-----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, PRRs4ULEoRP0ensgdVWgcGGoo+T3O3VBcL4iaVcn/CORCuqYwD/86Ljg29BjI+nV pIIzUKiDHEIu0Cefd43SXw== 0001068800-00-000017.txt : 20000202 0001068800-00-000017.hdr.sgml : 20000202 ACCESSION NUMBER: 0001068800-00-000017 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 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-Q/A SEC ACT: SEC FILE NUMBER: 001-02516 FILM NUMBER: 511124 BUSINESS ADDRESS: STREET 1: 800 N LINDBERGH BLVD CITY: ST LOUIS STATE: MO ZIP: 63167 BUSINESS PHONE: 3146941000 MAIL ADDRESS: STREET 1: 800 NORTH LINDBERGH BLVD CITY: ST LOUIS STATE: MO ZIP: 63167 FORMER COMPANY: FORMER CONFORMED NAME: MONSANTO CHEMICAL CO DATE OF NAME CHANGE: 19711003 10-Q/A 1 MONSANTO COMPANY FORM 10-Q/A ====================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-2516 MONSANTO COMPANY ---------------- (Exact name of registrant as specified in its charter) DELAWARE 43-0420020 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 800 NORTH LINDBERGH BLVD., ST. LOUIS, MO 63167 ---------------------------------------------- (Address of principal executive offices) (Zip Code) (314) 694-1000 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. OUTSTANDING AT CLASS SEPTEMBER 30, 1999 ----- ------------------ COMMON STOCK, $2 PAR VALUE 634,608,378 SHARES ====================================================================== PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The Statement of Consolidated Income of Monsanto Company and subsidiaries for the three months and nine months ended September 30, 1999 and the three months and nine months ended September 30, 1998, the Statement of Consolidated Financial Position as of September 30, 1999 and December 31, 1998, the Statement of Consolidated Cash Flow for the nine months ended September 30, 1999 and nine months ended September 30, 1998, and related Notes to Financial Statements follow. In the opinion of management, these unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position, results of operations and cash flows for the interim periods reported. This Quarterly Report on Form 10-Q/A should be read in conjunction with Monsanto's 1998 amended Annual Report on Form 10-K/A and Quarterly Reports on Form 10-Q/A for the periods ended March 31, 1999 and June 30, 1999. Unless otherwise indicated, "Monsanto" and "the company" are used interchangeably to refer to Monsanto Company or to Monsanto Company and consolidated subsidiaries, as appropriate to the context. Unless otherwise indicated, "earnings per share" and "per share" mean diluted earnings per share. In tables, all dollars are in millions, except per share data. Throughout this quarterly filing, "EBITDA (excluding unusual items)" is net earnings (loss) before income taxes, interest expense, depreciation expense, amortization expense, and excludes the effects of unusual items. Net income and income from continuing operations for both the third quarter and first nine months of 1999 included unusual items after-tax of $9 million, or $0.01 per share, and $25 million or $0.04 per share, respectively. These unusual items included an after-tax charge of $49 million principally associated with the accelerated integration of the agricultural chemical and seed operations offset by a net after-tax gain of $40 million from the reversal of restructuring reserves established in 1998, partially offset by the cost to exit the alginates business. Net income and income from continuing operations for the third quarter of 1998 included an after-tax charge of $187 million, or $0.30 per share, for the write-off of in-process research and development ("R&D") principally related to the acquisition of Plant Breeding International Cambridge Limited ("PBIC"). This charge in third quarter of 1998 was subsequently revised in fourth quarter of 1998, as a result of clarified guidance on in-process R&D from the United States Securities and Exchange Commission. Net income and income from continuing operations for the first nine months of 1998 included an after-tax charge of $13 million, or $0.02 per share, for the net cost of exiting the Company's optical products business and an after-tax charge of $187 million, or $0.30 per share, for the write-off of in-process R&D, partially offset by a restructuring reserve reversal. EBITDA (excluding unusual items) may not be directly comparable to EBITDA performance measures reported by other companies because it excludes unusual items. Although EBITDA (excluding unusual items) is a financial performance measure commonly used in the financial community, it is not a measure of financial performance under accounting principles generally accepted in the United States. The presentation of EBITDA (excluding unusual items) in this quarterly report is intended to supplement investors' understanding of Monsanto's operating performance and not to replace net income, cash flows, financial position nor comprehensive income as determined in accordance with accounting principles generally accepted in the United States. EBITDA (excluding unusual items) excludes the effects of intangible amortization and interest expense. For this reason, the increases in these two elements of the financial statements resulting from the 1998 acquisitions will not be reflected in EBITDA (excluding unusual items), but will impact net income in future periods. Investors and other users of the financial statements should refer to management's discussion and analysis for a description of events that have impacted EBITDA (excluding unusual items) and net income during the three months and nine months ended September 30, 1999 and the three months and nine months ended September 30, 1998. 1 MONSANTO COMPANY AND SUBSIDIARIES STATEMENT OF CONSOLIDATED INCOME (Dollars in millions, except per share) Unaudited
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 1999 1998 1999 1998 ---- ---- ---- ---- Net Sales $1,922 $1,706 $6,804 $5,504 Costs and Expenses: Cost of Goods Sold 729 623 2,450 2,115 Selling, General and Administrative Expenses 714 517 2,107 1,528 Technological Expenses 339 346 1,008 931 Acquired In-Process Research and Development 189 189 Amortization of Intangible Assets 92 51 259 167 Restructuring Expense (Income) 10 10 (35) Interest Expense 83 49 287 144 Interest Income (16) (15) (30) (35) Other Expense - Net 14 24 13 6 ------ ------ ------ ------ Income (Loss) from Continuing Operations Before Income Taxes (43) (78) 700 494 Income Tax Expense (Benefit) (53) 33 243 215 ------ ------ ------ ------ Net Income (Loss) from Continuing Operations 10 (111) 457 279 Before Change in Accounting Principle Income from Discontinued Operations, Net of taxes of $15, $3, $30, and $35 million, respectively 27 11 57 74 Gain on Sale of Discontinued Operations, Net of taxes of $4 million 12 12 ------ ------ ------ ------ Income (Loss) before Cumulative Effect of Accounting Change 49 (100) 526 353 Cumulative Effect of a Change in Accounting Principle, Net of taxes of $12 million (20) ------ ------ ------ ------ Net Income (Loss) $ 49 $ (100) $ 506 $ 353 ====== ====== ====== ====== Basic Earnings (Loss) per Share: Continuing Operations $ 0.02 $(0.18) $ 0.72 $ 0.47 Discontinued Operations 0.04 0.01 0.09 0.12 Gain on Sale of Discontinued Operations 0.02 0.02 Cumulative Effect of Accounting Change (0.03) ------ ------ ------ ------ Net Income (Loss) $ 0.08 $(0.17) $ 0.80 $ 0.59 Diluted Earnings (Loss) per Share: Continuing Operations $ 0.02 $(0.18) $ 0.70 $ 0.45 Discontinued Operations 0.04 0.01 0.09 0.11 Gain on Sale of Discontinued Operations 0.02 (0.02) Cumulative effect of Accounting Change (0.03) ------ ------ ------ ------ Net Income (Loss) $ 0.08 $(0.17) $ 0.78 $ 0.56 ------ ------ ------ ------ Dividends per Share $ 0.03 $ 0.03 $ 0.09 $ 0.09 ------ ------ ------ ------ The accompanying notes are an integral part of the financial statements.
2 MONSANTO COMPANY AND SUBSIDIARIES STATEMENT OF CONSOLIDATED FINANCIAL POSITION (Dollars in millions, except per share) Unaudited
September 30, December 31, 1999 1998 ---- ---- ASSETS Current Assets: Cash and cash equivalents $ 84 $ 89 Receivables, net of allowances of $150 in 1999 and $87 in 1998 2,791 2,119 Miscellaneous receivables and prepaid expenses 659 777 Deferred income tax benefit 515 488 Inventories 1,598 1,722 ------- ------- Total Current Assets 5,647 5,195 ------- ------- Property, Plant and Equipment 5,438 5,185 Less Accumulated Depreciation 2,388 2,320 ------- ------- Net Property, Plant and Equipment 3,050 2,865 ------- ------- Intangible Assets, net of accumulated amortization 4,645 5,281 Other Assets 1,055 1,120 Net Assets of Discontinued Operations 1,586 1,924 ------- ------- Total Assets $15,983 $16,385 ======= ======= LIABILITIES AND SHAREOWNERS' EQUITY Current Liabilities: Accounts payable $ 472 $ 823 Accrued liabilities 2,168 1,888 Short-term debt 915 1,069 ------- ------- Total Current Liabilities 3,555 3,780 ------- ------- Long-Term Debt 5,961 6,259 Postretirement Liabilities 858 848 Other Liabilities 366 512 Shareowners' Equity: Common stock (authorized: 1,000,000,000 shares, par value $2) Issued: 846,927,220 shares in 1999 and 1998 1,694 1,694 Additional contributed capital 1,467 1,389 Treasury stock, at cost (212,318,842 shares in 1999 and 217,632,240 shares in 1998) (2,449) (2,508) Reinvested earnings 5,101 4,652 Reserve for ESOP debt retirement (91) (106) Accumulated other comprehensive loss (479) (135) ------- ------- Total Shareowners' Equity 5,243 4,986 ------- ------- Total Liabilities and Shareowners' Equity $15,983 $16,385 ======= ======= The accompanying notes are an integral part of the financial statements.
