, the purchase price for certain international seed operations of Cargill have been reduced by $261 million in 1999. Any other adjustments to purchase price allocations for businesses acquired in 1998 are not expected to materially impact Monsanto's financial position, results of operations, or cash flows. On December 19, 1999, Monsanto announced that it had entered into a definitive agreement with Pharmacia & Upjohn, Inc. (PNU) to combine the two companies in a merger of equals transaction. As the transaction is currently structured, holders of PNU common stock will receive 1.19 shares of the combined enterprise for each share of PNU common stock held on the date the transaction is consummated. Each Monsanto share outstanding prior to the transaction will represent one share of the newly combined enterprise. In conjunction with the creation of the newly combined enterprise, it was announced that up to 19.9 percent of the agricultural products business is expected to be offered in an initial public offering (IPO) as soon as practical following the closing of the merger. The agricultural products business will become a separate legal entity, with a separate board of directors and its own publicly-traded securities upon completion of the intended IPO. The transaction is subject to approval by both companies shareowners, normal governmental reviews and other customary conditions. The merger is intended to qualify as a tax-free reorganization and to be accounted for on a pooling of interest basis. 38 On December 20, 1999, Monsanto withdrew its filing for U.S. antitrust clearance of its proposed merger with Delta and Pine Land Company (D&PL) in light of the U.S. Department of Justice's unwillingness to approve the transaction on commercially reasonable terms. On January 3, 2000, Monsanto paid D&PL $80 million in cash, equal to the amount of a termination fee set forth in the merger agreement, plus reimbursement of $1 million in expenses. On December 29, 1999, Monsanto completed the sale of Stoneville Pedigreed Seed Company. Proceeds were $92 million resulting in a gain of approximately $25 million and were primarily used to pay down debt. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements" (SAB 101) which provides guidance related to revenue recognition based on interpretations and practices followed by the SEC. SAB 101 requires companies to report any changes in revenue recognition as an accounting change at the time of implementation in accordance with APB opinion No. 20, "Accounting Changes". Monsanto will record a cumulative effect of a change in accounting principle, effective January 1, 1999, for revenue recognized in 1998 related to the sale of marketing rights to Scotts Company. The impact to earnings in 1999 will be an aftertax loss of $20 million, net of taxes of $12 million. As a result of discussions with the staff of the SEC and clarification of its interpretation regarding the classification of certain transaction, Monsanto agreed to reclassify certain revenues in the Statement of Consolidated Income. As a result, the company has reclassified revenues associated with the sales of Pharmaceutical product rights from net sales to other expense (income) - net for all periods presented. The effect of this reclassification was to reduce net sales and increase other income included in other expense (income) - net by $124 million, $120 million and $61 million in 1998, 1997 and 1996, respectively. SIGNIFICANT ACCOUNTING POLICIES Monsanto's significant accounting policies are italicized in the following Notes to Financial Statements. BASIS OF PRESENTATION Previously reported amounts have been reclassified to make them consistent with the current presentation. REVENUE RECOGNITION Revenues are recognized when title to finished goods inventories is transferred and goods are delivered to customers. Where the right of return exists, sales revenues are reduced at the time of sale to reflect expected returns which are estimated based on historical experience. License revenues are recognized when the rights have been contractually conferred to the licensee. Additional conditions for recognition of revenue are that the collection of sales proceeds is reasonably assured and that Monsanto has no further performance obligations under the sale or license agreement. TECHNOLOGICAL EXPENSES Technological expenses consist of research and development, engineering, commercial development and patent management costs. Research and development costs are expensed as incurred. Engineering costs for capital projects are expensed until the costs contribute directly to the final design and installation of the asset, at which time subsequent costs incurred are capitalized. Commercial development and patent management costs are also expensed as incurred. BASIS OF CONSOLIDATION The consolidated financial statements include the company and its majority- owned subsidiaries. Intercompany transactions have been eliminated in consolidation. Other companies in which Monsanto has a significant ownership interest generally greater than 20 percent) are included in other assets in the Statement of Consolidated Financial Position. Monsanto's share of these companies' net 39 earnings or losses is included in other expense (income) -- net in the Statement of Consolidated Income (Loss). USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and that affect revenues and expenses during the period reported. Estimates are adjusted to reflect actual experience when necessary. Significant estimates are used to account for restructuring reserves, self-insurance reserves, employee benefit plans, asset impairments, in-process research and development (R&D), business acquisitions, and contingencies. NEW ACCOUNTING STANDARDS Effective Jan. 1, 1998, Monsanto adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS 130). FAS 130 establishes standards for the reporting and display of comprehensive income and its components in financial statements. Comprehensive income includes all nonshareowner changes in equity, and consists of net income, foreign currency translation adjustments, unrealized gains and losses on available- for-sale securities, and additional minimum pension liability adjustments. Effective Jan. 1, 1998, Monsanto adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (FAS 131). FAS 131 establishes standards for defining operating segments and for reporting information about operating segments in financial statements. It also establishes standards for related disclosures about products, geographic areas, and major customers. Monsanto's reportable operating segments did not change as a result of adopting FAS 131. However, Monsanto changed its publicly reported measure of segment profitability from operating income to EBIT excluding unusual items to make it consistent with its internally reported measure of segment profitability. Effective Jan. 1, 1998, Monsanto adopted the American Institute of Certified Public Accountants' Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 provides guidance about when to capitalize costs incurred for internal-use computer software. Monsanto's previous accounting policies were essentially in compliance with the provisions of this statement, therefore adoption of SOP 98-1 did not have a material effect on the company's results of operations. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133). FAS 133 requires all derivatives to be recognized as assets or liabilities on the balance sheet and measured at fair value. Changes in the fair value of derivatives should be recognized in either net income or other comprehensive income, depending on the designated purpose of the derivative. This statement is effective for Monsanto on Jan. 1, 2001. Because of the effect of recent acquisitions, Monsanto is reassessing its position and has not yet determined the effect this statement will have on its consolidated financial position or results of operations. CURRENCY TRANSLATION The financial statements for most of Monsanto's entities outside the United States are translated into U.S. dollars at current exchange rates. Unrealized currency translation adjustments in the Statement of Consolidated Financial Position are accumulated in shareowners' equity as a component of Accumulated Other Comprehensive Loss. The financial statements of entities outside the United States that operate in highly inflationary economies are translated at either current or historical exchange rates, as appropriate. These currency adjustments are included in net income. For the year ended December 31, 1998, Monsanto's subsidiaries in Romania, Russia, and Venezuela operated in highly inflationary economies, and related currency adjustments were not material. 40 Currencies in which Monsanto has significant exposures are the euro (which, as of Jan. 1, 1999, replaced the Belgian franc, German mark, Italian lira and eight other European currencies), Japanese yen and U.K. pound sterling. Other currency exposures include the Argentine peso, Brazilian real, and Canadian dollar. Currency restrictions are not expected to have a significant effect on Monsanto's cash flow, liquidity or capital resources. Currency option contracts are purchased to manage currency exposure for anticipated transactions (for example, expected export sales in the following year denominated in foreign currencies). Currency option and forward contracts are used to manage other currency exposures, primarily for receivables and payables denominated in currencies other than the entities' functional currencies. This hedging activity is intended to protect the company from adverse fluctuations in foreign currencies vs. the entities' functional currencies. As of Dec. 31, 1998, Monsanto had currency forward contracts to purchase $26 million and to sell $697 million of other currencies, and purchased currency option contracts to sell $85 million of other currencies. Gains and losses on contracts that are designated and effective as hedges are deferred and are included in the recorded value of the transaction being hedged. Net deferred hedging losses as of Dec. 31, 1998, were not material. Gains and losses on other currency forward and option contracts are included in net income immediately. Monsanto is subject to loss if the counterparties to these contracts do not perform. INTANGIBLE ASSETS Goodwill, the excess of cost over the fair value of net assets acquired, is being amortized using the straight-line method over various periods not exceeding 40 years. Monsanto periodically reviews goodwill to evaluate whether changes have occurred that would suggest that goodwill may be impaired based on the estimated undiscounted cash flows of the assets acquired over the remaining amortization period. If this review indicates that the remaining estimated useful life of goodwill requires revision or that the goodwill is not recoverable, the carrying amount of the goodwill is reduced by the estimated shortfall of cash flows on a discounted basis. Trademarks which are included in goodwill are assessed for impairment periodically using undiscounted cash flows over the remaining useful life of the trademark. If this review indicates that the remaining estimated useful life of the trademark requires revision, the carrying amount of the trademark is reduced by the estimated shortfall of cash flows on a discounted basis. PRINCIPAL ACQUISITIONS AND DIVESTITURES In 1998, the company made strategic acquisitions of several seed companies. In July 1998, Monsanto acquired Plant Breeding International Cambridge Limited (PBIC) for approximately $525 million. In October 1998, Monsanto announced the acquisition of certain international seed operations of Cargill Inc. in Asia, Africa, Central and South America, and Europe, excluding certain operations in the United Kingdom, for approximately $1.4 billion. In December 1998, Monsanto completed its acquisition of DEKALB Genetics Corp. for approximately $2.3 billion. Monsanto recorded the following pretax charges in 1998 for the write-off of acquired in-process research and development (R&D) related to these acquisitions: approximately $60 million for PBIC, approximately $150 million for DEKALB and approximately $190 million for certain Cargill seed operations. Management believes that the technological feasibility of the acquired in-process R&D has