-----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, HeCElyI8Ah2L9juYUIE0j2U90iYfMWSd0KpRXYflRxDSn9OwuW51R1Hv7rn57lYw cYtBIdIVaxxhtYSp6Geq0w== 0001068800-00-000088.txt : 20000321 0001068800-00-000088.hdr.sgml : 20000321 ACCESSION NUMBER: 0001068800-00-000088 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000320 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MONSANTO CO CENTRAL INDEX KEY: 0000067686 STANDARD INDUSTRIAL CLASSIFICATION: CHEMICALS & ALLIED PRODUCTS [2800] IRS NUMBER: 430420020 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-02516 FILM NUMBER: 573295 BUSINESS ADDRESS: STREET 1: 800 N LINDBERGH BLVD CITY: ST LOUIS STATE: MO ZIP: 63167 BUSINESS PHONE: 3146941000 MAIL ADDRESS: STREET 1: 800 NORTH LINDBERGH BLVD CITY: ST LOUIS STATE: MO ZIP: 63167 FORMER COMPANY: FORMER CONFORMED NAME: MONSANTO CHEMICAL CO DATE OF NAME CHANGE: 19711003 10-K 1 MONSANTO COMPANY FORM 10-K 1999 ======================================================================== FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 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) Registrant's telephone number, including area code (314) 694-1000 -------------- Securities Registered Pursuant to Section 12(b) of the Act:
Name of each exchange Title of each class on which registered ------------------- --------------------- Common Stock $2 par value New York Stock Exchange Preferred Stock Purchase Rights New York Stock Exchange Adjustable Conversion-Rate Equity Security Units New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] State the aggregate market value of the voting stock held by nonaffiliates of the registrant: approximately $24.7 billion as of the close of business on February 29, 2000. Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: 635,054,641 shares of Common Stock, $2 par value, outstanding at February 29, 2000. ======================================================================== PART I ITEM 1. BUSINESS. Monsanto Company is a life sciences company, committed to finding solutions to the growing global needs for food and health by applying common forms of science and technology among agriculture, nutrition and health. Monsanto makes, researches and markets high-value agricultural products, pharmaceuticals and nutrition-based health products. Monsanto Company was incorporated in 1933 under Delaware law and is the successor to a Missouri corporation, Monsanto Chemical Works, organized in 1901. "Monsanto" and the "Company" are used interchangeably to refer to Monsanto Company or to Monsanto Company and its subsidiaries, as appropriate to the context. For 1999, Monsanto reported its business under three segments: Agricultural Products, Pharmaceuticals, and Corporate and Other. In 1999, Monsanto announced its intention to sell the artificial sweetener and biogum businesses. The results of operations, financial position, and cash flows of these businesses, and of the alginates and Ortho(R) lawn-and-garden products businesses, the dispositions of which were 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. In addition, Monsanto transferred the Roundup(R) lawn-and-garden and nutrition research operations of the former Nutrition and Consumer Products segment to the Agricultural Products and Corporate and Other segments, respectively. The first and last paragraphs appearing under "Definitions" on page 3, the information regarding sales of certain herbicides in 1999, 1998 and 1997 appearing under "Agricultural Products" on pages 11 and 12, the information regarding sales of certain arthritis treatments in 1999, 1998 and 1997 appearing under "Pharmaceuticals" on pages 14 and 15, and the tabular and narrative information appearing in "Note 3: Geographic Data" on page 32 and in "Note 23: Segment Information" on pages 52 and 53, all appearing in Exhibit 99.1 of this Report, are incorporated herein by reference. PRINCIPAL PRODUCTS Monsanto's principal products for 1999, categorized by segments reclassified as described above, include the following:
- ---------------------------------------------------------------------------------------------------------------------------- AGRICULTURAL PRODUCTS - ---------------------------------------------------------------------------------------------------------------------------- MAJOR PRODUCTS END-USE PRODUCTS AND APPLICATIONS - ---------------------------------------------------------------------------------------------------------------------------- Roundup(R) herbicide and other glyphosate-based herbicides Nonselective agricultural and industrial applications - ---------------------------------------------------------------------------------------------------------------------------- Roundup(R) herbicide Residential lawn and garden applications - ---------------------------------------------------------------------------------------------------------------------------- Lasso(R) and Harness(R) herbicides and other Corn, soybean, peanut and milo (sorghum) crops acetanilide-based herbicides Corn only - ---------------------------------------------------------------------------------------------------------------------------- Avadex(R) BW herbicide, Far-Go(R) herbicide Wheat crops - ---------------------------------------------------------------------------------------------------------------------------- 2 - ---------------------------------------------------------------------------------------------------------------------------- Machete(R) herbicide Rice crops - ---------------------------------------------------------------------------------------------------------------------------- Permit(R), Manage(R) and Sempra(R) herbicides Postemergence control of sedges and broadleaf weeds in corn and grain sorghum, turf and sugarcane crops - ---------------------------------------------------------------------------------------------------------------------------- Roundup Ready(R) traits in canola, cotton, soybeans Crops tolerant of Roundup(R) and other glyphosate herbicides and corn - ---------------------------------------------------------------------------------------------------------------------------- Bollgard(R) trait in cotton; Crops protected against certain viruses and insect pests NewLeaf(R), NewLeaf(R) Y and NewLeaf(R) Plus traits in potatoes; YieldGard(R) trait in corn - ---------------------------------------------------------------------------------------------------------------------------- Bollgard(R) and Roundup Ready(R) trait in cotton, Crops tolerant of Roundup(R) and other glyphosate herbicides YieldGard(R) and Roundup Ready(R) trait in corn and protected against certain insect pests - ---------------------------------------------------------------------------------------------------------------------------- AgriPro(R), Agroceres(TM), Asgrow(R), Cargill(R), Corn hybrids, soybean varieties, alfalfa, grain sorghum and DEKALB(R), Hartz(R), Hybritech(R) and Monsoy(TM) forage varieties, sunflowers, oilseed rape and barley branded seeds; Holden's Foundation Seeds(TM); varieties, cotton varieties, wheat varieties and hybrids PBi(R) foundation seed - ---------------------------------------------------------------------------------------------------------------------------- Posilac(R) bovine somatotropin Increase efficiency of milk production in dairy cows - ---------------------------------------------------------------------------------------------------------------------------- PHARMACEUTICALS - ---------------------------------------------------------------------------------------------------------------------------- MAJOR PRODUCTS END-USE PRODUCTS AND APPLICATIONS - ---------------------------------------------------------------------------------------------------------------------------- Celebrex(R) (celecoxib), Anti-inflammatory Daypro(R) (oxaprozin), Arthrotec(R) (misoprostol/diclofenac) - ---------------------------------------------------------------------------------------------------------------------------- Aldactone(R) (spironolactone), Cardiovascular Aldactazide(R) (spironolactone/ hydrochlorothiazide), Calan(R) formulations and Covera-HS(R) (verapamil hydrochloride) - ---------------------------------------------------------------------------------------------------------------------------- Ambien(R) (zolpidem tartrate) Central nervous system (sleep) - ---------------------------------------------------------------------------------------------------------------------------- CORPORATE AND OTHER - ---------------------------------------------------------------------------------------------------------------------------- MAJOR PRODUCTS END-USE PRODUCTS AND APPLICATIONS - ---------------------------------------------------------------------------------------------------------------------------- Enviro-Chem(R) engineering and construction management Processing plants for fertilizer producers, basic metals services for processing plants using sulfuric acid; production, oil refining proprietary equipment and air pollution control systems - ----------------------------------------------------------------------------------------------------------------------------
Products may be sold under different brand names outside the United States. Monsanto's products are sold and/or licensed directly to customers in various industries, to wholesalers and other distributors, to retailers and to the ultimate user or consumer, principally by its own sales force, or, in some cases, through third parties. With respect to pharmaceuticals, such sales force concentrates on detailing to physicians and managed health care providers. The Pharmaceuticals segment's anti-arthritis product Celebrex(R) will be co-promoted with Yamanouchi Pharmaceutical Co. Ltd. in Japan and with Pfizer Inc. in most other countries of the world. PRINCIPAL EQUITY AFFILIATES Monsanto participates in a number of joint ventures in which it shares management control with other companies. For example, Monsanto has a 60% ownership interest in a joint venture with Solutia Inc., from which it purchases elemental phosphorus. In addition, Monsanto and Cargill Incorporated have established Renessen LLC, a worldwide joint 3 venture in which Monsanto has a 50% interest, to create and market new products enhanced through biotechnology for the crop processing and animal feed markets. SALE OF PRODUCTS Monsanto's net income has been historically higher during the first half of the year, primarily because of the concentration of generally more profitable sales of the Agricultural Products segment during that part of the year. Monsanto's marketing and distribution practices do not result in unusual working capital requirements on a consolidated basis, although the seasonality of sales of the Agricultural Products segment results in short- term borrowings to finance customer accounts receivable and inventories. Inventories of finished goods, goods in process and raw materials are maintained to meet customer requirements and Monsanto's scheduled production. In general, Monsanto does not manufacture its products against a backlog of firm orders; production is geared primarily to the level of incoming orders and to projections of future demand. Monsanto generally is not dependent upon one or a group of customers and Monsanto has no material contracts with the government of the United States or any state, local or foreign government. However, pursuant to contracts executed under U.S. federal and state laws, the Pharmaceuticals segment pays rebates to state governments for pharmaceuticals sold under state Medicaid programs and under state-funded programs for the indigent. The Pharmaceuticals segment also grants discounts to certain managed health care providers. Sales through managed health care providers constitute an increasing percentage of that segment's sales. Introduction of new products by the Agricultural Products and Pharmaceuticals segments typically is, and introduction of new products by other segments may be, subject to prior review and approval by the FDA, the U.S. Environmental Protection Agency and/or the U.S. Department of Agriculture (or comparable agencies of governments outside the United States) before they can be sold. Such reviews are often time-consuming and costly. These agencies also have continuing jurisdiction over many existing products of these segments. Governmental actions may also affect or determine the pricing of certain products, particularly in the Pharmaceuticals segment. RAW MATERIALS AND ENERGY RESOURCES Monsanto is both a producer and significant purchaser of a wide spectrum of its basic and intermediate raw material requirements. Major requirements for key raw materials and fuels are typically purchased pursuant to long-term contracts. Monsanto is not dependent on any one supplier for a material amount of its raw materials or fuel requirements, but certain important raw materials are obtained from a few major suppliers. Monsanto purchases its North American supply, and has the option to purchase its ex-North American supplies, of elemental phosphorus, a key raw material for the production of Roundup(R) brand herbicides, from P4 Production, L.L.C., a joint venture between the Company and Solutia Inc. In general, where Monsanto has limited sources of raw materials, it has developed contingency plans to minimize the effect of any interruption or reduction in supply. 4 While temporary shortages of raw materials and fuels may occasionally occur, these items are generally sufficiently available to cover current and projected requirements. However, their continuing availability and price are subject to unscheduled plant interruptions occurring during periods of high demand, or due to domestic and world market and political conditions, as well as to the direct or indirect effect of U.S. and other countries' government regulations. The impact of any future raw material and energy shortages on Monsanto's business as a whole or in specific world areas cannot be accurately predicted. Operations and products may, at times, be adversely affected by legislation, shortages or international or domestic events. PATENTS, TRADEMARKS, LICENSES, FRANCHISES AND CONCESSIONS Monsanto owns a large number of patents which relate to a wide variety of products and processes and has pending a substantial number of patent applications. United States Plant Variety Protection Act Certificates and foreign plant registrations are also significant to the Agricultural Products segment. In addition, Monsanto holds a number of licenses granted by other parties, some of which may be significant. Monsanto also owns a considerable number of established trademarks in many countries under which it markets its products. Monsanto's patents and trademarks in the aggregate are of material importance to the Agricultural Products and Pharmaceuticals segments. Certain proprietary products are covered by patents. Certain of Monsanto's patents and licenses are currently the subject of litigation; see "Legal Proceedings" below. Although patents protecting Roundup(R) herbicide have expired in most countries, compound per se patent protection for the active ingredient in Roundup(R) herbicide continues in the United States until September 20, 2000. Monsanto's insect-resistant seed traits (including NewLeaf(R) traits in potato, YieldGard(R) trait in corn and Bollgard(R) trait in cotton) are protected by patents which extend until at least 2013. Monsanto's herbicide-resistant seed traits (Roundup Ready(R) traits in cotton, corn, canola and soybeans) are protected by patents which extend until at least 2014. Posilac(R) bovine somatotropin is protected by a United States patent that expires in 2008, and by corresponding patents in other countries, most of which expire in 2005. Other patents protect various aspects of bovine somatotropin manufacture in the United States and expire as late as 2012; corresponding patents in other countries have varying terms. Calan(R) SR, an antihypertensive pharmaceutical, is licensed through the year 2004 to Searle by a third party, which has retained co-marketing rights. The product no longer has patent protection nor non-patent regulatory exclusivity conferred by the Waxman-Hatch amendments to the U.S. Food, Drug and Cosmetics Act. Cytotec(R) ulcer preventive drug is protected by a U.S. composition patent until July 29, 2000. Ambien(R) short-term treatment for insomnia is licensed to a joint venture of which Searle is a general partner for the duration of the venture. Pursuant to the joint venture agreement, the other partner has agreed to purchase Searle's interest and thereby terminate the venture in April 2002. Ambien(R) is protected by a U.S. patent until October 21, 2006. Daypro(R) once-a-day arthritis treatment is licensed to Searle until January 5, 2003 in the U.S. and varying dates in other countries. This product is protected by a U.S. process patent that expires on February 26, 2002 and by non-patent regulatory exclusivity extending to April 29, 2000. Arthrotec(R) 5 arthritis treatment is protected by a U.S. patent until February 11, 2014. Celebrex(R), a COX-2 inhibitor for the treatment of osteoarthritis and rheumatoid arthritis is protected by a U.S. patent to November 30, 2013 and by regulatory exclusivity under the Waxman-Hatch Act to December 31, 2003. COMPETITION Monsanto encounters substantial competition in each of its industry segments. This competition, from other manufacturers of the same products and from manufacturers of different products designed for the same uses, is expected to continue in both U.S. and ex-U.S. markets. Depending on the product involved, various types of competition are encountered, including price, delivery, service, performance, product innovation, product recognition and quality. The number of Monsanto's principal competitors varies from product to product. It is not practical to discuss Monsanto's numerous competitors because of the large variety of Monsanto's products, the markets served and the worldwide business interests of Monsanto. Overall, however, Monsanto regards its principal product groups to be competitive with many other products of other producers and believes that it is an important producer of many of such product groups. RESEARCH AND DEVELOPMENT Research and development constitute an important part of Monsanto's activities. See "Development and Commercialization of New Products Continue to be Priorities," and "Note 21: Supplemental Data", on pages 8 and 51, respectively, appearing in Exhibit 99.1 of this Report and incorporated herein by reference. ENVIRONMENTAL MATTERS Monsanto remains strongly committed to complying with various laws and government regulations concerning environmental matters and employee safety and health in the United States and other countries. Monsanto is dedicated to long-term environmental protection and compliance programs that reduce and monitor emissions of hazardous materials into the environment, as well as to the remediation of identified existing environmental concerns. While the costs of compliance with environmental laws and regulations cannot be predicted with certainty, Monsanto does not expect such costs to have a material adverse effect upon its capital expenditures, earnings, or competitive position. See information regarding remediation of waste disposal sites appearing in "Note 20: Commitments and Contingencies" on page 50 appearing in Exhibit 99.1 of this Report and incorporated herein by reference. On November 22, 1999, Monsanto, Solutia Inc. and P4 Production, L.L.C. ("P4 Production") received notice that the Department of Justice ("DOJ") was preparing a federal court enforcement action against the companies on behalf of the Environmental Protection Agency (EPA). P4 Production is a joint venture formed by Monsanto and Solutia Inc. ("Solutia"), and operated by Solutia under an operating agreement with P4 Production. The potential action concerned alleged violations of Wyoming's environmental laws and 6 regulations, and an air permit issued in 1994 by the Wyoming Department of Environmental Quality to Sweetwater Resources, Inc., a former subsidiary of Monsanto's. The permit was issued for a coal coking facility in Rock Springs, Wyoming that is currently owned by P4 Production. The DOJ recommended a proposed settlement of $2.5 million. After discussions with the DOJ, Monsanto, Solutia and P4 Production filed a lawsuit in the United States District Court for the District of Wyoming on January 18, 2000 against the EPA seeking a declaratory judgment that the threatened enforcement action is precluded by the doctrine of res judicata on the grounds that the companies had already fully resolved the underlying allegations in a consent decree entered in the First Judicial District Court in Laramie County, Wyoming on June 25, 1999. EMPLOYEE RELATIONS As of December 31, 1998, Monsanto had approximately 29,900 employees worldwide, 1,700 of whom were associated with businesses classified as discontinued operations. Satisfactory relations have prevailed between Monsanto and its employees. INTERNATIONAL OPERATIONS Monsanto and affiliated companies are engaged in manufacturing, sales and/or research and development in the United States, Europe, Canada, Latin America, Australia, Asia and Africa. A number of products are manufactured abroad. Ex-U.S. operations are potentially subject to a number of unique risks and limitations, including: fluctuations in currency values; exchange control regulations; import and trade restrictions, including embargoes; governmental instability; economic conditions in other countries; and other potentially detrimental domestic and foreign governmental practices or policies affecting U.S. companies doing business abroad. See "Note 3: Geographic Data" on page 32 appearing in Exhibit 99.1 of this Report and incorporated herein by reference. LEGAL PROCEEDINGS Because of the size and nature of its business, Monsanto is a party to numerous legal proceedings. Most of these proceedings have arisen in the ordinary course of business and involve claims for money damages or seek to restrict Monsanto's business activities. While the results of litigation cannot be predicted with certainty, Monsanto does not believe these matters or their ultimate disposition will have a material adverse effect on Monsanto's financial position, profitability or liquidity in any one year, as applicable. In 1974, Searle introduced in the United States an intrauterine contraceptive product, commonly referred to as an intrauterine device ("IUD"), under the name Cu-7(R). Following extensive testing by Searle and review by the FDA, the Cu-7(R) was approved for sale as a prescription drug in the United States. It was marketed internationally as the Gravigard(R). Searle has been named as a defendant in a number of product liability lawsuits alleging that this IUD caused personal injury resulting from pelvic inflammatory disease, perforation, pregnancy or ectopic pregnancy. As of March 1, 2000, 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 7 action, these nine individuals are considered representative of the entire group of Australian plaintiffs. Plaintiffs' are appealing that verdict. The lawsuits seek damages in varying amounts, including compensatory and punitive damages, with most suits seeking at least $50,000 in damages. Searle believes it has meritorious defenses and is vigorously defending each of these lawsuits. On January 31, 1986, Searle voluntarily discontinued the sale of the Cu-7(R) in the United States, citing the cost of defending such litigation. Ex-U.S. sales were discontinued in 1990. Searle has been named, together with numerous other prescription pharmaceutical manufacturers and in some cases wholesalers or distributors, as a defendant in a large number of related actions brought in federal and/or state court, based on the practice of providing discounts or rebates to managed care organizations and certain other large purchasers. The federal cases have been consolidated for pre-trial proceedings in the Northern District of Illinois. The federal suits include a certified class action on behalf of retail pharmacies representing the majority of retail pharmacy sales in the United States. The class plaintiffs alleged an industry-wide agreement in violation of the Sherman Act to deny favorable pricing on sales of brand-name prescription pharmaceuticals to certain retail pharmacies in the United States. The other federal suits, brought as individual claims by several thousand pharmacies, allege price discrimination in violation of the Robinson-Patman Act as well as Sherman Act claims. Several defendants, not including Searle, settled the federal class action case. On November 30, 1998, Searle and its co-defendants in the Federal class action case received a verdict for the defense and all claims were dismissed. On July 13, 1999, the U. S. Court of Appeals for the Seventh Circuit upheld most of the lower court's decision to throw out price fixing charges against the manufacturers as well as the wholesalers, but 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, New Mexico and West Virginia. On December 14, 1999, suit was filed against Monsanto in the United States District Court for the District of Columbia (Cause No. 1:99CV03337) by six farmers as representative of a putative class action alleging that purchasers of genetically modified soybean and corn seed may assert antitrust and other claims against Monsanto. The suit alleges that Monsanto has violated various antitrust laws and unspecified international laws through its patent license agreements and has breached an implied warranty of merchantability by offering for sale genetically modified seed. Nine other companies are accused in the lawsuit of participating in an international cartel to violate the antitrust laws but Monsanto is the only named defendant. The suit claims anti-competitive behavior and monopolistic practices by artificially inflating the prices of genetically modified seed and imposing excessive technology fees, prohibiting the reuse of modified seed, or requiring the use of specified herbicides with the seed. The suit claims that despite governmental approval for the sale of the genetically modified products there are uncertain risks posed by the technology which subjects Monsanto to liability regardless of the actual safety of the products. Plaintiffs seek declaratory and injunctive relief in addition to antitrust, treble, 8 compensatory and punitive damages and attorneys' fees. On November 8, 1999, a similar lawsuit was filed by a single plaintiff in United States District Court for the Northern District of Mississippi (Cause No. 2:99CV218-P-B) alleging to represent a putative class of soybean farmers who have purchased genetically-modified soybeans which contain Monsanto's patented technology. The complaint asserts claims under the Racketeer Influenced and Corrupt Organizations Act (RICO) and various antitrust acts and also asserts claims for breach of contract. The suit seeks an award of antitrust damages, treble damages and compensatory damages and attorneys' fees. On February 14, 2000, a similar lawsuit was filed in United States District Court for the Southern District of Illinois (Cause No. 00-403JLF), on behalf of five farmers purporting to represent various classes of farmers and alleging claims virtually identical to those in the District of Colombia and Mississippi cases. Monsanto has filed motions to dismiss the District of Columbia and Mississippi cases with prejudice. Subsequently, plaintiffs filed motions to dismiss these cases without prejudice, and have expressed their intention to refile in connection with the Illinois case. Monsanto is vigorously defending these lawsuits and has meritorious defenses to all claims in the lawsuits, including: failure to state any claim under existing law, no breach of any legal duty, lack of damage, legal authorization to extend technology licenses under the patent laws and other defenses. Monsanto will maintain in the litigation that its products are safe, approved for sale by regulatory authorities and that its actions have been pro-competitive under the antitrust laws and protected under the patent laws. In 1996 Monsanto 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 Monsanto, DEKALB Genetics Corporation ("DEKALB") (subsequently acquired by Monsanto) and Delta & Pine Land Company alleging infringement of Bt related U.S. Patent Nos. 5,567,600 and 5,567,862 issued to Mycogen on that date. Jury trial in this matter concluded on February 3, 1998 with a verdict in favor of all defendants. The patents of Mycogen were found invalid on the basis that Monsanto was a prior inventor. On September 8, 1999, the District Court issued a revised order which upheld the jury verdict and also ruled that Mycogen's patents were invalid due to their lack of enablement. Mycogen's appeal was filed in the Court of Appeals for the Federal Circuit on December 6, 1999, as appeal number 00-1001-1051. Monsanto has meritorious legal positions and will continue to vigorously oppose Mycogen's claims in the appeal. On May 19, 1995, Mycogen Plant Science Inc. initiated suit in U.S. District Court in California against Monsanto alleging infringement of U.S. Patent No. 5,380,831 involving synthetic Bt genes and seeking damages and injunctive relief. On November 10, 1999, the District Court granted summary judgment in Monsanto's favor dismissing all of Mycogen's patent claims and finding the patent invalid on the basis of prior invention by Monsanto. Previously, the District Court had also held that products containing Bt genes made prior to January 1995 did not infringe the patent. Mycogen has filed an appeal with the Court of Appeals for the Federal Circuit (Appeal Number 00-1127) seeking to overturn the dismissal. Monsanto has various meritorious defenses against all claims of Mycogen 9 including non-infringement, lack of validity, prior invention and collateral estoppel as a result of the outcome in the jury trial in which Mycogen's related patents were found invalid. Monsanto will continue to vigorously oppose the claims of Mycogen in the litigation. Monsanto is also a party in interference proceedings against Mycogen in the U.S. Patent and Trademark Office to determine the first party to invent certain inventions related to Bt technology and has requested a stay of the interference pending determination of the appeals. In all of the foregoing actions Monsanto has meritorious legal positions which it is vigorously litigating to establish that the final judgment in the Delaware litigation is dispositive of Mycogen's claims and that all Mycogen Bt patents are invalid as a result of prior judicial determinations. On December 22, 1999, Mycogen Plant Science, Inc. ("MPS"), filed a patent suit in the Federal Court of Australia, Victoria District Registry as Cause No. V746 of 1999, against Monsanto Australia Limited and DeltaPine Australia Limited. The suit alleges that the respondents have infringed certain claims of two Australian patents (574101 and 623429) associated with Bt technology. These patents are Australian counterparts to patents and inventions found invalid in other jurisdictions. Monsanto has meritorious defenses against the lawsuit, including patent invalidity due to lack of enablement, prior art and obviousness. Monsanto will vigorously defend against MPS's claims in the action. Monsanto and/or DEKALB are involved in various legal actions involving herbicide-resistant and/or insect-resistant fertile, transgenic corn. 