3 MONSANTO COMPANY AND SUBSIDIARIES STATEMENT OF CONSOLIDATED CASH FLOW (Dollars in millions) Unaudited
Nine Months Ended September 30, ----------------- 1999 1998 ---- ---- Increase (Decrease) in Cash and Cash Equivalents Operating Activities: Income from continuing operations $ 457 $ 279 Add income taxes - continuing operations 243 215 ----- ------- Income from continuing operations before income taxes 700 494 Adjustments to reconcile to Cash Provided (Used) in Continuing Operations: Income tax refunds (payments) (57) 135 Items that did not use (provide) cash: Depreciation and amortization 521 365 Restructuring expense (income) 10 (35) Acquired in-process research and development expense 189 Bad debt expense and other 53 67 Working capital changes that provided (used) cash: Accounts receivable (670) (975) Inventories 39 (78) Accounts payable and accrued liabilities (146) (41) Other 37 (312) Pharmaceutical licensing and product rights sales 225 Other items 22 27 ----- ------- Cash Provided by Continuing Operations 509 61 Cash Provided by (Used in) Discontinued Operations (144) 155 ----- ------- Total Cash Provided by Operations 365 216 ----- ------- Investing Activities: Property, plant and equipment purchases (626) (538) Acquisition and investment payments (78) (768) Investment disposal and other proceeds 452 130 Discontinued operations proceeds (payments) 301 (28) ----- ------- Cash Provided by (Used in) Investing Activities 49 (1,204) ----- ------- Financing Activities: Net change in short-term financing (154) 818 Long-term debt proceeds 25 224 Long-term debt reductions (323) (68) Dividend payments (57) (54) Common stock issued under employee stock plans 90 149 ----- ------- Cash Provided by (Used in) Financing Activities (419) 1,069 ----- ------- Increase in Cash and Cash Equivalents (5) 81 Cash and cash equivalents beginning of year 89 134 ----- ------- Cash and cash equivalents at end of period $ 84 $ 215 ----- -------
The effect of exchange rate changes on cash and cash equivalents was not material. Cash payments for interest (net of amounts capitalized) were $224 million as of September 30, 1999, and $162 million as of September 30, 1998. The accompanying notes are an integral part of the financial statements. 4 MONSANTO COMPANY AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS UNAUDITED 1. In 1998, Monsanto announced that it had entered into a definitive agreement with Delta and Pine Land Company ("D&PL") to merge it with Monsanto. Under terms of the agreement, D&PL shareowners would be entitled to receive 0.8625 shares of Monsanto's common stock in exchange for each share of D&PL they hold. Approximately 33 million shares of Monsanto common stock would be issued to D&PL shareowners. Based on Monsanto's closing stock price of $53 1/2 per common share on May 8, 1998, the date of the merger agreement, this would result in a purchase price for purchase accounting purposes 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. Also during 1998, Monsanto completed its acquisition of DEKALB Genetics Corporation. ("DEKALB") and acquired Plant Breeding International Cambridge Limited ("PBIC") and certain international seed operations of Cargill, Incorporated ("Cargill"). Monsanto accounted for these acquisitions as purchases. The preliminary purchase price allocations are based on assumptions that are subject to revision during 1999, pending final valuation studies. Significant components of the current preliminary purchase price allocation for the principal acquisitions made during 1998 are to goodwill, $2,835 million; germplasm and core technology, $324 million; trademarks, $206 million; in-process research and development, $402 million; exit costs and employee termination liabilities, ($58) million; inventories and other individually insignificant tangible assets and liabilities, $259 million. The company is continuing to obtain additional information related to intangible assets (primarily germplasm and trademarks), litigation, costs to complete the exit plan for certain activities of the acquired businesses, and inventories. The information necessary to complete the allocation of purchase price is expected to be obtained during the fourth quarter of 1999. On October 20, 1999, Monsanto and 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 to Monsanto for the lost use of certain germplasm and for 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. As a result, the purchase price for certain international seed operations of Cargill has been reduced by $261 million and final estimates related to the purchase price allocation to goodwill, inventories, and other individually insignificant tangible assets are expected to be completed and adjusted during the fourth quarter of 1999. Any other adjustment to the purchase price allocation for the businesses acquired is not expected to materially impact Monsanto's financial position, results of operations, or cash flows. 2. Comprehensive income (loss) includes all non-shareowner changes in equity and consists of net income, foreign currency translation adjustments, unrealized gains and losses on available-for-sale securities, and minimum pension liability adjustments. Total comprehensive income (loss) for the three months and nine months ended September 30, 1999 and September 30, 1998, were as follows:
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 1999 1998 1999 1998 ---- ---- ---- ---- Net Income (Loss) $ 49 $(100) $ 506 $353 ---- ----- ----- ---- Other Comprehensive Income (Loss): Foreign Currency Translation Adjustments (43) 39 (360) (13) Unrealized Investment Gains 10 9 16 17 ---- ----- ----- ---- Total Other Comprehensive Income (Loss) (33) 48 (344) 4 ---- ----- ----- ---- Total Comprehensive Income (Loss) $ 16 $ (52) $ 162 $357 ---- ----- ----- ----
5 MONSANTO COMPANY AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED) UNAUDITED 3. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"). FAS 133 requires all derivatives to be recognized as assets or liabilities on the balance sheet and measured at fair value. Changes in the fair value of derivatives should be recognized in either Net Income or Other Comprehensive Income, depending on the designated purpose of the derivative. This statement is effective for Monsanto 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. 4. Basic earnings per share ("EPS") from continuing operations were computed using the weighted average number of common shares outstanding each period (632.6 million and 600.4 million for the first nine months ended September 30, 1999 and 1998, respectively). Diluted EPS from continuing operations were computed taking into account the effect of dilutive potential common shares (16.0 million in 1999 and 26.5 million in 1998). Dilutive potential common shares consist of outstanding stock options. Certain potential common share equivalents were not included in the computation of diluted earnings per share, because the effect of their exercise or conversion is not dilutive, when based on the average market price of Monsanto common stock for the period. These included approximately 61.7 million shares of outstanding stock options, which expire through 2008, and 17.5 million of Adjustable Conversion-rate Equity Securities ("ACES") that include stock purchase contracts exercisable in November 2001. 5. Monsanto's 1998 restructuring plan resulted in the recognition of liabilities totaling $220 million (current and long-term) at December 31, 1998. During the third quarter of 1999, 250 employees were severed at a cost of approximately $23 million. Year-to-date severance's for 1999 total 925 employees at a cost of $67 million. Cash outflows associated with these separations were charged against the restructuring liability. Monsanto completed a portion of the facility closures in the first nine months of 1999, reducing the restructuring liability by another $12 million. In addition, in the third quarter of 1999, Monsanto reversed restructuring liabilities of $36 million pretax, largely the result of lower actual severance and facility shut-down expenses than originally estimated. Monsanto expects to complete the remaining restructuring actions within the originally planned time frame.
Work Force Facility Reduction Closures Total --------- -------- ----- 1998 restructuring reserve balance as of December 31, 1998 $188 $ 32 $220 Costs charged against reserves (67) (12) (79) Restructuring reserve reversals (25) (11) (36) ---- ---- ---- 1998 restructuring reserve balance as of September 30, 1999 $ 96 $ 9 $105 ---- ---- ----
6. Components of inventories as of September 30, 1999 and December 31, 1998 were as follows:
September 30, December 31, 1999 1998 ---- ---- Finished goods $ 698 $1,064 Goods in process 446 469 Raw materials and supplies 486 224 ------ ------ Inventories, at FIFO cost 1,630 1,757 Excess of FIFO over LIFO cost (32) (35) ------ ------ Total $1,598 $1,722 ------ ------
6 MONSANTO COMPANY AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED) UNAUDITED 7. During 1998, a jury verdict was returned against Monsanto in a lawsuit filed in the California Superior Court. The lawsuit was brought by Mycogen Corp., Agrigenetics Inc., and Mycogen Plant Sciences Inc., claiming that Monsanto delayed providing access to certain gene technology under a 1989 agreement with Lubrizol Genetics Inc., a company which Mycogen Corp. subsequently purchased. The jury awarded $174.9 million in damages. Monsanto has filed an appeal of the verdict, has meritorious defenses and grounds to overturn the award, and intends to vigorously pursue all available means to have this verdict set aside. No provision has been made in Monsanto's consolidated financial statements with respect to this verdict. In April 1999, a jury verdict was returned against DEKALB Genetics Corporation (which became a wholly-owned subsidiary of Monsanto during December 1998), in a lawsuit filed in U.S. District Court in North Carolina. The lawsuit was brought by Rhone Poulenc Agrochimie S.A., claiming that a 1994 license agreement was induced by fraud stemming from DEKALB's nondisclosure of relevant information and that DEKALB did not have the right to license, make or sell products using Rhone Poulenc's technology for glyphosate resistance under this agreement. The jury 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. Monsanto is party to a number of lawsuits and claims, which it is vigorously defending. Such matters arise in the normal course of business and relate to a variety of issues. Certain of the lawsuits and claims seek damages in very large amounts or seek to restrict Monsanto's business activities. Although the results of litigation cannot be predicted with certainty, management's belief is that the final outcome of such litigation will not have a material adverse effect on Monsanto's consolidated financial position, profitability or liquidity. 7 MONSANTO COMPANY AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED) UNAUDITED 8. In June, 1999, Monsanto management committed to a plan to sell its artificial sweetener and biogum businesses. The results of operations, financial position, and cash flows of these businesses, and of the alginates and Ortho(R) lawn-and-garden products businesses, the divestiture of which was approved by Monsanto's Board of Directors in 1998, have been reclassified as discontinued operations; and, for all periods presented, the consolidated financial statements and notes have been reclassified to conform to this presentation. The Company expects to sell these businesses for a gain by July, 2000. In addition, Monsanto transferred the Roundup(R) lawn-and-garden and nutrition research operations of the former Nutrition and Consumer Products segment to the Agricultural Products and Corporate and Other segments, respectively (see Discontinued Operations disclosure for further details). Net sales, income and net assets from discontinued operations are as follows:
Three Months Ended Nine Months Ended September 30, September 30 ------------------ ----------------- 1999 1998 1999 1998 ---- ---- ---- ---- Net Sales $243 $274 $712 $971 Income from Discontinued Operations, Net of tax of $15, $3, $30 and $35, respectively 27 11 57 74 Gain on Sale of Discontinued Operations: Operating Income From Discontinued Operations, Net of Tax of $11 million 23 23 Loss on Disposal of Discontinued Operations, Net of tax of $7 million (11) (11) ---- ---- ---- ---- Gain on Sale of Discontinued Operations, Net of tax of $4 million 12 12 Net Income from Discontinued Operations $ 39 $ 11 $ 69 $ 74 ---- ---- ---- ---- Net Assets of Discontinued Operations: As of September 30, As of December 31, ------------------- ------------------ 1999 1998 ---- ---- Current Assets $ 579 $ 994 Non-Current Assets 1,339 1,269 ------ ------ Total Assets $1,918 $2,263 ------ ------ Current Liabilities $ 182 $ 272 Non-Current Liabilities 150 67 ------ ------ Total Liabilities $ 332 $ 339 ------ ------ Net Assets of Discontinued Operations $1,586 $1,924 ------ ------
9. On August 6, 1999, Monsanto announced the signing of a definitive agreement to sell Stoneville Pedigreed Seed Company to an affiliate of Hicks, Muse, Tate & Furst, Inc. Closing of this transaction is subject to customary closing conditions; and Monsanto's obligation to close this transaction is subject to satisfaction of all conditions precedent to its merger with D&PL. 10. 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 from the sale were used to pay down debt. 8 MONSANTO COMPANY AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED) UNAUDITED 11. Business segment data for the three months and nine months ended September 30, 1999 and September 30,1998 were as follows for net sales, EBIT (earnings before interest expense and income taxes) and EBITDA (earnings before interest expense, income taxes, depreciation and amortization). Segment EBIT and EBITDA exclude unusual items and are indicated as "EBIT (excluding unusual items)" and "EBITDA (excluding unusual items)". Total Monsanto consolidated EBIT includes the effects of unusual items. Net income and income from continuing operations for the third quarter and first nine months of 1999 included unusual items after-tax of $9 million and $25 million, respectively. These unusual items included an after-tax charge of $49 million principally associated with the accelerated integration of the agricultural chemical and seed operations offset by a net after- tax gain of $40 million from the reversal of restructuring reserves established in 1998, partially offset by the cost to exit the alginates business. Net income and income from continuing operations for the third quarter of 1998 included an after-tax charge of $187 million, or $0.30 per share, for the write-off of in-process research and development ("R&D") principally related to the acquisition of Plant Breeding International Cambridge Limited ("PBIC"). This charge in third quarter of 1998 was subsequently revised in fourth quarter of 1998, as a result of clarified guidance on in-process R&D from the United States Securities and Exchange Commission. Net income and income from continuing operations for the first nine months of 1998 included an after-tax charge of $13 million, or $0.02 per share, for the net cost of exiting the Company's optical products business and an after-tax charge of $187 million, or $0.30 per share, for the write-off of in-process R&D, partially offset by a restructuring reserve reversal.