not been established and that it has no alternative future uses. Accordingly, the amounts allocated to in-process R&D are required to be expensed immediately under generally accepted accounting principles. These 1998 acquisitions were accounted for as purchases. Accordingly, the results of operations for these companies were included in the Statement of Consolidated Income (Loss) from the dates of acquisition. The excess of the purchase price over the estimated fair value of net assets acquired was recorded as goodwill and is being amortized over periods ranging from 20 to 30 years. The purchase price allocations are based on preliminary assumptions and are subject 41 to revision, pending final appraisal and valuation studies. Significant components of our preliminary purchase price allocations for the principal acquisitions made during 1998 were to goodwill, $3,149 million, germplasm and core technology, $324 million, trademarks, $206 million, in-process research and development, $402 million, exit cost and employee termination liabilities, $(78) million, inventories, and other individually insignificant tangible assets and liabilities, $222 million. The Company is continuing to obtain additional information related to intangible assets, primarily germplasm and trademarks, litigation, costs to complete the exit plans 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 1999. Any adjustment to the purchase price allocation for the businesses acquired is not expected to materially impact Monsanto's financial position, results of operations, cash flows or comprehensive income, with the exception of purchase price allocation for Cargill (see Notes to Financial Statements, SUBSEQUENT EVENTS disclosure for further details). Monsanto financed these acquisitions by issuing debt, common stock, and hybrid securities. At the time of and in connection with the 1998 acquisitions, Monsanto established a plan in 1998 to integrate the acquired businesses as members of the company's life sciences business. Monsanto plans to close or rationalize (consolidate, shut down or move facilities to achieve more efficient operations) certain assets or facilities and eliminate approximately 1,300 jobs, primarily in manufacturing and administrative functions, as part of the integration plan. Approximately 300 of the positions are expected to be eliminated from Monsanto's existing seed operations and were therefore included in the December 1998 restructuring plan. The costs related to the 1,000 positions and the other actions, estimated to be $78 million, were recognized as liabilities in connection with the business combinations. This plan is expected to be completed by the second quarter of 2000. As this integration plan is completed, additional liabilities may be recognized. Any such liabilities would be recognized as additional liabilities assumed in the acquisitions. Unresolved issues that could result in adjustments to the purchase price allocation include final determinations of inventory obsolescence, litigation and facility closure and severance costs. In 1997, Monsanto also acquired several other seed companies. In February 1997, the company completed its acquisition of the Asgrow Agronomics seed business for approximately $250 million. In May 1997, the company completed its acquisition of the remaining shares of Calgene Inc. that the company did not already own for approximately $270 million. In September 1997, Monsanto completed the acquisitions of Holden's Foundation Seeds Inc. and Corn States Hybrid Service Inc. for approximately $1.0 billion. In December 1997, the company acquired controlling interest in Sementes Agroceres S.A., a Brazilian seed company, for approximately $160 million. Significant components of purchase price allocations for the principal acquisitions made during 1997 were to goodwill, $568 million; germplasm and core technology, $176 million; in-process research and development, $684 million; exit costs and employee termination liabilities ($10 million); inventories and other individually insignificant tangible assets and liabilities, $262 million. These purchase price allocations were finalized and the exit activities and employee terminations were completed during 1998, with no significant adjustments of the cost of the acquired companies required. Monsanto recorded the following pretax charges in 1997 for the write-off of acquired in-process R&D related to these acquisitions: approximately $102 million for Asgrow, approximately $72 million for Calgene of which $21 million included in continuing operations and $51 million included in discontinued operations, approximately $435 million for Holden's and Corn States, and approximately $75 million for Agroceres. The in-process R&D charges for the 1998 and 1997 seed company acquisitions cover numerous seed breeding projects, no single one of which was significant, as is typical in the seed industry. These projects consist of conventional breeding programs for corn, wheat and other hybrids; conventional breeding for soybean varieties; and the development of transgenic crops. In-process R&D charges for the Calgene acquisition included a project to develop 42 naturally colored cotton fiber ($25 million). Successful commercialization of products developed through these projects is expected to occur five to nine years after program initiation. The in-process projects were at various stages of completion at the dates of acquisition. Revenues from the in-process R&D projects related to the 1997 acquisitions began in 1998. Revenues from the in-process R&D projects related to the 1998 acquisitions are expected to begin in 1999. During the next nine years, management expects to spend approximately $333 million on biotechnology-related activities and $220 million on conventional breeding activities to complete these in-process R&D projects. On average, a new seed technology is in the research process or developmental stage for eight years before it is launched in a commercial product. Additionally, based on historical experience, Monsanto assumed that one eighth of the products in the 'in-process pipeline' would be released or launched each year for the next eight years. From this information, a weighted-average percent complete was computed. The present value of future cash flows was then multiplied by the estimated percentage complete as of the valuation date to determine the value of the acquired in-process R&D. The in-process R&D projects were valued using a discounted cash flow method with risk-adjusted discount rates generally ranging from 12 percent to 20 percent, which took into account the stage of completion and the appropriate development cycle of each in-process R&D category. The following unaudited pro forma information combines the consolidated results of operations of Monsanto with those of PBIC, DEKALB, and certain Cargill operations as if these acquisitions had occurred at the beginning of each period presented:
1998 1997 - ------------------------------------------------------------------------------ Sales $7,935 $6,752 Income (loss) from continuing operations 41 (103) Earnings (loss) per share -- continuing operations 0.07 (.17) - --------------------------------------------------------------------------------
The pro forma results give effect to certain purchase accounting adjustments, including additional amortization expense from goodwill and other identified intangible assets, and increased interest expense and additional shares outstanding related to debt and common stock issued to finance the acquisitions. Pro forma income from continuing operations for 1998 excludes unusual aftertax charges of $371 million, primarily for the write-offs of in-process R&D related to these acquisitions of $351 million, and $20 million for the cancellation of stock options in exchange for cash related to the DEKALB acquisition. These charges were excluded because of their nonrecurring nature. This pro forma financial information is presented for comparative purposes only. It is not necessarily indicative of the operating results that actually would have occurred had the acquisitions occurred on the earliest day of the periods presented. In addition, these results are not intended to be a projection of future results. Pro forma income from continuing operations for 1998 includes aftertax restructuring and special charges of $239 million. Pro forma loss from continuing operations for 1997 includes aftertax unusual charges of $404 million related to in-process R&D. 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 would be accounted for as a purchase. In September 1997, the company spun off its chemical businesses to 43 shareowners by distributing shares of a newly formed company called Solutia Inc. Monsanto's financial statements present the results of operations and cash flow of the chemical businesses as discontinued operations. In March 1996, Monsanto acquired significant equity positions in Calgene and DEKALB(R). In November 1996, Monsanto acquired a controlling interest in Calgene. In May 1996, Monsanto acquired the plant biotechnology assets of Agracetus. RESTRUCTURING AND SPECIAL CHARGES In 1998, the company recorded net restructuring and other unusual charges of $340 million ($239 million aftertax) as part of the company's overall strategy to reduce costs and continue the commitment to life sciences. The 1998 net restructuring and unusual charges were recorded in the Statement of Consolidated Income (Loss) in the following categories:
=============================================================================================== OTHER WORK FORCE FACILITY ASSET EXPENSE REDUCTIONS CLOSURES IMPAIRMENTS INCOME TOTAL - ----------------------------------------------------------------------------------------------- Cost of goods sold $ 6 $ 8 $ 84 $ 98 Amortization 3 63 66 Restructuring 103 64 $(14) 153 Other expense (income) 43 (20) 23 - ----------------------------------------------------------------------------------------------- TOTAL $109 $75 $190 $(34) $340 ===============================================================================================
In December 1998, the board of directors approved a plan to close certain facilities, reduce the current work force and exit nonstrategic businesses. The activities Monsanto plans to exit in connection with this plan principally comprise a tomato business, in which Monsanto has been attempting to develop tomatoes improved through genetic engineering techniques, and a business involved in the operation of membership-based health and wellness centers. This plan also contemplates exiting several small, embryonic business activities, none of which had a significant impact on the restructuring reserve. The company recorded pretax restructuring charges and other unusual items of $327 million ($226 million aftertax) to cover the costs associated with these actions. Approximately 1,400 jobs are expected to be eliminated by these actions by the end of 1999,primarily in manufacturing and administrative functions. Included in these actions are approximately 190 positions that had been part of the 1996 restructuring plan. The affected employees are entitled to receive severance benefits based on established severance policies or by governmentally mandated employment regulations. The charges also reflect pretax amounts for asset impairments, primarily for property, plant and equipment; intangible assets; and certain investments, totaling $130 million. The asset impairments were recorded primarily because of the company's decision to sell certain nonstrategic businesses. As a result, the net assets of these businesses have been classified as assets held for sale and are carried at their net realizable value, estimated to be approximately $36 million ($33 million in the Agricultural Products segment, and $3 million in the Corporate and Other segment). These businesses are expected to be sold by the end of 1999. They produced net income of $3 million in 1998, a net loss of $7 million in 1997, and a net loss of $31 million in 1996. The aftertax effect of suspending depreciation on assets held for sale was not material. Other impairment charges totaling $40 million were recorded because of management's decision to exit certain long-term investments. Fair values of the impaired assets and the businesses held