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). (a) DEKALB has filed infringement actions in U.S. District Court for the Northern District of Illinois (the "Rockford Litigation"). These include actions initially filed on April 30, 1996, against Pioneer Hi-Bred International, Inc. ("Pioneer") and Mycogen Corporation and two of its subsidiaries; and on August 27, 1996, against several Hoechst Schering AgrEvo GmbH entities. 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. 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. (b) On July 2, 1999, DEKALB sued Pioneer in United States District Court for the Northern District of Illinois in a patent interference action to declare that DEKALB was the first inventor of the microprojectile method of producing fertile transgenic corn. Pioneer's motion to dismiss that litigation has been denied. On July 30, 1999, DEKALB moved to consolidate this suit with the remainder of the Rockford Litigation for purposes of trial but the consolidation request has been provisionally denied. (c) On November 23, 1999, Pioneer sued Monsanto, DEKALB and Novartis Seeds Inc. in United States District Court for the 10 Eastern District of Iowa (Cause No 4-99-CV90666) for alleged infringement of its new patent (United States Patent No. 5,990,387) pertaining to microprojectile transformation of corn. Suit was also filed by DEKALB (CA 99-C-50385) on the same date in the federal court responsible for the Rockford Litigation seeking an interference action to declare that DEKALB was the first inventor of the microprojectile method of producing fertile transgenic corn. On March 19, 1996, Monsanto was issued U.S. Patent No. 5,500,365 pertaining to synthetic Bt genes 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-infringement on the reverse doctrine of equivalents. The matter remains pending on appeal and Monsanto is continuing to litigate vigorously its position on appeal. On March 27, 1997, Pioneer Hi-Bred International Inc. ("Pioneer") filed an action against Monsanto which is now pending in U.S. District Court for the Eastern District of Missouri (4:97CV01609-ERW). In the lawsuit, Pioneer alleged that it was entitled to obtain via Monsanto a license to the corn transformation patents of DEKALB which were being enforced against Pioneer in the Rockford Litigation. Pioneer's license claims all have been denied by the District Court and Pioneer's claims have been dismissed. The litigation remains pending only to consider Monsanto's counterclaim to terminate the 1993 license to Pioneer pertaining to Bt corn technology, including the Yieldgard(R) corn product which is currently sold by Pioneer. Monsanto's counterclaims allege that Pioneer's actions breached the contract. All of Pioneer's summary judgment motions have been denied. Compensatory damages and equitable relief to terminate Pioneer's existing rights under the 1993 license for Yieldgard(R) Bt corn product and technology are sought by Monsanto in the litigation. The case is set for jury trial commencing in August 2000. On November 30, 1999, Monsanto filed suit against Pioneer Hi-Bred International Inc. (4:99CV0917-LOD) ("Pioneer") in U.S. District Court for the Eastern District of Missouri to terminate a technology license for glyphosate tolerant soybeans and canola which had been previously extended to Pioneer and was assigned by Pioneer in connection with its merger with E.I. DuPont De Nemours and Company. The lawsuit alleges that the assignment resulted in unauthorized sales of herbicide tolerant soybeans and canola and thereby infringed Monsanto patents and violated certain of its trademark rights. Monsanto seeks injunctive relief and is vigorously pursuing its claims against Pioneer in the lawsuit. In 1997 Monsanto commercially introduced corn containing a gene providing glyphosate resistance. On November 20, 1997, Aventis CropScience S.A. (formerly Rhone Poulenc Agrochimie S. A.) ("Aventis") filed suit in U.S. District Court in North Carolina (Charlotte) against Monsanto and DEKALB (now a subsidiary of Monsanto) alleging that a 1994 license agreement (the "1994 Agreement") between DEKALB and Aventis was 11 induced by fraud stemming from DEKALB's nondisclosure of a research report involving testing of plants to determine glyphosate tolerance. Aventis also alleged that DEKALB did not have a right to license, make or sell products using Aventis technology for glyphosate resistance under the terms of the 1994 Agreement. The subject of the 1994 Agreement and of the lawsuit is certain technology incorporated in herbicide-resistant corn known as "GA21 corn". On April 5, 1999, the trial court rejected Aventis'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 Aventis and against DEKALB, under which the jury awarded $15 million in actual damages for "unjust enrichment" and $50 million in punitive damages. The trial was bifurcated to allow claims for patent infringement and misappropriation of trade secrets to be tried before a different jury. Jury trial of the patent infringement and misappropriation claims ended June 3, 1999, with a verdict for Aventis and against DEKALB. On or about February 8, 2000, the District Court issued its order affirming both the fraud and infringement/misappropriation jury verdicts against DEKALB and enjoining DEKALB from future sales of GA21 corn (other than materials held in DEKALB's inventory on June 2, 1999). The District Court suspended entry of the injunction for 30 days to allow DEKALB to file an appeal and request a stay of the injunction. Notice of Appeal has been filed by DEKALB and the matter is now on appeal to the U. S. Court of Appeals for the Federal Circuit, which has extended the stay and is considering whether the stay should be extended for the duration of the appeal. DEKALB will vigorously appeal the injunction and verdicts and will assert its meritorious defenses to all remaining claims in the litigation. DEKALB is continuing to defend the litigation and maintains that it also remains licensed to use any Aventis technology incorporated in GA21 corn notwithstanding the verdict or any subsequent action that may occur to rescind the 1994 license between Aventis and DEKALB. In addition to the claim of license, DEKALB believes that it has other meritorious defenses to the patent and trade secret allegations, including patent invalidity and absence of trade secret status due to Aventis's own public disclosure of the alleged trade secret. The District Court had dismissed Monsanto from both phases of the trial prior to verdict on the legal basis that it was a bona fide licensee of the GA21 corn technology. Monsanto, its licensees and DEKALB (to the extent permitted under the District Court's order and an agreement with Aventis) continue to sell GA21 corn pursuant to a royalty-bearing agreement with Aventis, entered into prior to the June 3, 1999 jury verdict. Previously, Monsanto and DEKALB had announced their intention to replace GA21 corn, commencing in 2001, with new technology that is not associated with the claims asserted by Aventis in the litigation. In June 1996, Mycogen Corporation ("Mycogen"), Agrigenetics Inc. and Mycogen Plant Sciences, Inc. ("MPS") filed suit against Monsanto in California State Superior Court in San Diego, alleging damage by an alleged failure of Monsanto to license, under an option agreement, technology relating to Bt corn and to glyphosate resistant corn, cotton and canola. On September 9, 1996, Monsanto successfully demurred to all claims but plaintiffs were permitted to amend to file a damage claim seeking recovery under a theory of continuing breach. On October 20, 1997, the court construed the contract as involving only a license to receive genes rather than a license to receive germplasm. Jury trial of the remaining damage claim for lost future profits from the alleged delay in performance ended March 20, 1998, with a verdict against Monsanto awarding damages totaling $174.9 million. The case is now on appeal as Appeal No. D031336 before the California Court of 12 Appeal for the Fourth Appellate District. Mycogen, Agrigenetics Inc. and MPS have filed a cross appeal seeking to reinstate claims for damages that were dismissed prior to trial. This cross appeal has been consolidated for all purposes on appeal. Monsanto has numerous meritorious defenses and grounds to overturn the award, including the speculative nature of the damages for lost future profits, improper splitting of the causes of action, lack of continuing breach, and trial error in directing a verdict against Monsanto on the issue of liability. Mycogen and MPS are also seeking to overturn an award of monetary sanctions against them in connection with this litigation and to obtain a determination that the contract entitles Mycogen and MPS to a license to germplasm from Monsanto. Monsanto will continue to vigorously litigate its position on appeal. On October 28, 1998, two related lawsuits were filed in U.S. District Court in Iowa: one against Asgrow Seed Company, L.L.C. ("Asgrow"), a subsidiary of Monsanto (No. 4-98-CV-70577); and the other against DEKALB (since acquired by Monsanto) (No. 4-98-CV-90578). The lawsuits allege that defendants misappropriated trade secrets of Pioneer in their corn breeding programs. On October 8, 1999, Pioneer added the prior owners of Asgrow and DEKALB (The Upjohn Company and Pfizer Inc.) and Monsanto as defendants in the litigation. In addition to claims under Iowa state law for trade secret misappropriation, Pioneer alleges violations of the Lanham Act and the patent law. Actual and exemplary damages and injunctive relief are sought. Pioneer also asserts that defendants have violated an unspecified contractual obligation not to breed with Pioneer germplasm. On July 17, 1999, the court denied without prejudice defendants' motions to dismiss the initial trade secret claims. On January 4, 2000, the District Court allowed Pioneer to amend its claims in the litigation to assert claims that the defendants infringed numerous patents. As a consequence of the new claims the prior trial date has been vacated and no trial date has been assigned. The defendants have meritorious defenses including non- infringement of patents, lack of validity of the patents on numerous grounds, preemption, laches, statute of limitations, lack of trade secrets, ownership of the germplasm, bona fide purchaser status and other defenses. The defendants will vigorously defend against Pioneer's claims in the litigation. Monsanto is engaged in litigation relating to the failed merger with Delta and Pine Land Company ("D&PL"). On December 20, 1999, Monsanto announced that it had withdrawn its filing for U.S. antitrust clearance of the proposed merger. The filing was withdrawn in light of the U.S. Department of Justice's unwillingness to approve the transaction on commercially reasonable terms. (a) Following the announcement on May 11, 1998, of the merger agreement between Monsanto and D&PL, five alleged holders of D&PL common stock filed suits, now consolidated (the "D&PL Shareholder Suit"), in the Delaware Court of Chancery in and for New Castle County against Monsanto, D&PL, and members of the D&PL Board of Directors (the "D&PL Board"). Seeking to represent a purported class of D&PL shareowners, plaintiffs in the D&PL Shareholder Suit alleged that the consideration that was to be received by holders of D&PL common stock in the merger was unfair and inadequate, that the members of the D&PL Board breached their fiduciary duties by approving the transaction and that Monsanto aided and abetted such breaches. Plaintiffs in the D&PL Shareholder Suit sought judgment declaring that each Delaware action is maintainable as a class action, preliminarily and permanently enjoining consummation of the merger or rescinding the transaction in the event that it was consummated, awarding unspecified compensatory damages against defendants, and 13 awarding plaintiffs their attorneys' fees and expenses. On or about November 18, 1998, the parties in the D&PL Shareholder Suit entered into a Memorandum of Understanding to settle the litigation. That Memorandum of Understanding, however, appears to be null and void because of the failure of completion of the merger. (b) On December 30, 1999, a derivative and class action lawsuit was filed (Civil Action 17707) (the "Delaware Suit"), by two alleged holders of D&PL common stock, in the Delaware Court of Chancery. Defendants include Monsanto, D&PL and members of the D&PL Board. The Delaware Suit relates to Monsanto's withdrawal of its filing for U.S. antitrust clearance of the proposed merger, and alleges that D&PL has been harmed by the termination of the effort to complete the transaction and that the individual defendants have a continuing duty to seek a value-maximizing transaction for the shareholders. The suit seeks a declaration that the individual defendants have violated their fiduciary duties and a direction that the individual defendants take certain actions to maximize shareholder value. The suit also requests compensatory damages, costs, disbursements and fees. (c) On January 18, 2000, suit was reinstituted against Monsanto by D&PL (Cause No. 2000-2) in Circuit Court of the First Judicial District of Bolivar County, Mississippi, seeking compensatory and punitive damages allegedly as a result of the failure to complete the merger pursuant to the exercise of reasonable efforts. Monsanto did exercise commercially reasonable efforts to complete the transaction and believes it has meritorious defenses to the claims in the lawsuits and will vigorously defend the actions. Monsanto has requested a stay of the Bolivar County suit during the pendency of the previously-filed Delaware Suit. 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 Monsanto 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. Monsanto's motion for rehearing or, in the alternative, for rehearing en banc, was denied. 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. On December 2, 1999, a complaint was filed in United States District Court for the Eastern District of Pennsylvania as a putative class action purporting to represent the claims of over 9,000 Korean and 1,000 U.S. service persons allegedly exposed to the herbicide Agent Orange and other defoliants, including Agent Blue and Monuran, sprayed during 1967-1970 in or near the demilitarized zone separating North Korea from South Korea. The complaint names Monsanto and five other manufacturers of the defoliants which were made and sold to the U.S. government for use in Vietnam. The complaint does 14 not assert any specific causes of action or demand a specified amount in damages. The Judicial Panel on Multidistrict Litigation has granted provisional transfer of the case to the United States District Court for the Eastern District of New York for coordinated pretrial proceedings as part of In re "Agent Orange" Product Liability Litigation, MDL 381 (which is the multidistrict litigation proceeding established in 1977 to coordinate Agent Orange related litigation in the United States). Various other claims by veterans or civilians alleging personal injury from exposure to herbicides used in Vietnam have been filed since a 1984 settlement in the MDL proceeding concluded all class action litigation filed on behalf of U.S. and certain other groups of plaintiffs. In a suit filed against Dow Chemical Company and Monsanto in Seoul Korea during October 1999, approximately 13,760 Korean veterans of the Vietnam war alleged they were exposed to herbicides and suffered injuries as a result. The suit involves three separate complaints which were filed and are being handled collectively as Case No. 99 Kahap 84147 (84123; 84130), 13th Civil Division, Seoul District Court. The complaints fail to assert any specific causes of action but seek damages of 300 million won (approximately $250,000) per plaintiff. Other ancillary actions are also pending in Korea, including a request for provisional relief pending resolution of the main action. In all of the above referenced matters Monsanto has numerous meritorious defenses including: lack of jurisdiction; absence of injury; lack of causation; lack of negligence or legal liability; acting under the supervision and direction of the U.S. government; and statutes of limitations. In all of the actions Monsanto is vigorously defending the actions. RISK MANAGEMENT Monsanto continually evaluates risk retention and insurance levels for product liability, property damage and other potential areas of risk. Monsanto devotes significant effort to maintaining and improving safety and internal control programs, which reduce its exposure to certain risks. Management decides the amount of insurance coverage to purchase from unaffiliated companies and the appropriate amount of risk to retain, based on the cost and availability of insurance and the likelihood of a loss. Since 1986, Monsanto's liability insurance has been on the "claims made" policy form. Management believes that the current levels of risk retention are consistent with those of other companies in the various industries in which Monsanto operates and are reasonable for Monsanto. There can be no assurance that Monsanto will not incur losses beyond the limits of, or outside the coverage of, its insurance. Monsanto's liquidity, financial position and profitability are not expected to be affected materially by the levels of risk retention that the Company accepts. CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION Information regarding forward-looking statements, and factors that could cause actual performance or results to differ materially from those described in this Report, are set forth under the heading "Cautionary Statements Regarding Forward-Looking Information" described on pages 21 through 23 of Exhibit 99.1, accompanying this Report and incorporated herein by reference. 15 ITEM 2. PROPERTIES. The General Offices of the Company are located on a 245-acre tract of land in St. Louis County, Missouri. The Company also owns a 210-acre tract in St. Louis County on which additional research facilities are located. These two office and research facilities serve the Agricultural Products, Pharmaceuticals and Corporate and Other segments. In addition, Monsanto and its subsidiaries own or lease manufacturing facilities, laboratories, agricultural facilities, office space, warehouses, and other land parcels in North America, South America, Europe, Asia, Australia and Africa. In addition to the facilities in St. Louis County, Missouri, Monsanto's principal properties include the following locations, serving the segments noted: Alvin, Texas (Agricultural Products); Antwerp, Belgium (Agricultural Products); Augusta, Georgia (Agricultural Products, Pharmaceuticals); Barceloneta, Puerto Rico (Pharmaceuticals); Caguas, Puerto Rico (Pharmaceuticals); Fayetteville, North Carolina (Agricultural Products); Feucht, Germany (Pharmaceuticals); Luling, Louisiana (Agricultural Products); Morpeth, United Kingdom (Pharmaceuticals); Muscatine, Iowa (Agricultural Products); Sao Jose dos Campos, Brazil (Agricultural Products); Skokie (Old Orchard), Illinois (Pharmaceuticals); Skokie (Searle Parkway), Illinois (Pharmaceuticals); and Zarate, Argentina (Agricultural Products). All of these properties are manufacturing facilities, except for the research building in Skokie (Searle Parkway), Illinois, and the office building in Skokie (Old Orchard), Illinois. The Company is also constructing a new Agricultural Products manufacturing facility at Camacari, Brazil. Monsanto's principal properties are suitable and adequate for their use. Utilization of these facilities may vary with seasonal, economic and other business conditions, but none of the principal properties is substantially idle. The facilities generally have sufficient capacity for existing needs and expected near-term growth, and expansion projects are undertaken as necessary to meet future needs. Most of these properties are owned in fee. However, the Company leases the land underlying facilities that it owns at Alvin, Texas. In certain instances, Monsanto has granted leases on portions of plant sites not required for current operations. ITEM 3. LEGAL PROCEEDINGS. For information concerning certain legal proceedings involving Monsanto, see "Business--Environmental Matters", "Business--Legal Proceedings" and "Business--Cautionary Statements Regarding Forward- Looking Information" in Item 1 of this Report. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to the security holders during the fourth quarter of 1999. EXECUTIVE OFFICERS OF THE REGISTRANT. Information regarding executive officers is contained in Item 10 of Part III of this Report (General Instruction G) and is incorporated herein by reference. 16 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. SHAREOWNER MATTERS The narrative information appearing under "Shareowner Matters" on page 18, and the tabular information regarding Dividends Per Share and Common Stock Price (for the years 1999 and 1998) appearing in "Note 25: Quarterly Data" on pages 54 and 55, all appearing in Exhibit 99.1 of this Report, are incorporated herein by reference. SALE OF UNREGISTERED SECURITIES On December 19, 1999, Monsanto and Pharmacia & Upjohn, Inc. ("Pharmacia & Upjohn") entered into a Stock Option Agreement (the "Stock Option Agreement"), dated as of December 19, 1999, pursuant to which Monsanto granted an option (the "Option") to Pharmacia & Upjohn to purchase up to 94,774,810 shares (the "Option Shares") of the Company's common stock at a price of $41.75 per share. The Option was granted by the Company as an inducement to Pharmacia & Upjohn (1) to enter into the Agreement and Plan of Merger (the "Merger Agreement"), dated as of December 19, 1999 (and subsequently amended as of February 18, 2000), among the Company, a wholly owned subsidiary of the Company and Pharmacia & Upjohn, pursuant to which such wholly owned subsidiary of the Company will merger with and into Pharmacia & Upjohn (the "Merger") and (2) to grant to Monsanto a substantially similar option to purchase up to 77,388,932 shares of Pharmacia & Upjohn's common stock, par value $0.01 per share, at an exercise price of $50.25. The number of Option Shares is subject to adjustment in certain circumstances, provided that the aggregate number of Option Shares may not exceed 14.9% of the total outstanding shares of the Company's common stock immediately prior to the time of exercise. The option will, subject to certain limitations, become exercisable upon the occurrence of an event the result of which is that the total fee or fees required to be paid by the Company to Pharmacia & Upjohn pursuant to the Merger Agreement equals $575 million (a "Purchase Event"). The Stock Option Agreement provides that Monsanto may, after the occurrence of a Purchase Event, repurchase all or a portion of the Option for a specified price in cash. In no event may the "Total Profit" (as defined in the Stock Option Agreement) of Pharmacia & Upjohn under the Stock Option Agreement and the Merger Agreement exceed $635 million. No Purchase Event has occurred at the time of this filing. The Option will terminate upon the occurrence of certain events, including the consummation of the Merger. The granting of the Option was deemed to be exempt from registration under the Securities Act or 1933, as amended (the "Securities Act"), in reliance on Section 4(2) of the Securities Act, as a transaction by an issuer not involving a public offering. 17 ITEM 6. SELECTED FINANCIAL DATA. The following information, appearing on the pages indicated of Exhibit 99.1 of this Report, is incorporated herein by reference: (a) the second sentence of the first paragraph under "Definitions" on page 3; and (b) the tabular information regarding Net Sales, Income (Loss) From Continuing Operations, Income (Loss) From Continuing Operations (per share), Total Assets, Long-Term Debt, and Dividends (per share), appearing under "Financial Summary" on page 2. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. The following information, appearing on the pages indicated of Exhibit 99.1 of this Report, is incorporated herein by reference: (a) the four paragraphs under "Definitions" on page 3; and (b) the tabular and narrative information appearing under "Management's Discussion and Analysis of Financial Condition and Results of Operation" on pages 4 through 23. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS. The tabular and narrative information appearing under "Market Risk Management" on pages 19 and 20 of Exhibit 99.1 of this Report is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The following information, appearing on the pages indicated of Exhibit 99.1 of this Report, is incorporated herein by reference: (a) the first and last paragraphs under "Definitions" on page 3; (b) the consolidated financial statements of Monsanto appearing on pages 24 through 55 (excluding "Key Financial Measures" on page 28); and (c) the Independent Auditors' Report appearing on page 56. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 18 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. DIRECTORS: The following information is as of March 1, 2000. The following Directors have been elected to terms expiring at the annual meeting of shareowners to be held in 2000:
Year First Became a Name--Age Principal Occupation Director Business Experience since January 1, 1995; and Directorships --------- -------------------- -------- ------------------------------------------------------------ Michael Kantor, 60 Partner, Mayer, Brown & Platt 1997 Business Experience: Partner, Mayer, Brown & Platt, -------------------- since 1997; U.S. Secretary of Commerce, 1996-97; U.S. Trade Representative, 1993-96; National Chairman for the Clinton/Gore Campaign, 1992; Partner, Manatt, Phelps, Phillips and Kantor, 1975-92. Gwendolyn S. King, 59 Retired Senior Vice President, 1993 Business Experience: Senior Vice President, Corporate and Corporate and Public Affairs, -------------------- PECO Energy Company Public Affairs, PECO Energy Company (formerly Philadelphia Electric Company), 1992-98; Commissioner, Social Security Administration, 1989-92. Director: Lockheed Martin Corp.; Marsh & McLennan Companies, --------- Inc.; Erie Indemnity Co. John S. Reed, 61 Chairman and Co-Chief Executive 1985 Business Experience: Chairman and Co-Chief Executive Officer, Citigroup, Inc. -------------------- Officer, Citigroup Inc. since 1998; Chairman and Chief Executive Officer, Citicorp and Citibank, N.A., 1984-98. Director: Citigroup Inc.; Philip Morris Companies, Inc.; --------- Member: The Business Council The following Directors have been elected to terms expiring at the annual meeting of shareowners to be held in 2001: Year First Became a Name--Age Principal Occupation Director Business Experience since January 1, 1995; and Directorships --------- -------------------- -------- ------------------------------------------------------------ Philip Leder, 65 Chairman, Department of 1990 Business Experience: Chairman, Department of Genetics, Genetics, Harvard Medical -------------------- School; Senior Investigator, Harvard Medical School since 1980; John Emory Andrus Howard Hughes Medical Institute Professor of Genetics since 1980; Senior Investigator, Howard Hughes Medical Institute since 1986. Director: Genome Therapeutics Corporation; Trustee: The General --------- Hospital Corporation; The Hadassah Medical Organization; Massachusetts General Hospital; The Charles A. Revson Foundation 19 Year First Became a Name--Age Principal Occupation Director Business Experience since January 1, 1995; and Directorships --------- -------------------- -------- ------------------------------------------------------------ John E. Robson, 69 Senior Advisor, Robertson 1996 Business Experience: Senior Advisor, Robertson Stephens, Stephens -------------------- since 1993; Distinguished Faculty Fellow, Yale University School of Management and Visiting Fellow, The Heritage Foundation, 1993; Deputy Secretary of the U.S. Department of the Treasury, 1989-92; Dean, Emory University Business School, 1986-89; President and Chief Executive Officer, G.D. Searle & Co., 1985-86; Executive Vice President and Chief Operating Officer, G.D. Searle & Co., 1978-85. Director: Exide Corporation; Northrop Grumman Corp.; ProLogis --------- Trust; First Horizon Pharmaceutical Company William D. Principal, Madrona Investment 1985 Business Experience: Former Chairman, Browning-Ferris Ruckelshaus, 67 Group, L.L.C. -------------------- Industries, Inc., 1995-1999; Principal, Madrona Investment Group L.L.C., since 1996; Chairman and Chief Executive Officer, Browning-Ferris Industries, Inc., 1988-95; Of Counsel, Perkins Coie, 1985-88; Administrator, Environmental Protection Agency, 1983-85. Director: Coinstar, Inc.; Cummins Engine Co., Inc.; Nordstrom, --------- Inc.; Solutia Inc.; Weyerhaeuser Company The following Directors have been elected to terms expiring at the annual meeting of shareowners to be held in 2002: Year First Became a Name--Age Principal Occupation Director Business Experience since January 1, 1995; and Directorships --------- -------------------- -------- ------------------------------------------------------------ Richard U. De Vice Chairman and Chief 1999 Business Experience: Director, Vice Chairman and Chief Schutter, 59 Administrative Officer, -------------------- Monsanto Company; Chairman Administrative Officer, Monsanto Company, 1999; Vice and Chief Executive Officer, Chairman, Monsanto Company, 1997; Advisory Director, G.D. Searle & Co. Monsanto Company, 1995; Chairman, President and Chief Executive Officer, G. D. Searle & Co., 1994. Director: Pharmaceutical Research and Manufacturers of America; --------- Northwestern University Board of Trustees; Evanston Northwestern Healthcare Board of Directors, where he additionally serves as chairman of Research Institute; U.S. Japan Business Council Inc.; General Binding Corporation; ReliaStar 20 Year First Became a Name--Age Principal Occupation Director Business Experience since January 1, 1995; and Directorships --------- -------------------- -------- ------------------------------------------------------------ Jacobus F. M. Retired Chairman of the 1993 Business Experience: Chairman of the Executive Board and Peters, 68 Executive Board and Chief -------------------- Executive Officer, AEGON N.V. Chief Executive Officer, AEGON N.V., 1984-93. Director: Kleinwort Endowment Policy Trust Plc; Chairman of --------- Supervisory Board: Bank Dutch Municipalities; Member of Supervisory Board: AEGON N.V.; Amsterdam Company for Town Restoration Ltd.; Gilde Investment Funds; Randstad Holding N.V.; SAMAS Group N.V.; United Flower Auctions Aalsmeer, KEMA Robert B. Shapiro, 61 Chairman and Chief Executive 1996 Business Experience: Chairman and Chief Executive Officer, Officer, Monsanto Company -------------------- Monsanto Company since 1997; Chairman, President and Chief Executive Officer, Monsanto Company, 1995; Director, President and Chief Operating Officer, Monsanto Company, 1993. Director: Citigroup Inc.; Northwestern Memorial Hospital, Silicon --------- Graphics, Inc.; Rockwell International Corporation; Trustee: Washington University; Member: The Business Council; American Society of Corporate Executives; The Business Roundtable Hendrik A. Verfaillie, President and Chief Operating 1999 Business Experience: President, Chief Operating Officer and 54 Officer, Monsanto Company -------------------- Director, Monsanto Company, 1999; President, Monsanto Company, 1997; Advisory Director and Vice President, Monsanto Company, 1995; Advisory Director, Vice President and President of The Agricultural Group, Monsanto Company, 1993.