Net Sales Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 1999 1998 1999 1998 ---- ---- ---- ---- Agricultural Products $ 951 $ 868 $4,020 $3,440 Pharmaceuticals 948 796 2,696 1,916 Corporate and Other 23 42 88 148 ------ ------ ------ ------ Total Net Sales $1,922 $1,706 $6,804 $5,504 ------ ------ ------ ------ EBIT Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 1999 1998 1999 1998 ---- ---- ---- ---- Segment EBIT (excluding unusual items): Agricultural Products $(25) $ 103 $ 779 $ 921 Pharmaceuticals 142 130 432 128 Corporate and Other (39) (73) (186) (209) ---- ----- ------ ----- Total segment EBIT (excluding unusual items) 78 160 1,025 840 ---- ----- ------ ----- Restructuring and Other Unusual Items from Continuing Operations - Net (38) (189) (38) (202) ---- ----- ------ ----- Total EBIT from Continuing Operations $ 40 $ (29) $ 987 $ 638 ---- ----- ------ -----
9 MONSANTO COMPANY AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED) UNAUDITED
EBITDA (excluding unusual items) Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 1999 1998 1999 1998 ---- ---- ---- ---- Segment EBITDA (excluding unusual items): Agricultural Products $ 91 $ 194 $1,122 $1,163 Pharmaceuticals 181 171 550 227 Corporate and Other (23) (70) (134) (208) ---- ----- ------ ------ Total Segment EBITDA (excluding unusual items) 249 295 1,538 1,182 ---- ----- ------ ------ Interest Expense 83 49 287 144 Income Taxes (53) 33 243 215 Amortization Expense 92 51 259 167 Depreciation 87 84 262 198 Restructuring and Other Unusual Items - Net 30 189 30 179 ---- ----- ------ ------ Income from Continuing Operations $ 10 $(111) $ 457 $ 279 ---- ----- ------ ------
Financial information for the third quarter or first nine months should not be annualized. Monsanto's sales and operating income are historically higher during the first half of the year, primarily because of the concentration of sales from the Agricultural Products segment in the first half of the year. 12. In the third quarter of 1999, Monsanto recorded an after-tax charge of $49 million for unusual items principally associated with the accelerated integration of Monsanto's agricultural chemical and seed operations. Also during the third quarter of 1999, a net after-tax gain of $40 million was recorded from the reversal of restructuring liabilities originally established in 1998, partially offset by $11 million of cost to exit the alginates business. These restructuring liability reversals were required as a result of lower actual severance and facility shut- down expenses than originally estimated, primarily because of the disposal of the alginates business. The following table represents the expenses / (income) components of the net after-tax charge of $9 million that was recorded in the Statement of Consolidated Income as the result of these unusual items. In the third quarter of 1998, Monsanto recorded unusual items of $189 million pretax for the write-off of in-process research and development ("R&D") related to the acquisition of Plant Breeding International Cambridge Limited ("PBIC"). This charge in third quarter of 1998 was subsequently revised in fourth quarter of 1998, as a result of clarified guidance on in-process R&D from the United States Securities and Exchange Commission.
Total Unusual Items Unusual Restructuring Nine Months Ended Charges Reversals September 30, 1999 ------- ------------- ------------------- Cost of Goods Sold $ 20 $ - $ 20 Amortization of Intangible Assets 8 - 8 Restructuring Expense 47 (37) 10 ---- ---- ---- (Income) Loss from Continuing Operations Before Tax 75 (37) 38 Income Taxes (26) 13 (13) ---- ---- ---- (Income) Loss from Continuing Operations 49 (24) 25 Income from Discontinued Operations, Net of tax of $15 - (27) (27) Loss on Sale of Discontinued Operations, Net of tax of $7 - 11 11 ---- ---- ---- Net (Income) Loss $ 49 $(40) $ 9 ---- ---- ----
10 MONSANTO COMPANY AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS (CONTINUED) UNAUDITED 13. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements" (SAB 101). SAB 101 provides guidance related to revenue recognition issues based on interpretations and practices followed by the SEC. SAB 101 requires companies to report any changes in revenue recognition as an accounting change in accordance with APB opinion No. 20, "Accounting Changes". Monsanto recorded a cumulative effect of a change in accounting principle, effective January 1, 1999, for revenue recognized in 1998 related to the sale of marketing rights to Scotts Company. The impact to earnings in 1999 was an aftertax loss of $20 million, net of taxes of $12 million. As a result of discussions with the staff of the SEC and clarification of its interpretation regarding the classification of certain transactions, Monsanto agreed to reclassify certain revenues associated with the sales of pharmaceutical product rights in the Statement of Consolidated Income. The effect of this reclassification was to reduce "Net Sales" and increase other income included in "Other Expense, Net" by $23 million and $6 million in the three months ended September 30, 1999 and 1998, respectively; and $37 million and $25 million in the nine months ended September 30, 1999 and 1998, respectively. 11 MONSANTO COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Segment EBIT (earnings before interest expense and income taxes) and EBITDA (earnings before interest expense, income taxes, depreciation and amortization) exclude unusual items and are indicated as "EBIT (excluding unusual items)" and "EBITDA (excluding unusual items)". Total Monsanto consolidated EBIT includes the effects of unusual items. RESULTS FROM OPERATIONS - THIRD QUARTER 1999 COMPARED WITH THIRD QUARTER - ------------------------------------------------------------------------ 1998 - ---- Net income for Monsanto totaled $49 million, or $0.08 per share, in the third quarter of 1999 compared with a net loss of $100 million, or $0.17 per share, for the third quarter of 1998. Monsanto recorded income from continuing operations in the third quarter of 1999 of $10 million, or $0.02 per share, compared with a loss from continuing operations of $111 million, or $0.18 per share, for the prior year quarter. Net income and income from continuing operations for the third quarter of 1999 included unusual items of $9 million after-tax, or $0.01 per share, and $25 million, or $0.04 per share, respectively. Unusual items included an after-tax charge of $49 million principally associated with the accelerated integration of the agricultural chemical and seed operations, offset by a net after-tax gain of $40 million from the reversal of restructuring reserves established in 1998. This gain was partially offset by the cost to exit the alginates business. The restructuring reserve reversals were required as a result of lower actual severance and facility shut-down expenses than originally estimated, primarily for the disposal of the alginates business. Net income and income from continuing operations for the third quarter of 1998 included an after-tax net charge of $187 million, or $0.30 per share, for the write-off of in-process research and development ("R&D"), principally related to the acquisition of Plant Breeding International Cambridge Limited ("PBIC"). If the unusual charges were excluded in 1999 and 1998, income from continuing operations would have been $35 million, or $0.05 per share, in 1999, versus $76 million, or $0.12 per share, in 1998, a decrease of $41 million, or $0.07 per share. The third quarter of 1998 included one-time pretax payments of $140 million from Pfizer Inc. and $32 million from The Scotts Company (Updated information available in Subsequent Event footnote). Consolidated earnings before interest expense and taxes ("EBIT") from continuing operations was $40 million in the third quarter of 1999, compared with an EBIT loss from continuing operations of $29 million in the third quarter of 1998. Net sales increased to $1,922 million in the third quarter of 1999, compared with net sales of $1,706 million for the same period a year ago. Selling, general and administrative ("SG&A") expenses increased to $714 million in the third quarter of 1999 compared with prior year quarter SG&A expenses of $517 million. The inclusion in 1999 of SG&A expenses from acquired seed companies and continued marketing spending associated with Celebrex(R) arthritis treatment were the primary reasons for the increase. Amortization of intangible assets increased to $92 million in the third quarter of 1999, compared with $51 million for the same period a year ago, principally because of the increase in intangible assets related to the seed company acquisitions made in 1998. Monsanto financed the 1998 seed company acquisitions primarily with long-term borrowings which created a higher debt level in third quarter 1999 compared with the same period in the prior year. As a result, interest expense increased to $83 million in the third quarter of 1999 versus $49 million in the third quarter 1998. Other expense decreased slightly in the third quarter of 1999, to $14 million compared with $24 million in the prior year quarter, primarily because of increased pharmaceutical product rights sales partly offset by increases in minority interest expense and higher foreign currency losses in the third quarter of 1999. A tax benefit of $53 million was recorded for the third quarter of 1999 compared with a tax expense of $33 million in the prior year quarter, primarily because of a change in the cumulative effective tax rate for 1999. This benefit was driven by the recognition of greater than anticipated foreign tax credits. 12 MONSANTO COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) In the first half of 1999, Monsanto management committed to a plan to sell its artificial sweetener and biogum businesses. The results of operations, financial position, and cash flows of these businesses, and of the alginates and Ortho(R) lawn-and-garden products businesses, the divestiture of which was approved by Monsanto's Board of Directors in 1998, have been reclassified as discontinued operations; and, for all periods presented, the consolidated financial statements and notes have been reclassified to conform to this presentation. The company expects to sell these businesses for a gain by July, 2000. In addition, Monsanto transferred the Roundup(R) lawn-and-garden and nutrition research operations of the former Nutrition and Consumer Products segment to the Agricultural Products and Corporate and Other segments, respectively. Business segment data for the three months and nine months ended September 30, 1999 and September 30, 1998, were as follows:
Net Sales Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 1999 1998 1999 1998 ---- ---- ---- ---- Agricultural Products $ 951 $ 868 $4,020 $3,440 Pharmaceuticals 948 796 2,696 1,916 Corporate and Other 23 42 88 148 ------ ------ ------ ------ Total Net Sales $1,922 $1,706 $6,804 $5,504 ------ ------ ------ ------ EBIT Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 1999 1998 1999 1998 ---- ---- ---- ---- Segment EBIT (excluding unusual items): Agricultural Products $(25) $ 103 $ 779 $ 921 Pharmaceuticals 142 130 432 128 Corporate and Other (39) (73) (186) (209) ---- ----- ------ ----- Total Segment EBIT (excluding unusual items) 78 160 1,025 840 ---- ----- ------ ----- Restructuring and Other Unusual Items - Net (38) (189) (38) (202) ---- ----- ------ ----- Total EBIT from Continuing Operations $ 40 $ (29) $ 987 $ 638 ---- ----- ------ -----