for sale were recorded at their current market values or on estimated sale proceeds, based on either discounted cash flows or sales contracts. The December 1998 restructuring amounts also included pretax charges of $99 million for the shutdown or rationalization of certain production and administrative facilities. Rationalization entails the 44 consolidation, shutdown or movement of facilities to achieve more efficient operations. Approximately 80 facilities, located primarily in the U.S., Europe and Latin America, will be impacted by these actions. Charges for these shutdowns included $21 million for property, plant and equipment, $15 million for intangible assets, $26 million for miscellaneous investments, and $6 million for inventories. Leasehold termination costs of $13 million and various facility closure costs of $18 million, principally for facilities shutdown costs, equipment dismantling and contract cancellation payments, are also included in the shutdown charges. The closure or rationalization of these facilities is expected to be completed by the end of 1999. Cash payments to implement the plan are expected to be approximately $220 million through March 2000. These cash payments will be funded from operations and are not expected to significantly impact Monsanto's liquidity. The restructuring actions are expected to result in annual pre-tax cash savings of $150 million. In May 1998, the board of directors approved a decision to exit Monsanto's optical products business, which included the Orcolite and Diamonex optical products business and the Diamonex performance products business (both reported in the Corporate and Other segment), and recorded net pretax charges of $48 million ($34 million aftertax). Monsanto recognized a $20 million pretax gain on the sale of the Orcolite business and recorded pretax charges of $68 million for the rationalization of the Diamonex business, primarily for severance costs and the write-off of manufacturing facilities and intangible assets. In connection with this rationalization, certain Diamonex product lines were sold, and others were shut down. In connection with the shutdown of the Diamonex business approximately 200 jobs, primarily in manufacturing and administrative functions, were eliminated at a total cost of $6 million. These actions, including work force reductions and payment of severance, were substantially complete by Dec. 31, 1998. The sale of the remaining assets, which are classified as assets held for sale and carried at their net realizable value of $7 million, is expected to be completed during 1999. Fair values of the impaired assets and the businesses held for sale were recorded at their current market values, based on estimated cash flows, appraisals or sales contracts. Net income generated by the optical products businesses in 1998, 1997 and 1996 totaled $2 million, $5 million and $2 million, respectively. Also during the second quarter of 1998, Monsanto recognized a pretax gain of $35 million ($21 million aftertax) primarily related to the reversal of a restructuring reserve based on a decision not to rationalize a European pharmaceutical production facility. There were approximately 70 jobs scheduled to be eliminated as part of this rationalization plan. The decision was driven by changes in the business and regulatory environment, and successes in the R&D pipeline. The net result of the actions was a pretax charge of $13 million (also, $13 million aftertax) in the second quarter of 1998, recorded in the Statement of Consolidated Income (Loss) in the following categories:
=============================================================================================== OTHER WORK FORCE FACILITY ASSET EXPENSE REDUCTIONS CLOSURES IMPAIRMENTS INCOME TOTAL - ----------------------------------------------------------------------------------------------- Cost of goods sold $ 6 $ 2 $ 36 $ 44 Amortization and adjustment of intangible assets 24 24 Restructuring and special charges (26) (9) (35) Other expense (income) - - net (20) (20) - ----------------------------------------------------------------------------------------------- TOTAL INCREASE IN LOSS FROM OPERATIONS BEFORE INCOME TAXES $ 6 $(24) $ 60 $(29) $ 13 ===============================================================================================
45 Restructuring and unusual charges were partially offset by $68 million from the reversal of prior year restructuring reserves that were no longer needed ($35 million in May 1998 and $33 million in December 1998) and the $20 million gain of the sale of the Orcolite(R) business, resulting in a net charge to earnings of $340 million. Certain workforce reduction costs originally accrued as part of the 1996 Plan were delayed, principally as a result of the failed merger with American Home Products (AHP) Monsanto remains committed to accomplishing these workforce reductions and, accordingly, the accrual has been included in the 1998 Plan. 46 Activity related to the 1998 restructuring plans and special charges balances was as follows:
================================================================================================== 1998 Plans WORK FORCE FACILITY ASSET REDUCTIONS CLOSURES IMPAIRMENTS OTHER TOTAL ---------- -------- ----------- ----- ----- - -------------------------------------------------------------------------------------------------- Restructuring & Unusual Charges: May 1998 $ 6 $ 2 $ 60 $ 68 Dec. 1998 103 99 130 $ 28 360 ---- ---- ---- ---- ---- Total Restructuring & Unusual Charges 109 101 190 28 428 Transfer from 1996 Plan 85 85 Reclassification of reserves to other balance sheet accounts: Property (21) (73) (94) Investments (40) (40) Intangible Assets (14) (66) (80) Inventory (6) (15) (21) Receivables (26) (26) Other Assets 4 (28) (24) Costs charged against reserves: May 1998 (6) (2) (8) - -------------------------------------------------------------------------------------------------- RESERVE BALANCE AS OF DEC. 31, 1998 $188 $ 32 $ 0 $ 0 $220 ================================================================================================== Restructuring and unusual charges were partially offset by $68 million from the reversal of prior year restructuring reserves that were no longer needed ($35 million in May 1998 and $33 million in December 1998) and the $20 million gain of the sale of the Orcolite(R) business, resulting in a net charge to earnings of $340 million. Certain workforce reduction costs originally accrued as part of the 1996 plan were delayed, principally as a result of the failed merger with (AHP). Monsanto remains committed to accomplishing these workforce reductions and, accordingly, the accrual has been included in the 1998 plan.
47 In December 1996, Monsanto approved a restructuring plan and recorded pretax charges associated with the closure or rationalization of certain facilities and asset write-offs totaling $327 million ($226 million aftertax or $0.38 per share). The activities Monsanto planned to close or rationalize in connection with this restructuring plan principally comprised production at certain U.S. and European pharmaceutical facilities and the consolidation of certain pharmaceutical & administrative facilities. This plan also included several individually insignificant office and plant consolidations. The 1996 restructuring and unusual charges were recorded in the Statement of Consolidated Income (Loss) in the following categories:
================================================================================================== WORK FORCE FACILITY ASSET REDUCTIONS CLOSURES IMPAIRMENTS OTHER TOTAL - -------------------------------------------------------------------------------------------------- Cost of goods sold $28 $ 28 Amortization and Adjustment of Intangibles Assets 23 23 Restructuring and Special Charges $224 $88 312 Other expense (income) (36) (36) - -------------------------------------------------------------------------------------------------- TOTAL $224 $88 $51 ($36) $327 ==================================================================================================
Approximately 1,400 jobs, primarily in manufacturing and administrative functions, were expected to be eliminated by these actions at a cost of $224 million. The affected employees were entitled to receive severance benefits based on established severance policies or by governmentally mandated employment regulations. As of June 30, 1998, the company had eliminated approximately 900 jobs associated with these actions. The original plan approved by the Board of Directors called for completion of substantially all of the work force reductions by the second quarter of 1998. However, implementation of the plan was delayed in the second half of 1998 due to Monsanto's contemplated merger with American Home Products Corp. (AHP), announced on June 1, 1998, and the anticipated organizational changes required to integrate these two companies. Following the termination of the proposed merger agreement with AHP on Oct. 13, 1998, management reconsidered the remaining actions originally contemplated in the December 1996 plan, and resumed implementation of the plan with approximately 190 jobs to be eliminated by the end of 1999. In addition, approximately 140 jobs to be eliminated in the original plan were accomplished through attrition during 1997 and 1998. In the fourth quarter of 1998, $33 million of restructuring reserves were reversed due to changes in estimates; principally reflecting the decrease of approximately 120 positions from the original 1996 estimates in the number of jobs to be eliminated combined with a decline in the expected costs of completing the job elimination actions. Included in the facility closure charges for 1996 were charges of $42 million to property, plant and equipment, $20 million of costs associated with the legal reorganization of ex-U.S. corporate entities, $11 million in payments to discontinue a phantom stock program, leasehold termination costs of $2 million, dismantling costs of $5 million, $4 million to exit a joint venture and other shutdown costs of $4 million. Pretax charges for asset impairments of $51 million were related to intangible assets for products to be discontinued and for certain rights to production capacity to be eliminated. Assets were adjusted to their estimated fair values, using appropriate discounted cash flows and discount rates. Other income of $36 million relates to $15 million of minority interest in the losses incurred by Calgene, and a reduction of $21 million in the amount of costs expected to be incurred in connection with the Company's decision to dispose of its plastics business. 48 Activity related to the 1996 restructuring plan and special charges balances was as follows:
======================================================================================== 1996 Plan WORK FORCE FACILITY ASSET REDUCTIONS CLOSURES IMPAIRMENTS TOTAL ---------- -------- ----------- ----- - ---------------------------------------------------------------------------------------- Restructuring & Unusual Charges $224 $ 88 $ 51 $ 363 Reclassification of reserves to other balance sheet accounts: Property (42) (7) (49) Investments (4) (4) Intangible Assets (24) (24) Other Assets (1) (20) (21) Reserve balance as of Dec. 31, 1996 224 41 265 Costs charged against reserves (76) (39) (115) Reserve balance as of Dec. 31, 1997 148 2 150 Reversal of reserves: May 1998 (15) (15) December 1998 (33) (33) Transfer to 1998 Plan (85) (85) Costs charged against reserves (15) (15) - ---------------------------------------------------------------------------------------- RESERVE BALANCE AS OF DEC. 31, 1998 $ 0 $ 2 $ 0 $ 2 ======================================================================================== Restructuring and unusual charges were partially offset by $15 million of minority interest in the losses incurred by Calgene and $21 million for the reversal of prior year restructuring reserves that were no longer needed, resulting in a net charge to earnings of $327 million. Certain workforce reduction costs originally accrued as part of the 1996 Plan were delayed, principally as a result of the failed merger with American Home Products. Monsanto remains committed to accomplishing these workforce reductions and, accordingly, the accrual has been included in the 1998 Plan.