21 EXECUTIVE OFFICERS The following information with respect to the Executive Officers of the Company on March 1, 2000, is included pursuant to Instruction 3 of Item 401(b) of Regulation S-K:
Year First Became an Present Position Executive Name--Age with Registrant Officer Other Business Experience since January 1, 1995 --------- ---------------- ------- ----------------------------------------------- Bruce P. Bickner, 56 Executive Vice President, 1999 Chairman and Chief Executive Officer - DEKALB Genetics Agricultural Sector- Corporation, 1988 to present; Co-President, Global Seed Monsanto Company Group - Monsanto Company, 1999; and present position, 1999. Martin E. Blaylock, Vice President, 1999 Director, Manufacturing Operations - Monsanto Company, 1993; 59 Manufacturing Operations and present position, 1995. - Monsanto Company Gary L. Crittenden, 46 Senior Vice President, 1998 Executive Vice President and Chief Financial Officer - Chief Financial Officer Melville Corp., 1994; Executive Vice President, Strategy and - Monsanto Company Business Development - Sears Roebuck & Co., 1996; President, Hardware Stores Division - Sears Roebuck & Co., 1996; Executive Vice President and Chief Financial Officer - Sears Roebuck & Co., 1998; and present position, 1998. Richard U. Vice Chairman and Chief 1995 Chairman, Chief Executive Officer and President - G.D. De Schutter, 59 Administrative Officer - Searle & Co., 1994; Advisory Director-Monsanto Company, Monsanto Company; Chairman 1995; Vice Chairman - Monsanto Company, 1997-1999; and and Chief Executive Officer, present positions, 1999. G.D. Searle & Co. Steven L. Engelberg, Senior Vice President - 1995 Vice President, Worldwide Government Affairs - Monsanto 57 Monsanto Company Company, 1994; and present position, 1996. Robert Fraley, 47 Co-President, Agricultural 1999 Group Vice President and General Manager, New Products Sector - Monsanto Company Division - Monsanto Company, 1993; President, Ceregen- Monsanto Company, 1995; and present position, 1997. Hugh Grant, 41 Co-President, Agricultural 1999 Director, Global Roundup(R) Product Strategy - Monsanto Sector - Monsanto Company Company, 1994; General Manager, Agricultural Sector for Southeast Asia, Australia, New Zealand & South Korea - Monsanto Company, 1995; and present position, 1998. Alan L. Heller, 46 Co-President - 1999 Vice President, Finance - G.D. Searle & Co. 1994; President, G.D. Searle & Co. Americas, G.D. Searle & Co.; 1995; Chief Operating Officer-G.D. Searle & Co., 1997; and present position, 1999. 22 Year First Became an Present Position Executive Name--Age with Registrant Officer Other Business Experience since January 1, 1995 --------- ---------------- ------- ----------------------------------------------- R. William Ide III, 59 Senior Vice President, 1996 President, American Bar Association, 1993-1994; partner, General Counsel and Long, Aldridge & Norman, 1993; and present position, 1996. Secretary - Monsanto Company Madonna A. Kindl, 42 Senior Vice President - 1996 Director of Human Resources, Staff of the Vice Chairman - Monsanto Company Monsanto Company, 1993; Director, Human Resources, Crop Protection Business Unit - Monsanto Company, 1995; Vice President - Human Resources-Monsanto Company, 1996; and present position, 1999. Ganesh M. Kishore, 46 Co-President, Nutrition 1999 Director of Technology, Agricultural Sector - Monsanto and Consumer Products - Company, 1994; Director of Technology, Ceregen-Monsanto Monsanto Company Company, 1995; Director of Crop Enhancement, Ceregen- Monsanto Company, 1996; Distinguished Science Fellow - Monsanto Company, 1996; and present position, 1997. David L. Morley, 43 Senior Vice President 1998 Global Strategies and Operations - The Agricultural Group, 1993; Group Vice President and General Manager, Americas Division, Crop Protection Business Unit, 1995; President, Nutrition and Consumer Products, 1997; and present position, 1998. Philip Needleman, 61 Senior Vice President, 1991 Senior Vice President, Research and Development and Chief Research and Development Scientist-Monsanto Company; President, Research and and Chief Scientist; Development - G.D. Searle & Co., 1993; Co-President, Co-President, G.D. Searle Pharmaceuticals Sector-Monsanto Company, 1996; and present & Co. position, 1996. Nicholas E. Rosa, 48 Senior Vice President - 1999 Executive Vice President - The NutraSweet Company, 1994; Monsanto Company President, Benevia-Monsanto Company, 1996; President, Nutrition and Consumer Products - Monsanto Company, 1997; Co-President, Nutrition and Consumer Products Sector, 1999; and present position, 1999. Robert B. Shapiro, 61 Chairman and Chief Executive 1987 Director, President and Chief Operating Officer - Monsanto Officer - Monsanto Company Company, 1993; Director, Chairman, Chief Executive Officer and President - Monsanto Company, 1995; and present position, 1997. 23 Year First Became an Present Position Executive Name--Age with Registrant Officer Other Business Experience since January 1, 1995 --------- ---------------- ------- ----------------------------------------------- Hendrik A. Verfaillie, President and Chief 1993 Vice President and Advisory Director - Monsanto Company; 54 Operating Officer President - The Agricultural Group - Monsanto Company, 1993; - Monsanto Company Vice President and Advisory Director - Monsanto Company, 1995; Executive Vice President and Advisory Director - Monsanto Company, 1995; President-Monsanto Company, 1997; and present positions, 1999. Joan H. Walker, 52 Senior Vice President 1999 President and Chief Executive Officer - Bozell Public Relations, 1993; Senior Vice President, Corporate Communications - Ameritech Corporation, 1996; and present position, 1999.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act") requires all Company executive officers, directors, and persons owning more than 10% of any registered class of Company stock to file reports of ownership and changes in ownership with the Securities and Exchange Commission. During 1999, Mr. Nick E. Rosa was inadvertently late in filing his initial report on Form 3. 24 ITEM 11. EXECUTIVE COMPENSATION. DIRECTORS' FEES AND OTHER ARRANGEMENTS Non-employee directors receive annual compensation having an anticipated total annual value of $90,000 ($100,000 for directors who serve as Chair of a Board Committee). One-half of this amount is in the form of stock options to purchase shares of the Company's common stock. Each director may elect the form of the other half of compensation, choosing any combination of additional options, cash paid currently, deferred cash, common stock that is subject to forfeiture if the director does not complete his or her term, or common stock the delivery of which is deferred. Each director makes this election at the beginning of each term for which he or she is elected. The number of options granted as compensation to each director is determined in accordance with the Black-Scholes option valuation method used for employee option grants, with an exercise price equal to the value of a share of the Company's common stock on the date of grant. Options granted for a term will vest in pro rata installments on the day before each Annual Meeting of Shareowners during that term. After vesting, options will generally be exercisable until the tenth anniversary of the date of grant. When a director's service as a director of the Company ends, any unvested options will be forfeited automatically. The portion of his or her compensation, if any, which a director elects to receive in cash is paid on a pro rata basis throughout the director's term. Deferred cash will accrue interest at an interest rate equal to the average Moody's Baa Bond Index Rate for the prior calendar year until it is paid either in a lump sum or in installments after the director's service as a director terminates. A director who elects to receive a portion of Board compensation in restricted stock will be issued the number of shares of the Company's common stock having a value, as of the first day of the term to which the compensation relates, equal to such portion. Restricted stock will be forfeitable and nontransferable until it vests in pro rata installments on the day before each Annual Meeting of Shareowners during the term. The portion, if any, of director compensation that a director elects to receive in deferred stock will be provided by crediting a stock unit account maintained by the Company for the director with a number of stock units representing hypothetical shares of the Company's common stock having a value, as of the first day of the term to which the compensation relates, equal to such portion. Stock units are paid in shares of the Company's common stock either in a lump sum or in installments after the director's service as a director terminates. Whenever the Company declares a dividend or other distribution with respect to its common stock, deferred stock accounts will be credited with additional stock units equal to the number of shares of the Company's common stock having a value equal to the dividend or other distribution that the director would have received had the stock units on the record date of such dividend or other distribution been shares of the Company's common stock. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION None of the members of the People Committee of the Board of Directors is or has been an 25 officer or employee of Company. However, until his consulting agreement with the Company expired in January 2000, Dr. Leder, who is a member of the Committee, provided consulting services and the benefit of his considerable professional skills, knowledge, experience, and judgment in areas of interest to the Company, particularly in the field of biological sciences. In 1999, Dr. Leder received $143,400 under the consulting agreement. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION ------------------- ---------------------- AWARDS PAYOUTS ------ ------- (A) (B) (C) (D) (E) (G) (H) OTHER (F) SECURITIES (I) ANNUAL RESTRICTED UNDER- ALL OTHER NAME AND COMPEN- STOCK LYING LTIP COMPEN- PRINCIPAL SATION AWARDS OPTIONS PAYOUTS SATION POSITION YEAR SALARY($) BONUS($) ($) ($) (#) ($) ($) - ----------------------- -------- --------- ---------- ------- ------------- ---------- ------------- --------- R. B. Shapiro 1999 850,000 1,440,000 61,207 0 394,064 0 120,185 Chairman, CEO 1998 800,000 800,000 --- 0 0 0 101,070 and Director 1997 800,000 965,000 69,466 0 79,811 750,365 171,624 G. L. Crittenden 1999 565,000 900,000 --- 445,000 146,777 0 64,379 Senior Vice President 1998 176,667 800,000 --- 1,359,435 303,289 0 6,492 and Chief Financial 1997 --- --- --- --- --- --- --- Officer R. U. De Schutter 1999 650,000 950,000 --- 0 160,339 0 156,452 Vice Chairman, Chief 1998 600,000 810,000 --- 0 0 0 60,236 Administrative Officer 1997 525,000 700,000 --- 0 460,391 6,757,745 66,339 and Director; Chairman and CEO, G.D. Searle & Co. P. Needleman 1999 550,000 1,100,000 --- 0 96,005 0 105,221 Senior Vice President; 1998 495,833 700,000 --- 0 193,588 0 67,761 Co-President, G.D. 1997 450,000 700,000 --- 0 76,904 4,570,360 53,367 Searle & Co. H. A. Verfaillie 1999 650,000 900,000 --- 0 222,115 0 138,932 President, Chief 1998 600,000 810,000 --- 0 0 0 72,439 Operating Officer and 1997 566,667 645,000 --- 0 34,917 979,000 96,146 Director NOTE: Information regarding shares and stock options reported in this table and in succeeding tables has been adjusted to reflect the spinoff of the Company's chemicals business in 1997. Applicable regulations set reporting levels for certain non- cash compensation. The 1999 and 1997 amounts for Mr. Shapiro include $36,938 and $53,891, respectively, for personal use, as directed by resolution of the Board of Directors, of Company aircraft, and other perquisites totaling $24,269 and $15,575, respectively. The annual incentive program for the years 1994 through 1996 was designed to encourage sustained performance by withholding a percentage (i) of each annual award (15% of the 1994 award and 30% of the awards for each of 1995 and 1996) and, (ii) for certain employees working in selected business units, including Mr. Verfaillie, of such employees' cash long-term incentive opportunity. These withheld amounts were adjusted upward or downward based on sustained 26 performance during the three-year period. The amounts shown represent the March 1997 payment of the withheld amounts after application of the sustained performance adjustment. Gary L. Crittenden commenced employment with the Company on September 1, 1998. Prior to February 1997, Messrs. De Schutter and Needleman participated in the Searle Phantom Stock Option Plan of 1986 ("Searle Phantom Plan"), which gave participants the opportunity to receive the appreciation in the value of a hypothetical share of the common stock of G.D. Searle & Co. ("Searle"), now a wholly-owned subsidiary of the Company. Such "shares" represented units of valuation created solely for purposes of measuring the increase, if any, in the value of Searle. Options to receive the appreciation in the value of these units were granted for a ten-year period. In February 1997, the Executive Compensation and Development Committee decided to terminate the Searle Phantom Plan and to credit Messrs. De Schutter and Needleman and other active participants with a combination of cash and options on Company common stock representing current and anticipated future appreciation of the units. The amount shown for Mr. De Schutter represents payment of $1,495,000 in cash, $2,445,000 in deferred cash (deferred to avoid losing the compensation deduction under Section 162(m) of the Code), and the value of 227,474 Company stock options, with an exercise price equal to the fair market value per underlying share on the date of grant, paid to Mr. De Schutter in cash in connection with the termination of the Searle Phantom Plan, plus $403,848 in payment of the withheld amounts, after application of the sustained performance adjustment, as discussed in footnote 2 to this Summary Compensation Table. The amount shown for Mr. Needleman represents payment of $660,000 in cash, $1,770,000 in deferred cash (deferred to avoid losing the compensation deduction under Section 162(m) of the Code), and the value of 162,162 Company stock options, with an exercise price equal to the fair market value per underlying share on the date of grant, paid to Mr. Needleman in cash in connection with the termination of the Searle Phantom Plan, plus $421,605 in payment of the withheld amounts, after application of the sustained performance adjustment, as discussed in footnote 2 to this Summary Compensation Table. Amounts shown for 1999 include: contributions to savings plans for Mr. Shapiro, $120,185; Mr. Crittenden, $64,379; Mr. De Schutter, $74,148; Mr. Needleman, $103,491; and Mr. Verfaillie, $116,432; split dollar life insurance premiums for Mr. Shapiro, $7,497; Mr. De Schutter, $32,002; Mr. Needleman, $10,721; and Mr. Verfaillie, $11,391; compensation for changes made to the Company's vacation program: Mr. De Schutter $31,154 and Mr. Verfaillie $22,500; performance match payments on deferred bonus awards: Mr. De Schutter $51,150 and Mr. Needleman $1,400; and costs for executive travel accident plans for each of the named executive officers of $146. Mr. Crittenden held a total of 35,410 shares of restricted stock on December 31, 1999, none of which had vested. The value of such shares based on the closing price of the Company's common stock on such date of $35.625 was $1,261,481. Dividends are paid in cash on the restricted shares.
27 OPTION GRANTS IN 1999
INDIVIDUAL GRANTS GRANT DATE VALUE ----------------- ---------------- (A) (B) (C) (D) (E) (F) NUMBER OF % OF TOTAL SECURITIES OPTIONS EXERCISE UNDERLYING GRANTED TO OR BASE GRANT DATE OPTIONS EMPLOYEES IN PRICE EXPIRATION PRESENT VALUE NAME GRANTED(#) FISCAL YEAR ($/SHARE) DATE ($) ---- ---------- ------------ --------- ---------- ------------- R. B. Shapiro 102,960 0.2 75 4/23/07 1,350,835 229,344 0.3 75 4/23/07 4,790,996 61,760 .01 51 6/30/09 1,248,787 G. L. Crittenden 50,000 .01 42.406 1/12/09 788,000 13,642 .01 75 4/23/07 178,983 62,548 .01 75 4/23/07 1,306,628 20,587 .01 51 6/30/09 416,269 R. U. De Schutter 15,444 .01 75 4/23/07 202,625 62,548 .01 75 4/23/07 1,306,628 82,347 .01 51 6/30/09 1,665,056 P. Needleman 12,870 .01 75 4/23/07 168,854 62,548 .01 75 4/23/07 1,306,628 20,587 .01 51 6/30/09 416,269 H. A. Verfaillie 77,220 .01 75 4/23/07 1,013,126 62,548 .01 75 4/23/07 1,306,628 82,347 .01 51 6/30/09 1,665,056 In accordance with Securities and Exchange Commission rules, the Black-Scholes option pricing model was chosen to estimate the grant date present value of the options set forth in this table. The Company's use of this model should not be construed as an endorsement of its accuracy at valuing options. Accordingly, there is no assurance that the value realized by an executive, if any, will be at or near the value estimated by the Black-Scholes model. Future compensation resulting from option grants is based solely on the performance of the Company's stock price. For the options granted under the 1999 Premium Option Purchase Program, the option purchase price of $7.77 per share was subtracted from the Black-Scholes value before the grant date value was determined. The following weighted- average assumptions were made for purposes of calculating the original Grant Date Present Value: an option term of ten years, average volatility of 42.5%, dividend yield of 0.28%, and a risk-free interest rate equal to the then current ask yield of ten-year Treasury Bonds. The units represent shares purchased under the 1999 Premium Option Purchase Program. Pursuant to this Program, the named executive officers purchased these options at a price of $7.77 per share. The purchase price is being paid through base salary or bonus reductions over a four year period. These options become exercisable on the latest to occur of (i) the date on which payment is made for such option, and (ii) the first to occur of (a) April 23, 2000 and (b) the date, if any, on which the average of the highest and lowest sales price of a share of the Company's common stock has been equal to or greater than $75 for at least ten consecutive trading days (the "Stock Price Target"). These options will instead expire on April 23, 2005 if, prior to such date, the Stock Price Target is not achieved. The units represent long-term compensation awards for 2000 and were granted in tandem with the Premium Option Purchase Program. The options are exercisable on a pro-rata basis based upon the number of months of employment in 2000, but in no event prior to April 23, 2000. 28 Represents the grant of 1999 Premium Priced Options. These options are exercisable in the later of (i) the first business day next following a period of the consecutive trading days during which the optional shares equals or exceeds $51 per share, or (ii) March 1, 200l. The exercise price of $42.406 for this tranche of options, granted to Mr. Crittenden for retention purposes, was the fair market value on January 13, 1999, the date of grant. These options will become exercisable on January 14, 2002.
AGGREGATED OPTION EXERCISES IN 1999 AND OPTION VALUES ON DECEMBER 31, 1999
(A) (B) (C) (D) (E) - ----------------- ----------- --------- ----------------- ----------------- NUMBER OF SECURITIES VALUE OF UNDERLYING UNEXERCISED UNEXERCISED IN-THE-MONEY SHARES OPTIONS AT OPTIONS AT ACQUIRED ON VALUE FY-END (#) FY-END ($) EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/ NAME (#) ($) UNEXERCISABLE UNEXERCISABLE ---- ----------- --------- ----------------- ----------------- R. B. Shapiro 229,865 8,077,456 2,407,887/425,988 3,400,051/63,050 G. L. Crittenden 0 0 106,052/344,015 0/0 R. U. De Schutter 0 0 921,425/174,305 4,919,640/27,583 P. Needleman 0 0 926,018/185,479 12,887,310/24,826 H. A. Verfaillie 0 0 1,365,841/236,081 14,534,090/27,583 The amount in column (c) reflects the value of shares received on the exercises of options granted February 24, 1995 at a fair market value of $14.36. Unexercised options shown in columns (d) and (e) reflect grants received over an extended period of time.
LONG-TERM INCENTIVE PLANS--AWARDS IN 1999 There were no long-term incentive awards to the named executive officers in 1999. PENSION PLAN The named executive officers (as well as other employees of the Company) are eligible for retirement benefits payable under the Company's tax- qualified and non-qualified defined benefit pension plans. Effective January 1, 1997, the U.S. defined benefit pension plans for the Company, Searle and The NutraSweet Company, a wholly owned subsidiary of the Company ("NutraSweet"), were amended and unconsolidated. The amended defined benefit pension plan consists of two accounts: a "Prior Plan Account" and a "Cash Balance Account." The opening balance of the Prior Plan Account was the lump sum value of the executive's December 31, 1996 monthly retirement benefit earned prior to January 1, 1997 under the old defined benefit pension plans described below, calculated using the assumption that the monthly benefit would be payable at age 55 with no reduction for early payment. The formula used to calculate the opening balance for employment with the Company was the 29 greater of 1.4% (1.2% for employees hired by the Company on or after April 1, 1986) of average final compensation multiplied by years of service, without reduction for Social Security or other offset amounts, or 1.5% of average final compensation multiplied by years of service, less a 50% Social Security offset. Average final compensation for purposes of determining the opening balance was the greater of (1) average compensation received during the 36 months of employment prior to 1997 or (2) average compensation received during the highest three of the five calendar years of employment prior to 1997. The annual normal retirement benefits under the Searle and NutraSweet pension plans used to determine the opening balance for employment with Searle or NutraSweet was (1) 1.8% of average compensation (the average compensation for the highest consecutive 60 of the last 120 months of employment preceding 1997) multiplied by years of service (up to a maximum of 30 years) less (2) 1.67% of estimated annual Social Security benefits at age 65 multiplied by years of service (up to a maximum of 30 years). For each year of the executive's continued employment with the Company, the executive's Prior Plan Account will be increased by 4% to recognize that prior plan benefits would have grown as a result of pay increases. For each year that the executive is employed by the Company after 1996, 3% of annual eligible compensation in excess of the Social Security wage base and a percentage (based on age) of annual compensation (salary and annual bonus) will be credited to the Cash Balance Account. The applicable percentages and age ranges are: 3% before age 30, 4% for ages 30 to 39, 5% for ages 40 to 44, 6% for ages 45 to 49, and 7% for age 50 and over. In addition, the Cash Balance Account of executives who earned benefits under the Company's old defined benefit pension plan will be credited each year (for up to 10 years based on prior years of service with the Company), during which the executive is employed after 1996, with an amount equal to a percentage (based on age) of annual compensation. The applicable percentages and age ranges are: 2% before age 30, 3% for ages 30 to 39, 4% for ages 40 to 44, 5% for ages 45 to 49, and 6% for age 50 and over. The estimated annual benefits payable as a single life annuity beginning at age 65 (assuming that each executive officer remains employed by the Company until age 65 and receives 4% annual compensation increases) are as follows: Mr. Shapiro, $751,290; Mr. Crittenden, $660,375; Mr. De Schutter, $828,269; Mr. Needleman, $280,810; and Mr. Verfaillie, $785,296. Mr. Shapiro will be provided supplemental retirement benefits to recognize his experience prior to employment by the Company. The Company will provide Mr. Shapiro with supplemental retirement benefits equal to 12% of average final compensation. The supplemental retirement benefits become non- revocable immediately in the event of a change of control of the Company. The estimated annual supplemental benefits payable to Mr. Shapiro upon retirement at age 65 are $222,837. Mr. Shapiro will also receive the same Company contribution to the retiree medical plan as an eligible retiree with 30 years of service. The value of his benefits will be determined at retirement based on age, the premium paid for medical coverage, and projected premium cost increases. If the total of the benefits payable to Mr. De Schutter under the Company's defined benefit pension plans described above do not equal the benefit Mr. De Schutter would have 30 received if all his service had been with the Company, he will be provided supplemental retirement benefits in an amount equal to the benefits he would have received under the Company's plans had all his years of service been with the Company, less the benefits provided by the Searle plans. It is estimated that there will be no annual supplemental benefit payable to Mr. De Schutter if he retires at age 65. Mr. Needleman will be provided supplemental retirement benefits equal to 14% of his annual compensation to recognize his experience prior to employment by the Company. The supplemental retirement benefits become non-revocable immediately in the event of a change of control of the Company. The estimated annual supplemental benefits payable to Mr. Needleman upon retirement at age 65 are $196,952. In addition to the retirement benefits for Mr. Verfaillie based on his years of service as a Company employee in the U.S., Mr. Verfaillie is also eligible for regular retirement benefits based on his years of service as an employee outside the U.S. In addition, he participates in the Company's regular, non-qualified pension plan designed to protect retirement benefits for employees serving in more than one country. However, his total retirement benefits from the combined plans when considering his total service are expected to be generally comparable to the benefits described in this section. CERTAIN AGREEMENTS The Company has entered into Change of Control Employment Agreements with each of the executive officers who are named in the Summary Compensation Table and certain other key executives. Each such Change of Control Employment Agreement becomes effective upon a "change of control" of the Company (as defined in the Change of Control Employment Agreement). Each Change of Control Employment Agreement provides for the continuing employment of the executive after the change of control on terms and conditions no less favorable than those in effect before the change of control. If the executive's employment is terminated by the Company without "cause" or if the executive terminates his or her own employment for "good reason" (each as defined in the Change of Control Employment Agreement), the executive is entitled to severance benefits equal to a "multiple" of his or her annual compensation (including bonus) and continuation of certain benefits for a number of years equal to the multiple. For two executives, including Mr. Crittenden, the severance benefits calculation also includes such executive's long-term incentive opportunity. The multiple is three for the executive officers who are named in the Summary Compensation Table and two or three for the other executives (or, in either case, the shorter number of years until the executive's normal retirement date). In addition, each of the executive officers who are named in the Summary Compensation Table and the other executives who are entitled to a severance multiple of three is entitled to receive the severance benefits if he or she voluntarily terminates his or her own employment during the 30-day period beginning on the first anniversary of the occurrence of certain changes of control. Finally, the executives are entitled to an additional payment, if necessary, to make them whole as a result of any excise tax imposed by the Code on certain change of control payments (unless the safe harbor below which the excise tax is imposed is not exceeded by more than 10%, in which event the payments will be reduced to avoid the excise tax). A cash medical allowance of $15,000 for payment of medical insurance premiums will also be provided to Mr. Verfaillie if he does not qualify for retiree 31 medical coverage. In addition to any payments that may be due to him pursuant to his Change of Control Employment Agreement, under a supplemental agreement Mr. De Schutter will be entitled to receive a payment from the Company in the event his employment is terminated for any reason other than cause. This supplemental agreement was entered into to retain Mr. De Schutter's employment with the Company. If triggered, the payment will be equal to one year of base salary and annual incentive at one-half of Mr. De Schutter's opportunity at an outstanding level of performance if such termination occurs prior to December 31, 2000 and two years of base salary and annual incentive at one-half his opportunity at an outstanding level of performance if such termination occurs after December 31, 2000. The estimated amounts that would be payable to Mr. De Schutter pursuant to this agreement prior to and after December 31, 2000, are $1,820,000 and $3,640,000, respectively. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information is set forth below regarding beneficial ownership of common stock of the Company by (i) each person who is a director or nominee; (ii) each executive officer named in the Summary Compensation Table on page 24; and (iii) all directors and executive officers as a group. Except as otherwise noted, each person has sole voting and investment power as to his or her shares. All information is as of December 31, 1999.
SHARES OF SHARES UNDERLYING COMMON STOCK OPTIONS EXERCISABLE OWNED DIRECTLY WITHIN 60 NAME OR INDIRECTLY DAYS TOTAL ---- ----------------- ------------------- ---------- Gary L. Crittenden 35,544 53,026 88,570 Richard U. De Schutter 243,806 921,425 1,165,231 Michael Kantor 800 13,637 14,437 Gwendolyn S. King 3,865 7,387 11,252 Philip Leder 9,002 13,636 22,638 Phil Needleman 204,807 926,018 1,130,825 Jacobus F. M. Peters 4,705 10,227 14,932 John S. Reed 91,947 14,395 106,342 John E. Robson 6,093 10,546 16,639 William D. Ruckelshaus 16,286 8,919 25,205 Robert B. Shapiro 1,042,353 2,407,887 3,450,240 Hendrik A. Verfaillie 231,894 1,365,841 1,597,735 23 directors and executive officers as a group 2,074,038 9,048,549 11,122,587 Includes shares held under Monsanto Company's Savings and Investment Plan ("SIP"): Mr. Crittenden, 404; Mr. De Schutter, 16,996; Mr. Needleman, 3,216; Mr. Shapiro, 4,274; Mr. Verfaillie, 16,285; and directors and executive officers as a group, 86,155. With respect to shares held under the SIP, employee directors and officers have sole discretion as to voting and, within limitations provided by the SIP, investment of shares. Shares are voted by the trustees in accordance with instructions from participants. If instructions are not received by the trustees as to the voting of particular shares, shares are to be voted in proportion to instructions actually received from other participants in SIP. With respect to shares held under other benefit and incentive plans, employee directors and officers have sole voting power and no current investment power. 32 The Securities and Exchange Commission deems a person to have beneficial ownership of all shares which that person has the right to acquire within 60 days of December 31, 1999. The shares indicated represent stock options granted under incentive plans. The shares underlying options cannot be voted. Includes 1,378 shares owned jointly by Mr. Robson and his wife. Includes 150,374 shares owned jointly by Mr. Verfaillie and his wife. Includes 1,999 shares as to which certain executive officers not named above have shared voting and investment power; and 54,485 shares under contract pursuant to the Company's Employee Stock Purchase Plan.