Agricultural Products Segment - ----------------------------- The Agricultural Products segment recorded an EBIT (excluding unusual items) loss of $25 million in the third quarter of 1999 compared with EBIT (excluding unusual items) income of $103 million in the third quarter of 1998. The decrease in EBIT (excluding unusual items) of $128 million was primarily attributed to one-time events in the Roundup(R) lawn and garden business, increased amortization expense, and timing of biotechnology marketing expenses. Revenues from the Roundup(R) lawn and garden business declined by $36 million when compared with revenues from the prior year quarter primarily because of changes in the distribution network. Additionally, Roundup(R) lawn and garden results for third quarter 1998 included a one-time $32 million payment from The Scotts Company for the right to sell and market Roundup(R) herbicide for lawn and garden uses. (Updated information available in Note 13 to Notes to Financial Statements.) Amortization of intangible assets increased $35 million in the third quarter of 1999 when compared with the prior year, principally because of an increase in intangible assets related to seed company acquisitions in 1998. SG&A expenses for the third quarter of 1999 increased over the prior year quarter primarily because of the inclusion of seed companies and $22 million of biotechnology marketing expenses, which historically have occurred in the fourth quarter. Continued unfavorable economic conditions in certain Latin American and eastern European countries caused an increase in bad debt expense in the third quarter of 1999 compared with bad debt expense in the prior year quarter. 13 MONSANTO COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Net sales for the Agricultural Products segment were $951 million, in the third quarter of 1999, compared with net sales of $868 million in the third quarter of 1998, a 10 percent increase. The inclusion of sales from seed companies acquired in 1998 accounted for the increase. Sales volumes for the family of Roundup(R) herbicides in the third quarter of 1999 were higher when compared with sales volumes in the third quarter of 1998. The higher sales volumes, led by increases in the United States and strong recovery in Brazil, were primarily driven by lower prices of Roundup(R) herbicides. These higher sales volumes were partially offset by lower sales volumes in Argentina and eastern Europe because of unfavorable economic conditions. Additionally, Asia and Australian sales volumes were lower when compared with sales volumes in the prior year quarter because of unfavorable weather conditions. Pharmaceuticals Segment - ----------------------- EBIT (excluding unusual items) for the Pharmaceuticals segment increased to $142 million for the third quarter of 1999, compared with EBIT (excluding unusual items) of $130 million in the third quarter of 1998. EBIT (excluding unusual items) for third quarter 1998 included $140 million in milestone payments from Pfizer Inc. relating to Celebrex(R) arthritis treatment. The continued strong product sales of Celebrex(R) arthritis treatment and increased sales of Ambien(R) short-term treatment for insomnia were the primary reasons for the increase. SG&A expenses rose because of increased spending associated with the marketing of Celebrex(R) for the third quarter of 1999. The Pharmaceuticals segment recorded net sales of $948 million in the third quarter of 1999, compared with net sales of $796 million during the same period in 1998, a 19 percent increase. The strong product sales of Celebrex(R) were primarily responsible for the increase. The increase in net sales was partially offset by a decrease in sales of Arthrotec(R) and Daypro(R) arthritis treatment in the United States as market share shifted toward Celebrex(R). Sales of Ambien(R) short-term treatment for insomnia increased $46 million, or 54 percent, in the third quarter of 1999, when compared to the prior year quarter, as new and refill prescription rates continued to grow. Corporate and Other Segment - --------------------------- Corporate and Other segment EBIT (excluding unusual items) increased 47 percent in the third quarter of 1999 when compared with EBIT (excluding unusual items) in the third quarter of the prior year, primarily because of lower SG&A expenses as a result of cost adjustments associated with executive compensation programs combined with lower incentive accruals in the current year quarter. Net sales were $19 million lower in the third quarter of 1999 when compared with net sales in the same period last year, primarily because of lower sales from the Envirochem business. SG&A expenses were lower because of the absence of businesses divested and lower incentive accruals. 14 MONSANTO COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) SEGMENT EBITDA (EXCLUDING UNUSUAL ITEMS) - ---------------------------------------- Business segment earnings before interest expense, taxes, depreciation and amortization (EBITDA) excluding unusual items for the three months and nine months ended September 30, 1999 and September 30, 1998, were as follows:
EBITDA (excluding unusual items) -------------------------------- Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 1999 1998 1999 1998 ---- ---- ---- ---- EBITDA (excluding unusual items): Agricultural Products $ 91 $ 194 $1,122 $1,163 Pharmaceuticals 181 171 550 227 Corporate and Other (23) (70) (134) (208) ---- ----- ------ ------ Total EBITDA from Continuing Operations (excluding unusual items) 249 295 1,538 1,182 ---- ----- ------ ------ Interest Expense 83 49 287 144 Income Taxes (53) 33 243 215 Amortization Expense 92 51 259 167 Depreciation 87 84 262 198 Restructuring and Other Unusual Items - Net 30 189 30 179 ---- ----- ------ ------ Income from Continuing Operations $ 10 $(111) $ 457 $ 279 ---- ----- ------ ------
Monsanto's EBITDA (excluding unusual items) in the third quarter of 1999 was $249 million, compared with EBITDA (excluding unusual items) of $295 million in the third quarter of 1998, a decrease of 16 percent. Results in 1998 reflected one-time pretax payments from Pfizer Inc. of $140 million and from The Scotts Company of $32 million. The absence of such transactions in the third quarter of 1999 was partially offset by the inclusion of the results from seed companies acquired in 1998 and increased sales from Celebrex(R) arthritis treatment. On a segment basis, Monsanto's Agricultural Products segment EBITDA (excluding unusual items) decreased to $91 million in the third quarter of 1999 compared with EBITDA (excluding unusual items) of $194 million in the third quarter of 1998. This decrease was primarily a result of one-time events in the Roundup(R) lawn and garden business, and change in the timing of biotechnology marketing expenses. On a quarter-to-quarter basis, Monsanto's Pharmaceuticals segment EBITDA (excluding unusual items) improved to $181 million in the third quarter of 1999, from EBITDA (excluding unusual items) of $171 million in the third quarter of 1998, because of the strong product sales of Celebrex(R) arthritis treatment and Ambien(R) short-term treatment for insomnia. Financial information for the third quarter or first nine months of 1999 should not be annualized. Monsanto's sales and operating income are historically higher during the first half of the year, primarily because of the concentration of sales from the Agricultural Products segment in the first half of the year. RESULTS FROM OPERATIONS - FIRST NINE MONTHS OF 1999 COMPARED WITH FIRST - ----------------------------------------------------------------------- NINE MONTHS OF 1998 - ------------------- Net income for Monsanto totaled $506 million, or $0.78 per share, for the first nine months of 1999, compared with net income of $353 million, or $0.56 per share, for the first nine months of 1998. Monsanto earned income from continuing operations for the first nine months of 1999 of $457 million, or $0.70 per share, compared with income from continuing operations of $279 million, or $0.45 per share, for the same period in 1998. However, results from both years included unusual items. Net income and income from continuing operations for the first nine months of 1999 included unusual items after-tax of $9 million, or $0.01 per share, and $25 million, or $0.04 per share, respectively. Unusual items included an after-tax charge of $49 million principally associated with the accelerated integration of the agricultural chemical and seed operations, which was offset by a net after-tax gain of $40 million from the reversal of restructuring reserves established in 1998. This gain was partially offset by an after-tax charge of $11 million for the cost to exit the 15 MONSANTO COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) alginates business. The restructuring reserve reversals were required as a result of lower actual severance and facility shut-down expenses than originally estimated, primarily for the disposal of the alginates business. Prior-year net income and income from continuing operations included an after-tax net charge of $13 million, or $0.02 per share, for the net cost of exiting the company's optical products business offset by a restructuring reserve reversal, and an after-tax net charge of $187 million, or $0.30 per share, for the write-off of in-process research and development ("R&D"), principally related to the acquisition of Plant Breeding International Cambridge Limited ("PBIC"). Excluding the unusual items, income from continuing operations would have totaled $481 million, or $0.74 per share, in the first nine months of 1999, versus $479 million, or $0.76 per share, in the same period of 1998. Consolidated earnings before interest expense and taxes ("EBIT") from continuing operations increased 55 percent to $987 million for the first nine months of 1999, compared with EBIT from continuing operations of $638 million for the first nine months of 1998. Sales for the first nine months of 1999 grew to $6,804 million, primarily because of the inclusion of seed companies acquired in 1998 and the strong performance of the Pharmaceuticals segment. Selling, general and administrative ("SG&A") expenses increased to $2,107 million in the first nine months of 1999 compared with SG&A expenses of $1,528 million in the same period of 1998. Inclusion in the first nine months of 1999 of SG&A expenses from acquired seed companies and continued marketing spending associated with Celebrex(R) arthritis treatment were principally responsible for the increase. Technological expenses rose 8 percent in the first nine months of 1999, compared with technological expense in the first nine months of 1998, primarily due to the inclusion in 1999 of acquired seed companies and continued spending on crop biotechnology initiatives. Amortization of intangible assets increased 55 percent for the first nine months of 1999 compared with the first nine months of 1998, principally because of the increase in intangible assets related to seed companies acquired in 1998. Interest expense increased to $259 million for the first nine months of 1999 compared with interest expense of $144 million in the prior year period, primarily due to higher debt levels. The higher debt level in 1999 was required as Monsanto financed the 1998 seed company acquisitions primarily with long-term borrowings. The increase in other expenses of $7 million in the first nine months of 1999 primarily reflects lower equity income and higher foreign currency losses. Equity earnings decreased by $14 million for the first nine months of 1999 compared with the first nine months of 1998 primarily because of losses associated with the divestment of the Kiel Partnership. Continued economic weakness in certain Latin American and eastern European countries have driven foreign currency losses higher in the first nine months of 1999 when compared to the prior year period. Sales of pharmaceutical product rights increased in 1999 and partly offset the aforementioned decreases. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements" (SAB 101). SAB 101 provides guidance related to revenue recognition issues based on interpretations and practices followed by the SEC. SAB 101 requires companies to report any changes in revenue recognition as an accounting change in accordance with APB opinion No. 20, "Accounting Changes". Monsanto recorded a cumulative effect of a change in accounting principle, effective January 1, 1999, for revenue recognized in 1998 related to the sale of marketing rights to Scotts Company. The impact to earnings in 1999 was an aftertax loss of $20 million, net of taxes of $12 million. Agricultural Products Segment - ----------------------------- Agricultural Products segment EBIT (excluding unusual items) was $779 million in the first nine months of 1999, compared with EBIT (excluding unusual items) of $921 million for the first nine months of 1998, a 15 percent decrease. The decrease in EBIT (excluding unusual items) in the first nine months of 1999, compared with the first nine months of 1998, was attributed to increases in SG&A, technological, and amortization costs, as well as one-time events in the Roundup(R) lawn and garden business, all of which more than offset increased sales. The inclusion in 1999 of the acquired seed companies and spending on crop biotechnology initiatives caused an increase in SG&A and technological expenses in the first nine months of 1999. An increase in intangible assets related to seed companies acquired in 1998 caused higher amortization expense year-to-date compared with amortization expense in the prior year period. Revenues from the Roundup(R) lawn and garden business declined by $36 million when compared with revenue in the prior year period because of changes in the distribution network. Additionally, Roundup(R) lawn and garden results for third quarter 1998 included a one-time $32 million payment from The Scotts Company for the right to sell and market Roundup(R) herbicide for lawn and garden uses (Updated information available in Note 13 to Notes to Financial 16 MONSANTO COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Statements). Continued unfavorable economic conditions in certain Latin American and eastern European countries caused an increase in bad debt expense in the first nine months of 1999 compared with bad debt expense in the same period a year ago. Year-to-date net sales for the Agricultural Products segment increased $580 million, or 17 percent, compared to the prior year period, primarily because of the inclusion of sales from seed companies acquired in 1998. In addition, higher licensing revenues from crops developed through biotechnology, and sales for the family of Roundup(R) herbicides, which were partially offset by lower sales of other herbicides, contributed to the increase. Biotechnology licensing revenues increased 61 percent in the first nine months of 1999 compared with the same period in 1998. Sales volume for the family of Roundup(R) herbicides increased primarily driven by increased usage in conservation tillage and over-the-top use of RoundupReady(R) crop applications. Sales volumes rose in many world areas, especially North America and Asia. Sales associated with these volume increases were largely offset by lower overall prices of Roundup(R) herbicides. Sales volumes were relatively flat and prices were lower in Latin America due to the weakened economy. Unfavorable weather conditions in Australia and Indonesia partially offset sales volume increases of Roundup(R) herbicide in other world areas in the first nine months of 1999. Pharmaceuticals Segment - ----------------------- EBIT (excluding unusual items) for the Pharmaceuticals segment increased to $432 million for the first nine months of 1999, compared with EBIT (excluding unusual items) of $128 million in the same period a year ago. EBIT (excluding unusual items) in the first nine months of 1998 included $240 million of milestone payments from Pfizer Inc. related to Celebrex(R) arthritis treatment. The strong EBIT (excluding unusual items) performance for the first nine months of 1999 can primarily be attributed to the sales increase of Celebrex(R) arthritis treatment and Ambien(R) short-term treatment for insomnia . SG&A expenses increased $463 million, or 63 percent primarily because of increased spending associated with Celebrex(R) arthritis treatment marketing programs. Net sales for the Pharmaceuticals segment rose to $2,696 million in the first nine months of 1999, compared with net sales of $1,916 million in the same period of 1998, an increase of 41 percent. The successful launch and continued strong sales of Celebrex(R) arthritis treatment is the primary reason for the increase. In addition, segment sales for the first nine months of 1999 reflect significant increases in sales volumes of Arthrotec(R) arthritis treatments and Ambien(R) short-term treatment for insomnia when compared with sales volumes in the same period in 1998. Corporate and Other Segment - --------------------------- Corporate and Other segment EBIT (excluding unusual items) increased $23 million, or 11 percent, for the first nine months of 1999 when compared with the same period a year ago, primarily because 1998 included operating losses of businesses which were divested. Net sales were $60 million lower in the first nine months of 1999, primarily because of the disposal of the Orcolite(R) and Diamonex(R) optical products businesses in 1998. SG&A expenses were $72 million lower in the first nine months of 1999 compared with the same period a year ago, primarily because of divested businesses and lower incentive accruals. Results from Discontinued Operations - ------------------------------------ Net sales in the third quarter of 1999 were $243 million compared with net sales of $274 million in the same period of 1998. The decline was primarily because of the January 1999 divestiture of the Ortho(R) lawn- and-garden products business. Income from discontinued operations was $27 million in the third quarter of 1999 compared with the prior year of $11 million. Income from discontinued operations for the third quarter 1999 and third quarter of 1998 is net of tax of $15 million and $3 million, respectively. Income from discontinued operations for the third quarter of 1999 is associated with the partial reversal of restructuring reserves established in 1998. The restructuring reserve reversals were required as a result of lower actual severance and facility shut-down expenses than originally estimated, primarily for the disposal of the alginates business. The gain on sale of discontinued operations for the third quarter of 1999, which is the results of the discontinued business from June 30, 1999 through September 30, 1999, was $12 million, net of taxes of $4 million, and included net after-tax costs of $11 million to exit the alginates business. 17 MONSANTO COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Net sales for the first nine months of 1999 were $712 million compared with net sales of $971 million in the same period of the prior year, primarily because of the divestiture of the Ortho(R) lawn-and-garden products business. Income from discontinued operations was $57 million, net of taxes of $30 million, for the first nine months of 1999, compared with $74 million, net of taxes of $35 million, in the prior year. CHANGES IN FINANCIAL CONDITION - SEPTEMBER 30, 1999 COMPARED WITH DEC. - ---------------------------------------------------------------------- 31, 1998 - -------- Working capital as of September 30, 1999 increased to $2,092 million from $1,415 million as of December 31, 1998, primarily because of an increase in the Agricultural Products segment's trade receivables. This increase was partially offset by an inventory decrease of $124 million. The current ratio was 1.6 at September 30, 1999 compared to 1.4 at year- end 1998. Accounts payable balance remained relatively unchanged while short-term debt decreased $154 million when compared to the 1998 year- end balance. The restructuring liability of $220 million established in 1998 was reduced by $79 million in the first nine months of 1999 to cover the cost for employees severed and facility closures. In addition, Monsanto reversed restructuring reserves established in 1998 totaling $36 million pretax in the third quarter of 1999. These restructuring reserve reversals were required as a result of lower actual severance and facility shut-down expenses than originally estimated. Monsanto expects to complete the remaining restructuring actions within the originally planned time frame. The percent of total debt to total capitalization decreased to 57 percent as of September 30, 1999 compared with 60 percent as of December 31, 1998 as collections of trade receivables were used to pay down long-term debt by $298 million. Operating activities from continuing operations provided a net $509 million of cash in the first nine months of 1999, compared with $61 million of cash provided from operations during the same period in 1998. The increase in cash provided from operations resulted primarily from increased income from continuing operations of $205 million and increase in non-cash charges for amortization and depreciation of $156 million, primarily associated with seed companies acquired in 1998. For comparative purposes, cash provided from operations for the first nine months of 1998 included the collection of $225 million of miscellaneous receivables related to 1997 Pharmaceuticals licensing and product rights sales. Investing activities in the first nine months of 1999 provided $49 million of cash compared with a cash outflow of $1,204 million in the first nine months of 1998. Investing activities for the 1999 period included the proceeds from the divestment of the Ortho(R) lawn-and- garden business for $340 million. Also, investing activities for the first nine months of 1999 included $335 million representing a refund of a portion of the original purchase price for certain international seed operations of Cargill acquired in 1998. Financing activities for the first nine months of 1999 used $419 million of cash compared with cash provided of $1,069 million of in the first nine months of 1998. Financing activities for the first nine months of 1999 include a net decrease in long-term financing of $323 million, and a net decrease in short-term borrowings of $154 million. Financing activities for the first nine months of 1998 included borrowings related to the 1998 seed company acquisitions. On June 4, 1999, Monsanto announced that the interest rate on $2.5 billion of senior unsecured debt, issued in a