The restructuring and special charges established in 1998 and 1996 were based on estimates prepared at the time the actions were approved by the board of directors. Management believes that the balance of these reserves as of Dec. 31, 1998, is adequate for completion of the actions. In December 1996, $21 million of restructuring reserves were reversed due to the successful completion of actions at costs less than originally estimated. In May 1998, $35 million of restructuring reserves were reversed because of a decision not to rationalize a European pharmaceutical production facility. In December 1998, $33 million of reserves were reversed due to a reduction of approximately 120 job eliminations which had been part of the December 1996 plan and lower average severance payments estimated for approximately 190 job eliminations from the December 1996 plan which were continued as part of the December 1998 plan. These reversals, including the $33 million of restructuring reserves that were reversed in December 1998, have been reported as a reduction to the new reserves established in each year. 49 During 1996, workforce reductions of approximately 510 jobs and other facility closures occurred relative to restructuring plans approved prior to 1996. These actions were substantially completed by the end of 1997. DEPRECIATION AND AMORTIZATION
1998 1997 1996 - --------------------------------------------------------------------------- Depreciation $269 $242 $205 Amortization of intangible assets 220 121 74 Obsolescence 29 15 19 - --------------------------------------------------------------------------- TOTAL $518 $378 $298 ===========================================================================
Property, plant and equipment is recorded at cost. The cost of plant and equipment is depreciated over weighted average periods of 18 years for buildings and 10 years for machinery and equipment, by the straight-line method. Intangible assets are recorded at cost less accumulated amortization. Total amortization and adjustment of intangible assets reflected in the Statement of Consolidated Income (Loss) includes $66 million of charges for asset impairments in 1998 and $23 million of charges for asset impairments in 1996. The components of intangible assets were:
1998 1997 - ---------------------------------------------------------------------- Goodwill $4,496 $ 997 Patents and other intangible assets 785 784 - ---------------------------------------------------------------------- TOTAL $5,281 $1,781 ======================================================================
Goodwill is the cost of acquired businesses in excess of the fair value of their identifiable net assets and is amortized over the estimated periods of benefit (five to 40 years). Patents obtained in a business acquisition are recorded at the present value of estimated future cash flows resulting from patent ownership. The cost of patents is amortized over their legal lives. The cost of other intangible assets (principally seed germplasm, product rights and trademarks) is amortized over their estimated useful lives. Impairment tests of long-lived assets are made periodically and when conditions indicate a possible loss. Such impairment tests are based on a comparison of undiscounted cash flows over the remaining useful life . If an impairment is indicated, the asset value is written down to its discounted cash value, using an appropriate discount rate. INVESTMENTS Certain investments in equity securities, other than investments in equity affiliates, are classified as available-for-sale securities, and are recorded at their market values. When a decline in market value is deemed other than temporary, the reduction to the investment in a security is charged to expense. As of Dec. 31, these equity securities were detailed as follows:
1998 1997 - ----------------------------------------------------------------- Aggregate fair value $75 $72 Gross unrealized holding: Gains 36 27 Losses 14 20 - -----------------------------------------------------------------
Debt securities held are recorded at amortized cost, because the company has the ability and intent to hold these securities to their maturity date. These securities mature in less than five years. As of Dec. 31, 1998 and 1997, 50 the total amortized cost of these securities was $90 million and $116 million, respectively. INVENTORIES Inventories are stated at lower of cost or market. Actual cost is used to value raw materials and supplies. Standard cost, which approximates actual cost, is used to value finished goods and goods in process. Standard cost includes direct labor and raw materials, and manufacturing overhead based on practical capacity. The cost of certain inventories (26 percent as of Dec. 31, 1998) is determined by using the last-in, first-out (LIFO) method, which generally reflects the effects of inflation or deflation on cost of goods sold sooner than other inventory cost methods do. The cost of other inventories generally is determined by the first-in, first-out (FIFO) method. Inventories at FIFO approximate current cost. The components of inventories were:
1998 1997 - ---------------------------------------------------------------- Finished goods $1,064 546 Goods in process 469 230 Raw materials and supplies 224 324 - ---------------------------------------------------------------- Inventories, at FIFO cost 1,757 1,100 Excess of FIFO over LIFO cost (35) (45) - ---------------------------------------------------------------- TOTAL $1,722 $1,055 ================================================================
Commodity futures and options contracts are used to hedge the price volatility of certain commodities, primarily soybeans and corn. This hedging activity is intended to manage the price paid to production growers for corn and soybean seeds. Gains and losses on contracts that are designated and effective as hedges are deferred and are included in cost of goods sold when the underlying seeds are sold. As of Dec. 31, 1998, Monsanto had futures contracts to purchase $173 million of corn and soybeans. INCOME TAXES The components of income (loss) from continuing operations before income taxes were:
1998 1997 1996 - ------------------------------------------------------------------------------- United States $ 51 $ (91) $254 Outside United States (136) 280 102 - ------------------------------------------------------------------------------- TOTAL $ (85) $127 $356 ===============================================================================
51 The components of income tax expense charged to operations were:
1998 1997 1996 - ------------------------------------------------------------------------------- Current: U.S. federal $ 290 $ 84 $ 43 U.S. state 22 13 13 Outside United States (10) 59 47 - ------------------------------------------------------------------------------- 302 156 103 - ------------------------------------------------------------------------------- Deferred: U.S. federal (245) (165) (7) U.S. state (4) (14) (8) Outside United States (7) 1 (11) - ------------------------------------------------------------------------------- (256) (178) (26) - ------------------------------------------------------------------------------- TOTAL $ 46 $ (22) $ 77 ===============================================================================
Factors causing Monsanto's income taxes to differ from the U.S. federal statutory rate were:
1998 1997 1996 - ------------------------------------------------------------------------------------------- U.S. federal statutory rate $(30) $ 45 $125 U.S. export earnings (25) (22) (29) Puerto Rican operations (16) (14) (20) U.S. R&D tax credit (34) (23) (7) Higher (lower) rates outside the United States 31 ( 6) (2) Nondeductible goodwill 30 6 9 Other nondeductible expenses 4 4 6 Valuation allowances (15) (8) Acquired in-process R&D 71 7 Equity income 9 (3) 16 Other 6 (1) (13) - ------------------------------------------------------------------------------------------- INCOME TAXES $46 $(22) $77 ===========================================================================================
Deferred income tax balances were related to:
1998 1997 - ------------------------------------------------------------------------------------------- Property $(213) $(149) Pension and postretirement benefits 267 231 Restructuring reserves 186 67 Inventories 85 Net operating tax loss and tax credit carryforwards 282 138 Acquired in-process R&D 233 207 Other (13) (13) Valuation allowances (13) (22) - ------------------------------------------------------------------------------------------- NET DEFERRED TAX ASSETS $ 814 $ 459 ===========================================================================================
Deferred tax balances were:
1998 1997 - -------------------------------------------------------------------------------------------- Deferred tax assets $818 $485 Deferred tax liabilities 4 26 - -------------------------------------------------------------------------------------------- NET DEFERRED TAX ASSETS $814 $459 ============================================================================================
The change in valuation allowances in 1998 was primarily related to the utilization of the state net operating loss carryforwards. As of Dec. 31, 1998, Monsanto had available approximately $400 million in remaining net operating loss carryforwards in the United States. These expire from 1999 through 2012. As of Dec. 31, 1998, Monsanto also had available roughly $110 million in remaining net operating loss carry-forwards outside the United States, which do not expire. Income taxes and remittance taxes have not been recorded on $1.4 billion in undistributed earnings of subsidiaries, either because any taxes on dividends would be offset substantially by foreign tax credits or because Monsanto intends 52 to reinvest those earnings indefinitely. It is not practical to estimate the income tax liability that might be incurred if such earnings were remitted to the United States. SHORT-TERM DEBT AND CREDIT ARRANGEMENTS Short-term debt was:
1998 1997 - -------------------------------------------------------------------------------- Notes payable to banks $ 328 $ 312 Commercial paper 541 1,200 Bank overdrafts 134 126 Current portion of long-term debt 66 88 - -------------------------------------------------------------------------------- TOTAL $1,069 $1,726 ================================================================================ Weighted average interest rates of notes payable as of Dec. 31: Banks 9.5% 8.5% Commercial paper 5.3% 5.9% - -------------------------------------------------------------------------------- Includes the effect of notes in certain countries that have interest rates higher than those in the United States.
Monsanto had aggregate short-term loan facilities of $533 million, under which loans totaling $328 million were outstanding as of Dec. 31, 1998. Interest on these loans is related to various bank rates. Monsanto has a $1.0 billion credit facility, expiring in 2001, that allows the company to request that lenders increase their commitments up to an aggregate of $1.6 billion. In November 1998, Monsanto entered into a $2.0 billion, 364-day credit facility. There were no borrowings under these credit facilities as of Dec. 31, 1998. These facilities are used to support the issuance of commercial paper. Interest on amounts borrowed under these agreements is expected to be at money market rates. Covenants under these credit facilities restrict maximum borrowings. The company does not anticipate that future borrowings will be limited by the terms of these agreements. 53 LONG-TERM DEBT Long-term debt (exclusive of current maturities) was:
1998 1997 - ------------------------------------------------------------------------------------------- Industrial revenue bond obligations, 5.5% average rate at Dec. 31, 1998, due 1999 to 2028 $ 337 $ 338 Medium-term notes, 7.5% average rate at Dec. 31, 1998, due 2000 to 2005 165 90 Commercial paper 1,000 625 6% notes due 2000 150 150 7.09% and 8.13% amortizing ESOP notes and debentures due 2000 and 2006, guaranteed by the company 91 101 5 3/8% notes due 2001 498 Adjustable conversion-rate equity security units due 2003 700 Variable-rate notes due 2003 575 5.75% notes due 2005 596 5 7/8% notes due 2008 199 8 7/8% debentures due 2009 99 99 5.6% yen note due 2016 86 77 6.5% debentures due 2018 496 8.7% debentures due 2021 100 100 8.2% debentures due 2025 150 150 6.75% debentures due 2027 198 198 6.6% debentures due 2028 694 Other 125 51 - ------------------------------------------------------------------------------------------- TOTAL $6,259 $1,979 =========================================================================================== ESOP stands for employee stock ownership plan.