The percentage of shares of outstanding common stock of the Company, including options exercisable within 60 days of December 31, 1999, beneficially owned by all directors and executive officers as a group is approximately 1.7%. The percentage of such shares beneficially owned by any director or nominee does not exceed 1%. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. TRANSACTIONS AND RELATIONSHIPS Mr. Michael Kantor is a partner at the law firm of Mayer, Brown & Platt, which provided services to the Company in 1999 and is providing services to the Company in 2000. Mr. John E. Robson is Senior Advisor of BancBoston Robertson Stephens, which provided services to the Company in 1999 and is expected to provide services to the Company in 2000. INDEBTEDNESS In May 1996, the Company's shareowners approved a plan whereby each of the Company's executive officers received full-recourse, interest bearing loans for the purchase price of Company common stock purchased pursuant to the Monsanto Executive Stock Purchase Incentive Plan ("Executive Plan"). The loans have an eight-year term and accrue interest at the applicable federal rate (as determined pursuant to Section 1274(d) of the Code) on the purchase date for loans of such maturity, compounded annually. Interest is payable prior to maturity to the extent of dividends paid on the purchased shares, with the balance due at the maturity of the loan. The proceeds of the deferred cash incentives awarded during the performance cycle under the Executive Plan must also be applied to prepay the loans. Following such prepayment, the balance of the loans at the end of the performance cycle, together with accrued and unpaid interest thereon, will generally be payable in three equal installments (plus interest) on the first three anniversaries after the end of the performance cycle. The payment of the loan will be accelerated if the executive officer's service is terminated during the performance cycle for any reason other than retirement or following a change of control. In the event of retirement, there is no loan acceleration. In the event of a change of control, the loan must be repaid over a three-year period following such event. The loan may also be prepaid at any time at the executive officer's option. 33 In addition to the Executive Plan, executive officers may also participate in the Company's Employee Stock Purchase Plan ("Employee Plan"). The Employee Plan is open to all regular U.S., Canada, and Singapore full-time and regular part-time employees of the Company for shares of stock they contracted to purchase over a period of months by means of payroll deductions. No interest is charged on loans granted under the Employee Plan. The following table describes the indebtedness of the executive officers under the Executive Plan, except where otherwise indicated:
GREATEST AGGREGATE AMOUNT OF AGGREGATE AMOUNT OF INDEBTEDNESS IN INDEBTEDNESS AS OF INTEREST RATE 1999 DECEMBER 31, 1999 NAME YEAR OF LOAN (%) ($) ($) ---- ------------ ------------- ------------------ ------------------- M. L. Blaylock 1997 6.8 553,004 553,004 R. U. De Schutter 1996/1998 6.36/5.69 1,721,672 1,721,672 A. W. Donald 1996 6.36 728,146 728,146 S. L. Engelberg 1,279,787 1,275,118 R. T. Fraley 835,178 797,153 H. Grant 1998 19,670 12,682 R. W. Ide III 1,096,121 1,082,655 D. A. Kindl 1996 6.20 1,224,985 1,224,985 G. M. Kishore 1997 6.80 434,134 434,134 D. L. Morley 1997 6.80 434,134 434,134 P. Needleman 1996 6.36 728,146 728,146 N. E. Rosa 1996 6.36 728,146 728,146 R. B. Shapiro 1996 6.36 6,553,310 6,553,310 H. A. Verfaillie 1996 6.36 2,366,473 2,366,473 Mr. Engelberg obtained loans under the Executive Plan in 1996 and 1997, with applicable interest rates of 6.36% and 6.80%, respectively. In addition, Mr. Engelberg obtained a no-interest loan under the Employee Plan in 1996. Mr. Fraley obtained a loan under the Executive Plan in 1996, with an applicable interest rate of 6.36%. In addition, Mr. Fraley obtained a no-interest loan under the Employee Plan in 1998. Mr. Grant obtained a no-interest loan under the Employee Plan in 1998. Mr. Ide obtained a loan under the Executive Plan in 1996, with an applicable interest rate of 6.60%. In addition, Mr. Ide obtained a no-interest loan under the Employee Plan in 1998. The aggregate amount of indebtedness for Messrs. Engelberg, Fraley, Grant and Ide includes amounts owed under the Employee Plan as of February 28, 2000. 34 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) Documents filed as part of this Report: 1. The financial statements set forth at page 24 through the top of page 28 of Exhibit 99.1 to this Report 2. Financial Statement Schedules None required 3. Exhibits--See the Exhibit Index beginning at page 39 of this Report. For a listing of all management contracts and compensatory plans or arrangements required to be filed as exhibits to this Form 10-K, see the Exhibits listed under Exhibit No. 10, items 4 through 30 on pages 40 through 43 of the Exhibit Index. The following Exhibits listed in the Exhibit Index are filed with this Report: 3 2. By-Laws of the Company, as amended effective February 10, 2000 10 4. Monsanto Company Non-Employee Director Deferred Compensation Plan, as amended February 25, 2000 29. Supplemental Retirement Plan and Amendment to Supplemental Retirement Plan for Philip Needleman 21 Subsidiaries of the registrant 23 Consent of Independent Auditors 24 1. Powers of attorney submitted by Richard U. De Schutter, Michael Kantor, Gwendolyn S. King, Philip Leder, Jacobus F.M. Peters, John S. Reed, John E. Robson, William D. Ruckelshaus, Robert B. Shapiro, Hendrik A. Verfaillie, Gary L. Crittenden and Richard B. Clark 2. Certified copy of Board resolution authorizing Form 10-K filing utilizing powers of attorney 27 Financial Data Schedule (part of electronic submission only) 99 1. Financial Information for Fiscal Year Ended December 31, 1999 35 2. Computation of the Ratio of Earnings to Fixed Charges for Monsanto Company and Subsidiaries (b) Reports on Form 8-K during the quarter ended December 31, 1999: The following reports on Form 8-K were filed by the Company on the dates indicated: December 21, 1999 (announcement of merger with Pharmacia & Upjohn, Inc.); December 22, 1999 (additional financial information regarding the merger); December 29, 1999 (merger agreement and stock option agreements); and December 30, 1999 (preferred share purchase rights). 36 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. MONSANTO COMPANY ------------------------------------ (Registrant) By: /s/ Richard B. Clark --------------------------------- Richard B. Clark Vice President and Controller (Principal Accounting Officer) Date: March 17, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, the Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- Chairman March 17, 2000 ----------------------- President and Director (Robert B. Shapiro) (Principal Executive Officer) Vice Chairman, Chief March 17, 2000 ----------------------- Administrative Officer, (Richard U. De Schutter and Director Director March 17, 2000 ----------------------- (Michael Kantor) Director March 17, 2000 ----------------------- (Gwendolyn S. King) Director March 17, 2000 ----------------------- (Philip Leder) Director March 17, 2000 ----------------------- (Jacobus F. M. Peters) Director March 17, 2000 ----------------------- (John S. Reed) Director March 17, 2000 ----------------------- (John E. Robson) Director March 17, 2000 ----------------------- (William D. Ruckelshaus) 37 President, Chief Operating March 17, 2000 ----------------------- Officer and Director (Hendrik A. Verfaillie) Senior Vice President, March 17, 2000 ----------------------- Chief Financial Officer (Gary L. Crittenden) (Principal Financial Officer) /s/ Richard B. Clark Vice President and March 17, 2000 ------------------------ Controller (Principal (Richard B. Clark) Accounting Officer) Sonya M. Davis by signing his/her name hereto, does sign this document on behalf of the above noted individuals, pursuant to powers of attorney duly executed by such individuals which have been filed as an Exhibit to this Report.
/s/ Sonya M. Davis -------------------------- Sonya M. Davis Attorney-in-Fact 38 EXHIBIT INDEX These Exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K. EXHIBIT NO. DESCRIPTION - ----------- ----------- 2 1. Agreement and Plan of Merger, dated as of December 19, 1999, as amended by Amendment No. 1 dated as of February 18, 2000, among Monsanto Company, MP Sub, Incorporated and Pharmacia & Upjohn, Inc. (incorporated herein by reference to Exhibit 2.1 of the Company's Form S-4 filed on February 22, 2000, File No. 333-30824) 2. Stock Option Agreement, dated as of December 19, 1999, by and between Monsanto Company, as Issuer, and Pharmacia & Upjohn, Inc., as Grantee (incorporated herein by reference to Exhibit 2.2 of the Company's Form S-4 filed on February 22, 2000, File No. 333-30824) 3. Stock Option Agreement, dated as of December 19, 1999, by and between Pharmacia & Upjohn, Inc. and Monsanto Company, as Grantee (incorporated herein by reference to Exhibit 2.3 of the Company's Form S-4 filed on February 22, 2000, File No. 333-30824) 3 1. Restated Certificate of Incorporation of the Company as of October 28, 1997 (incorporated herein by reference to Exhibit 3(i) of the Company's Form 10-Q for the quarter ended September 30, 1997) 2. By-Laws of the Company, as amended effective February 10, 2000 4 1. Form of Rights Agreement, dated as of December 19, 1999 between the Company and EquiServe Trust Company N.A., First Chicago Trust Company as successor to The First National Bank of Boston (incorporated herein by reference to Form 8-A filed on December 30, 1999) 2. Master Unit Agreement, dated as of November 30, 1998, by and between the Company and The First National Bank of Chicago, as Unit Agent (incorporated herein by reference to Exhibit 4.2 of the Company's Form 8-K filed on December 14, 1998) 3. Call Option Agreement, dated as of November 30, 1998, by and between Goldman, Sachs & Co., as Call Option Holder, and The First National Bank of Chicago, as Unit Agent and as Attorney-In- Fact (incorporated herein by reference to Exhibit 4.3 of the Company's Form 8-K filed on December 14, 1998) 39 4. Pledge Agreement, dated as of November 30, 1998, by and among the Company, Goldman, Sachs & Co., as Call Option Holder, First Union National Bank, as Collateral Agent and Securities Intermediary, and The First National Bank of Chicago, as Unit Agent and as Attorney-In-Fact (incorporated herein by reference to Exhibit 4.4 of the Company's Form 8-K filed on December 14, 1998) 5. Registrant agrees to furnish to the Securities and Exchange Commission upon request copies of instruments defining the rights of holders of certain long-term debt not being registered of the registrant and all subsidiaries for which consolidated or unconsolidated financial statements are required to be filed. 9 Omitted--Inapplicable 10 1. Distribution Agreement by and between Monsanto Company and Solutia Inc., as of September 1, 1997, plus identification of contents of omitted schedules and exhibits and agreement to furnish supplementally a copy of any omitted schedule or exhibit to the Securities and Exchange Commission upon request (incorporated herein by reference to Exhibit 2.1 of the Company's Form 8-K filed September 16, 1997) 2. Employee Benefits and Compensation Allocation Agreement between Monsanto Company and Solutia Inc., dated as of September 1, 1997 (incorporated herein by reference to Exhibit 99.1 of the Company's Form 8-K filed September 16, 1997) 3. Tax Sharing and Indemnification Agreement dated as of September 1, 1997, by and between Monsanto Company and Solutia Inc. (incorporated herein by reference to Exhibit 99.2 of the Company's Form 8-K filed September 16, 1997) 4. Monsanto Company Non-Employee Director Deferred Compensation Plan, as amended February 25, 2000 5. Monsanto Company Non-Employee Director Equity Incentive Compensation Plan (incorporated herein by reference to Exhibit 10.4 of the Company's Form 10-Q for the quarter ended September 30, 1997) 6. Non-Employee Directors Stock Plan, as amended in 1991 (incorporated herein by reference to Exhibit 19(ii)1 of the Company's Form 10-Q for the quarter ended June 30, 1991) 7. Amendment to Non-Employee Directors Stock Plan (incorporated herein by reference to Exhibit 10.8 of the Company's Form 10-Q for the quarter ended June 30, 1997) 40 8. Charitable Contribution Program effective April 1, 1992 (incorporated herein by reference to Exhibit 19(i)1 of the Company's Form 10-K for the year ended December 31, 1991) 9. Deferred Compensation Plan for Non-Employee Directors, as amended in 1983 and 1991 (incorporated herein by reference to Exhibit 19(ii)1 of the Company's Form 10-K for the year ended December 31, 1991) 10. Excerpt of Resolutions of Monsanto Company Board of Directors Regarding Directors' Compensation, adopted by Unanimous Consent effective August 4, 1997 (incorporated herein by reference to Exhibit 10.5 of the Company's Form 10-Q for the quarter ended September 30, 1997) 11. Monsanto Management Incentive Plan of 1988/I, as amended in 1988, 1989, 1991, 1992, April 1997, July 1997, and 1999 (incorporated herein by reference to Exhibit 10.2 of the Company's Form 10-Q for the quarter ended September 30, 1999) 12. Monsanto Management Incentive Plan of 1988/II, as amended in 1989, 1991, 1992, April 1997, July 1997, and 1999 (incorporated herein by reference to Exhibit 10.3 of the Company's Form 10-Q for the quarter ended September 30, 1999) 13. Monsanto Management Incentive Plan of 1994, as amended in April 1997, July 1997, and 1999 (incorporated herein by reference to Exhibit 10.4 of the Company's Form 10-Q for the quarter ended September 30, 1999) 14. Monsanto Management Incentive Plan of 1996 as amended April 25, 1997, July 25, 1997, August 18, 1997, February 26, 1998, September 25, 1998, April 23, 1999, and October 22, 1999, and as Adjusted to Reflect Stock Split as of May 15, 1996 and Spinoff as of September 1, 1997 (incorporated herein by reference to Exhibit 10.1 of the Company's Form 10-Q for the quarter ended September 30, 1999) 15. Monsanto Executive Stock Purchase Incentive Plan (incorporated herein by reference to Appendix B of the Monsanto Company Notice of Annual Meeting and Proxy Statement dated March 14, 1996) 41 16. Form of Non-Qualified Purchased and Year 2000 Premium Stock Option Certificate (incorporated herein by reference to Exhibit 10 of the Company's Form 10-Q for the quarter ended March 31, 1999) 17. Form of Non-Qualified Premium Stock Option Certificate (incorporated herein by reference to Exhibit 10.2 of the Company's Form 10-Q for the quarter ended June 30, 1998) 18. Form of Monsanto Company 1999 Non-Qualified Premium Stock Option Certificate (incorporated herein by reference to Exhibit 10.5 of the Company's Form 10-Q for the quarter ended September 30, 1999) 19. Annual Incentive Program for Executive Officers (incorporated herein by reference to the description on pages 25-26 of the Monsanto Company Notice of Annual Meeting and Proxy Statement dated March 15, 1999) 20. Split-dollar Life Insurance Plan (incorporated herein by reference to Exhibit 10(iii)19 of the Company's Form 10-K for the year ended December 31, 1987) 21. Form of Employment Agreement for Executive Officers (incorporated herein by reference to Exhibit 10.7 of the Company's Form 10-Q for the quarter ended September 30, 1997) 22. 1999 Form of Employment Agreement for Executive Officers (incorporated herein by reference to Exhibit 10.24 of the Company's Form 10-K/A filed January 21, 2000) 23. Letter Agreement between the Company and Robert B. Shapiro entered into as of July 23, 1990 (incorporated herein by reference to Exhibit 19(i)3 of the Company's Form 10-Q for the quarter ended September 30, 1990) 24. Amendment to Letter Agreement between the Company and Robert B. Shapiro entered into as of July 23, 1990 (incorporated herein by reference to Exhibit 10.23 of the Company's Form 10-K for the year ended December 31, 1996) 25. Agreement between Monsanto Company and Robert B. Shapiro dated as of December 19, 1999 (incorporated herein by reference to Exhibit 10.1 of the Company's Form S-4 filed February 22, 2000, File No. 333-30824) 26. Letter Agreement between the Company and Hendrik A. Verfaillie entered into as of June 27, 1988 (incorporated herein by reference to Exhibit 10.20 of the Company's Form 10-K for the year ended December 31, 1996) 27. Supplemental Retirement Plan regarding Richard U. De Schutter (incorporated herein by reference to Exhibit 10.26 of the Company's Form 10-K for the year ended December 31, 1996) 42 28. Letter Agreement between the Company and Richard U. De Schutter, dated February 7, 1997 (incorporated herein by reference to Exhibit 10.2 of the Company's Form 10-Q for the quarter ended June 30, 1999) 29. Supplemental Retirement Plan and Amendment to Supplemental Retirement Plan for Philip Needleman 30. G. D. Searle & Co. Split Dollar Life Insurance Plan, as amended in 1989 (incorporated herein by reference to Exhibit 19(ii)3 of the Company's Form 10-Q for the quarter ended June 30, 1989) 11 Omitted--Inapplicable; see "Note 18: Earnings per Share" on page 49 of Exhibit 99.1 to this Report 12 Statement re Computation of the Ratio of Earnings to Fixed Charges - See Exhibit 99.2 below 13 Omitted - Inapplicable 18 Omitted--Inapplicable 21 Subsidiaries of the registrant 22 Omitted--Inapplicable 23 Consent of Independent Auditors 24 1. Powers of attorney submitted by Richard U. De Schutter, Michael Kantor, Gwendolyn S. King, Philip Leder, Jacobus F.M. Peters, John S. Reed, John E. Robson, William D. Ruckelshaus, Robert B. Shapiro Hendrik A. Verfaillie, Gary L. Crittenden and Richard B. Clark 2. Certified copy of Board resolution authorizing Form 10-K filing utilizing powers of attorney 27 Financial Data Schedule (part of electronic submission only) 99 1. Financial Information for Fiscal Year Ended December 31, 1999 2. Computation of the Ratio of Earnings to Fixed Charges for Monsanto Company and Subsidiaries [FN] - ------------- Only Exhibits Nos. 21, 23, 99.1 and 99.2 have been included in the printed copy of this Report. 43 APPENDIX 1. Throughout the electronic submission, trademarks are designated on each page by the letter "R" in parentheses or the letters "TM" in parentheses. In the printed copy of the Form 10-K, trademarks are indicated by the "R" registered symbol or the "TM" symbol. EX-3.2 2 BY-LAWS OF THE COMPANY EXHIBIT 3.2 MONSANTO COMPANY BY-LAWS As adopted February 10, 2000 OFFICES ------- 1. Registered The name of the registered agent of the Company is The Corporation Trust Company and the registered office of the Company shall be located in the City of Wilmington, County of New Castle, State of Delaware. 2. Other The Company shall have its General Offices in the County of St. Louis, State of Missouri, and may also have offices at such other places both within or without the State of Delaware as the Board of Directors may from time to time designate or the business of the Company may require. STOCKHOLDERS' MEETINGS ---------------------- 3. Annual Meeting An annual meeting of stockholders shall be held on such day and at such time as may be designated by the Board of Directors for the purpose of electing Directors and for the transaction of such other business as properly may come before such meeting. Any previously scheduled annual meeting of the stockholders may be postponed by resolution of the Board of Directors upon public notice given on or prior to the date previously scheduled for such annual meeting of stockholders. 4. Business to be Conducted at Annual Meeting (a) At an annual meeting of stockholders, only such business shall be conducted as shall have been brought before the meeting (i) pursuant to the Company's notice of the meeting, (ii) by or at the direction of the Board of Directors or (iii) by any stockholder of the Company who is a stockholder of record at the time of giving of the notice provided for in this By-Law, who shall be entitled to vote at such meeting and who shall have complied with the notice procedures set forth in this By-Law. (b) For business to be properly brought before an annual meeting by a stockholder pursuant to Section (a)(iii) of this By-Law, notice in writing must be delivered or mailed to the Secretary and received at the General Offices of the Company, not less than 90 days nor more than 120 days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date, notice by the stockholder must be received not earlier than the 120th day prior to such annual meeting and not later than the close of business on the later of the 90th day prior to such annual meeting or the tenth day following the day on which public announcement of the date of the annual meeting is first made. Such stockholder's notice shall set forth as to each matter the stockholder proposes to bring before the annual meeting (i) a brief description of the business to be brought before the annual meeting and the reasons for conducting such business at such meeting; (ii) the name and address, as they appear on the Company's books, of the stockholder proposing such business, and the name and address of the beneficial owner, if any, on whose behalf the proposal is made; (iii) the class and number of shares of the Company's stock which are beneficially owned by the stockholder, and by the beneficial owner, if any, on whose behalf the proposal is made; and (iv) any material interest of the stockholder, and of the beneficial owner, if any, on whose behalf the proposal is made, in such business. For purposes of these By-Laws, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable news service or in a document publicly filed by the Company with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(b) of the Securities Exchange Act of 1934, as amended. (c) Notwithstanding anything in these By-Laws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this By-Law. The chairman of the meeting may, if the facts warrant, determine that the business was not properly brought before the meeting in accordance with the provisions of this By-Law; and if the chairman should so determine, the chairman shall so declare to the meeting, and any such business not properly brought before the meeting shall not be transacted. Notwithstanding the foregoing provisions of this By-Law, a stockholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, (the "Exchange Act") and the rules and regulations thereunder with respect to the matters set forth in this By-Law. Nothing in this By-Law shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Company's proxy statement pursuant to Rule 14a-8 under the Exchange Act. The provision of this Section 4 shall also govern what constitutes timely notice for purposes of Rule 14a-4(c) of the Exchange Act. 5. Special Meetings Special meetings of stockholders, unless otherwise provided by the law of Delaware, may be called by the Chairman of the Board or the President, or pursuant to resolution of the Board of Directors, and such person calling the meeting shall have 2 the sole right to determine the proper purpose or purposes of such meeting. Business transacted at a special meeting of stockholders shall be confined to the purpose or purposes of the meeting as stated in the notice of such meeting. Any previously scheduled special meeting of the stockholders may be postponed by resolution of the Board of Directors upon notice by public announcement given on or prior to the date previously scheduled for such special meeting of stockholders. 6. Place of Meetings All meetings of stockholders shall be held at the General Offices of the Company in the County of St. Louis, State of Missouri, unless otherwise determined by resolution of the Board of Directors. 7. Notice of Meetings Except as otherwise required by the law of Delaware, notice of each meeting of the stockholders, whether annual or special, shall, at least ten days but not more than sixty days before the date of the meeting, be given to each stockholder of record entitled to vote at the meeting by mailing such notice in the United States mail, postage prepaid, addressed to such stockholder at such stockholder's address as the same appears on the records of the Company. Such notice shall state the place, date and hour of the meeting, and in the case of a special meeting, shall also state the purpose or purposes thereof. 8. Nominations of Directors (a) Only persons who are nominated in accordance with the procedures set forth in these By-Laws shall be eligible for election as Directors. Nominations of persons for election to the Board of Directors may be made at a meeting of stockholders (i) by or at the direction of the Board of Directors or (ii) by any stockholder of the Company who is a stockholder of record at the time of giving of the notice provided for in this By-Law, who shall be entitled to vote for the election of Directors at the meeting and who complies with the notice procedures set forth in this By-Law. (b) Nominations by stockholders shall be made pursuant to notice in writing, delivered or mailed to the Secretary and received at the General Offices of the Company (i) in the case of an annual meeting, not less than 60 days nor more than 90 days prior to the first anniversary of the preceding year's annual meeting, provided, however, that in the event that the date of the meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date, notice by the stockholder must be received not earlier than the 90th day prior to such annual meeting and not later than the close of business on the later of the 60th day prior to such annual meeting or the tenth day following the day on which public announcement of the date of the meeting is first made; or (ii) in the case of a special 3 meeting at which directors are to be elected, not earlier than the 90th day prior to such special meeting and not later than the close of business on the later of the 60th day prior to such special meeting or the tenth day following the day on which public announcement of the date of the meeting and of the nominees proposed by the Board of Directors to be elected at such meeting is first made. In the case of a special meeting of stockholders at which Directors are to be elected, stockholders may nominate a person or persons (as the case may be) for election only to such position(s) as are specified in the Company's notice of meeting as being up for election at such meeting. Such stockholder's notice shall set forth (i) as to each person whom the stockholder proposes to nominate for election or reelection as a Director, all information relating to such person that would be required to be disclosed in solicitations of proxies for election of Directors, or is otherwise required, in each case pursuant to Regulation 14A under the Exchange Act (including such person's written consent to being named as a nominee and to serving as a Director if elected); (ii) as to the stockholder giving the notice, the name and address, as they appear on the Company's books, of such stockholder and the class and number of shares of the Company's stock which are beneficially owned by such stockholder; and (iii) as to any beneficial owner on whose behalf the nomination is made, the name and address of such person and the class and number of shares of the Company's stock which are beneficially owned by such person. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a Director shall furnish to the Secretary that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. Notwithstanding anything in this By-Law to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Company is increased and there is no public statement naming all the nominees for Director or specifying the size of the increased Board of Directors made by the Company at least 70 days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this By-Law shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the General Offices of the Company not later than the close of business on the 10th day following the day on which such public announcement is first made by the Company. (c) No person shall be eligible for election as a Director of the Company unless nominated in accordance with the procedures set forth in these By-Laws. The chairman of the meeting may, if the facts warrant, determine that a nomination was not made in accordance with the procedures prescribed in this By-Law; and if the chairman should so determine, the chairman shall so declare to the meeting, and the defective nomination shall be disregarded. Notwithstanding the foregoing provisions of this By-Law, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this By- Law. 4 9. List of Stockholders (a) The Secretary of the Company shall prepare, at least ten days before each meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. (b) The stock ledger of the Company shall be the only evidence as to the identity of the stockholders entitled (i) to vote in person or by proxy at any meeting of stockholders, or (ii) to exercise the rights in accordance with Delaware law to examine the stock ledger, the list required by this By-Law or the books and records of the Company. 10. Quorum The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum for the transaction of any business at all meetings of the stockholders, except as otherwise provided by the law of Delaware, by the Certificate of Incorporation or by these By-Laws. The stockholders present at any duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of sufficient stockholders to render the remaining stockholders less than a quorum. Whether or not a quorum is present, either the Chairman of the meeting or a majority of the stockholders entitled to vote thereat, present in person or by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. At such adjourned meeting at which the requisite amount of voting stock shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally noticed. 11. Voting and Required Vote Subject to the provisions of the Certificate of Incorporation, each stockholder shall, at every meeting of stockholders, be entitled to one vote for each share of capital stock held by such stockholder. Subject to the provisions of the Certificate of Incorporation and Delaware law, Directors shall be chosen by the vote of a plurality of 5 the shares present in person or represented by proxy at the meeting; and all other questions shall be determined by the affirmative vote of the majority of shares present in person or represented by proxy at the meeting. In all matters, votes cast in any method adopted by the Company shall be valid so long as such method is permitted under Delaware law. 12. Proxies Each stockholder entitled to vote at a meeting of stockholders may authorize another person or persons to act for such stockholder by proxy, in any manner permitted by law. No proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. 13. Inspectors of Election; Polls Before each meeting of stockholders, the Chairman of the Board or another officer of the Company designated by resolution of the Board of Directors shall appoint one or more inspectors of election for the meeting and may appoint one or more inspectors to replace any inspector unable to act. If any of the inspectors appointed shall fail to attend, or refuse or be unable to serve, substitutes shall be appointed by the Chairman of the meeting. Each inspector shall have such duties as are provided by law, and shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of such person's ability. The Chairman of the meeting shall fix and announce at the meeting the date and time of the opening and closing of the polls for each matter upon which the stockholders will vote at the meeting. 14. Organization The Chairman of the Board of Directors, or in the Chairman's absence, (i) the President, if a member of the Board of Directors, (ii) one of the Vice Chairmen of the Board who is a member of the Board of Directors, if any, in such order as may be designated by the Chairman of the Board, in that order, or (iii) in the absence of each of them, a chairman chosen by a majority of the Directors present, shall act as chairman of the meetings of the stockholders. The order of business and the procedure at any meeting of stockholders shall be determined by the chairman of the meeting. 15. No Stockholder Action by Written Consent Any action required or permitted to be taken by the stockholders of the Company must be effected at a duly called annual or special meeting of stockholders of the Company and may not be effected by any consent in writing in lieu of a meeting of such stockholders. 