private placement in late 1998, would increase 25 basis points beginning June 8, 1999. These debt securities were to be registered with the Securities and Exchange Commission ("SEC") by June 7, 1999. The registration statement relating to these debt securities, which was filed in March 1999, is being reviewed by the staff of the SEC and will not be declared effective until the staff review is completed. This interest rate increase is temporary, and will be discontinued after the registration statement is declared effective and other conditions are met. On October 20, 1999, Monsanto and 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 to Monsanto for the lost use of certain germplasm and for 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. As a result, the purchase price for certain international seed operations of Cargill has been reduced by $261 million and final estimates related to the purchase price allocation to goodwill, inventories, and other individually insignificant tangible assets are expected to be completed and adjusted 18 MONSANTO COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) during the fourth quarter of 1999. Any other adjustment to the purchase price allocation for the businesses acquired is not expected to materially impact Monsanto's financial position, results of operations, or cash flows. In 1998, Monsanto announced that it had entered into a definitive agreement with Delta and Pine Land Company ("D&PL") to merge it with Monsanto. Under terms of the agreement, D&PL shareowners would be entitled to receive 0.8625 shares of Monsanto's common stock in exchange for each share of D&PL they hold. Approximately 33 million shares of Monsanto common stock would be issued to D&PL shareowners. Based on Monsanto's closing stock price of $53 1/2 per common share on May 8, 1998, the date of the merger agreement, this would result in a purchase price for purchase accounting purposes 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. On September 7, 1999, Monsanto announced the sale of the alginates business to International Specialty Products. The proceeds from the sale of the alginates business have been recorded as part of discontinued operations and have been used to pay down debt. Outlook for Agricultural Products - Update - ------------------------------------------ Worldwide agricultural economic conditions continue to be challenging to the industry. Monsanto is monitoring the effect on the business of low commodity prices and reduced farmer margins. Monsanto continues to address concerns of consumers, public interest groups and government regulators regarding acceptance and approval of agricultural and food products developed through biotechnology. The European Union continues to delay approvals for planting of seeds with agricultural biotechnology traits; and a court decision in Brazil has delayed planting of RoundupReady(R) soybeans in that country. Although seeds with Monsanto's agricultural biotechnology traits have been well- accepted and successfully planted by farmers in the United States and other countries, delays in import approvals and continuing public acceptance issues may affect the market for these seeds in the United States and in other countries where planting is permitted. Outlook for Pharmaceuticals - Update - ------------------------------------ On October 27, Monsanto announced that Searle, Monsanto's pharmaceutical subsidiary, had acquired two cardiovascular products in a number of European countries from AStraZeneca, which is divesting these products to comply with European Commission merger conditions. Under terms of the agreement, Searle has exclusive trademark rights to Beloc ZOC Comp(R) throughout Europe and exclusive distribution rights to Tenormin(R) in Scandinavia. COMPANY PREPARES FOR YEAR 2000 - ------------------------------ State of Readiness - ------------------ Monsanto's preparations for Year 2000 are fundamentally complete. The company has remediated and tested the internal business application systems, information technology ("IT") infrastructure components, and embedded systems components vital to serving customer needs. During the fourth quarter of 1999, the company will continue to test systems and components; monitor the readiness of key suppliers; and exercise and test business continuity plans. Monsanto is committed to making certain that our systems and processes will continue to function into the Year 2000 as they do today in order to minimize the possibility of any inconvenience for our customers. Background - ---------- Beginning in 1996, the company initiated the Global Year 2000 Program (the "Y2K Program") to ensure that its business would not be adversely affected by the inability of many existing computer systems to distinguish between the year 1900 and the year 2000. The Y2K Program covers all company sites in all world areas. 19 The company's Y2K Program encompasses all areas of the company's internal systems including conventional business applications, IT infrastructure, and embedded systems. Embedded systems include process control/manufacturing, laboratory automation systems, and site-specific facility management systems such as elevators and heating and cooling systems. The remediation process applied to each area consists of four- steps: Identification of the systems or components that need to be replaced or fixed; assessment of the extent of the work required (internal investigation or research with vendor or manufacturer); prioritization of the work; and successful completion of the required remediation activity. All material remediation work for all business sectors (Agriculture, Pharmaceuticals), including all recent acquisitions, was completed by September 30, 1999. Contingency Planning - -------------------- The company began a major contingency planning initiative in November 1998 with the establishment of the Y2K Business Continuity Team. Continuity plans have been prepared in critical functional areas throughout the company and have been consolidated into comprehensive plans around key business sectors. These plans include risk assessment, failure response, manual procedures, and emergency communications, among other items. Preparedness exercises are scheduled for the fourth quarter of 1999, and the company will continue to adjust contingency plans as needed throughout 1999. The plans include a multi-tiered Y2K communication center structure (world area, business sector, and corporate) encompassing all critical regional locations. The Y2K Communication Centers will be staffed 24 hours a day from December 31, 1999 continuing through January 3, 2000. The centers will monitor the transition to the Year 2000 and will supplement existing problem resolution and emergency communications processes. Although the company does not expect to experience any significant Y2K problems, contingency plans will be ready to deal with any emergency. Costs - ----- The company continues to evaluate the estimated costs associated with Y2K compliance based on actual experience. The total cost is currently projected at about $35 million, with approximately $32.6 million expended through September 30, 1999. Such costs encompass only the company's Y2K remediation efforts and do not include expenses such as overtime wages, additional warehouse space or increased finance costs which may be incurred upon implementation of the company's contingency plans. The company does not expect the costs associated with its Year 2000 efforts to be materially adverse to the company's business operations, financial position, profitability or liquidity. Risks - ----- The company believes that the Y2K Program follows both prudent and best demonstrated practices (including contingency planning) and makes use of appropriate internal and external skills at the proper level and in the proper amount to minimize the impact of any failures. However, since the Year 2000 problem is unprecedented in scope or complexity, no complete assurance of risk avoidance can be given. In the company's case, failure to correct a material Year 2000 problem could result in lost profits or breach of contract claims in the event the company is unable to deliver its products pursuant to the terms of its agreements or such products fail to meet contract specifications as well as claims for personal injury or property damage at its facilities. The company may also experience lost revenues in the event any of its customers experience Y2K problems which cause them to order less product from the company or which cause financial difficulties resulting in a breach of their payment obligations to the company. 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 Sept. 1997, Monsanto formed a cross-functional team and engaged a consultant to prepare for the euro conversion. Since Jan. 1, 1999, Monsanto engaged in euro-denominated transactions and is legally compliant. Monsanto expects to 20 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. FORWARD LOOKING INFORMATION - --------------------------- Other important factors affecting Monsanto's business are discussed in Item 5 of Part II of this Report, under the heading "Disclosure Regarding Forward Looking Information", incorporated herein by reference. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Monsanto is exposed to market risk, including changes in interest rates, currency exchange rates and commodity prices. To manage the volatility relating to these exposures, the company enters into various derivative transactions. Monsanto does not hold or issue derivative financial instruments for trading purposes. For more information about how Monsanto manages specific risk exposures, see the currency translation note, the inventory valuation note, and the long-term debt note in Notes to Financial Statements in Monsanto's annual report for the year ended December 31, 1998 ("1998 Annual Report"), incorporated by reference in Monsanto's Annual Report on Form 10-K for the year ended December 31, 1998 ("1998 Form 10-K"). The tables under Market Risk Management in the Management's Discussion and Analysis section of the 1998 Annual Report, incorporated by reference in the 1998 Form 10-K, provide information about the company's derivative instruments and other financial instruments that are sensitive to changes in interest rates, currency exchange rates and commodity prices. There have been no material changes to the information provided in the tables in the 1998 Annual Report and Form 10-K except as noted below. 21 Significant interest rate risk sensitive instruments as of September 30, 1999 were:
Expected Maturity Date ------------------------------------------------------------------ 1999 2000 2001 2002 2003 Thereafter TOTAL ---- ---- ---- ---- ---- ---------- ----- Long-Term Debt: Fixed Rate ($US) Principal Amount $161 $ 533 $19 $738 $2,797 $4,248 Average Interest Rate 6.1% 5.6% 8.3% 6.1% 6.7% 6.5% Fixed Rate (Japanese Yen) $ 96 $ 96 Average Interest Rate 5.6% 5.6% Variable Rate ($US) Principal Amount $ 60 $1,063 $72 $365 $ 208 $1,769 Average Interest Rate 5.1% 5.4% 5.0% 5.3% 4.1% 5.2% Short-Term Debt: Fixed Rate ($US) Principal Amount $ 57 $ 57 Average Interest Rate 7.5% 7.5% Variable Rate ($US) Principal Amount $556 $ 556 Average Interest Rate 5.4% 5.4% 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 the variable rates on September 30, 1999. Actual rates may be higher or lower.