Maturities and sinking-fund requirements on long-term debt, excluding commercial paper, are $66 million in 1999, $208 million in 2000, $561 million in 2001, $92 million in 2002, and $1.3 billion in 2003. The weighted average maturity of long-term debt as of Dec. 31, 1998, was approximately 11 years. Commercial paper balances of $1.0 billion and $625 million as of Dec. 31, 1998 and 1997, respectively, were classified as long-term debt. Monsanto has the ability and intent to renew these obligations beyond 1999. In November 1998, the company issued 17,500,000 units of 6.5 percent Adjustable Conversion-rate Equity Security (ACES) units at a stated value of $40 per unit, for an aggregate initial offering price of $700 million. Each unit consists of a purchase contract for the company's common stock and a junior subordinated deferrable debenture. Under the purchase contracts, in November 2001, the unit holders will purchase for $40 not more than one share and not less than 0.8197 of one share of the company's common stock per unit, depending on the average trading price of the common stock during a specified period in November 2001. In addition, the company pays quarterly deferrable contract fees to the unit holders at 0.55 percent of the stated amount, and such payments are charged to equity as paid. The junior subordinated deferrable debentures have a principal amount equal to the stated amount of the units and an interest rate of 5.95 percent. They mature in 2003. Interest-rate swap agreements are used to reduce interest rate risks and to manage interest expense. By entering into these agreements, the company changes the fixed/variable interest-rate mix of its debt portfolio. As of Dec. 31, 1998, Monsanto was party to interest-rate swap agreements with an aggregate notional principal amount of $145 million related to existing debt. The agreements effectively convert floating-rate debt into fixed-rate debt. This reduces the company's risk of incurring higher interest costs in periods of rising interest rates. Monsanto is subject to loss if the counter parties to these agreements do not perform. Interest differentials to be paid or received because of swap agreements are reflected as an adjustment to interest expense over the related debt period. 54 FAIR VALUES OF FINANCIAL INSTRUMENTS The estimated fair values of Monsanto's financial instruments were:
1998 1997 ------------------------------------------------------- Recorded Fair Recorded Fair Amount Value Amount Value - ---------------------------------------------------------------------------------------------- Long-term debt $6,259 $6,579 $1,979 $2,053 - ----------------------------------------------------------------------------------------------
The recorded amounts of cash, trade receivables, investments in securities, discounted receivables, third-party guarantees, commodity futures contracts, currency forward contracts and swaps, accounts payable, interest-rate swaps, and short-term debt approximate their fair values. Fair values are estimated by the use of quoted market prices, estimates obtained from brokers, and other appropriate valuation techniques based on information available as of year-end. The fair-value estimates do not necessarily reflect the values Monsanto could realize in the current market. POSTRETIREMENT BENEFITS - PENSIONS Most Monsanto employees are covered by noncontributory pension plans. The components of pension cost were:
1998 1997 1996 - ----------------------------------------------------------------------------------------------- Service cost for benefits earned during the year $ 58 $ 61 $ 83 Interest cost on benefit obligation 170 148 287 Assumed return on plan assets (156) (167) (322) Amortization of unrecognized net loss 22 13 9 - ----------------------------------------------------------------------------------------------- TOTAL $ 94 $ 55 $ 57 =============================================================================================== Continuing operations $ 94 $ 55 $ 54 Discontinued operations 3 - ----------------------------------------------------------------------------------------------- TOTAL $ 94 $ 55 $ 57 =============================================================================================== In connection with the classification of the former Nutrition and Consumer Products segment as discontinued operations (see Notes to Financial Statements, SUBSEQUENT EVENTS disclosure for further details), no pension liabilities or related assets were allocated or assumed by the discontinued business for its active employees or for certain former employees. Monsanto has retained the pension liability and related assets for the employees of the former Nutrition and Consumer Products segment now classified as discontinued operations in the consolidated financial statements because it is uncertain, at this time, whether the pension liabilities and related assets will be assumed by the buyers of these businesses. In connection with the spinoff of the company's chemical businesses as Solutia Inc., Solutia assumed the pension liabilities and received related assets for its active employees and for certain former employees of the chemical businesses. The components of pension cost for 1996 have not been restated for amounts related to continuing and discontinued operations as no detailed information was available.
Pension benefits are based on an employee's years of service and/or compensation level. Pension plans are funded in accordance with the company's long-range projections of the plans' financial conditions. These projections take into account benefits earned and expected to be earned, anticipated returns on pension plan assets, and income tax and other regulations. Pension costs were determined through the use of the preceding year- end rate assumptions. Assumptions used as of Dec. 31 for the principal plans were:
1998 1997 1996 - ---------------------------------------------------------------------------------------- Discount rate 6.75% 7.00% 7.50% Assumed long-term rate of return on plan assets 9.50% 9.50% 9.50% Annual rates of salary increase (for plans that base benefits on final compensation level) 4.00% 4.00% 4.50% - ----------------------------------------------------------------------------------------
55 The funded status of Monsanto's pension plans at year-end was:
1998 1997 - ---------------------------------------------------------------------------------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $ 2,483 $ 4,026 Service cost 58 61 Interest cost 170 148 Amendments 11 77 Actuarial loss 146 376 Acquisitions/divestitures 9 (1,759) Benefits paid (222) (446) - ---------------------------------------------------------------------------------- Benefit obligation at end of year 2,655 2,483 - ---------------------------------------------------------------------------------- CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year 2,029 3,817 Actual return on plan assets 310 350 Employer contributions 17 (3) Plan participants' contributions 3 3 Acquisitions/divestitures 9 (1,603) Fair value of benefits paid (222) (535) - ---------------------------------------------------------------------------------- Plan assets at end of year 2,146 2,029 - ---------------------------------------------------------------------------------- Unfunded status 509 454 Unrecognized initial net gain 15 27 Unrecognized prior service cost (94) (106) Unrecognized subsequent loss (22) (70) - ---------------------------------------------------------------------------------- ACCRUED NET PENSION LIABILITY $ 408 $ 305 ==================================================================================
Amounts recognized in the Statement of Consolidated Financial Position were:
1998 1997 - ---------------------------------------------------------------------------------- Postretirement liabilities: Accrued pension liability $433 $357 Additional minimum pension liability 61 33 Other assets (25) (52) Intangible asset (10) (6) Accumulated other comprehensive loss (51) (27) - ---------------------------------------------------------------------------------- ACCRUED NET PENSION LIABILITY $408 $305 ==================================================================================
As a result of employment reductions from the 1996 restructuring program, $36 million of restructuring reserves was transferred to accrued net pension liability during 1997. The accumulated benefit obligation (ABO) and fair value of plan assets for pension plans with ABOs in excess of plan assets were $1.9 billion and $1.6 billion, respectively, as of Dec. 31, 1998; and $1.8 billion and $1.6 billion, respectively, as of Dec. 31, 1997. Plan assets consist principally of common stocks and U.S. government and corporate obligations. Contributions to qualified plans were neither required nor made in 1998, 1997 and 1996 because the company's principal pension plans are adequately funded, based on the indicated assumed returns. POSTRETIREMENT BENEFITS -- HEALTH CARE AND OTHER Monsanto provides certain health care and life insurance benefits for retired employees. Substantially all of Monsanto's regular, full-time U.S. employees and certain employees in other countries may become eligible for these benefits if they reach retirement age while employed by Monsanto. These postretirement benefits are unfunded and generally are based on employees' years of service and/or compensation levels. The costs of postretirement benefits are accrued by the date the employees become eligible for the benefits. 56 The components of the cost of these postretirement benefits, principally health care and life insurance, were:
1998 1997 1996 - ----------------------------------------------------------------------------------------------- Service cost for benefits earned during the year $ 13 $ 10 $ 25 Interest cost on benefit obligation 27 27 88 Amortization of unrecognized net (gain) loss (1) (3) 2 - ----------------------------------------------------------------------------------------------- TOTAL $ 39 $ 34 $115 =============================================================================================== Continuing operations $ 39 $ 34 $ 33 Discontinued operations 82 - ----------------------------------------------------------------------------------------------- TOTAL $ 39 $ 34 $115 =============================================================================================== In connection with the classification of the former Nutrition and Consumer Products segment as discontinued operations (see Notes to Financial Statements, SUBSEQUENT EVENTS disclosure for further details), no postretirement benefit liabilities were allocated or assumed by the discontinued business for its active employees or for former employees. Monsanto has retained the postretirement benefit liability for the employees of the former Nutrition and Consumer Products segment now classified as discontinued operations in the consolidated financial statements because it is uncertain, at this time, whether the postretirement benefit liabilities will be assumed by the buyers of these businesses. In connection with the spinoff of the company's chemical businesses as Solutia Inc., Solutia assumed the postretirement benefit liabilities for its active employees and for former employees who last worked at a chemical facility. The components of the cost of postretirement benefits for 1996 have not been restated for amounts related to continuing and discontinued operations as no detailed information was available.
Postretirement costs were determined by using the preceding year-end rate assumptions. Assumptions used as of Dec. 31 for the principal plans were:
1998 1997 1996 - ------------------------------------------------------------------------------------------- Discount rate 6.75% 7.00% 7.50% Initial trend rate for health care costs 5.75% 7.00% 8.00% Ultimate trend rate for health care costs 4.75% 5.00% 5.00% - ------------------------------------------------------------------------------------------- The initial trend rate for health care costs declines by 1 percent per year, to 4.75 percent for years after the year 1999.
A 1 percent increase in the assumed trend rate for health care costs would have increased the cost of 1998 postretirement health care benefits by $1 million and the accumulated postretirement benefit obligation by $15 million as of Dec. 31, 1998. A 1 percent decrease in the assumed trend rate for health care costs would have decreased the cost of 1998 postretirement health care benefits by $1 million and the accumulated postretirement benefit obligation by $16 million as of Dec. 31, 1998. As of Dec. 31, the status of Monsanto's postretirement health care and life insurance benefit plans and of its employee disability benefit plans was:
1998 1997 - ----------------------------------------------------------------------------------------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $383 $1,249 Service cost 13 10 Interest cost 27 27 Actuarial (gain)/loss 6 (1) Acquisitions/divestitures (830) Benefits paid (26) (72) - ----------------------------------------------------------------------------------------- Benefit obligation at end of year 403 383 - ----------------------------------------------------------------------------------------- Unfunded status 403 383 Unrecognized prior service cost 10 12 Unrecognized subsequent loss (31) (26) - ----------------------------------------------------------------------------------------- ACCRUED POSTRETIREMENT LIABILITY $382 $ 369 =========================================================================================
57 Amounts recognized in the Statement of Consolidated Financial Position were:
1998 1997 - ---------------------------------------------------------------------------------------- Miscellaneous accruals $ 28 $ 24 Postretirement liabilities 354 345 - ---------------------------------------------------------------------------------------- Accrued postretirement liability $382 $369 ========================================================================================
The assumptions used to compute the accumulated benefit obligation of the principal plans were changed as of Dec. 31, 1997. That resulted in a decrease of approximately $26 million in the accrued postretirement liability. EMPLOYEE SAVINGS PLANS For some company employee savings plans, employee contributions are matched in part by Monsanto. The value of the company's contributions to such plans was $45 million in 1998, $39 million in 1997, and $30 million in 1996. Monsanto has established an Employee Stock Ownership Plan (ESOP), which held 14.7 million shares of Monsanto common stock as of Dec. 31, 1998. At its inception, the ESOP acquired shares by using proceeds from the issuance of long-term notes and debentures guaranteed by Monsanto, and the ESOP also borrowed $50 million from Monsanto. A portion of the ESOP shares are allocated each year to employee savings accounts as matching contributions. Also, in 1998, a portion of the ESOP shares were allocated to employees in connection with a change in vacation policy. In 1998, 944,215 shares were allocated to participants under the plan, leaving 9.2 million unallocated shares as of Dec. 31, 1998. Unallocated shares held by the ESOP are considered outstanding for earnings-per-share calculations. Compensation expense is equal to the cost of the shares allocated to participants, less cash dividends paid on the shares held by the ESOP. Dividends on the common stock owned by the ESOP are used to repay the ESOP borrowings, which were $129 million as of Dec. 31, 1998. In September 1997, the ESOP received Solutia shares in connection with the spinoff of the company's chemical businesses. These shares were exchanged for Monsanto shares.