6 BOARD OF DIRECTORS ------------------ 16. General Powers, Number, Term of Office The business of the Company shall be managed under the direction of its Board of Directors. Subject to the rights of the holders of any series of preferred stock, without par value, of the Company ("Preferred Stock") to elect additional directors under specified circumstances, the number of directors of the Company which shall constitute the whole Board shall be not less than five nor more than 20. The exact number of directors within the minimum and maximum limitation specified in the preceding sentence shall be fixed from time to time exclusively by resolution of a majority of the whole Board. The Directors, other than those who may be elected by the holders of any series of Preferred Stock, shall be divided into three classes, as nearly equal in number as possible. One class of directors shall have a term expiring at the annual meeting of stockholders to be held in 1998, another class shall have a term expiring at the annual meeting of stockholders to be held in 1999, and another class shall have a term expiring at the annual meeting of stockholders to be held in 2000. Members of each class shall hold office until their successors are elected and qualified. At each annual meeting of the stockholders of the Company commencing with the 1998 annual meeting, (1) directors elected to succeed those directors whose terms then expire shall be elected to hold office for a term expiring at the third succeeding annual meeting of stockholders after their election, with each director to hold office until his or her successor shall have been duly elected and qualified, and (2) only if authorized by a resolution of the Board of Directors, directors may be elected to fill any vacancy on the Board of Directors, regardless of how such vacancy shall have been created. Directors need not be stockholders of the Company or residents of the State of Delaware. 17. Vacancies Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, and unless the Board of Directors otherwise determines, vacancies resulting from death, resignation, retirement, disqualification, removal from office or other cause, and newly created directorships resulting from any increase in the authorized number of directors, may be filled only by the affirmative vote of a majority of the remaining directors, though less than a quorum of the Board of Directors, or by a sole remaining director, and directors so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of office of the class to which they have been elected expires and until such director's successor shall have been duly elected and qualified. No decrease in the number of authorized directors constituting the Board of Directors shall shorten the term of any incumbent director. 7 18. Regular Meetings Following the annual meeting of stockholders, the first meeting of each newly elected Board of Directors may be held, without notice, on the same day and at the same place as such stockholders' meeting. The Board of Directors by resolution may provide for the holding of regular meetings and may fix the times and places at which such meetings shall be held. Notice of regular meetings shall not be required provided that whenever the time or place of regular meetings shall be fixed or changed, notice of such action shall be given promptly to each director, as provided in Section 19 below, who was not present at the meeting at which such action was taken. 19. Special Meetings Special meetings of the Board of Directors shall be held whenever called by the Chairman of the Board of Directors or the President, or in the absence of each of them, by any Vice Chairman of the Board, in such order as may be designated by the Chairman of the Board, or by the Secretary at the written request of a majority of the Directors. 20. Notices Notice of any special meeting of the Board of Directors shall be addressed to each Director at such Director's residence or business address and shall be sent to such Director by mail, electronic mail, telecopier, telegram or telex or telephoned or delivered to such Director personally. If such notice is sent by mail, it shall be sent not later than three days before the day on which the meeting is to be held. If such notice is sent by electronic mail, telecopier, telegram or telex, it shall be sent not later than 12 hours before the time at which the meeting is to be held. If such notice is telephoned or delivered personally, it shall be received not later than 12 hours before the time at which the meeting is to be held. Such notice shall state the time, place and purpose or purposes of the meeting. 21. Quorum One-third of the total number of Directors constituting the whole Board, but not less than two, shall constitute a quorum for the transaction of business at any meeting of the Board of Directors, but if less than such required number of Directors for a quorum is present at a meeting, a majority of the Directors present may adjourn the meeting from time to time without further notice. Except as otherwise specifically provided by the law of Delaware, the Certificate of Incorporation or these By-Laws, the act of a majority of the Directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. 8 22. Organization At each meeting of the Board of Directors, the Chairman of the Board or, in the Chairman's absence, (i) the President, if a member of the Board of Directors, (ii) one of the Vice Chairmen of the Board who is a member of the Board of Directors, if any, in such order as may be designated by the Chairman of the Board, in that order, or (iii) in the absence of each of them, a chairman chosen by a majority of the Directors present, shall act as chairman of the meeting, and the Secretary or, in the Secretary's absence, an Assistant Secretary or any employee of the Company appointed by the chairman of the meeting, shall act as secretary of the meeting. 23. Resignations Any Director may resign at any time by giving written notice to the Chairman of the Board, the President or the Secretary of the Company. Such resignation shall take effect upon receipt thereof or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. 24. Removal Subject to the rights of the holders of any series of Preferred Stock to elect additional directors under specified circumstances, any director may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of at least 80 percent of the voting power of the then outstanding Voting Stock, voting together as a single class. For purposes of these By-Laws, "Voting Stock" shall mean the outstanding shares of capital stock of the Company entitled to vote generally in the election of directors. 25. Action Without a Meeting Unless otherwise restricted by the Certificate of Incorporation or these By-Laws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. 26. Location of Books Except as otherwise provided by resolution of the Board of Directors and subject to the law of Delaware, the books of the Company may be kept at the General Offices of the Company and at such other places as may be necessary or convenient for the business of the Company. 9 27. Dividends Subject to the provisions of the Certificate of Incorporation and the law of Delaware, dividends upon the capital stock of the Company may be declared by the Board of Directors at any regular or special meeting. Dividends may be paid in cash, in property, or in shares of the Company's capital stock. 28. Compensation of Directors Directors shall receive such compensation and benefits as may be determined by resolution of the Board for their services as members of the Board and committees. Directors shall also be reimbursed for their expenses of attending Board and committee meetings. Nothing contained herein shall preclude any Director from serving the Company in any other capacity and receiving compensation therefor. 29. Additional Powers In addition to the powers and authorities by these By-Laws expressly conferred upon it, the Board of Directors may exercise all such powers of the Company and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these By- Laws directed or required to be exercised or done by the stockholders. COMMITTEES OF DIRECTORS ----------------------- 30. Designation, Power, Alternate Members The Board of Directors may, by resolution or resolutions passed by a majority of the whole Board, designate an Executive Committee and one or more additional committees, each committee to consist of two or more of the Directors of the Company. Any such committee, to the extent provided in said resolution or resolutions and subject to any limitations provided by law, shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the Company. The Board of Directors may designate one or more Directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. If at a meeting of any committee one or more of the members thereof is absent or disqualified, and if either the Board of Directors has not so designated any alternate member or members, or the number of absent or disqualified members exceeds the number of alternate members who are present at such meeting, then the member or members of such committee (including alternates) present at any meeting and not disqualified from voting, whether or not they constitute a quorum, may unanimously appoint another Director to act at the meeting in the place of such absent or disqualified member. The term of office of the members of each committee shall be as fixed from time to time by the Board; 10 provided, however, that any committee member who ceases to be a member of the Board shall automatically cease to be a committee member. 31. Quorum, Manner of Acting At any meeting of a committee, the presence of one-third, but not less than two, of its members then in office shall constitute a quorum for the transaction of business; and the act of a majority of the members present at a meeting at which a quorum is present shall be the act of the committee; provided that in the event that any member or members of the committee is or are in any way interested in or connected with any other party to a contract or transaction being approved at such meeting, or are themselves parties to such contract or transaction, the act of a majority of the members present who are not so interested or connected, or are not such parties, shall be the act of the committee. Each committee may provide for the holding of regular meetings, make provision for the calling of special meetings and, except as otherwise provided in these By-Laws or by resolution of the Board of Directors, make rules for the conduct of its business. 32. Minutes The committees shall keep minutes of their proceedings and report the same to the Board of Directors when required; but failure to keep such minutes shall not affect the validity of any acts of the committee or committees. ADVISORY DIRECTORS ------------------ 33. Advisory Directors The Board of Directors may, by resolution adopted by a majority of the whole Board, appoint such number of senior executives of the Company as Advisory Directors as the Board may from time to time determine. The Advisory Directors shall have such advisory responsibilities as the Chairman of the Board may designate and the term of office of such Advisory Directors shall be as fixed by the Board. OFFICERS -------- 34. Designation The officers of the Company shall be a Chairman of the Board, and a President, one of whom shall be designated by the Board of Directors as the Chief Executive Officer, one or more Vice Presidents, a Secretary, a Treasurer and a Controller. The Board of Directors may also elect one or more Vice Chairmen of the Board, one or more Vice Chairmen of the Company, one or more Executive Vice Presidents, Senior Vice Presidents, Group Vice Presidents, a Chief Financial Officer, Deputy and Assistant Secretaries, Deputy and Assistant Treasurers, 11 Deputy and Assistant Controllers and such other officers as it shall deem necessary. Any number of offices may be held by the same person. The Chairman of the Board of Directors shall be chosen from among the Directors. 35. Election and Term At least annually, the Board of Directors of the Company shall elect the officers of the Company and at any time thereafter the Board may elect additional officers of the Company and each such officer shall hold office until the officer's successor is elected and qualified or until the officer's earlier death, resignation, termination of employment or removal. 36. Removal Any officer shall be subject to removal or suspension at any time, for or without cause, by the affirmative vote of a majority of the whole Board of Directors. 37. Resignations Any officer may resign at any time by giving written notice to the Chairman of the Board, the President or to the Secretary. Such resignation shall take effect upon receipt thereof or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. 38. Vacancies A vacancy in any office because of death, resignation, removal or any other cause may be filled for the unexpired portion of the term by the Board of Directors. 39. Compensation The People Committee of the Board of Directors shall fix the salaries of all employees of the Company who are subject to the reporting requirements of Section 16(a) of the Securities Exchange Act of 1934 or any successor statute, rule or provision, and other members of executive management designated by such committee. 40. Chairman of the Board The Chairman of the Board shall preside at all meetings of the stockholders and of the Board of Directors, except as may be otherwise required under the law of Delaware. The Chairman shall act in an advisory capacity with respect to matters of policy and other matters of importance pertaining to the affairs of the Company. The Chairman, alone or with the President, one or more of the Vice Chairmen of the 12 Board, and/or the Secretary shall sign and send out reports and other messages which are to be sent to stockholders from time to time. The Chairman shall also perform such other duties as may be assigned to the Chairman by these By-Laws, the Board of Directors or, if applicable, the Chief Executive Officer. 41. President The President, if a member of the Board of Directors, shall, in the absence of the Chairman of the Board, preside at all meetings of the stockholders and of the Board of Directors. The President shall perform such other duties as may be assigned to the President by these By-Laws, the Board of Directors or, if applicable, the Chief Executive Officer. 42. Chief Executive Officer The Chief Executive Officer shall have the general and active management and supervision of the business of the Company. The Chief Executive Officer shall see that all orders and resolutions of the Board of Directors are carried into effect. The Chief Executive Officer shall also perform such other duties as may be assigned to the Chief Executive Officer by these By-Laws or the Board of Directors. The Chief Executive Officer shall designate who shall perform the duties of the Chief Executive Officer in the Chief Executive Officer's absence. 43. Vice Chairmen of the Board; Vice Chairmen The Vice Chairmen of the Board, if a member of the Board of Directors, shall, in the absence of the Chairman of the Board and the President, and in such order as may be designated by the Chairman of the Board, preside at all meetings of the stockholders and of the Board of Directors. The Vice Chairmen of the Board and the Vice Chairmen shall perform such other duties as may be assigned to them by these By-Laws, the Board of Directors or the Chief Executive Officer. 44. Executive, Senior, Group and other Vice Presidents Each Executive Vice President, Senior Vice President, Group Vice President and each other Vice President shall perform the duties and functions and exercise the powers assigned to such officer by the Board of Directors or the Chief Executive Officer. 45. Chief Financial Officer The Chief Financial Officer (if any) shall act in an executive financial capacity. The Chief Financial Officer shall assist the Chairman of the Board and the President in the general supervision of the Company's financial policies and affairs. 13 46. Secretary The Secretary shall attend all meetings of the Board of Directors and of the stockholders and record all votes and the minutes of all proceedings in a book to be kept for that purpose. The Secretary shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors and, when appropriate, shall cause the corporate seal to be affixed to any instruments executed on behalf of the Company. The Secretary shall also perform all duties incident to the office of Secretary and such other duties as may be assigned to the Secretary by these By-Laws, the Board of Directors, the Chairman of the Board or the Chief Executive Officer. 47. Assistant Secretaries The Assistant Secretaries shall, during the absence of the Secretary, perform the duties and functions and exercise the powers of the Secretary. Each Assistant Secretary shall perform such other duties as may be assigned to such Assistant Secretary by the Board of Directors, the Chairman of the Board, the Chief Executive Officer or the Secretary. 48. Treasurer The Treasurer shall have the custody of the funds and securities of the Company and shall deposit them in the name and to the credit of the Company in such depositories as may be designated by the Board of Directors or by any officer or officers authorized by the Board of Directors to designate such depositories; disburse funds of the Company when properly authorized by vouchers prepared and approved by the Controller; and invest funds of the Company when authorized by the Board of Directors or a committee thereof. The Treasurer shall render to the Board of Directors, the Chief Executive Officer, the Senior Vice President-Finance or the Vice President-Finance, whenever requested, an account of all transactions as Treasurer and shall also perform all duties incident to the office of Treasurer and such other duties as may be assigned to the Treasurer by these By-Laws, the Board of Directors, the Chief Executive Officer, the Senior Vice President-Finance or the Vice President-Finance. 49. Assistant Treasurers The Assistant Treasurers shall, during the absence of the Treasurer, perform the duties and functions and exercise the powers of the Treasurer. Each Assistant Treasurer shall perform such other duties as may be assigned to the Assistant Treasurer by the Board of Directors, the Chief Executive Officer, the Senior Vice President-Finance, the Vice President-Finance or the Treasurer. 14 50. Controller The Controller shall serve as the principal accounting officer of the Company and shall keep full and accurate account of receipts and disbursements in books of the Company and render to the Board of Directors, the Chief Executive Officer, the Senior Vice President- Finance or the Vice President-Finance, whenever requested, an account of all transactions as Controller and of the financial condition of the Company. The Controller shall also perform all duties incident to the office of Controller and such other duties as may be assigned to the Controller by these By-Laws, the Board of Directors, the Chief Executive Officer, the Senior Vice President-Finance or the Vice President- Finance. 51. Assistant Controllers The Assistant Controllers shall, during the absence of the Controller, perform the duties and functions and exercise the powers of the Controller. Each Assistant Controller shall perform such other duties as may be assigned to such officer by the Board of Directors, the Chief Executive Officer, the Senior Vice President-Finance, the Vice President-Finance or the Controller. COMPANY CHECKS, DRAFTS AND PROXIES ---------------------------------- 52. Checks, Drafts All checks, drafts or other orders for the payment of money by the Company shall be signed by such person or persons as from time to time may be designated by the Board of Directors or by any officer or officers authorized by the Board of Directors to designate such signers; and the Board of Directors or such officer or officers may determine that the signature of any such authorized signer may be facsimile. 53. Proxies Except as otherwise provided by resolution of the Board of Directors, the Chairman of the Board, the President, any Vice Chairman of the Board, any Vice President, the Treasurer and any Assistant Treasurer, the Controller and any Assistant Controller, the Secretary and any Assistant Secretary of the Company, shall each have full power and authority, in behalf of the Company, to exercise any and all rights of the Company with respect to any meeting of stockholders of any corporation in which the Company holds stock, including the execution and delivery of proxies therefor, and to consent in writing to action by such corporation without a meeting. 15 CAPITAL STOCK ------------- 54. Stock Certificates Each holder of stock in the Company shall be entitled to have a certificate signed by, or in the name of the Company by, the Chairman of the Board, the President, any Vice Chairman of the Board, any Executive Vice President, any Senior Vice President, any Group Vice President or any other Vice President, and by the Secretary or any Assistant Secre- tary of the Company, certifying the number of shares owned by such holder in the Company. Any of or all the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Company with the same effect as if such person were such officer, transfer agent or registrar at the date of issue. 55. Record Ownership The Company shall be entitled to treat the person in whose name any share, right or option is registered as the owner thereof, for all purposes, and shall not be bound to recognize any equitable or other claim to or interest in such share, right or option on the part of any other person, whether or not the Company shall have notice thereof, except as otherwise provided by the law of Delaware. 56. Record Dates In order that the Company may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix a record date, which shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors and which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. 57. Transfer of Stock Transfers of shares of stock of the Company shall be made only on the books of the Company by the registered holder thereof, or by the registered holder's attorney thereunto authorized by power of attorney duly executed and filed with the Secretary or a transfer agent of the Company, and on surrender of the certificate or certificates for such shares properly endorsed and the payment of all taxes thereon. 16 58. Lost, Stolen or Destroyed Certificates The Board of Directors may authorize a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Company alleged to have been lost, stolen or destroyed, upon the making of an affidavit of the fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or the owner's legal representative, to give the Company a bond sufficient to indemnify it against any claim that may be made against the Company on account of the alleged loss, theft or destruction of such certificate or the issuance of such new certificate. 59. Terms of Preferred Stock The provisions of these By-Laws, including those pertaining to voting rights, election of Directors and calling of special meetings of stockholders, are subject to the terms, preferences, rights and privileges of any then outstanding class or series of Preferred Stock as set forth in the Certificate of Incorporation and in any resolutions of the Board of Directors providing for the issuance of such class or series of Preferred Stock; provided, however, that the provisions of any such Preferred Stock shall not affect or limit the authority of the Board of Directors to fix, from time to time, the number of Directors which shall constitute the whole Board as provided in Section 16 above, subject to the right of the holders of any class or series of Preferred Stock to elect additional Directors as and to the extent specifically provided by the provisions of such Preferred Stock. INDEMNIFICATION --------------- 60. Indemnification (a) The Company shall indemnify and hold harmless, to the fullest extent permitted by applicable law as it presently exists or may hereafter be amended, any person who was or is made or is threatened to be made a party or is otherwise involved in any claim, action, suit, or proceeding, whether civil, criminal, administrative or investigative (a "proceeding") by reason of the fact that the person, or a person for whom he or she is the legal representative, is or was a Director, officer, employee or agent of the Company or is or was serving at the request of the Company as a director, officer, employee, fiduciary or agent of another corporation or of a partnership, joint venture, trust, non-profit entity, or other enterprise, including service with respect to employee benefit plans, against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person. The right to indemnification conferred in this By-Law shall be a contract right. Except as provided in paragraph (c) of this By-Law with respect to proceedings 17 seeking to enforce rights to indemnification, the Company shall indemnify a person in connection with a proceeding initiated by such person or a claim made by such person against the Company only if such proceeding or claim was authorized by the Board of Directors of the Company. (b) The Company shall pay the expenses incurred in defending any proceeding in advance of its final disposition, provided, however, that if and to the extent required by law the payment of expenses incurred by any person covered hereunder in advance of the final disposition of the proceeding shall be made only upon receipt of an undertaking by or on behalf of the affected person to repay all amounts advanced if it should ultimately be determined that such person is not entitled to be indem- nified under this By-Law or otherwise. (c) If a claim for indemnification or payment of expenses under this By-Law is not paid in full within thirty days, or such other period as might be provided pursuant to contract, after a written claim therefor has been received by the Company, the claimant may file suit to recover the unpaid amount of such claim or may seek whatever other remedy might be provided pursuant to contract. In any such action the Company shall have the burden of proving that the claimant was not entitled to the requested indemnification or payment of expenses under applicable law. If successful in whole or in part, claimant shall be entitled to be paid the expense of prosecuting such claim. Neither the failure of the Company (including its Directors, independent legal counsel or stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because the claimant has met the applicable standard of conduct set forth in the General Corporation Law of the State of Delaware, nor an actual determination by the Company (including its Directors, independent legal counsel or stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. (d) Any determination regarding whether indemnification of any person is proper in the circumstances because such person has met the applicable standard of conduct set forth in the General Corporation Law of the State of Delaware shall be made by independent legal counsel selected by such person with the consent of the Company (which consent shall not unreasonably be withheld). (e) The rights conferred on any person by this By-Law shall not be exclusive of any other rights which such person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, these By-Laws, agreement, vote of stockholders or disinterested Directors or otherwise. (f) Any repeal or modification of the foregoing provisions of this By-Law 60 shall not adversely affect any right or protection hereunder of any person with respect to any act or omission occurring prior to or at the time of such repeal or modification. 18 MISCELLANEOUS ------------- 61. Corporate Seal The seal of the Company shall be circular in form, containing the words "Monsanto Company" and the word "Delaware" on the circumference surrounding the word "Seal". Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. 62. Fiscal Year The fiscal year of the Company shall begin on the first day of January in each year. 63. Auditors The Board of Directors shall select certified public accountants to audit the books of account and other appropriate corporate records of the Company annually and at such other times as the Board shall determine by resolution. 64. Waiver of Notice Whenever notice is required to be given pursuant to the law of Delaware, the Certificate of Incorporation or these By-Laws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting of stockholders or the Board of Directors or a committee thereof shall constitute a waiver of notice of such meeting, except when the stockholder or Director attends such meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders or the Board of Directors or committee thereof need be specified in any written waiver of notice unless so required by the Certificate of Incorporation or by these By-Laws. AMENDMENT TO BY-LAWS -------------------- 65. Amendments Notwithstanding any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any series of Preferred Stock of the Corporation required by law, the Certificate of Incorporation or any Preferred Stock designation, the affirmative vote of the holders of at least 80 percent of the voting power of all of the then-outstanding Voting Stock (as defined in the Certificate of Incorporation), voting together as a single class, shall be required 19 for the stockholders to amend or repeal the By-Laws or to adopt new By- Laws. The By-Laws may also be amended or repealed and new By-Laws may be adopted by the affirmative vote of a majority of the whole Board of Directors at any regular or special meeting of the Board of Directors. ---------------------------- EMERGENCY BY-LAWS ----------------- These Emergency By-Laws, notwithstanding any different provision in the Certificate of Incorporation or By-Laws, shall be operative during any emergency resulting from an attack on the United States or on a locality in which the Company conducts its business or customarily holds meetings of the Board of Directors or its stockholders, or during any nuclear or atomic disaster, or during the existence of any catastrophe, or other similar emergency condition, as a result of which a quorum of the Board of Directors or a committee thereof cannot be readily convened for action. These Emergency By-Laws shall cease to be operative upon termination of such emergency. During any such emergency: (a) A meeting of the Board of Directors or a committee thereof may be called by any officer or Director. Notice of the time and place of the meeting shall be given by the person calling the meeting to only such of the Directors as it may be feasible to reach at the time and by such means as may be feasible at the time. Such notice shall be given at such time in advance of the meeting as circumstances permit in the judgment of the person calling the meeting. (b) The officers or other persons designated on a list approved by the Board of Directors before the emergency, all in such order or priority and subject to such conditions and for such period of time (not longer than reasonably necessary after the termination of the emergency) as may be provided in the resolution approving the list, shall, to the extent required to constitute a quorum at any meeting of the Board of Directors during the emergency, be deemed Directors for such meeting. If at the time of the emergency the Board of Directors has not approved such a list of persons, then to the extent required to constitute a quorum at any meeting of the Board of Directors during the emergency, the officers of the Company who are present shall be deemed, in order of rank and within the same rank in order of seniority, Directors for such meeting. Two Directors (including persons deemed to be Directors) in attendance at the meeting shall constitute a quorum. (c) The Board of Directors, either before or during any such emergency, may provide, and from time to time modify, lines of succession in the event that during such an emergency any or all officers or agents of the Company shall for any reason be rendered incapable of discharging their duties. 20 (d) The Board of Directors, either before or during any such emergency, may, effective in the emergency, change the General Offices or designate several alternative General Offices or regional offices, or authorize an officer, or officers, so to do. No officer, Director or employee acting in accordance with these Emergency By-Laws shall be liable except for willful misconduct. These Emergency By-Laws shall be subject to repeal or change by further action of the Board of Directors or by action of the stockholders, but no such repeal or change shall modify the provisions of the next preceding paragraph with regard to action taken prior to the time of such repeal or change. Any amendment of these Emergency By-Laws may make any further or different provision that may be practical and necessary for the circumstances of the emergency. 