The instruments in the table of significant currency exchange rate risk sensitive instruments that appeared in the 1998 Annual Report and Form 10-K were no longer outstanding at September 30, 1999. At September 30, 1999, the following significant forward contracts were outstanding (all expected to mature by September 30, 2000): purchases of Brazilian real with a notional amount of $10 million and an average exchange rate of 1.93 Brazilian real per U.S. dollar; sales of Canadian dollars with a notional amount of $126 million and an average exchange rate of 1.4742 Canadian dollars per U.S. dollar; sales of British pounds with a notional amount of $400 million and an average exchange rate of 0.6126 British pounds per U.S. dollar; sales of Australian dollars with a notional amount of $39 million and an average exchange rate of 1.5330 Australian dollars per U.S. dollar; sales of Polish zlotys with a notional amount of $47 million and an average exchange rate of 4.1667 Polish zlotys per U.S. dollar; purchases of Japanese yen with a notional amount of $87 million and an average exchange rate of 106.86 Japanese yen per U.S. dollar; sales of South African rand with a notional amount of $33 million and an average exchange rate of 6.114 South African rand per U.S. dollar; sales of Czech koruna with a notional amount of $8 million and an average exchange rate of 34.3680 Czech koruna per U.S. dollar; sales of Hungarian forint with a notional amount of $8 million and an average exchange rate of 244.5 Hungarian forint per U.S. dollar; sales of Indonesian rupiahs with a notional amount of $25 million and an average exchange rate of 8302 Indonesian rupiah per U.S. dollar; sales of Philippines pesos with a notional amount of $10 million and an average exchange rate of 40.05 Philippines pesos per U.S. dollar; sales of Thailand baht with a notional amount of $5 million and an average exchange rate of 39.76 Thailand baht per U.S. dollar; sales of Mexican pesos with a notional amount of $8 million and an average exchange rate of 9.4410 Mexican pesos per U.S. dollar; and sales of European euros with a notional amount of $121 million and an average exchange rate of 0.9541 European euros per U.S. dollar. The fair market values of these contracts approximated the notional amounts at September 30, 1999. The instruments in the table of significant commodity price risk sensitive instruments that appeared in the 1998 Annual Report and Form 10-K were no longer outstanding at September 30, 1999. At September 30, 1999, the following significant commodity price risk sensitive instruments were outstanding: purchased soybean futures contracts totaling $109.1 million (20.4 million bushels at a weighted average price per bushel of $5.36) with a fair value of $100.2 million, purchased corn futures contracts totaling $28.4 million (12.8 million bushels at a weighted average price per 22 bushel of $2.21) with a fair value of $26.6 million, and sold lean hogs futures contracts totaling $6.6 million (0.1 million CWT with a weighted average price per CWT of $53.07) with a fair value of $6.0 million. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Because of the size and nature of its business, Monsanto is a party to numerous legal proceedings. Most of these proceedings have arisen in the ordinary course of business and involve claims for money damages or seek to restrict the company's business activities. While the results of litigation cannot be predicted with certainty, Monsanto does not believe these matters or their ultimate disposition will have a material adverse effect on Monsanto's financial position, profitability or liquidity, as applicable. As described in the company's Annual Report on Form 10-K for the year ended December 31, 1998, 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. Following extensive testing by Searle and review by the FDA, the Cu-7 was approved for sale as a prescription drug in the United States. It was marketed internationally as the Gravigard. 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 in the United States, citing the cost of defending such litigation. Ex-U.S. sales were discontinued in 1990. As described in the company's Annual Report on Form 10-K for the year ended December 31, 1998, and in its Reports on Form 10-Q for the quarters ending March 31, 1999, and June 30, 1999, Searle has been named, together with numerous other prescription pharmaceutical manufacturers and in some cases wholesalers or distributors, as a defendant in a large number of related actions brought in federal and/or state court, based on the practice of providing discounts or rebates to managed care organizations and certain other large purchasers. The federal cases have been consolidated for pre-trial proceedings in the Northern District of Illinois. The federal suits include a certified class action on behalf of retail pharmacies representing the majority of retail pharmacy sales in the United States. The class plaintiffs alleged an industry-wide agreement in violation of the Sherman Act to deny favorable pricing on sales of brand-name prescription pharmaceuticals to certain retail pharmacies in the United States. The other federal suits, brought as individual claims by several thousand pharmacies, allege price discrimination in violation of the Robinson-Patman Act as well as Sherman Act claims. Several defendants, not including Searle, settled the federal class action case. Trial of the federal class action case commenced on September 14, 1998. On November 30, 1998, Searle and its co-defendants received a verdict for the defense and all claims were dismissed. On January 4, 1999, the class plaintiffs filed a notice of appeal with the U. S. Court of Appeals for the Seventh Circuit. Following oral arguments in June 1999, the Seventh Circuit Court of Appeals ruled on July 13, 1999. The opinion upheld most of the lower court's decision to throw out price fixing charges against the manufacturers as well as the wholesalers. The court reversed the trial judge on one discrete issue involving the Consumer Price Index. 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. As described in the company's Annual Report on Form 10-K for the year ended December 31, 1998, 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 23 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 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. On September 17, 1999, Mycogen filed its notice of appeal in this matter. As described in the company's Annual Report on Form 10-K for the year ended December 31, 1998, 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. The District Court has granted motions dismissing virtually all of Mycogen's patent claims on the basis that products containing Bt genes made prior to January 1995 do not infringe the patent. The company has various meritorious defenses to the 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 has made application to dismiss the Mycogen patent claims on the basis that the related Delaware litigation is now subject to a final judgment. Monsanto's application is under advisement by the District Court. 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. In all of the foregoing actions the company is vigorously litigating its position and is asserting that the final judgment in the Delaware litigation is dispositive of Mycogen's claim for a valid patent. As described in the company's Annual Report on Form 10-K for the year ended December 31, 1998, 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 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 will be 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. As described in the company's Annual Report on Form 10-K for the year ended December. 31, 1998, and in its Report on Form 10-Q for the quarter ended June 30, 1999, the company and/or DEKALB is the plaintiff in various legal actions involving Bt technology, herbicide-resistant and/or insect-resistant transgenic corn, or corn transformation patents. (a) The DEKALB patents involved in the most significant DEKALB-initiated transactions are: U.S. Patent No. 5,484,956 covering fertile, transgenic corn plants expressing genes encoding Bacillus thuringiensis (Bt) insecticidal proteins; U.S. Patent No. 5,489,520 covering the microprojectile method for producing fertile, transgenic corn plants covering a bar or pat gene, as well as the production and breeding of progeny of such plants; U.S. Patent Nos. 5,538,880 and 5,538,877 directed to methods of producing either herbicide-resistant or insect- resistant transgenic corn; and U.S. Patent No. 5,550,318 directed to transgenic corn plants containing a bar or pat gene (all lawsuits related to this patent have been stayed pending resolution of an interference proceeding at the U.S. Patent and Trademark Office). In each case DEKALB has asked the court to determine that infringement has occurred, to enjoin further infringement and to award unspecified compensatory and exemplary damages. Most of these actions have been filed in U.S. District Court for the Northern District of Illinois (the "Rockford Litigation"). By order dated June 30, 1999, 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. In addition to the Rockford Litigation, 24 DEKALB sued Beck's Hybrids, Inc. and Countrymark Cooperative, Inc. on July 23, 1996, in U. S. District Court for the Northern District of Indiana (Indianapolis Division); this action has been stayed awaiting decision on the Rockford Litigation. (b) On March 19, 1996, Monsanto was issued U.S. Patent No. 5,500,365 and filed suit in U.S. District Court in Delaware seeking damages and injunctive relief against Mycogen Plant Science, Inc., Agrigenetics, Inc. and Ciba-Geigy Corporation (Seed Division) (now Novartis Seeds, Inc.) for infringement of that patent. Trial of this matter ended June 30, 1998, with a jury verdict that while the patent was literally infringed by defendants, the patent was not enforceable due to a finding of prior invention (now owned by Monsanto) by another party, and not infringed due to the defense of the reverse doctrine of equivalents. 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. Notice of appeal was filed September 15, 1999 by Monsanto which is continuing to litigate vigorously its position on appeal. In a settlement entered into in November 1999, Monsanto, DEKALB and Novartis agreed to dismiss all claims against Novartis entities in the above- referenced lawsuits, in recognition of patent license agreements among those parties. As described in the company's Annual Report on Form 10-K for the year ended December 31, 1998, and in its Reports on Form 10-Q for the quarters ending March 31, 1999 and June 30, 1999, in 1997 the company commercially introduced corn containing a gene providing glyphosate resistance. On November 20, 1997, Rhone Poulenc Agrochimie S. A. ("Rhone Poulenc") filed suit in the U. S. District Court in North Carolina (Charlotte) against the company and DEKALB (now a subsidiary of the company) alleging that a 1994 license agreement (the "1994 Agreement") between DEKALB and Rhone Poulenc was induced by fraud stemming from DEKALB's nondisclosure of a research report involving testing of plants to determine glyphosate tolerance. Rhone Poulenc also alleged that neither DEKALB nor Monsanto has a right to license, make or sell products using Rhone Poulenc technology for glyphosate resistance under the terms of the 1994 Agreement. On April 5, 1999, the trial court rejected Rhone Poulenc's claim that the contract language did not convey a license but found that a disputed issue of fact existed as to whether the contract was obtained by fraud. Jury trial of the fraud claims ended April 22, 1999, with a verdict for Rhone Poulenc and against DEKALB. Monsanto was dismissed from the trial prior to verdict since it was not involved in the inducement allegation and was involved in the case only due to the fact that in 1996, DEKALB sublicensed to Monsanto certain technology previously licensed by Rhone Poulenc. The jury awarded $15 million in actual damages for "unjust enrichment" and $50 million in punitive damages. DEKALB has filed motions with the trial court to set aside the damage award. DEKALB has meritorious grounds to overturn the jury verdict and has filed a Motion for Judgment as a Matter of Law to overturn the jury verdict. The trial was bifurcated to allow claims against DEKALB and Monsanto for patent infringement and misappropriation of trade secrets to be tried before a different jury. On May 6, 1999, the District Court dismissed Monsanto from all remaining claims and granted Monsanto's motion for summary judgment holding that Monsanto was a bona fide purchaser which retained all license rights to the Rhone Poulenc technology notwithstanding the prior verdict against DEKALB. The Court concurred that Monsanto was not liable for trade secret or patent infringement claims since Monsanto obtained its license from DEKALB without any knowledge of the claims that allegedly gave rise to the jury verdict against DEKALB. Jury trial of the patent infringement and misappropriation claims ended June 3, 1999, with a verdict for Rhone Poulenc and against DEKALB. DEKALB is continuing to defend the litigation and maintains that they remain licensed to use the Rhone Poulenc technology notwithstanding the verdict or any subsequent action that may occur to rescind the 1994 license between Rhone Poulenc and DEKALB. In addition to the claim of license, DEKALB believes that they have other meritorious defenses to the patent and trade secret allegations, including patent invalidity and absence of trade secret status due to Rhone Poulenc's own public disclosure of the alleged trade secret. On July 16, 1999, a hearing occurred on all post-trial motions including the request by Rhone Poulenc for injunctive relief against future sales of DEKALB-brand RoundupReady(R) corn products if the material was not currently in inventory or within the scope of the prior damage verdict. No ruling has occurred on the post-trial motions. 