1998 1997 1996 - ---------------------------------------------------------------------------------------- Total ESOP expense $21 $18 $14 Interest portion of total ESOP expense 10 12 12 Cash contribution 14 6 16 Dividends paid on ESOP shares held 2 8 11
STOCK OPTION PLANS - --------------------------------------------------------------------------- The company grants stock options under two fixed plans. Under the company's Management Incentive Plan of 1996, the company may grant key officers and management employees stock-based awards, including stock options, of up to 71.6 million shares of common stock. Under this plan, the exercise price of each option equals not less than the market price of the company's stock on the date of grant. An option's maximum term is 10 years. Options are granted at the discretion of the board of directors' people committee or its delegate. Options generally vest upon the achievement of business performance targets or the ninth anniversary of the option grant date, whichever comes first. Certain options granted to senior management vest upon the attainment of pre-established prices within specified time periods. Under the company's Shared Success Stock Option Plan, most regular full-time and regular part-time employees of the company were granted options on 200 shares of common stock in 1996, 330 shares in 1997, and 500 shares in 1998. The maximum number of shares for which stock options may be granted under this plan is 26.8 million. The exercise price of each option is determined by the committee and generally equals the market price of the company's stock on the date of grant. An option's maximum term is 10 years. As permitted by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," (FAS 123), the company has elected to 58 continue following the guidance of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," for measurement and recognition of stock-based transactions with employees. Accordingly, no compensation cost has been recognized for the company's option plans. Had the determination of compensation cost for these plans been based on the fair value at the grant dates for awards under these plans, consistent with the method of FAS 123, the company's income (loss) from continuing operations and earnings (loss) per share from continuing operations would have been reduced to the pro forma amounts indicated below:
1998 1997 1996 - ---------------------------------------------------------------------------------------- Income (loss) from continuing operations: As reported $ (131) $149 $279 Pro forma (339) 61 197 Earnings (loss) per share -- continuing operations: As reported $(0.22) $0.24 $0.47 Pro forma (0.56) 0.10 0.33 - ----------------------------------------------------------------------------------------
The pro forma compensation expense may not be representative of pro forma compensation expense that would be incurred in future years. In computing the pro forma compensation expense, the fair value of each option grant was estimated on the date of grant by using the Black-Scholes option- pricing model. The following weighted-average assumptions were used for grants:
1998 1997 1996 - --------------------------------------------------------------------------- Expected dividend yield 0.25% 0.29% 1.5% Expected volatility 30.0 % 27.0 % 25.0% Risk-free interest rates 5.6 % 6.4 % 6.0% Expected option lives (years) 4.0 4.3 4.0 - ---------------------------------------------------------------------------
A summary of the status of the company's stock option plans for the three- year period ended Dec. 31, 1998, follows:
OUTSTANDING -------------------------------------- EXERCISABLE WEIGHTED-AVERAGE SHARES SHARES EXERCISE PRICE - ------------------------------------------------------------------------------------------------ DEC. 31, 1995 45,383,790 55,269,310 $12.63 - ------------------------------------------------------------------------------------------------ 1996: Granted 25,004,150 33.38 Exercised (16,327,617) 11.93 Expired (801,605) 22.59 - ------------------------------------------------------------------------------------------------ DEC. 31, 1996 38,362,943 63,144,238 $20.90 - ------------------------------------------------------------------------------------------------ 1997: Granted 27,740,275 37.98 Exercised (12,002,286) 13.64 Expired (3,476,815) 34.71 - ------------------------------------------------------------------------------------------------ DEC. 31, 1997 45,257,512 75,405,412 $25.22 - ------------------------------------------------------------------------------------------------ 1998: Granted 42,132,104 50.23 Exercised (10,770,147) 17.76 Expired (2,932,138) 45.38 - ------------------------------------------------------------------------------------------------ DEC. 31, 1998 51,055,016 103,835,231 $26.21 ================================================================================================
The weighted-average fair values of options granted during 1998, 1997 and 1996, were $16.51, $10.01 and $8.86, respectively. The following table summarizes information about stock options outstanding as of Dec. 31, 1998: 59
OPTIONS OUTSTANDING WEIGHTED-AVERAGE REMAINING WEIGHTED- RANGE OF CONTRACTUAL LIFE AVERAGE EXERCISE PRICES SHARES (IN YEARS) EXERCISE PRICE - --------------------------------------------------------------------------------------- $ 7.00 to 9.99 6,206,664 4.0 $ 9.31 10.00 to 14.99 40,260,354 7.5 12.32 15.00 to 19.99 329,343 6.5 16.78 20.00 to 29.99 8,773,867 7.2 26.24 30.00 to 39.99 31,182,304 7.9 34.18 40.00 to 54.99 13,544,604 9.0 49.01 55.00 to 80.00 3,538,095 9.5 57.26 - --------------------------------------------------------------------------------------- $ 7.00 to 80.00 103,835,231 8.1 $26.21 ======================================================================================= OPTIONS EXERCISABLE WEIGHTED- RANGE OF AVERAGE EXERCISE PRICES SHARES EXERCISE PRICE - --------------------------------------------------------------------------------------- $ 7.00 to 9.99 6,206,664 $ 9.31 10.00 to 14.99 14,253,619 13.32 15.00 to 19.99 319,343 16.72 20.00 to 29.99 4,442,467 24.90 30.00 to 39.99 22,975,859 34.32 40.00 to 55.00 2,857,064 43.66 - --------------------------------------------------------------------------------------- $ 7.00 to 55.00 51,055,016 $25.01 =======================================================================================
OTHER EXPENSE (INCOME) ======================================================================= Significant components of Other Expense (Income) were: 1998 1997 1996 ---- ---- ---- - ----------------------------------------------------------------------- Equity expense (income) 35 (6) 22 Minority interest expense 32 26 6 Royalty income (7) (4) (32) Foreign currency loss 22 52 2 Gain on sale of pharmaceutical product rights (124) (120) (61) Gain on sale of assets (19) (25) (9) Gain on sale of plastics business - - (21) Losses on common stock investments 40 - - Other miscellaneous expense (income) (11) (12) 7 - ----------------------------------------------------------------------- Other expense (income) (31) (89) (86) =======================================================================
60 EARNINGS PER SHARE Basic earnings (loss) per share from continuing operations were computed using the weighted average number of common shares outstanding each year (603.5 million in 1998, 590.2 million in 1997, and 581.2 million in 1996). In 1998, 23.5 million dilutive common share equivalents were not included in computing the diluted per share amounts because Monsanto recognized a loss from continuing operations. The computation of diluted earnings per share from continuing operations in 1997 and 1996 took into account the effect of dilutive common share equivalents totaling 20.3 million in 1997 and 17.7 million in 1996. Dilutive common share equivalents consisted of outstanding stock options. Other common share equivalents also were not included in the computation of 1998 diluted loss 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 103.8 million of outstanding stock options and 17.5 million shares of common stock to be issued under the ACES described in the Long-Term Debt note. These options and ACES units expire from 2002 through 2008. CAPITAL STOCK In January 1990, the company's board of directors declared a dividend of one preferred stock purchase right on each then-outstanding share of the company's common stock. If a person or group acquires beneficial ownership of 20 percent or more, or announces a tender offer that would result in beneficial ownership of 20 percent or more of the company's outstanding common stock, the rights become exercisable. As a result of two subsequent stock splits, for every 10 rights held, the owner will be entitled to purchase one one-hundredth of a share of a new series of preferred stock for $450. If Monsanto is acquired in a business combination transaction while the rights are outstanding, for every 10 rights held, the holder will be entitled to purchase, for $450, common shares of the acquiring company having a market value of $900. In addition, if a person or group acquires beneficial ownership of 20 percent or more of the company's outstanding common stock, for every 10 rights held, the holder (other than such person or members of such group) will be entitled to purchase, for $450, a number of shares of the company's common stock having a market value of $900. Furthermore, at any time after a person or group acquires beneficial ownership of 20 percent or more (but less than 50 percent) of the company's outstanding common stock, the board of directors may, at its option, exchange part or all of the rights (other than rights held by the acquiring person or group) for shares of the company's common stock on a one-share-for-every-10-rights basis. At any time prior to the acquisition of such a 20 percent position, the company can redeem each right for $0.001. The board of directors also is authorized to reduce the aforementioned 20 percent thresholds to not less than 10 percent. The rights expire in the year 2000. As of Dec. 31, 1998, 120.7 million common shares were reserved for employee stock options. In November 1998, the company issued 17,500,000 units of 6.5 percent ACES at a stated value of $40 per unit. For further information, see the Long-Term Debt note. COMMITMENTS AND CONTINGENCIES Commitments, principally in connection with uncompleted additions to property, were approximately $51 million as of Dec. 31, 1998. Excluding the ESOP notes and debentures, Monsanto was contingently liable as a guarantor for bank loans and for discounted customers' receivables totaling approximately $158 million as of Dec. 31, 1998, and $123 million as of Dec. 31, 1997. Future minimum payments under noncancelable operating leases, unconditional inventory purchases, and R&D alliances are $116 million for 1999, $75 million for 2000, $53 million for 2001, $41 million for 2002, $15 million for 2003, and $51 million thereafter. 61 The more significant concentrations in Monsanto's trade receivables at year-end were:
1998 1997 - ------------------------------------------------------------------------------- U.S. agricultural product distributors $388 $359 European agricultural product distributors 284 203 Pharmaceutical distributors worldwide 351 435 Customers in the former Soviet Union 99 75 Customers in Southeast Asia 60 25 Customers in Latin American southern cone countries 560 331 ===============================================================================
Management does not anticipate losses on its trade receivables in excess of established allowances. Costs for remediation of waste disposal sites are accrued in the accounting period in which the responsibility is established and when the cost is estimable. Postclosure and remediation costs for hazardous and other waste facilities at operating locations are accrued over the estimated life of the facility as part of its anticipated closure cost. Monsanto's Statement of Consolidated Financial Position included accrued liabilities of $21 million as of Dec. 31, 1998, and $19 million as of Dec. 31, 1997, for the remediation of identified waste disposal sites. Monsanto's future remediation expenses for waste disposal sites are affected by a number of uncertainties. These uncertainties include, but are not limited to, the method and extent of remediation, the percentage of material attributable to Monsanto at the sites relative to that attributable to other parties, and the financial capabilities of the other potentially responsible parties (PRPs). The company does not expect the resolution of such uncertainties to have a material effect on profitability. On March 20, 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 future damages. Monsanto has filed an appeal of the verdict with the California Court of Appeals for the Fourth Judicial District. No provision has been made in Monsanto's consolidated financial statements with respect to this verdict. The company intends to vigorously pursue all available means to have this verdict set aside. Monsanto is a 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 the company'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. 62 SUPPLEMENTAL DATA Supplemental income statement data were:
1998 1997 1996 - ---------------------------------------------------------------------------------------- Rent expense $ 102 $ 117 $100 ======================================================================================== Technological expenses: Research and development $1,238 $ 944 $623 Engineering, commercial development and patent 70 105 34 - ---------------------------------------------------------------------------------------- Total technological expenses $1,308 $1,049 $657 ======================================================================================== Interest expense: Total interest cost $ 224 $ 148 $ 92 Less capitalized interest (14) (13) (9) - ---------------------------------------------------------------------------------------- Net interest expense $ 210 $ 135 $ 83 ======================================================================================== Currency losses including equity in affiliates' currency gains and losses $ 22 $ 52 $ 2 ========================================================================================
SEGMENT INFORMATION Certain segment data and geographic data for 1998, 1997 and 1996 that appear in the "REVIEW OF CONSOLIDATED RESULTS OF OPERATIONS - SEGMENT DATA" are integral parts of the accompanying financial statements. The company's principal product lines are discussed in the segment data. DISCONTINUED OPERATIONS Subsequent to the date of these consolidated financial statements (December 31, 1998), but prior to the date of this amended 10-K/A, Monsanto announced its intention to sell the artificial sweetener and biogum businesses. The results of operations, financial position, and cash flows of these businesses, and of the alginates and Ortho(R) lawn-and-garden products businesses, the divestiture of which was approved by Monsanto's Board of Directors in 1998, have been reclassified as discontinued operations; and, for all periods presented, the consolidated financial statements and notes have been reclassified to conform to this presentation. The Company expects to sell these businesses for a gain by July 2000. In addition, Monsanto transferred the Roundup(R) lawn-and- garden and nutrition research operations of the former Nutrition and Consumer Products segment to the Agricultural Products and Corporate and Other segments, respectively. Net sales, income and net assets from discontinued operations include the alginates, Ortho(R) lawn-and-garden products, artificial sweeteners, and biogums businesses for 1998. Net sales and income from discontinued operations in 1997 also includes eight months of the chemicals business which was spun off to shareholders September 1, 1997. Net sale, income and net assets for 1996 includes alginates, artificial sweeteners, biogums and chemicals business. 63
1998 1997 1996 - ------------------------------------------------------------------------ Net Sales $1,288 $3,279 $4,339 Income (Loss)from Discontinued Operations Before Income Tax (158) 506 184 Income Tax Expense (Benefit) (39) 185 78 Net Income (Loss) from Discontinued Operations (119) 321 106 Net Assets of Discontinued Operations: Current Assets $ 994 $ 681 Non-Current Assets 1,269 1,681 Total Assets $2,263 $2,362 Current Liabilities $ 272 $ 224 Non-Current Liabilities 67 33 Total Liabilities $ 339 $ 257 Net Assets of Discontinued Operations $1,924 $2,105 - ------------------------------------------------------------------------
Income tax expense for discontinued operations for 1998 exceeded the 35 percent U.S. federal statutory rate primarily because of a nondeductible write-off of intangibles assets associated with the alginates business. Income tax expense for discontinued operations for 1996 exceeded the U.S. federal statutory amount primarily because of nondeductible exit costs incurred to separate the chemicals business. Interest expense charged to discontinued operations was $103 million in 1998, $74 million in 1997, and $88 million in 1996 based on working capital requirements and expected proceeds from the discontinued Nutrition and Consumer segment and debt assumed by the spun-off chemical business. Historically, the company did not allocate any debt to the Nutrition and Consumer Products or Chemicals businesses because the company centrally manages cash requirements for its operations. Net assets of the Nutrition and Consumer Products segment do not include pension liabilities, pension assets, and postretirement benefit liabilities associated with its active employees or former employees. Expenses related to pension and postretirement benefits have been allocated to discontinued operations based on payroll costs. Monsanto has not revised its existing retirement plans for any employment status changes associated with the divestiture of the Nutrition and Consumer Products segment. In 1997, the chemical company assumed the pension liability and related pension assets for its active employees and certain former employees of the chemical business. On September 7, 1999, Monsanto announced the sale of the alginates business to International Specialty Products (ISP). The closing of this transaction occurred on October 15, 1999 and is recorded in results from discontinued operations. Proceeds of $40 million from the sale were used to pay down debt. 64 CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION - ------------------------------------------------------------- Under the Private Securities Litigation Reform Act of 1995, companies are provided with a "safe harbor" for making forward-looking statements about the potential risks and rewards of their strategies. Monsanto believes it's in the best interest of its shareowners to use these provisions in discussing future events. Forward-looking statements include Monsanto's plans for growth; the potential for the development, regulatory approval, and public acceptance of new products; and other factors that could affect Monsanto's future operations or financial position. Such statements often include the words "believes," "expects," "anticipates," "intends," "plans," "estimates," or similar expressions. Monsanto's ability to achieve its goals depends on many known and unknown risks and uncertainties, including changes in general economic and business conditions. These factors could cause the anticipated performance and results of the company to differ materially from those described or implied in forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below. Factors Affecting the Agricultural Products Segment Roundup Generic Competition: The family of Roundup(R) herbicides is a - --------------------------- major product line for Monsanto's Agricultural Products segment. These herbicides are likely to face increasing competition from generic products. Patents protecting Roundup(R) in several countries expired in 1991. Compound per se patent protection for the active ingredient in Roundup(R) herbicide expires in the United States in Sept. 2000. Monsanto believes that it can compensate for increased generic competition both within and outside the United States and continue to increase revenues and profits from Roundup(R) through a combination of (1) marketing strategy, (2) pricing strategy, and (3) decreased production costs. Marketing Strategy. Monsanto expects to increase Roundup(R) sales by - ------------------ focusing on brand premiums, providing unique formulations and services, offering integrated seed and biotech solutions through cross selling and the growth and introduction of RoundupReady(R) crops, and continuing to encourage the practice of conservation tillage. In addition, Monsanto will seek to enter into strategic agreements to supply glyphosate to other herbicide producers. The success of the company's Roundup(R) marketing strategy will depend on the continued expansion of conservation tillage practices and the company's ability to realize and promote cost and production benefits of its product packages, introduce new RoundupReady(R) crops and economically produce glyphosate in sufficient quantities to allow it to market to such producers. Pricing Strategy. Monsanto significantly reduced the sales price of - ---------------- Roundup(R) in the United States. This price elasticity strategy is designed to increase demand for Roundup(R) in the United States by making Roundup(R) more economical, encouraging both new uses of the product and expansion of the number of acres treated. Monsanto's experience in numerous markets worldwide has been that price reductions have stimulated volume growth. However, the volume increases in the other countries also may have been influenced by a variety of other factors, such as weather; the increased use of conservation tillage practices; development of other new markets or applications for Roundup(R); launch of new products including Roundup Ready(R) crops; competitive products and practices; and an increase in agricultural acres planted. Conditions, and therefore volume trends in one country may or may not be duplicated in other world areas. As a result, Monsanto's experience with price elasticity in markets outside the United States may or may not be replicated in the United States. Production Cost Decreases. Monsanto also believes that increased volumes - ------------------------- and technological innovations will lead to efficiencies that will reduce the production cost of glyphosate. Such cost reductions will depend on 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 65 availability of sufficient financial resources to fund research and development needs, demonstrated product effectiveness, the company's ability to develop, purchase or license required technology, the existence of sufficient distribution channels and the acceptance and competition factors discussed below. Governmental and Consumer Acceptance: The commercial success of - ------------------------------------ agricultural and food products developed through biotechnology will depend in part on government and public acceptance of their cultivation, distribution and consumption. Monsanto continues to work with consumers, customers and regulatory bodies to encourage understanding of nutritional and agricultural biotechnology products. However, public attitudes may be influenced by claims that genetically modified plant products are unsafe for consumption or pose unknown risks to the environment or to traditional social or economic practices. For instance, consumer groups have brought lawsuits in various countries seeking to halt industry activities with respect to products developed through biotechnology. Securing governmental approvals for, and consumer confidence in, such products poses numerous challenges, particularly outside the United States. Some countries also have labeling requirements. In some markets, because these crops are not yet approved for import, growers in other countries may be restricted from introducing or selling their grain. In these cases, the grower may have to arrange to sell the grain only in the domestic market or to use the grain for feed on his or her farm. The market success of Monsanto's products developed through biotechnology could be delayed or impaired in certain geographical areas because of such factors. Technological Change and Competition: A number of companies are engaged - ------------------------------------ in plant biotechnology research. Technological advances by others could render Monsanto's products less competitive. In addition, the ability to be first to market a new product can result in a significant competitive advantage. Monsanto believes that competition will intensify, not only from agricultural biotechnology firms but from major agrichemical, seed and food