21 EX-10.4 3 NON-EMPLOYEE DIRECTOR DEFERRED COMPENSATION PLAN EXHIBIT 10.4 THE MONSANTO COMPANY NON-EMPLOYEE DIRECTOR DEFERRED COMPENSATION PLAN (AS AMENDED FEBRUARY 25, 2000) 1. NAME OF PLAN. This plan shall be known as the "The Monsanto Company Non-Employee Director Deferred Compensation Plan" and is hereinafter referred to as the "Plan." 2. PURPOSES OF PLAN. The purposes of the Plan are to enable Monsanto Company, a Delaware corporation (the "Company"), to retain qualified persons to serve as Directors, and to replace the vested benefits of currently active Directors under the Monsanto Company Non- Employee Directors Retirement Plan (the "Retirement Plan") with interests in the equity of the Company or in a deferred cash account. 3. EFFECTIVE DATE AND TERM. The Plan shall be effective as of the date of the Chemicals Distribution (as defined in Section 4 below) (the "Effective Date"). The Plan shall remain in effect until terminated by action of the Board, or until all Participants have received all amounts to which they are entitled hereunder, if earlier. 4. DEFINITIONS. The following terms shall have the meanings set forth below: "Annual Meeting" means an annual meeting of the shareholders of the Company. "Beneficiary" has the meaning set forth in Section 7(d). "Cash Account" has the meaning set forth in Section 6(a). "Change of Control" means any of the following events: (a) The acquisition (other than from the Company) by any person, entity or "group", within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934 (the "Exchange Act") (a "Person"), of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that, for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this definition; or (b) Individuals who, as of the date hereof, constitute the Board of Directors (as of the date hereof the "Incumbent Board") cease for any reason to constitute at least a majority of the Board of Directors; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents -2- by or on behalf of a Person other than the Board; or (c) Approval by the stockholders of the Company of a reorganization, merger, consolidation, or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets or stock of another corporation (a "Business Combination"), or, if consummation of such Business Combination is subject, at the time of such approval by shareholders, to the consent of any government or governmental agency, the obtaining of such consent (either explicitly or implicitly by consummation), in each case unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the -3- corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. "Change of Control Consideration" means (i) the amount of any cash, plus the value of any securities and other noncash consideration, constituting the most valuable consideration per share of Common Stock paid to any shareholder in the transaction or series of transactions that results in a Change of Control or (ii) if no consideration per share of Common Stock is paid to any shareholder in the transaction or series of transactions that results in a Change of Control, the highest reported sales price, regular way, of a share of Common Stock in any transaction reported on the New York Stock Exchange Composite Tape or other national exchange on which such shares are listed or on NASDAQ during the 60-day period prior to and including the date of a Change of Control. To the extent that such consideration consists all or in part of securities or other noncash consideration, the value of such securities or other noncash consideration shall be determined by the Committee in good faith. "Chemicals" means the Company's newly formed chemicals subsidiary. "Chemicals Distribution" means the distribution to the holders of Common Stock of the stock of Chemicals. The "Committee" means the committee that administers the Plan, as more fully defined in Section 13. "Common Stock" means the Company's common stock, par value $2.00 per share. "Common Stock Value" means the excess of (i) the average of the daily high and low trading prices on the New York Stock Exchange for the Monsanto Common Stock with due bills on each of the five trading days prior to the date of the Chemicals Distribution over (ii) one-fifth of the average of the daily high and low trading Prices on the New York Stock Exchange for the -4- common stock of Chemicals on a when-issued basis on each of such five trading days. The "Company" has the meaning set forth in Section 2. "Deferral Account" means a bookkeeping account maintained by the Company for a Director representing the Director's interest in the stock units or cash credited to such account pursuant to Section 6. "Deferred Delivery Election" has the meaning set forth in Section 7(a). "Delivery Election" has the meaning set forth in Section 7(a). "Director" means an individual who is a non-employee member of the Board of Directors of the Company. The "Dividend Equivalent" for a given dividend or distribution means a number of shares of Common Stock having a Value, as of the date such Dividend Equivalent is credited to a Stock Unit Account, equal to the amount of cash, plus the fair market value on the date of distribution of any property, that is distributed with respect to one share of Common Stock pursuant to such dividend or distribution; such fair market value to be determined by the Committee in good faith. The "Effective Date" has the meaning set forth in Section 3. "Immediate Payment Election" has the meaning set forth in Section 7(a). The "Initial Amount" has the meaning set forth in Section 6(a). The "Interest Rate" means Moody's Baa Bond Index Rate, as in effect from time to time. "IRA Election" means an election to receive distributions under the Plan in annual installments beginning on the Starting Date, over a period of years equal to the life expectancy of the Participant or joint life expectancy of the Participant and his or her spouse (if any), as elected by the Participant, such life expectancy to be determined as of the Starting Date. -5- "Keogh Election" means an election to receive distributions under the Plan in annual installments beginning on the Starting Date, over a period of years equal to the life expectancy of the Participant or joint life expectancy of the Participant and his or her spouse (if any), as elected by the Participant, such life expectancy to be determined as of the Starting Date and redetermined as of each anniversary thereof. "Participant" has the meaning set forth in Section 5. "Retirement Plan" has the meaning set forth in Section 2. "Single Sum Election" means an election to receive distributions under the Plan in a single payment on the Starting Date. "Stock Unit Account" has the meaning set forth in Section 6(a). "Starting Date" has the meaning set forth in Section 7(a). "Term Certain Election" means an election to receive distributions under the Plan in annual installments over a specified number of years beginning on the Starting Date, provided, that in the case of a Stock Unit Account, such number of years may not exceed ten, and in the case of a Cash Account, such number of years may not exceed the Participant's life expectancy determined as of the Starting Date. The "Termination Date" for a Participant is the date his or her service as a Director terminates for any reason. The "Value" of a share of Common Stock as of the last day of a given Plan Year shall mean the average (rounded to the nearest cent) of the monthly average for each of the full calendar months during such Plan Year of the means between the reported high and low sale prices of a share of Common Stock on the New York Stock Exchange composite tape (or, if the Common Stock is not listed on such exchange, on any other national securities exchange on which the Common Stock is listed) for each trading day during each such calendar month. If the Common Stock is not traded on any national securities exchange, the Value of the Common -6- Stock shall be determined by the Committee in good faith. "Vested Benefit" has the meaning set forth in Section 6(a). 5. ELIGIBLE PARTICIPANTS; INITIAL ELECTIONS. Each individual who is a Director on the last business day before the Effective Date and has a vested benefit in the Retirement Plan as of that date shall be a participant ("Participant") in the Plan. 6. ACCOUNTS; CREDITS. (a) Except as provided in Section 7(b) below, the Company shall maintain a Deferral Account for each Participant, which shall be a "Stock Unit Account" or a "Cash Account," as elected by the Participant on or before August 15, 1997, in accordance with procedures established by the Committee. Each Participant's Deferral Account shall initially be credited with an amount (the "Initial Amount") having a value on the last business day before the Effective Date equal to the amount of the Participant's vested benefit under the Retirement Plan as of the Effective Date (the "Vested Benefit"). The amounts of such Vested Benefits shall be determined by Towers Perrin based upon information supplied by the Company. (b) If a Participant's Deferral Account is a Cash Account the Initial Amount shall be a cash amount, and shall accrue interest on the balance therein at the Interest Rate, such interest to be credited at least monthly. -7- (c) If a Participant's Deferral Account is a Stock Unit Account, the Initial Amount credited to such account pursuant to such account pursuant to Section 6(a) shall take the form of stock units representing shares of Common Stock determined by dividing (i) the amount of the Participant's Vested Benefit by (ii) the Common Stock Value. Whenever a dividend is paid or other distribution made with respect to the Common Stock, each Stock Unit Account shall be credited with a number of shares of Common Stock having a Value equal to (i) the number of stock units in such Stock Unit Account as of the record date for such dividend or distribution multiplied by (ii) the Dividend Equivalent for such dividend or other distribution. Notwithstanding the foregoing, no amounts shall be credited to any Stock Unit Account as a result of the Chemicals Distribution, because the amounts initially credited to the Stock Unit Accounts are being determined based upon the ex-dividend trading value of the Common Stock with respect to the Chemicals Distribution. The stock units credited to the Stock Unit Accounts pursuant to this Section 6 may represent fractional as well as whole shares of Common Stock. (d) As soon as practicable after the Effective Date, the Committee shall cause each Participant to be notified in writing of the value of his or her Vested Benefit and, in the case of Participants who have elected Stock Unit Accounts, the -8- average price described in clause (ii) of the preceding sentence, and the number of stock units credited to his or her Stock Unit Account. 7. DELIVERY OF ACCOUNT BALANCES. (a) Each Participant shall be provided the opportunity to elect, in accordance with procedures established by the Committee, the manner in which his or her interest in the Plan will be distributed on or after his or her Termination Date (each such election, a "Delivery Election"). Such Delivery Election may call for delivery in a single sum or in installments on or beginning on the later of (i) the Termination Date or (ii) the date which is six months after the Delivery Election is made (an "Immediate Payment Election") or for deferred delivery in a single sum or in installments (a "Deferred Delivery Election on or beginning on a specified date (in either case, the date on which delivery is to be made or is to being is referred to as the "Starting Date"). The Starting Date for a Deferred Delivery Election must be on or after the third anniversary of the Termination Date; provided, that in no event shall the Starting Date for a Deferred Delivery Election be later than the later of (i) the Participant's 73rd birthday and (ii) the third anniversary of the Termination Date. Each Delivery Election shall specify whether it is a Single Sum Election, a Term Certain Election, a Keogh Election, or an IRA Election; provided, that -9- Keogh Elections and IRA Elections may only be made in connection with Deferred Delivery Elections made with respect to Cash Accounts. (b) Notwithstanding any other provision of this Plan, a Participant who makes an Immediate Payment Election and who ceases to be a Director and becomes a director of Chemicals in connection with the Chemicals Distribution shall not be credited with a Deferral Account, but shall receive a cash lump sum payment equal to the value of his or her Vested Benefit as soon as practicable after the Effective Date. (c) The stock units in a Participant's Stock Unit Account or the cash in a Participant's Cash Account, as applicable, shall be delivered on or beginning on the Starting Date in accordance with the Participant's Delivery Election. If the Participant's Deferral Account is a Stock Unit Account, such delivery shall be made in the form of stock representing a number of Common Shares equal to the number of stock units as and when they are to be delivered. If any such stock units or cash are to be delivered after the Participant has died or become legally incompetent, they shall be delivered to the Participant's Beneficiary or legal guardian, as the case may be, in accordance with the foregoing; provided, that if a Participant who has made a Keogh Election dies before beginning to receive or receiving all of his or her distributions, the entire balance in his or her -10- Deferral Account shall be distributed to his or her Beneficiary immediately. References to a Participant in this Plan shall be deemed to refer to the Participant's Beneficiary or legal guardian, where appropriate. (d) Participants shall be provided with the opportunity to designate, in accordance with procedures to be established by the Committee, the person or persons ("Beneficiaries") who will receive distributions of his or her interests in the Plan upon the death of the Participant (a "Beneficiary Designation"). Once made, a Beneficiary Designation or Delivery Election may be superseded by another Beneficiary Designation or Delivery Election (as applicable) or revoked in writing by the Participant. However, in order for any initial or superseding Delivery Election or revocation thereof to be valid, it must be received by the Committee before the Participant's Termination Date. In the case of multiple Beneficiary Designations, Delivery Elections and/or revocations by any Participant, the most recent valid Beneficiary Designation, Delivery Election or revocation (as applicable) in effect as of the date of death or Termination Date, as applicable, shall be controlling. If a Participant does not have a valid Beneficiary Designation in effect as of the date of his or her death, his or her Beneficiary shall be his or her estate. If a Participant does not have a valid Delivery Election in effect as of his or -11- her Termination Date, he or she shall be deemed to have made an Immediate Payment Election. 8. SHARE CERTIFICATES; VOTING AND OTHER RIGHTS. The shares delivered to a Participant pursuant to Section 7 above shall be issued in the name of the Participant, and the Participant shall be entitled to all rights of a shareholder with respect to Common Stock for all such shares issued in his or her name, including the right to vote the shares, and the Participant shall receive all dividends and other distributions paid or made with respect thereto. 9. GENERAL RESTRICTIONS. (a) Notwithstanding any other provision of the Plan or agreements made pursuant thereto, the Company shall not be required to issue or deliver any shares of Common Stock under the Plan prior to fulfillment of all of the following conditions: (i) Listing or approval for listing upon official notice of issuance of such shares on the New York Stock Exchange, Inc., or such other securities exchange as may at the time be a market for the Common Stock; (ii) Any registration or other qualification of such shares under any state or federal law or regulation, or the maintaining in effect of any such registration or other qualification which the Committee shall, in its absolute discretion upon the advice of counsel, deem necessary or advisable; and (iii) Obtaining any other consent, approval, or permit from any state or federal governmental agency which the Committee shall, in its absolute discretion after receiving the advice of counsel, determine to be necessary or advisable. -12- (b) Nothing contained in the Plan shall prevent the Company from adopting other or additional compensation arrangements for the Participants. 10. NUMBER AND SOURCE OF SHARES AVAILABLE. Subject to adjustment pursuant to Section 11 below, 75,000 shares of Common Stock may be issued under the Plan. Shares of Common Stock issuable under the Plan shall be taken from treasury shares of the Company or purchased on the open market. 11. CHANGE IN CAPITAL STRUCTURE; CHANGE OF CONTROL. (a) In the event that there is, at any time after the Board adopts the Plan, any change in the Common Stock by reason of any stock dividend, stock split, combination of shares, exchange of shares, warrants or rights offering to purchase Common Stock at a price below its fair market value, reclassification, recapitalization, merger, consolidation, spin-off or other change in capitalization of the Company, other than the Chemicals Distribution, appropriate adjustment shall be made in the number and kind of shares or other property subject to the Plan and the number and kind of shares or other property held in the Stock Unit Accounts (taking into account whether any Dividend Equivalent is credited to the Stock Unit Accounts in connection therewith), and any other relevant provisions of the Plan by the Committee, whose determination shall be binding and conclusive on all persons. -13- (b) Without limiting the generality of the foregoing, and notwithstanding any other provision of this Plan, in the event of a Change of Control, the Company shall immediately pay to each Participant in a cash lump sum (i) the Change of Control Consideration multiplied by the number of stock units in such Participant's Stock Unit Account immediately before such Change of Control, or (ii) the cash balance in such Participant's Cash Account, as applicable, and the Plan shall be terminated. Notwithstanding the foregoing, if the payment of cash with respect to Stock Unit Accounts pursuant to the preceding sentence would make a Change in Control transaction ineligible for pooling-of-interests accounting under APB No. 16 that but for the nature of such grant would otherwise be eligible for such accounting treatment, the Committee shall have the ability to substitute for such cash Common Stock or other equity securities with a Value equal to the amount of such cash. Notwithstanding any other provision of the Plan, with respect to a "Change of Control" that occurs as a result of the consummation of the transactions contemplated by the Agreement and Plan of Merger dated as of December 19, 1999 among Monsanto Company, MP Sub, Incorporated, and Pharmacia & Upjohn, Inc., the provisions of Section 11(b) of the Plan shall not apply with respect to any Electing Participant (as defined in the next sentence), and if one or more Participants are Electing -14- Participants, the Plan shall not terminate with respect to such Electing Participant(s) as a result of such a "Change of Control." An "Electing Participant" means a Participant who delivers a written notice, electing to have the foregoing provision of this Amendment apply to himself or herself, to the Committee no later than 10 business days after the Change of Control. (c) If the shares of Common Stock credited to the Stock Unit Accounts are converted pursuant to this Section 11 into another form of property, references in the Plan to the Common Stock shall be deemed, where appropriate, to refer to such other form of property, with such other modifications as may be required for the Plan to operate in accordance with its purposes. Without limiting the generality of the foregoing, references to delivery of certificates for shares of Common Shares shall be deemed to refer to delivery of cash and the incidents of ownership of any other property held in the Stock Unit Accounts. 12. ADMINISTRATION; AMENDMENT. (a) The Plan shall be administered by a committee consisting of the Chief Financial Officer, the General Counsel and the Corporate Vice President -- Human Resources of the Company (or the holder of any successor officer position thereto) (the "Committee"), which shall have full authority to construe and interpret the Plan, to establish, amend and rescind rules and regulations relating to the Plan, and -15- to take all such actions and make all such determinations in connection with the Plan as it may deem necessary or desirable, including without limitation the determination of life expectancies and other assumptions and information to be used in determining the effect of Installment Delivery Elections. (b) The Board may from time to time make such amendments to the Plan as it may deem proper and in the best interest of the Company, and it may terminate the Plan at any time. 13. MISCELLANEOUS. (a) Nothing in the Plan shall be deemed to create any obligation on the part of the Board to nominate any Director for reelection by the Company's shareholders or to limit the rights of the shareholders to remove any Director. (b) The Company shall have the right to require, prior to the issuance or delivery of any cash or shares of Common Stock pursuant to the Plan, that a Director make arrangements satisfactory to the Committee for the withholding of any taxes required by law to be withheld with respect to the issuance or delivery of such cash or shares, including without limitation by the withholding of shares that would otherwise be so issued or delivered, by withholding from any other payment due to the Director, or by a cash payment to the Company by the Director. -16- 14. GOVERNING LAW. The Plan and all actions taken thereunder shall be governed by and construed in accordance with the laws of the State of Delaware. -17- EX-10.29 4 SUPPLEMENTAL RETIREMENT PLAN EXHIBIT 10.29 Monsanto ---------------------------- Monsanto Company RICHARD J. MAHONEY 800 N. Lindbergh Boulevard Chairman and St. Louis, Missouri 63167 Chief Executive Officer Phone: (314) 694-3756 February 1, 1989 Dr. Philip Needleman Monsanto Company 800 North Lindbergh Boulevard St. Louis, Missouri 63167 Dear Philip: It is my pleasure to advise you that the Executive Compensation and Development Committee of the Board ("ECDC") at its October 28, 1988 meeting, reviewed the retirement benefits which will be available to you under the Company's Salaried Employees' Pension Plan ("Pension Plan") and the Monsanto ERISA Parity Pension Plan. In recognition of the experience and expertise which you have brought to the Company, including 21 years of service with Washington University, and in recognition of your potential service with the Company, the ECDC has determined to award you, subject to certain conditions, a Supplemental Retirement Benefit equal to 14% of your "Average Total Earnings", as defined in the Pension Plan. Except as specifically provided below, the Supplemental Retirement Benefit will not be payable unless you accrue at least ten years of vesting service with Monsanto. Any optional payment form you elect under the Parity Pension Plan will also apply to the Supplemental Retirement Benefit, using the same actuarial factors as are used under the Pension Plan. If you choose to do so, you may request deferral of your Supplemental Retirement Benefit if you make a timely request prior to retirement. The terms and conditions of this deferral option are described in Attachment A, which is hereby incorporated in this agreement. If you die while employed, and your wife survives you, she will be entitled to receive a survivor's benefit equal to 50% of this Supplemental Retirement Benefit. In addition, if your widow is not yet eligible for a survivor benefit under the Pension and Pension Parity Plans, she would receive from this Supplemental Retirement Benefit a 50% survivor benefit based on the actual benefit accrued to the date of your death under these Plans. Each of these survivor benefits will be subject to the normal reductions provided in the Pension Plans. Such survivor's benefits would be payable for the remainder of your wife's lifetime. If you Terminate Employment with the Company after a Change of Control of the Company but before you attain ten years of Vesting Service, you will be entitled to a monthly Supplemental Retirement Benefit equal to 14% of your Average Total Earnings multiplied by a fraction, the numerator of which is your actual years of Vesting Service and the denominator of which is 10. The benefit will be payable to you commencing on the first day of the month following the later of your Termination or your attainment of age 55. Alternatively, you may elect to receive the actuarially commuted value of your Supplemental Retirement Benefit, or a portion thereof, in a single sum, in which case, the value of your Supplemental Retirement Benefit will be calculated by the Qualified Actuary for the Salaried Pension Plan who was serving as such immediately prior to the Change of Control using the actuarial assumptions applicab1e to the Plan. The amount so calculated by the Qualified Actuary will be paid to you in a single sum as soon as practicable after you Terminate Employment. This Supplemental Retirement Benefit will, be separate from and in addition to any pension benefit which you are entitled to receive under the Company's Pension Plan. This Supplemental Retirement Benefit is provided and continued at the sole discretion of the ECDC and may be terminated in whole or in part at any time for reasons such as, but not limited to, your subsequent employment with a chemical, pharmaceutical or other company in competition with Monsanto, or your engaging in activities deemed by the ECDC not to be in the best of interest of Monsanto. This Supplemental Retirement Benefit may not be assigned either by you or your spouse, and any attempted assignment, pledge or other transfer shall be void. If any court, agency, or other party orders or is otherwise successful in obtaining an order for transfer in whole or in part of the Supplemental Retirement Benefit, it shall thereupon be deemed automatically terminated in full. I am pleased to be able to offer this Supplemental Retirement Benefit on behalf of the Company. Please acknowledge your receipt and acceptance of this agreement by signing and returning one copy to my office. Very truly yours, MONSANTO COMPANY By /s/ Richard J. Mahoney ------------------------------ Richard J. Mahoney Chairman and Chief Executive Officer Received and Acknowledged: /s/ Philip Needleman - ---------------------------- Philip Needleman PhD. Date: 2/1/89 ------- Attachment A 2/1/89 PHILIP R. NEEDLEMAN SUPPLEMENTAL RETIREMENT BENEFIT AGREEMENT Supplemental Retirement Benefit Deferral Option - ----------------------------------------------- You may request deferral of your Supplemental Retirement Benefit if you submit a timely request at least six months prior to retirement. The ECDC will consider your deferral request, and if it is approved, you will be permitted to defer payment of your Supplemental Retirement Benefit on the same terms and conditions as permitted under the ERISA Pension Parity Plan ("Parity Plan"). For this reason, the terms and conditions of the Parity Plan are incorporated by reference herein and made a part of this Agreement. In making any request to defer the Supplemental Retirement Benefit under the Agreement, you may request that the Company measure the return on all or a portion of any deferred amount by the investment return on one or more participating funds in a related mutual fund group. The Company will consider your request, provided, among other things, that the mutual fund group meets certain criteria established by the Company, including diversification, liquidity, published valuation data, and exchange privileges among the funds participating within the group. The Company's decision as to whether it will follow your directed investment request will be final and binding and it may actually invest in the mutual fund, Interest on non-directed amounts will be credited in a manner authorized by the Company. You may make up to four requests in any calendar year to make changes in the mutual fund group. If your directed investment request is approved by the Company, you will assume full risk on the portion of your deferred amounts subject to your request. The Company's approval of your request should in no way be considered to be the Company's endorsement of the particular mutual fund, the mutual fund group, or the appropriateness of the investment decision. The Company in no way will guarantee investment return. Investment return will be measured on a "net" basis; that is, the gross investment return will be reduced by any sales or redemption charges of any type imposed by the mutual fund. In acknowledging acceptance of this Agreement, you specifically acknowledge and agree that the Company will in no way be responsible for the investment return on any directed Investment, that the Company in no way guarantees any performance on any such amounts, that you will have consulted with your personal financial or tax advisors and that the Company is in no way responsible for financial or other consequences resulting from any directed investment, and that the amount of the Supplemental Retirement Benefit payable to you or your beneficiary under this Agreement at the end of any deferral period will be directly affected by the investment performance of any directed investment. You further acknowledge and agree that the terms of this Agreement, and any directed investment made by you, will be binding on you, your estate, heirs, and beneficiaries, and you agree to indemnify and hold the Company, its directors, officers and employees, harmless from any claims or litigation. Monsanto ----------------------------- Monsanto Company ROBERT L. BERRA 800 N. Lindbergh Boulevard Senior Vice President, Administration St. Louis, Missouri 63167 Phone: (314) 694-3756 June 12, 1989 Dr. Philip Needleman Monsanto Company 800 North Lindbergh Boulevard St. Louis, MC 63167 Dear Philip: As you know, on February 1, 1989, you entered into an agreement ("Agreement") with the Company under which the Company awarded you, subject to certain conditions, a Supplemental Retirement Benefit. The Agreement provides that your Supplemental Retirement Benefit is provided and continued at the sole discretion of the Executive Compensation and Development Committee ("ECDC") and may be terminated in whole or in part at any time for reasons such as, but not limited to, your subsequent employment with a chemical, pharmaceutical or other company in competition with Monsanto or your engaging in activities deemed by the ECDC not to be in the best interests of Monsanto. The ECDC has decided that in order to minimize any distractions that could be caused by the personal uncertainties and risks created by a change of control proposal, it is in the Company's best interest to amend the Agreement by this addendum ("Addendum") to provide that upon a Change of Control of the Company, your Supplemental Retirement Benefit shall be fully vested and not subject to divestment for any reason by the ECDC or its successor, the Board of Directors of Monsanto or Monsanto's successor, or by any other person, committee, corporation or other legal entity. The term "Change of Control" has the same meaning as it does in your Key Executive Employment Agreement. This Addendum incorporates the terms of the Agreement which shall remain in full force and effect, except to the extent specifically modified hereby. On behalf of the Company, I am pleased to be able to inform you of this Addendum authorized by the ECDC. Please acknowledge your acceptance of the terms of the Addendum by signing both copies of this letter and returning one copy to me. Sincerely, MONSANTO COMPANY /s/ R.L. Berra --------------------------------- Senior Vice President ACKNOWLEDGED AND AGREED: /s/ Philip Needleman - -------------------------------- Philip Needleman, Ph.D. EX-21 5 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT The following is a list of the Company's subsidiaries as of December 31, 1999, except for unnamed subsidiaries which, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary. G. D. Searle & Co. (Delaware) DEKALB Genetics Corporation (Delaware) Monsanto International Sales Company, Inc. (Virgin Islands) EX-23 6 CONSENT OF EXPERT EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS MONSANTO COMPANY: We consent to the incorporation by reference in Monsanto Company's Registration Statements on Form S-8 (Nos. 2-36636, 2-76696, 2-90152, 33-13197, 33-21030, 33-39704, 33-39705, 33-39706, 33-39707, 33-49717, 33-53363, 33-53365, 33-53367, 333-02783, 333-02961, 333-02963, 333-33531, 333-38599, 333-45341 and 333-76653) and Registration Statements on Form S-4 (Nos. 333-66175, 333-73233 and 333-30824) of our report dated February 25, 2000, incorporated by reference in this annual report on Form 10-K of Monsanto Company for the year ended December 31, 1999. /s/ DELOITTE & TOUCHE LLP St. Louis, Missouri March 17, 2000 EX-24.1 7 POWER OF ATTORNEY EXHIBIT 24.1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That each person whose signature appears below, as a Director or Officer of Monsanto Company (the "Company"), a Delaware corporation with its general offices in the County of St. Louis, Missouri, does hereby make, constitute and appoint R. WILLIAM IDE III, JUDITH A REINSDORF, SONYA M. DAVIS or JANET L. HORGAN, or any one of them acting alone, his or her true and lawful attorneys, with full power of substitution and resubstitution, in his or her name, place and stead, in any and all capacities, to execute and sign the Company's Annual Report on Form 10-K and the following registration statements: (i) any registration statement on Form S-8 covering the registration of additional securities of the Company to be issued under the Monsanto Shared Success Stock Option Plan, the Monsanto Company ERISA Parity Savings and Investment Plan, the Monsanto Savings and Investment Plan or the Monsanto Management Incentive Plan of 1996, in each case as approved by the Board of Directors of the Company, (ii) any registration statement on Form S-8 covering the registration of securities of the Company to be issued under any other new or existing stock-based incentive or compensation plans of the Company or any subsidiary; and (iii) any amendments or post-effective amendments to any registration statement previously filed by the Company, and any and all amendments to any of the foregoing, and documents in connection therewith, all to be filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, giving and granting unto said attorneys full power and authority to do and perform such actions as fully as they might have done or could do if personally present and executing any of said documents. Dated and effective as of the 25th of February, 2000. /s/ Robert B. Shapiro /s/ Richard U. De Schutter - -------------------------------- -------------------------------- Robert B. Shapiro, Director and Richard U. De Schutter, Director Principal Executive Officer /s/ Michael Kantor /s/ Gwendolyn S. King - -------------------------------- -------------------------------- Michael Kantor, Director Gwendolyn S. King, Director /s/ Philip Leder /s/ Jacobus F. M. Peters - -------------------------------- -------------------------------- Philip Leder, Director Jacobus F. M. Peters, Director /s/ John S. Reed /s/ John E. Robson - -------------------------------- -------------------------------- John S. Reed, Director John E. Robson, Director /s/ William D. Ruckelshaus /s/ Hendrik A. Verfaillie - -------------------------------- -------------------------------- William D. Ruckelshaus, Director Hendrik A. Verfaillie, Director /s/ Gary L. Crittenden /s/ Richard B. Clark - -------------------------------- -------------------------------- Gary L. Crittenden, Principal Richard B. Clark, Principal Financial Officer Accounting Officer 2 EX-24.2 8 CERTIFICATE EXHIBIT 24.2 MONSANTO COMPANY CERTIFICATE ----------- I, Sonya M. Davis, Assistant Secretary of Monsanto Company, hereby certify that the following is a full, true and correct copy of excerpts from resolutions adopted by the Board of Directors of Monsanto Company on February 25, 2000, at which meeting a quorum was present and acting throughout: 1. The Chairman of the Board, the President, any Vice Chairman of the Company, any Vice President, the Chief Financial Officer, the Secretary, any Assistant Secretary, the Treasurer, any Assistant Treasurer or the Controller or any Assistant Controller of the Company is hereby authorized to sign and execute, for and on behalf of the Company, the Company's Annual Report on Form 10-K ("Form 10-K") for the year 1999 and any other report to be filed with the Securities and Exchange Commission (the "Commission") pursuant to the Securities Exchange Act of 1934, as amended. 