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. As described in the company's Annual Report on Form 10-K for the year ended December 31, 1998, and in its Report on Form 10-Q for the quarter ended June 30, 1999, on February 4, 1999, Pioneer Hi-Bred International, Inc. ("Pioneer") filed suit against Monsanto Company (Civil Action No. 4-99-CV-90063, United States District Court, Southern District of Iowa). The suit sought actual and compensatory damages and injunctive relief, alleging that Monsanto misappropriated Pioneer trade secrets through its acquisition of the international seed operations of Cargill, Incorporated ("Cargill). Pioneer alleged that certain of Cargill's employees misappropriated (via theft and otherwise) germplasm 25 belonging to Pioneer's corn seed business, bred the misappropriated Pioneer germplasm into corn lines of Cargill's international businesses, and sold the misappropriated materials to Monsanto. Pioneer filed a related lawsuit directly against Cargill in October 1998 (Civil Action No. 4-98-90576, United States District Court, Southern District of Iowa).Under a confidential agreement between Monsanto and Cargill, Monsanto returned to Cargill certain germplasm acquired from Cargill, and Cargill made a substantial cash payment to Monsanto. On October 22, 1999 the United States District Court dismissed Pioneer's action against Monsanto on the basis of a prior settlement between Monsanto and Pioneer. Under that confidential settlement agreement, the companies agreed to the destruction of a significant volume of germplasm originally obtained via the Cargill transaction and to certain future germplasm exchanges in addition to a cash payment by Monsanto to Pioneer. On October 28, 1998, two lawsuits were filed in U.S. District Court in Iowa: one against Asgrow Seed company, L.L.C., a subsidiary of the company (No. 4-98-CV-70577); and the other against DEKALB (since acquired by the company) (No. 4-98-CV-90578). The lawsuits allege that defendants misappropriated trade secrets of Pioneer in their corn breeding programs. In addition to claims under Iowa state law for trade secret misappropriation, Pioneer alleges violations of the Lanham Act. Actual and exemplary damages and injunctive relief are sought. Pioneer also asserts that defendants have violated an unspecified contractual obligation not to breed with Pioneer germplasm. On October 8, 1999 Pioneer's motion to add additional parties was granted and expanded the litigation to include Monsanto and other entities as predecessors or successors in interest to the original defendants. Trial of the DEKALB case is set for September 11, 2000. The defendants have numerous meritorious defenses including preemption, laches, statute of limitations, absence of trade secrets, ownership of the germplasm, bona fide purchaser status, preemption by federal law and other defenses. Defendants will vigorously defend against Pioneer's claims in the litigation. 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. That motion remains pending. 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. Other information with respect to legal proceedings appears in the company's Report on Form 10-K for the year ended December 31, 1998, and the company's Reports on Form 10-Q for the quarters ending March 31, 1999 and June 30, 1999. ITEM 5. OTHER INFORMATION DISCLOSURE REGARDING FORWARD LOOKING INFORMATION Under the Private Securities Litigation Reform Act of 1995, companies are provided with a "safe harbor" for making forward-looking statements about the potential risks and rewards of their strategies. Monsanto believes it's in the best interest of its shareowners to use these provisions in discussing future events. Forward-looking statements include Monsanto's plans for growth; the potential for the development, regulatory approval, and public acceptance of new products; and other factors that could affect Monsanto's future operations or financial position. Such statements often include the words "believes," "expects," "anticipates," "intends," "plans," "estimates," or similar expressions. Monsanto's ability to achieve its goals depends on many known and unknown risks and uncertainties, including changes in general economic and business conditions. These factors could cause the anticipated performance and results of the company to differ materially from those described or implied in forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below. 26 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 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 27 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. 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, 28 innovation, brand recognition and quality. Many of Monsanto's pharmaceutical competitors have greater research, financial, marketing and other resources than Monsanto does. Some of Monsanto's trademarked pharmaceutical products also face increasing pressures from producers of lower-priced generic products and from new products entering the marketplace. Finally, as the company introduces new products intended for use in the treatment of the same conditions as existing Monsanto products, sales of such existing products may suffer. Pricing: Managed care groups, health care organizations and government - ------- agencies worldwide actively seek discounts and lower prices on pharmaceutical products. Monsanto's challenge is to provide overall economic benefits to health care providers and negotiate prices for specific products that will allow it to profit at acceptable levels. FACTORS AFFECTING ALL SEGMENTS Financial Requirements: Monsanto's recent acquisitions will require a - ---------------------- significant commitment of the company's financial resources. In addition, new technological innovations generally require a significant investment for R&D and product launch. Lack of funds for investment in these areas could hinder the company's ability to make technological innovations and to introduce and distribute new products. Monsanto expects to generate the required capital by increasing the revenues of its core businesses, by seeking sufficient outside financing and by containing costs. The company's ability to do so will depend upon a variety of specific factors listed elsewhere in this report and upon capital market conditions generally. Intellectual Property: Monsanto has devoted significant resources to - --------------------- obtaining and maintaining patent protection worldwide for its products. It seeks to preserve its trade secrets and to operate without infringing the proprietary rights of third parties. Monsanto's patents and trademarks are of material importance in the operation of its business, particularly in the Agricultural Products and Pharmaceuticals segments. Intellectual property positions are becoming increasingly important within the agricultural biotechnology and pharmaceutical industries, as products developed through biotechnology become a larger part of the product landscape. 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 29 restructuring, and the resulting increased demands on certain employees, could cause a temporary interruption of or loss of momentum in Monsanto's business. In addition, the success of the company's divestiture plan will depend on its ability to negotiate acceptable sales prices for such assets which is in turn largely dependent on the long-term prospects and strategic value of the divested businesses and the availability of a buyer with sufficient financial resources. Year 2000 Readiness: The dates on which Monsanto believes the Year 2000 - ------------------- (Y2K) Program will be completed are based on management's best estimates, which include numerous assumptions about future events. There can be no guarantee that these estimates will be achieved, or that there will not be a delay in, or increased costs associated with, the implementation of the Y2K Program. Factors that may cause delays in the Y2K Program or increased costs in connection with it include, but are not limited to, the continued availability and cost of experts trained in these areas, the ability to locate and correct all relevant computer code and embedded systems, and the success of similar programs conducted by suppliers and other third parties. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - See the Exhibit Index. (b) Reports on Form 8-K during the quarter ended September 30, 1999 None 30 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MONSANTO COMPANY -------------------------------- (Registrant) /s/ RICHARD B. CLARK -------------------------------- RICHARD B. CLARK Vice President and Controller (On behalf of the Registrant and as Principal Accounting Officer) Date: January 21, 2000 31 EXHIBIT INDEX
Exhibit Number Description - ------ ----------- 2 Omitted - Inapplicable 3 Omitted - Inapplicable 4 Omitted - Inapplicable 10 1. Monsanto Management Incentive Plan of 1996, as amended April 25, 1997, July 25, 1997, August 18, 1997, February 26, 1998, September 25, 1998, April 23, 1999 and October 22, 1999 and as Adjusted to Reflect Stock Split as of May 15, 1996 and Spin-off as of September 1, 1997 2. Monsanto Management Incentive Plan of 1988/I, as amended in 1988, 1989, 1991, 1992, April 1997, July 1997 and October 22, 1999 3. Monsanto Management Incentive Plan of 1988/II, as amended in 1989, 1991, 1992, April 1997, July 1997 and October 22, 1999 4. Monsanto Management Incentive Plan of 1994, as amended in April 1997, July 1997 and October 22, 1999 5. Form of Monsanto Company 1999 Non-Qualified Premium Stock Option Certificate 11 Omitted - Inapplicable; see Note 4 of Notes to Financial Statements 15 Omitted - Inapplicable 18 Omitted - Inapplicable 19 Omitted - Inapplicable 22 Omitted - Inapplicable 23 Omitted - Inapplicable 24 Omitted - Inapplicable 27 Financial Data Schedule 99 Computation of the Ratio of Earnings to Fixed Charges for Monsanto Company and Subsidiaries - -------------- Previously filed.
32 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENT OF CONSOLIDATED INCOME OF MONSANTO COMPANY AND SUBSIDIARIES FOR THE THREE MONTHS ENDED 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 9-MOS DEC-31-1999 SEP-30-1999 84 0 2,791 0 1,598 5,647 5,438 2,388 15,983 3,555 5,961 0 1,694 0 3,549 15,983 6,804 6,804 2,450 2,450 0 0 287 700 243 457 69 0 (20) 506 .80 .78
EX-99 3 COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 99 MONSANTO COMPANY AND SUBSIDIARIES COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES
Nine Months Ended Sept. 30, Year Ended Dec. 31, ----------------- ---------------------------------------------------- 1999 1998 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- ---- ---- Income from continuing operations before provision for income taxes $ 700 $494 $(85) $127 $356 $533 $478 Add Fixed charges 340 180 269 188 131 133 123 Less capitalized interest (18) (6) (12) (13) (8) (4) (3) Dividends from affiliated companies -- 1 1 1 3 1 0 Less equity income (add equity loss) of affiliated companies 24 11 35 (6) 32 (12) (0) ------ ---- ---- ---- ---- ---- ---- Income as adjusted $1,046 $680 $208 $297 $514 $651 $598 ====== ==== ==== ==== ==== ==== ==== Fixed charges Interest expense $287 $144 $210 $135 $ 83 $ 92 $88 Capitalized interest 18 6 12 13 8 4 3 Portion of rents representative of interest factor 35 30 47 40 40 37 32 ------ ---- ---- ---- ---- ---- ---- Fixed charges $ 340 $180 $269 $188 $131 $133 $123 ====== ==== ==== ==== ==== ==== ==== Ratio of earnings to fixed charges 3.08 3.78 0.77 1.58 3.92 4.89 4.86 ==== ==== ==== ==== ==== ==== ==== Includes charges for restructuring, acquired in-process research and development, and other unusual items of $38 million and $202 million for the nine months ended September 30, 1999 and 1998, respectively and $762 million, $663 million, $327 million, and $24 million for the years ended December 31, 1998, 1997, 1996, and 1995, respectively. Excluding these unusual items, the ratio of earnings to fixed charges would have been 3.19 and 4.89 for the nine months ended September 30,1999 and 1998, respectively and 3.61, 4.95, 6.42, and 5.08 for the years ended December 31, 1998, l997, 1996, and 1995, respectively. The ratio was not materially affected by the restructuring and other unusual items in 1994.
-----END PRIVACY-ENHANCED MESSAGE-----