companies with biotechnology laboratories. Some of Monsanto's agricultural competitors have substantially greater financial, technical and marketing resources than Monsanto does. Successful Integration of Recent Transactions: Monsanto has made - --------------------------------------------- significant acquisitions, mergers and joint ventures involving seed, agricultural biotechnology and grain processing companies. These transactions are designed to strengthen Monsanto's capability to bring important new life sciences products to customers worldwide, and to contribute to the company's long-term growth. The Delta and Pine Land Co. (D&PL) transaction is subject to regulatory approval and other customary conditions. It is anticipated that the pending D&PL transaction, when final, and the recently completed acquisitions of DEKALB Genetics Corp., Plant Breeding International Cambridge, and certain international seed operations of Cargill Inc., will significantly dilute Monsanto's financial results for the next several years. Long term, Monsanto must integrate these companies into its business to realize projected synergies and to provide the distribution channels necessary to quickly and efficiently launch new products. It must also fit such acquisitions, mergers and joint ventures into its growth strategy to generate sufficient value to justify their cost. Mergers, acquisitions, and joint ventures also present other challenges, including geographical coordination, personnel integration, and the reconciliation of corporate cultures. This integration could cause a temporary interruption of or loss of momentum in Monsanto's business and the loss of key personnel from the acquired company. There can be no assurance that the diversion of management's attention to such matters or the delays or difficulties encountered in connection with integrating these operations will not have an adverse effect on Monsanto's business, results of operations, or financial condition. Planting Decisions and Weather: The company's agricultural products - ------------------------------ business is highly seasonal. It is subject to weather conditions and natural disasters that affect commodity prices, seed yields, and decisions by growers regarding purchases of seed and herbicides. As they have for all of 1999, crop commodity prices continue to be at historically low levels. There can be no assurance that this trend will not continue. These lower commodity prices affect growers' decisions about the types and amounts of crops to plant and may negatively influence sales of Monsanto's herbicide and seed products. 66 Factors Affecting the Pharmaceuticals Segment Ability to Realize Potential of Existing Pipeline Products: - ---------------------------------------------------------- Pharmaceutical research and development (R&D) is subject to inherent uncertainty, difficulties and delays. These include, but are not limited to, successful completion of clinical trials and the ability to obtain regulatory approval for the compounds worldwide. Failure to receive government approvals as anticipated could preclude or substantially delay commercialization of products in the company's R&D programs. Development and Commercialization of New Products and Expansion of - ------------------------------------------------------------------- Existing Product Uses: The Pharmaceuticals Segment's long-term success - --------------------- will depend in great part on its ability to commercialize new products (including second generation products) and to expand the use of its existing products by developing new indications for such products. Such efforts require substantial funding of R&D and, in the case of new products, launch expenses. If Monsanto is unable to earn or borrow sufficient resources to fund such expenses, its ability to develop new products and expand uses of existing products will suffer. Further, the outcome of R&D is inherently difficult to predict. Anticipated results may never materialize, or they may not be promising enough. Even when new pharmaceutical products are marketed, there can be no guarantees of their commercial success. Consumer demand and competitive factors, including the availability and price of treatment alternatives influence sales. In addition, timing is crucial. The results of R&D of new pharmaceutical products are difficult to forecast, and new products must be carefully deployed, with resources sufficient to realize the full value of the products. Product Liability and Consumer Acceptance: The sale of pharmaceutical - ----------------------------------------- products always involves a risk of product liability claims and associated adverse publicity. Substantial damage awards for injuries allegedly caused by the use of pharmaceuticals have been made against certain companies in past years. In addition, unexpected safety or efficacy concerns can arise with respect to marketed products. Whether or not they are scientifically justified, such concerns could lead to product recalls, withdrawals, or declining sales. Competition: Pharmaceutical research is intense and highly competitive. - ----------- It is characterized by rapid technological change. Depending on the product involved, competition may be encountered in price, delivery, service, performance, innovation, brand recognition and quality. Many of Monsanto's pharmaceutical competitors have greater research, financial, marketing and other resources than Monsanto does. Some of Monsanto's trademarked pharmaceutical products also face increasing pressures from producers of lower-priced generic products and from new products entering the marketplace. Finally, as the company introduces new products intended for use in the treatment of the same conditions as existing Monsanto products, sales of such existing products may suffer. Pricing: Managed care groups, health care organizations and government - ------- agencies worldwide actively seek discounts and lower prices on pharmaceutical products. Monsanto's challenge is to provide overall economic benefits to health care providers and negotiate prices for specific products that will allow it to profit at acceptable levels. Factors Affecting All Segments Financial Requirements: Monsanto's recent acquisitions will require a - ---------------------- significant commitment of the company's financial resources. In addition, new technological innovations generally require a significant investment for R&D and product launch. Lack of funds for investment in these areas could hinder the company's ability to make technological innovations and to introduce and distribute new products. Monsanto expects to generate the required capital by increasing the revenues of its core businesses, by seeking sufficient outside financing and by containing costs. The company's ability to do so will depend upon a variety of specific factors listed elsewhere in this report and upon capital market conditions generally. Intellectual Property: Monsanto has devoted significant resources to - --------------------- obtaining and maintaining patent protection worldwide for its products. It seeks to preserve its trade secrets and to operate without infringing the proprietary 67 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 68 computer code and embedded systems, and the success of similar programs conducted by suppliers and other third parties. 69 Financial Summary - ------------------------------------------------------------------------------------------------------------------------------
(Dollars in millions, except per share and share amounts) 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------ OPERATING RESULTS Net Sales $ 7,237 $ 6,058 $ 4,862 $ 4,165 $ 3,639 Income (Loss) from Continuing Operations (131) 149 279 386 350 As a Percent of Net Sales 2% 6% 9% 10% Income (Loss) from Discontinued Operations (119) 321 106 353 272 Net Income (Loss) (250) 470 385 739 622 - ------------------------------------------------------------------------------------------------------------------------------ EARNINGS (LOSS) PER SHARE: Income (Loss) from Continuing Operations $ (0.22) $ 0.24 $ 0.47 $ 0.67 $ 0.63 Net Income (Loss) (0.41) 0.77 0.64 1.27 1.06 - ------------------------------------------------------------------------------------------------------------------------------ YEAR-END FINANCIAL POSITION Total Assets $16,385 $10,517 $ 8,619 $ 8,008 $ 6,537 Working Capital 1,415 270 446 896 1,074 - ------------------------------------------------------------------------------------------------------------------------------ Property, Plant and Equipment: Gross $ 5,185 $ 3,885 $ 4,428 $ 4,111 $ 3,748 Net 2,865 1,921 1,629 1,413 1,405 - ------------------------------------------------------------------------------------------------------------------------------ Long-Term Debt $ 6,259 $ 1,979 $ 1,608 $ 1,667 $ 1,405 Shareowners' Equity 4,986 4,104 3,690 3,732 2,948 - ------------------------------------------------------------------------------------------------------------------------------ Current Ratio 1.37 1.08 1.19 1.50 1.74 Percent of Total Debt to Total Capitalization 60% 47% 38% 35% 37% - ------------------------------------------------------------------------------------------------------------------------------ OTHER DATA Stock Price: High $ 63 15/16 $ 52 15/16 $ 43 1/4 $ 25 $ 17 3/8 Low 33 3/4 34 3/4 23 13 3/4 13 3/8 Year-End 47 1/2 42 38 7/8 24 1/2 14 1/8 Price/Earnings Ratio on Year-End Stock Price 55 60 19 13 - ------------------------------------------------------------------------------------------------------------------------------ PER SHARE: Dividends $ 0.120 $ 0.500 $ 0.588 $ 0.540 $ 0.494 Shareowners' Equity 7.93 6.89 6.31 6.46 5.29 - ------------------------------------------------------------------------------------------------------------------------------ Shareowners (year-end) 62,769 61,265 54,828 50,745 53,694 - ------------------------------------------------------------------------------------------------------------------------------ Shares Outstanding (year-end, in millions) 629 595 584 575 560 - ------------------------------------------------------------------------------------------------------------------------------ Employees (year-end) 31,800 21,900 28,000 28,500 29,400 - ------------------------------------------------------------------------------------------------------------------------------ Loss from continuing operations for 1998 included $610 million, or $1.01 per share, for restructuring and special charges, write-offs for acquired in-process research and development (R&D), and charges for the cancellation of DEKALB(R) stock options. Income from continuing operations for 1997 included $404 million, or $0.66 per share, for the write-off of acquired in-process R&D. Income from continuing operations for 1996 included restructuring and other unusual charges of $226 million, or $0.38 per share, associated with the closure or rationalization of certain facilities, asset write-offs, and work force reductions. Income from continuing operations for 1995 included restructuring expenses and other unusual items of $63 million, or $0.11 per share. Income from continuing operations for 1994 included a net aftertax gain for restructuring and other unusual items of $20 million, or $0.03 per share. This financial statistic is not meaningful for 1998 because Monsanto reported a loss from continuing operations. Includes sale of styrenics plastics business in 1995, spinoff of the chemicals businesses in 1997, and classification of the Alginates, Artificial sweeteners, and biogums business as discontinued operations. Amounts not restated for the classification of Nutrition and Consumer Products segment as discontinued operations. In addition, amounts prior to 1997 were not restated to reflect the spinoff of the chemical businesses. The quarterly common stock dividend was reduced from $0.16 per share to $0.03 per share in the fourth quarter of 1997. Gross property, plant and equipment amounts prior to 1997 were not restated to reflect the reclassification of the former Nutrition & Consumer products businesses as discontinued operations.
70 APPENDIX 1. Throughout the electronic submission, trademarks are designated on each page by the letter "R" in parentheses or the letters "TM" in parentheses; whereas in the printed copy of the Form 10-K, all registered trademarks are indicated by the letter "R" in a circle. 71 -----END PRIVACY-ENHANCED MESSAGE-----