2. Each officer and director who may be authorized or required to sign and execute the Form 10-K or any document in connection therewith or any Registration Statement (whether for and on behalf of the Company, or as an officer or director of the Company, or otherwise), be and hereby is authorized to execute a power of attorney appointing R. William Ide III, Judith A. Reinsdorf, Sonya M. Davis or Janet L. Horgan, or any of them acting alone, his or her true and lawful attorney or attorneys, with full power of substitution and resubstitution to sign in his or her name, place and stead in any such capacity such Form 10-K or Registration Statement and any and all amendments thereto and documents in connection therewith, and to file the same with the Commission or any other governmental body, each of said attorneys to have power to act with or without the others, and to have full power and authority to do and perform, in the name and on behalf of each of said officers and directors, every act whatsoever which such attorneys, or any one of them, may deem necessary, appropriate or desirable to be done in connection therewith as fully and to all intents and purposes as such officers or directors might or could do in person. . . . IN WITNESS WHEREOF, I have hereunto set my hand in my official capacity and affixed the corporate seal of Monsanto Company this 7th day of March, 2000. /s/ Sonya M. Davis -------------------------- Sonya M. Davis [SEAL] Assistant Secretary EX-27 9 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENT OF CONSOLIDATED INCOME OF MONSANTO COMPANY AND SUBSIDIARIES FOR THE YEAR ENDED DECEMBER 31, 1999, AND THE STATEMENT OF CONSOLIDATED FINANCIAL POSITION AS OF DECEMBER 31, 1999. SUCH INFORMATION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS. 1,000,000 12-MOS DEC-31-1999 DEC-31-1999 284 0 2,618 0 1,728 5,787 5,754 2,434 16,535 3,750 5,903 1,694 0 0 3,655 16,535 9,146 9,146 3,272 3,272 0 0 345 751 248 503 92 0 (20) 575 .91 .88 Reported net of allowances of $167
EX-99.1 10 FINANCIAL INFORMATION FOR FISCAL YEAR ENDED DECEMBER 31, 1999 ======================================================================== Financial Section Contents ======================================================================== FINANCIAL SUMMARY Page 02 DEFINITIONS Page 03 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page 04 STATEMENT OF CONSOLIDATED INCOME (LOSS) Page 24 STATEMENT OF CONSOLIDATED FINANCIAL POSITION Page 25 STATEMENT OF CONSOLIDATED CASH FLOW Page 26 STATEMENT OF CONSOLIDATED SHAREOWNERS' EQUITY Page 27 STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS) Page 28 NOTES TO FINANCIAL STATEMENTS Page 29 INDEPENDENT AUDITORS' REPORT Page 56 1
================================================================================================================================== FINANCIAL SUMMARY (unaudited) ================================================================================================================================== (Dollars in millions, except per share) 1999 1998 1997 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------------- OPERATING RESULTS Net Sales $ 9,146 $ 7,237 $ 6,058 $ 4,862 $ 4,165 Income (Loss) from Continuing Operations 503 (131) 149 279 386 As a Percent of Net Sales 5% 2% 6% 9% Income (Loss) from Discontinued Operations 92 (119) 321 106 353 Cumulative Effect of a Change in Accounting Principle (20) Net Income (Loss) 575 (250) 470 385 739 - ---------------------------------------------------------------------------------------------------------------------------------- EARNINGS (LOSS) PER SHARE: Income (Loss) from Continuing Operations $ 0.77 $ (0.22) $ 0.24 $ 0.47 $ 0.67 Net Income (Loss) 0.88 (0.41) 0.77 0.64 1.27 - ---------------------------------------------------------------------------------------------------------------------------------- YEAR-END FINANCIAL POSITION Total Assets $16,535 $16,385 $10,517 $ 8,619 $ 8,008 Working Capital 2,037 1,415 270 446 896 Long-Term Debt $ 5,903 $ 6,259 $ 1,979 $ 1,608 $ 1,667 Shareowners' Equity 5,349 4,986 4,104 3,690 3,732 - ---------------------------------------------------------------------------------------------------------------------------------- Current Ratio 1.5 1.4 1.1 1.2 1.5 Percent of Total Debt to Total Capitalization 56% 60% 47% 38% 35% - ---------------------------------------------------------------------------------------------------------------------------------- OTHER DATA Stock Price: High $ 50 13/16 $ 63 15/16 $ 52 15/16 $ 43 1/4 $ 25 Low 32 3/4 33 3/4 34 3/4 23 13 3/4 Year-End 35 7/16 47 1/2 42 38 7/8 24 1/2 Price/Earnings Ratio on Year-End Stock Price 40 55 60 19 - ---------------------------------------------------------------------------------------------------------------------------------- Per Share: Dividends $ 0.120 $ 0.120 $ 0.500 $ 0.588 $ 0.540 Shareowners' Equity 8.41 7.93 6.89 6.31 6.46 - ---------------------------------------------------------------------------------------------------------------------------------- Shareowners (year-end) 54,973 62,769 61,265 54,828 50,745 - ---------------------------------------------------------------------------------------------------------------------------------- Shares Outstanding (year-end, in millions) 636 627 595 584 575 - ---------------------------------------------------------------------------------------------------------------------------------- Employees (year-end) 29,935 31,800 21,900 28,000 28,500 - ---------------------------------------------------------------------------------------------------------------------------------- Income from continuing operations for 1999 included $57 million, or $0.09 per share, for costs related to the failed merger between Monsanto and Delta and Pine Land Company, accelerated seed company integration costs, a gain on the divestiture of Stoneville Pedigreed Seed Company, and reversals of restructuring liabilities established in 1998. Loss from continuing operations for 1998 included $610 million, or $1.01 per share, for restructuring and special charges, write-offs for acquired in-process research and development and charges for the cancellation of DEKALB(R) Genetics Corporation stock options. Income from continuing operations for 1997 included $404 million, or $0.66 per share, for the write-off of acquired in-process research and development. Income from continuing operations for 1996 included restructuring and other unusual charges of $226 million, or $0.38 per share, associated with the closure or rationalization of certain facilities, asset write-offs and workforce reductions. Income from continuing operations for 1995 included net restructuring expenses and other unusual items of $63 million, or $0.11 per share. This financial statistic is not meaningful for 1998 because Monsanto reported a loss from continuing operations. Includes sales of styrenics plastics business in 1995, spinoff of the chemicals businesses in 1997 and classification of the alginates, Ortho lawn-and-garden products, artificial sweeteners, and biogums businesses as discontinued operations. The quarterly common stock dividend was reduced from $0.16 per share to $0.03 per share in the fourth quarter of 1997. 1999 includes approximately 1,700 employees associated with businesses Monsanto has classified as discontinued operations (former Nutrition and Consumer Products segment). Numbers prior to 1999 were not restated for the classification of Nutrition and Consumer Products segment as discontinued operations. In addition, numbers prior to 1997 were not restated to reflect the spinoff of the chemical businesses.
2 ======================================================================== Definitions: ======================================================================== "Monsanto" and "the company" are used interchangeably to refer to Monsanto Company or to Monsanto Company and consolidated subsidiaries, as appropriate to the context. Unless otherwise indicated, "earnings per share" means diluted earnings per share. In tables, all dollars are in millions, except per share data. Earnings from continuing operations before interest expense and income taxes (EBIT), and earnings from continuing operations before interest expense, income taxes, depreciation and amortization expense (EBITDA), and excluding unusual items are used as financial performance measures throughout this publication. For Monsanto's business segments, EBIT also excludes the effects of unusual items. Unusual items primarily were comprised of restructuring charges and reversals, write- offs of in-process research and development (R&D) related to acquisitions, matters related to mergers, acquisitions and divestments, accelerated agricultural chemical and seed operations integration costs, and the cancellation of DEKALB(R) Genetics Corporation (DEKALB(R)) stock options. EBITDA (excluding unusual items) may not be directly comparable to other companies' EBITDA performance measures because those companies may not exclude unusual items. Although EBITDA (excluding unusual items) is a performance measure commonly used in the financial community, it is not a measure of financial performance under accounting principles generally accepted in the United States. The presentation of EBITDA (excluding unusual items) in this annual report is intended to supplement investors' understanding of Monsanto's operating performance. It is not intended to replace net income, cash flows, financial position or 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, increases in these two costs in the financial statements resulting from the acquisitions in 1998 of DEKALB(R), Plant Breeding International Cambridge Limited, and certain international seed businesses of Cargill(R), Incorporated, were not reflected in EBITDA (excluding unusual items) but did affect net income in 1999. Investors and other users of the financial statements should refer to management's discussion and analysis for a description of events that have affected EBITDA (excluding unusual items) and net income during each of the three years ended Dec. 31, 1999, 1998 and 1997. Trademarks and service marks owned or licensed by Monsanto and its subsidiaries are indicated by special type throughout this publication. Ortho, Diamonex and Orcolite are trademarks associated with businesses formerly owned by Monsanto. 3 ======================================================================== MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ======================================================================== MONSANTO ACHIEVES RECORD SALES AND STRONG NET INCOME PERFORMANCE Sales in 1999 reached a record as a result of the successful product launch of Celebrex(R) arthritis treatment and as sales of key agricultural products continued to grow. Net income totaled $575 million, or $0.88 per share, in 1999. However, results included net aftertax charges of $75 million, or $0.12 per share, for costs associated with the failed merger between Monsanto and Delta and Pine Land Company (D&PL), accelerated integration expenses related to agricultural chemical and seed operations, a gain from the divestiture of Stoneville Pedigreed Seed Company (Stoneville), reversal of prior year restructuring liabilities, cumulative effect of an accounting change, and other unusual items. If these unusual items were excluded, net income would have been $650 million, or $1.00 per share, in 1999. Income from continuing operations totaled $503 million, or $0.77 per share, in 1999. Excluding unusual items, income from continuing operations would have been $560 million, or $0.86 per share. In comparison, 1999 results represent an $81 million, or $0.10 per share, increase from prior year income from continuing operations of $479 million, or $0.76 per share, excluding unusual items. In 1999, Monsanto continued to focus its efforts on its core businesses - agriculture, pharmaceutical and nutrition research. In the first half of 1999, Monsanto management committed to a plan to sell the company's artificial sweeteners and biogums businesses. The results of operations, financial position, and cash flows of these businesses, and of the alginates and Ortho lawn-and-garden products businesses, the dispositions of which were approved by Monsanto's board of directors in 1998, have been reclassified as discontinued operations. The company expects to sell the artificial sweeteners (bulk aspartame and tabletop sweeteners businesses) and biogums businesses for a net gain by July 2000. In addition, Monsanto transferred the Roundup(R) lawn-and-garden and nutrition research operations of the former Nutrition and Consumer Products segment to the Agricultural Products and Corporate and Other segments, respectively. Net sales reached a record $9.1 billion in 1999, surpassing prior year net sales of $7.2 billion by 26 percent. The increase came from strong performances by both the Pharmaceuticals and Agricultural Products segments. Record sales for the Pharmaceuticals segment increased $1.1 billion, or 41 percent, from 1998 net sales. The increase was driven by the success of Celebrex(R) arthritis treatment which was launched in early 1999. With the introduction of Celebrex(R) arthritis treatment in 1999, Searle, Monsanto's Pharmaceuticals segment, is the No. 1 provider of branded arthritis treatments in the United States. In addition, higher sales volumes of Ambien(R) short-term treatment for insomnia, and the Covera-HS(R) and spironolactone lines of cardiovascular products, contributed to the strong net sales performance. Sales of Ambien(R) captured a 53 percent share of the United States insomnia prescription market at the end of 1999. These sales increases were offset by lower sales of Daypro(R) arthritis treatment as market share shifted in the United States toward Celebrex(R), lower sales of Cytotec(R) ulcer preventive treatment and lower sales of other individually insignificant Pharmaceutical products. Despite an unfavorable agricultural economy, net sales for Agricultural Products set another record in 1999, led by the inclusion of a full year of revenues from seed companies acquired in 1998, increased planting of biotech acres and significant sales volume increases for the family of Roundup(R) herbicides. Demand for Roundup Ready(R) soybeans, cotton and corn, YieldGard(R) insect-protected corn, Bollgard(R) insect-protected cotton, and Bollgard(R) with Roundup Ready(R) cotton rose substantially in 1999. The increase in 1999 net sales for the Agricultural Products segment also reflected higher technology fee revenues from crops developed through biotechnology. Lower selling prices in the 1999 crop season, increases in the use of conservation tillage, new applications, and the use of Roundup(R) over the top of Roundup Ready(R) soybeans, cotton, canola, and corn resulted in more than a 20 percent volume gain for the family of Roundup(R) herbicides. Segment net sales also benefited from record sales volumes of Posilac(R) bovine somatotropin. Total net sales in markets outside the United States represented 38 percent of 1999 net sales, compared with 44 percent in 1998. An analysis of the company's sales change, along with comparative data, follows:
- ------------------------------------------------------------------------------------------- SALES ANALYSIS 1999 1998 - ------------------------------------------------------------------------------------------- Selling prices (5)% (1)% Sales volumes and mix 38 18 Acquisitions (Divestitures) - net (1) 1 Pharmaceutical licensing revenues (3) 4 Exchange rates (3) (3) - ------------------------------------------------------------------------------------------- Total Change 26% 19% ===========================================================================================
Near the close of this successful year in the face of stiff competition and unfavorable agricultural economic conditions, Monsanto's board of directors agreed to create a dynamic and powerful new global competitor in the pharmaceuticals industry and 4 maintain one of the world's leading agricultural business. On Dec. 19, 1999, Monsanto entered into a definitive agreement with Pharmacia & Upjohn Inc. (PNU) to combine the two companies in a merger-of-equals transaction. Upon completion of the merger, the new company will have one of the strongest sales forces in the pharmaceutical industry, an expansive product portfolio, and a world class agricultural products business. (See Notes to Financial Statements, Note 5 - Principal Mergers, Acquisitions, and Divestitures for further detail.) In December 1999, the United States 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 allows companies to report any change in revenue recognition related to adopting its provisions as an accounting change in accordance with Accounting Principles Board (APB) Opinion No. 20, "Accounting Changes". Monsanto recognized the cumulative effect of a change in accounting principle, effective Jan. 1, 1999, for revenue recognized in 1998 related to the sale of marketing rights to The Scotts Company. The effect on 1999 earnings was an aftertax loss of $20 million, net of taxes of $12 million. If Monsanto had recorded the sales of marketing rights as deferred revenues in 1998, net income (loss) would have been $595 million in 1999 and ($270) million in 1998. EVENTS AFFECT COMPARABILITY The company recorded a net aftertax charge of $57 million ($64 million pretax), or $0.09 per share in income from continuing operations for unusual items principally associated with costs related to the failed merger between Monsanto and D&PL, combined with expenses to accelerate the integration of Monsanto's agricultural chemical and seed operations. These net charges included the reversal of restructuring liabilities established in 1998 and the gain on the divestiture of Stoneville. Monsanto recorded a pretax charge of $85 million for a termination fee and other expenses associated with the failed merger between Monsanto and D&PL, and a $67 million charge to continuing operations principally associated with the company's continued focus on improving operating efficiency through accelerated integration of the agricultural chemical and seed operations. The charge of $67 million was recorded in the Statement of Consolidated Income (Loss) in cost of goods sold ($20 million), amortization of intangible assets ($8 million), and restructuring ($39 million); and was comprised of asset impairments of $10 million, workforce reduction costs of $18 million and facility shut-down charges of $39 million. These shut-down charges included $14 million for contractual research payments, $9 million for intangible assets, $8 million for inventories, $6 million for leasehold termination costs, and $2 million for property, plant and equipment write-offs. This charge for accelerated chemical and seed operations integration included involuntary employee separation costs for 360 employees worldwide and reflected charges for positions in administration of $14 million, and research and development of $4 million. As of Dec. 31, 1999, 150 of the planned employee eliminations were completed; 80 of these employees received cash severance payments totaling $6 million during 1999 and 70 employees elected deferred payments of $4 million which were paid in Jan. 2000. As of Dec. 31, 1999 these deferred severance payments were classified in the Statement of Consolidated Financial Position as other liabilities. During 1999, the company also made cash payments of $2 million under this plan for completed facility shut-down actions. In addition, the company reclassified contractual commitments of $18 million associated with 1999 accelerated integration plan to other liabilities. The remaining balance for employee severance related to the remaining 210 positions was $8 million at Dec. 31, 1999. The company expects these employee reductions for the 1999 charges to be completed by June 2000. Cash payments to complete the remaining accelerated integration actions will be funded from operations and are not expected to significantly impact Monsanto's liquidity. The accelerated integration plan is expected to result in annual pretax savings of approximately $25 million. Offsetting the accelerated integration costs and other unusual item charges from continuing operations in 1999 was a pretax gain of $54 million from the reversal of restructuring liabilities established in 1998. These restructuring liability reversals were required as a result of lower actual severance and facility shut-down costs than originally estimated. Also offsetting these charges was a pretax gain of approximately $35 million recognized on the sale of Stoneville. In 1998, the company recorded net restructuring and other unusual items of $340 million ($239 million aftertax) as part of the company's overall strategy to reduce costs and continue the commitment to its core businesses. The 1998 net restructuring and unusual charges were taken in the second and fourth quarters of 1998. The 1998 net restructuring and unusual items were recorded in the Statement of Consolidated Income (Loss) in the following categories: 5
================================================================================================================================== WORKFORCE FACILITY ASSET REDUCTIONS CLOSURES IMPAIRMENTS OTHER TOTAL - ---------------------------------------------------------------------------------------------------------------------------------- Cost of goods sold $ 6 $ 8 $ 84 $ 98 Amortization and adjustment of intangible assets 3 63 66 Restructuring and other special items 103 64 $(14) 153 Other expense (income) - net 43 (20) 23 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL INCREASE IN LOSS FROM OPERATIONS BEFORE INCOME TAXES $ 109 $ 75 $ 190 $(34) $ 340 ==================================================================================================================================
In December 1998, the board of directors approved a plan to close certain facilities, reduce the current workforce and exit nonstrategic businesses. These activities principally were comprised of a tomato business and a business involved in the operation of membership-based health and wellness centers. This plan also contemplated exiting several small, embryonic business activities, none of which had a significant effect on the restructuring reserve. The company recorded pretax restructuring charges and other unusual items of $327 million ($226 million aftertax) to cover the costs associated with these actions in 1998. The charges reflected the elimination of approximately 1,400 jobs, primarily in manufacturing and administrative functions. Included in these actions were approximately 190 positions that had been part of a restructuring plan approved in 1996. The affected employees are entitled to receive severance benefits based on established severance policies or by governmentally mandated employee regulations. The charges also reflected pretax amounts for asset impairments, primarily for property, plant and equipment, intangible assets, and certain other investments, totaling $130 million. The asset impairments were recorded primarily because of the company's decision to sell certain nonstrategic businesses. As a result, the net assets of these businesses were classified as assets held for sale and were carried at their net realizable value, estimated to be approximately $36 million ($33 million in the Agricultural Products segment, and $3 million in the Corporate and Other segment) as of Dec. 31, 1998. These businesses were sold during 1999. The effect on net income and the aftertax effect of suspending depreciation on assets held for sale were not material in 1999, 1998 nor 1997. Other impairment charges totaling $40 million pretax were recorded in December 1998 because of management's decision to exit certain long- term investments. Fair values of the impaired assets and the businesses held for sale were recorded at their current market values or based on estimated sale proceeds using either discounted cash flows or sales contracts. The December 1998 restructuring amounts also included pretax charges of $99 million for the shutdown or other rationalization of certain production and administrative facilities. Rationalization entails the consolidation, shutdown or movement of facilities to achieve more efficient operations. Approximately 80 facilities, located primarily in the United States, Europe and Latin America, were affected by these actions. Charges for these shutdowns included $21 million for property, plant and equipment, $15 million for intangible assets, $26 million for miscellaneous investments, and $6 million for inventories. Leasehold termination costs of $13 million and various facility closure costs of $18 million, principally for facility shutdown costs, equipment dismantling and contract cancellation payments, were also included in the shutdown charges. The closure or rationalization of these facilities were completed by Dec. 31, 1999. As of Dec. 31, 1999, cash payments of $81 million were made to eliminate approximately 1,100 positions and deferred employee severance costs of $9 million were paid in Jan. 2000. In addition, $20 million of facility shut-down costs were incurred in connection with the 1998 restructuring plans. As of Dec. 31, 1999, the remaining reserve balance for employee severance related to the approximately 175 positions was $30 million, and $4 million in facility shut down costs. The company expects these employee reduction obligations to be substantially completed by March 2000. An additional 125 positions were eliminated through attrition. Cash payments to complete the 1998 plan will be funded from operations and are not expected to significantly impact Monsanto's liquidity. These restructuring actions are expected to result in annual pretax cash savings of $150 million. In May 1998, the board of directors approved a plan to exit Monsanto's optical products business, which included the Orcolite and Diamonex optical products business and the Diamonex performance products business (both reported in the Corporate and Other segment). As a result, the company recorded a net pretax charges of $48 million ($34 million aftertax). Monsanto recognized a $20 million pretax gain on the sale of the Orcolite business and recorded pretax charges of $68 million for the rationalization of the Diamonex business, primarily for severance costs and the write-off of manufacturing facilities and intangible assets. In connection with this rationalization, certain Diamonex product lines were sold, and others were shut down. In connection with the shutdown of the 6 Diamonex business approximately 200 jobs, primarily in manufacturing and administrative functions, were eliminated at a total cost of $6 million. These actions, including workforce reductions and payment of severance, were completed by Dec. 31, 1998. The sale of the remaining assets, which were classified as assets held for sale as of Dec. 31, 1998 and carried at their net realizable value of $7 million, was completed during 1999. Fair values of the impaired assets and the businesses held for sale were recorded at their current market values, based on estimated cash flows, appraisals or sales contracts. Net income generated by the optical products businesses in 1998, and 1997 totaled $2 million, and $5 million, respectively. Also during the second quarter of 1998, Monsanto recognized a pretax gain of $35 million ($21 million aftertax) primarily related to the reversal of a restructuring reserve based on a decision not to rationalize a European pharmaceutical production facility. There were approximately 70 jobs scheduled to be eliminated as part of this rationalization plan. The decision was driven by changes in the business and regulatory environment, and successes in the R&D pipeline. The net result of the actions was a pretax charge of $13 million ($13 million aftertax) in the second quarter of 1998, recorded in the Statement of Consolidated Income (Loss) in the following categories:
================================================================================================================================== WORKFORCE FACILITY ASSET REDUCTIONS CLOSURES IMPAIRMENTS OTHER TOTAL - ---------------------------------------------------------------------------------------------------------------------------------- Cost of goods sold $6 $ 2 $36 $44 Amortization and adjustment of intangible assets 24 24 Restructuring and other special items (26) $ (9) (35) Other expense (income) - net (20) (20) - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL INCREASE IN LOSS FROM OPERATIONS BEFORE INCOME TAXES $6 $(24) $60 $ (29) $13 ==================================================================================================================================
Also in 1998, Monsanto acquired several seed companies, including Plant Breeding International Cambridge Limited (PBIC), DEKALB Genetics Corporation (DEKALB), and certain international seed operations of Cargill, Incorporated (Cargill), which are included in the Agricultural Products segment. Monsanto recorded pretax charges of $422 million ($371 million aftertax) related to these acquisitions, of which $402 million related to the write-off of acquired in-process R&D and $20 million related to the cancellation of DEKALB stock options associated with that acquisition. Management believes that the technological feasibility of the acquired in-process R&D has not been established and that the research has no alternative future uses. Accordingly, the amounts allocated to in-process R&D are required to be expensed immediately under generally accepted accounting principles. The acquired in-process R&D was valued using a discounted cash flow method with risk-adjusted discount rates generally ranging from 12 percent to 20 percent. This valuation took into account the stage of completion and development cycle of each in-process R&D category. (See further discussion under AGRICULTURAL PRODUCTS and Notes to Financial Statements, Note 5 - Principal Mergers, Acquisitions, and Divestitures.) As part of restructuring actions approved prior to 1998, Monsanto reorganized U.S. staff operations and closed approximately 20 production, administrative and research facilities and made final payments to complete contractual commitments as part of a U.S. production facility shut-down. These actions eliminated approximately 1,020 positions. PRODUCT LAUNCH OF CELEBREX(R) AND INCREASED SEED SALES DRIVE EBIT HIGHER Consolidated EBIT from continuing operations was $1.1 billion in 1999 compared to $125 million in 1998. EBIT for 1999 included pretax charges of $64 million related to costs associated with the failed merger between Monsanto and D&PL, accelerated integration costs, and other unusual items. EBIT for 1998 included unusual charges of $762 million for restructuring and special charges, write-offs for acquired in-process R&D, and charges for the cancellation of DEKALB stock options. Excluding these unusual charges, EBIT would have been $1.2 billion in 1999 compared with $887 million in 1998. The 31 percent increase in EBIT (excluding unusual items) was the result of strong sales performance of Celebrex(R) arthritis treatment and the inclusion of a full year of results from seed companies acquired in 1998, partially offset by increased selling, general, and administrative (SG&A) expenses, technological costs, and amortization expense. EBITDA (excluding unusual items) was $1.9 billion in 1999, a $485 million, or 35 percent, increase from EBITDA (excluding unusual items) of $1.4 billion in 1998. 7 Total SG&A expenses increased $855 million, or 40 percent, in 1999 compared with expenses in 1998, principally because of increased spending in the Agricultural Products and Pharmaceutical segments. SG&A expenses for Agricultural Products rose primarily because of the inclusion of a full year of results from seed companies acquired in 1998. These expenses were offset partially by $25 million of licensing fees for technical data on glyphosate. SG&A expenses for Pharmaceuticals increased as Searle expanded its sales infrastructure and marketing programs, which include co-promotion payments to support the launch of Celebrex(R) in early 1999 and fund the continued marketing support throughout the rest of the year. Total technological expenses in 1999 increased $65 million, or 5 percent, from those in 1998 primarily because of continued spending on biotechnology initiatives for the Agricultural Products segment. Searle's technological expenses remained relatively unchanged from the prior year, as cost sharing gains offset increased expenses as several new-product candidates continued to advance through the later, more expensive phases of development. There were no charges for acquired in- process R&D in 1999, compared with $402 million in the prior year. Amortization and adjustment of intangible assets, which is included in income from continuing operations and EBIT (excluding unusual items), increased because of the increase in intangible assets from seed company acquisitions in 1998. Interest expense increased 64 percent to $345 million in 1999, compared with interest expense of $210 million in the prior year. Higher debt levels existed throughout 1999 because Monsanto financed the 1998 seed company acquisitions primarily with long-term borrowings. Other expense (income) - net of $107 million were incurred in 1999 compared with other expense (income) - net of ($31) million in the prior year. This decrease of $138 million was principally because of a one- time charge of $85 million associated with the failed merger between Monsanto and D&PL. In addition, there were lower gains from sales of product rights, higher minority interest expense and increased foreign currency losses, partially offset by an increase in gains on the sale of fixed assets. Gain on the sale of product rights decreased $74 million compared with the prior year, combined with minority interest expense increase of $19 million, and increases in foreign currency losses of $14 million. These other expenses were partially offset by a $56 million increase in gains from sale of businesses and other fixed assets in 1999. Income tax expense of $248 million in 1999 was higher than income tax expense of $46 million in 1998, primarily because of the increase in pretax income. The annual effective tax rate was 33 percent in 1999. In 1998, Monsanto recorded tax expense on a pretax loss from continuing operations, primarily because of nondeductible goodwill from seed company acquisitions. The lower 1999 effective tax rate was the result of increased earnings in jurisdictions with lower tax rates. If unusual items from both years were excluded, the effective tax rates from continuing operations would have been 31 percent in 1999 and 29 percent in 1998. DEVELOPMENT AND COMMERCIALIZATION OF NEW PRODUCTS CONTINUE TO BE PRIORITIES New product discovery, development and commercialization continue to be strategic priorities for Monsanto. Recent successes include Celebrex(R), a novel arthritis treatment, and Maverick(R) wheat herbicide. Late stage agricultural product development efforts are focused on insect-protected and herbicide-tolerant crops. Monsanto's late stage (Phase III) pharmaceutical development programs include celecoxib for oncology related applications; eplerenone for hypertension and heart failure; parecoxib for analgesic use in hospitals; valdecoxib for pain, rheumatoid arthritis and osteoarthritis; leridistim for supportive care of patients undergoing chemotherapy; and tifacogin for sepsis. The Agricultural Products research pipeline includes corn rootworm protected corn, high oil corn, disease protected wheat, and nutritionally enhanced seeds. Monsanto's R&D expenditures were $1.3 billion in 1999, or 15 percent of net sales, a level that reflects management's strong, long- term commitment to research. The discovery and development of pharmaceutical, agricultural and science-based nutritional products continue to be a major focus of these expenditures. Significant R&D efforts in existing product technologies and new product applications also continue across all business sectors with the use of genomics being a critical enabling technology. Additionally, Monsanto's research program includes new technologies and proprietary information obtained through licensing and strategic acquisitions. As a result, Monsanto has numerous products in the R&D pipeline and expects many of them to be commercialized in the next few years. PRIOR YEAR REVIEW In 1998, the company recorded a loss from continuing operations of $131 million, or $0.22 per share, compared with income from continuing operations of $149 million, or $0.24 per share, in 1997. Both years' results, however, were affected by unusual events. Results for 1998 included pretax charges of $762 million ($610 million aftertax, or $1.01 per share) for restructuring charges, write-offs of in-process R&D related to acquisitions, and other unusual charges. In 1997, the company recorded pretax charges of $633 million ($404 million aftertax, $0.66 per share) for the write-off of acquired in-process R&D related to the acquisitions of several seed companies, including the Asgrow Agronomics business (Asgrow), Holden's Foundation Seeds Inc. (Holden's), Corn States Hybrid Services Inc. (Corn States), and Sementes Agroceres S. A. (Agroceres), and the remaining interest in Calgene. 8 Without the unusual events in 1998 and 1997, income from continuing operations would have been $479 million, or $0.76 per share for 1998, compared with $553 million, or $0.91 per share for 1997, a decrease of 13 percent. The decrease was driven primarily by higher SG&A, technological and interest expenses, which more than offset a 19 percent increase in net sales. Sales grew primarily because of higher volumes, technology fee revenues and increased seed sales. EBIT was $125 million in 1998 compared with $262 million in 1997. EBIT for 1998 included $762 million of restructuring and special charges, write-offs for acquired in-process R&D, and charges for cancellation of DEKALB stock options, as summarized in the following table:
================================================================================================================================== WRITE-OFFS FOR CANCELLATION WORKFORCE FACILITY ASSET ACQUIRED OF DEKALB REDUCTIONS CLOSURES IMPAIRMENTS IN-PROCESS STOCK OTHER TOTAL R&D OPTIONS - ---------------------------------------------------------------------------------------------------------------------------------- Cost of goods sold $ 6 $ 8 $ 84 $ 98 Acquired in-process R&D $ 402 402 Amortization and Adjustment of intangible assets 3 63 66 Restructuring and special charges 103 64 $ (14) 153 Other expense (income) - net 43 $ 20 (20) 43 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL DECREASE IN EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES $109 $ 75 $190 $ 402 $ 20 $ (34) $762 ==================================================================================================================================
EBIT for 1997 included unusual charges of $633 million for in- process R&D write-offs. If these unusual charges were excluded, EBIT would have been $887 million in 1998, compared with $895 million in 1997. The $8 million decrease in EBIT excluding unusual items was caused by increased selling, general, and administrative expenses, technological costs and amortization expense, partially offset by the aforementioned growth in sales. EBITDA (excluding unusual items) grew to $1.4 billion in 1998, a $132 million, or 10 percent, increase from EBITDA (excluding unusual items) of $1.3 billion in 1997. Total SG&A expenses increased $384 million, or 22 percent, in 1998 compared with 1997, principally because of increased spending in the Agricultural Products and Pharmaceuticals segments. SG&A expenses for Agricultural Products rose primarily because of the inclusion in 1998 of SG&A expenses from the acquired seed companies. These expenses were offset partially by $36 million of licensing fees for technical data on glyphosate. Selling, general, and administrative expenses for Pharmaceuticals increased as Searle expanded its sales infrastructure to accommodate the launch of Arthrotec(R) in 1998 and prepared for the launch of Celebrex(R) arthritis treatment in early 1999. Total technological expenses in 1998 grew $259 million, or 25 percent, compared with those in 1997, primarily because of higher expenses in the Agricultural Products and Pharmaceuticals segments. Technological expenses for the Agricultural Products segment rose principally because of higher spending on genomics and crop biotechnology initiatives, and the inclusion of expenses from the acquired seed companies. Searle's technological expenses increased markedly, as several product candidates in the pipeline advanced through the later, more expensive phases of development. Expenses for amortization and adjustment of intangible assets, which are included in income from continuing operations and EBIT, increased year-to-year because of the increase in intangible assets related to seed company acquisitions made in 1998 and late 1997, and because of the write-offs of goodwill related to the company's exit from non-core businesses. The non-core business goodwill write-offs reduced EBIT (excluding unusual items) of the Agricultural Products segment by $38 million and the Corporate and Other segment by $26 million. Interest expense -- included in income (loss) from continuing operations -- rose as the amount of debt outstanding increased during 1998. In 1998, other income of $31 million decreased significantly from other income in 1997 of $89 million. The decrease of $58 million was primarily because of $40 million of losses on common stock investments and $35 million of losses from equity affiliates in 1998, compared with $6 million of income from equity affiliates in the prior year. This decrease of other income was partially offset by lower foreign currency losses of $22 million, primarily in the Asia Pacific region, compared with $52 9 million in 1997, and slightly higher gains from the sale of product rights of $124 million in 1998 compared with gains of $120 million in 1997. Income tax expense for 1998 of $46 million increased from income tax benefit for 1997 of $22 million, primarily because of $402 million of nondeductible in-process R&D charges and $46 million of nondeductible goodwill charges principally related to the PBIC, Cargill seed operation and DEKALB acquisitions. If unusual items in 1998 and 1997 were excluded, the effective tax rate would have been 29 percent in 1998 and 27 percent in 1997. ANALYSIS OF CHANGE IN EARNINGS (LOSS) PER SHARE FROM CONTINUING OPERATIONS
BETTER (WORSE) -------------------------- 1999 vs. 1998 vs. 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------------- SALES-RELATED FACTORS: Selling prices $(0.44) $(0.10) Sales volumes and mix 2.65 0.88 Pharmaceutical licensing revenues (0.23) 0.32 - ---------------------------------------------------------------------------------------------------------------------------------- Total Sales-Related Factors 1.98 1.10 ================================================================================================================================== COST-RELATED FACTORS: Raw material and manufacturing costs (0.04) (0.05) Selling, general and administrative expenses (1.06) (0.44) Technological expenses (0.11) (0.28) Amortization of intangible assets (0.18) (0.08) - ---------------------------------------------------------------------------------------------------------------------------------- Total Cost-Related Factors (1.39) (0.85) ================================================================================================================================== OTHER FACTORS: Change in shares outstanding (0.11) Exchange rates (0.12) (0.17) Acquisitions and divestitures - net - (0.14) Interest expense (0.16) (0.03) Pharmaceutical product right sales (0.06) Other expense - net (0.08) (0.01) - ---------------------------------------------------------------------------------------------------------------------------------- Total Other Factors (0.53) (0.35) ================================================================================================================================== Change in earnings (loss) per share before unusual items 0.06 (0.10) Unusual Items: Restructuring and special charges - net 0.52 (0.46) Acquired in-process research and development 0.53 0.13 Accelerated integration costs (0.08) Failed merger costs (0.08) Other unusual items - net 0.04 (0.03) - ---------------------------------------------------------------------------------------------------------------------------------- Total Unusual Items 0.93 (0.36) - ---------------------------------------------------------------------------------------------------------------------------------- Change in Earnings (Loss) per Share from Continuing Operations $ 0.99 $(0.46) ==================================================================================================================================
10
- ---------------------------------------------------------------------------------------------------------------------------------- AGRICULTURAL PRODUCTS ================================================================================================================================== - ---------------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------------- Net Sales $5,102 $4,264 $3,470 EBIT (excluding unusual items) 775 868 827 EBITDA (excluding unusual items) 1,275 1,223 1,035 Capital Expenditures 607 469 316 Depreciation and Amortization 500 355 208 - ----------------------------------------------------------------------------------------------------------------------------------
THE AGRICULTURAL PRODUCTS SEGMENT IS A LEADING DEVELOPER, PRODUCER AND MARKETER OF CROP PROTECTION PRODUCTS AND SEEDS. THIS INCLUDES THE DEVELOPMENT AND MARKETING OF PRODUCTS ENHANCED BY BIOTECHNOLOGY, WHICH IMPROVE THE EFFICIENCY OF FOOD PRODUCTION AND PRESERVE ENVIRONMENTAL QUALITY FOR AGRICULTURAL AND INDUSTRIAL USES. MORE THAN HALF OF THE UNIT'S HERBICIDE NET SALES ARE MADE OUTSIDE OF THE UNITED STATES. WEATHER CONDITIONS IN AGRICULTURAL MARKETS WORLDWIDE AFFECT SALES VOLUMES. Despite the unfavorable agricultural economy, net sales for Agricultural Products set a record at $5.1 billion, an increase of 20 percent over the previous sales record set in 1998. The increase in net sales was led by higher seed sales, particularly in seed lines containing the Roundup Ready(R) gene, with Monsanto branded Roundup Ready(R) soybeans holding approximately 25 percent of the market for soybeans in the United States. Seed sales increased to over $1.3 billion in 1999 compared with $670 million in 1998 primarily because of the inclusion of a full year of results from seed companies acquired in 1998. In addition, Roundup Ready(R) corn volume increased more than 100 percent from the prior year's sales in the United States. Continued increased demand for crops developed through biotechnology - especially Roundup Ready(R) soybeans, corn and cotton, YieldGard(R) insect-protected corn, and Bollgard(R) with Roundup Ready(R) cotton - generated substantially higher technology fee revenues from these crops in 1999. Worldwide acreage of crops developed through biotechnology increased over 49 percent to approximately 88 million acres for the 1999 crop season compared to 59 million acres in the 1998 crop season. In addition, the technology fee for Roundup Ready(R) soybeans in the United States increased approximately 25 percent in 1999. As a result, technology fee revenues increased 51 percent over prior year revenues. Total cost to soybean farmers per acre decreased as lower Roundup(R) herbicide prices more than offset increases in technology fees for the 1999 crop season. Contributing to the 1999 sales record was the Roundup(R) family of herbicides, which delivered volume growth in 1999 slightly above the historical 20 percent trendline. Operations in the United States, Canada, Brazil, Argentina, and Australia posted record sales volumes of Roundup(R). Lower selling prices, principally in the United States, made Roundup(R) more cost effective in a wide range of crop and industrial uses. The effect of generic competition in certain markets outside the United States required modestly lower selling prices. However, the effect of lower selling prices was more than offset by the increased sales volumes. The large gains in sales volumes of Roundup(R) were driven by lower selling prices, the continued adoption of conservation tillage (the practice of substituting the judicious use of herbicides for mechanical tillage), new applications, and increased use of Roundup(R) over the top of Roundup Ready(R) soybeans, cotton, canola, and corn. Net sales of Roundup and other glyphosate-based herbicides totaled 29 percent of total company net sales compared with 35 percent of total company net sales in the prior year. Net sales for the Agricultural Products segment also benefited from record sales of Posilac(R) bovine somatotropin. Sales volumes of Posilac(R) bovine somatotropin increased 14 percent over volumes in the prior year. Declines in the U.S. dollar value of local currencies in certain Latin American and Eastern European countries negatively affected the translation to U.S. dollars of local currency-denominated operating results in 1999 compared with 1998. Poor economic conditions in certain world areas limited liquidity and lessened the demand for herbicides, especially in Eastern Europe, where volumes of Roundup(R) declined in 1999. Drought conditions in key areas of Brazil during the planting season lessened the demand for herbicides and negatively affected planned sales volumes of Roundup(R) in 1999. Revenues from the Roundup(R) lawn-and-garden products business declined 37 percent, or $86 million, to $146 million in 1999 compared with revenues of $232 million in 1998. The decrease in revenues was primarily because of a change in the distribution network. Additionally, Roundup(R) lawn-and-garden revenues for 1998 included a one- time $32 million payment from The Scotts Company (Scotts) for the exclusive right to sell and market Roundup(R) herbicide for lawn-and-garden uses. (See Notes to Financial Statements, Note 2 - New Accounting Standards for further details.) In 1999, Roundup(R) for residential use was marketed by Scotts along with its broad line of residential lawn- and-garden products. Under the current agreement, Scotts receives a commission for its services as agent based on a varying percentage of the earnings before interest and taxes (EBIT) for the Roundup(R) lawn-and- garden 11 business. Scotts is also responsible for contributing annually towards the expenses of the Roundup(R) lawn-and-garden business. Monsanto recognizes the amounts due to and from Scotts as marketing expenses as they are incurred. EBIT (excluding unusual items) for the Agricultural Products segment in 1999 decreased $93 million compared with 1998, while EBITDA (excluding unusual items) increased $52 million, or 4 percent, from 1998. EBIT (excluding unusual items) totaled $775 million in 1999, compared with $868 million in 1998, a decrease primarily associated with an increase in amortization expense related to the 1998 seed company acquisitions. In addition, SG&A expenses rose primarily because of the inclusion of a full year of SG&A costs from the seed companies acquired in 1998, higher seed integration costs, and higher information technology expenses. These increases were offset partially by $25 million of licensing fees for technical data on glyphosate. Technological expenses grew principally because of the inclusion of the acquired seed company technological spending and additional biotechnology research. Depreciation and amortization increased $145 million, or 41 percent, primarily because of the seed company acquisitions in the prior year and the completion of additional manufacturing capacity for herbicides. Pretax unusual items from continuing operations in 1999 for the Agricultural Products segment totaled $101 million and included an $85 million charge associated with the failed merger between Monsanto and D&PL, and $61 million for the accelerated integration of Monsanto's agricultural chemical and seed operations. These charges were offset by a $35 million gain from the divestiture of Stoneville, and $10 million from the reversal of restructuring reserves established in 1998. The reversal of $10 million of restructuring reserves was required as a result of lower actual severance and facility shut-down costs than originally estimated. In 1998, unusual items from continuing operations included charges of $402 million for the write-off of in-process R&D; and a charge of $166 million for restructuring and other actions; and a $20 million charge for the cancellation of stock options in exchange for cash related to the acquisition of DEKALB. The restructuring and other action charges principally related to the cost of workforce reductions ($52 million), and asset impairments ($81 million). The in-process R&D charges were primarily associated with the acquisitions of DEKALB, PBIC and certain international seed operations of Cargill. PRIOR YEAR REVIEW Net sales for Agricultural Products in 1998 were $4.3 billion, an increase of 23 percent compared with sales in 1997 of $3.5 billion. The increase in net sales was led by the Roundup(R) family of herbicides, with volume growth in 1998 over 20 percent. The United States, Argentina, Brazil, and Australia posted record sales volumes of Roundup(R). The large gains in volumes of Roundup(R) were driven by continued adoption of conservation tillage, new applications, and increased use of Roundup(R) over the top of Roundup Ready(R) soybeans, cotton, canola, and corn. Declines in the U.S. dollar value of local currencies in Indonesia, Australia and Malaysia negatively impacted the translation to U.S. dollars of local currency-denominated operating results in 1998 compared to 1997. Poor economic conditions in Asia lessened the demand for herbicides, especially in Southeast Asia, where volumes of Roundup(R) declined in 1998. Lower selling prices, principally outside the United States, made Roundup(R) more cost effective in a wide range of crop and industrial uses. The effect of generic competition, especially in certain markets outside the United States, lowered selling prices modestly. However, the effect of lower selling prices was more than offset by increased sales volumes. Net sales of Roundup(R) and other glyphosate-based herbicides totaled 35 percent of total company net sales in 1998 compared with 36 percent of total company net sales in 1997. Increased demand for crops developed through biotechnology, especially Roundup Ready(R) soybeans, canola and cotton, and Yieldgard(R) insect-protected corn, drove technology fee revenues from these crops substantially higher. In addition, Roundup Ready(R) corn sold out in its introductory year in the United States. Seed sales also were higher in 1998 as the company's Asgrow seed business enjoyed a strong year, particularly with seed lines containing the Roundup Ready(R) gene. Sales from Agroceres and from Holden's, both acquired in late 1997, also added to revenues. Net sales for the Agricultural Products segment also benefited from record sales of Posilac(R) bovine somatotropin, which increased 26 percent from sales in the prior year. Revenues from the lawn-and-garden products business rose 8 percent to $232 million in 1998, compared with revenues of $214 million in 1997. Revenues increased primarily because of $32 million in payments associated with an agreement signed with The Scotts Company for the exclusive rights to sell and market Roundup(R) herbicide. (See Notes to Financial Statements, Note 2 - New Accounting Standards for further details.) EBIT (excluding unusual items) for the Agricultural Products segment in 1998 increased $41 million compared with 1997, while EBITDA (excluding unusual items) increased $188 million, or 18 percent, from 1997. EBIT (excluding unusual items) totaled $868 million in 1998, compared with $827 million in 1997, as the growth in net sales was nearly offset by increased operating expenses. Selling, general and administrative (SG&A) expenses rose in 1998 primarily because of a full year inclusion of SG&A costs from the seed companies acquired in 1997, and higher global development costs, including higher information technology expenses. These increases were partially offset by $36 million of licensing fees for technical data on glyphosate. Technological expenses grew principally because of higher spending on crop biotechnology development initiatives, inclusion of recently acquired seed company technological spending, and additional genomics research. Depreciation and amortization increased by $147 million, or 71 percent, primarily because of the completion of additional manufacturing capacity for Roundup(R) and because of 1997 seed company acquisitions. 12 Pretax unusual items in 1998 included: charges of $402 million for the write-off of in-process research and development (R&D); a $20 million charge for the cancellation of stock options in exchange for cash related to the acquisition of DEKALB; and a charge of $166 million for restructuring and other actions, principally related to the cost of work force reductions ($52 million) and asset impairments ($81 million). The in-process R&D charges were primarily associated with the acquisitions of DEKALB, PBIC and certain international seed operations of Cargill. In 1997, the unusual items included $633 million of pretax charges for in-process R&D write-offs associated with several seed company acquisitions. In-process R&D charges for the seed company acquisitions cover numerous seed breeding projects, no single one of which was significant, as is typical in the seed breeding industry. These projects consist of conventional breeding programs for corn, wheat and other hybrids; conventional breeding for soybean varieties; and the development of transgenic crops. The in-process R&D projects were valued by a discounted cash flow method with risk-adjusted discount rates, generally from 12 to 20 percent, which took into account the stage of development of each in-process R&D category. Successful commercialization of products developed through these projects is expected to occur five to nine years after program initiation. Although there are risks associated with the ultimate completion and commercialization of these research projects (specific risks are discussed under "Cautionary Statements Regarding Forward-Looking Information - Factors Affecting the Agricultural Products Segment" section), the failure of any one project would not materially affect the total value of the research programs. The in-process projects were at various stages of completion at the dates of acquisition. In 1999, Monsanto spent $82 million on biotechnology-related activities and $47 million on conventional breeding activities related to completing these in-process R&D projects. During the next eight years, management expects to spend approximately $250 million on biotechnology-related activities and approximately $180 million on conventional breeding activities to complete these in-process R&D projects; approximately $120 million in 2000, $100 million in 2001, $80 million in 2002, $60 million in 2003, $60 million in 2004, and $70 million thereafter. Monsanto intends to fund these costs, consisting primarily of salary and benefit expenses for R&D employees, with cash generated from existing businesses. Revenues from the in-process R&D projects related to the 1998 acquisitions began in 1999. Revenues from the in-process R&D projects related to the 1997 acquisitions began in 1998. OUTLOOK Monsanto's family of Roundup(R) herbicides continues to face increasing competition from generic producers in certain markets outside the United States. Patents protecting Roundup(R) expired in various countries in 1991. Compound per se patent protection for the active ingredient in Roundup(R) herbicide continues in the United States until Sept. 2000. Management expects technological breakthroughs in manufacturing processes and formulation advancements, as well as rapidly expanding production capacity, to continue to improve Monsanto's cost structure and to help maintain its leadership position. Significant growth potential remains for Roundup(R) in conservation tillage applications, new uses, and in applications over-the-top of crops designed to tolerate Roundup(R). As discussed in the Notes to Financial Statements (see Note 6 - Restructuring and Unusual Items for further details), Monsanto made significant progress to complete several strategic actions in 1999. In 1999, the company began the accelerated integration of the agricultural chemical and seed operations. The successful integration of these seed companies as members of Monsanto's agriculture business, and partnerships such as the Monsanto/Cargill joint venture, Renessen LLC, should enhance the company's ability to bring new products to market. At the same time, these relationships should help Monsanto gain worldwide distribution of its and other companies' agronomic traits, as well as technology traits designed to improve the quality of food or feed currently in R&D pipelines. A planned price reduction for Roundup(R) herbicide was implemented in the United States to accelerate volume growth, and to further strengthen the long-term competitive position in the 1999 crop year. In numerous markets worldwide during the past 15 years, management believes that price reductions for Roundup(R) were an important factor in volume growth via price elasticity in key market segments. At lower prices in the past, more growers used more Roundup(R) in new applications (such as conservation tillage and preharvest), treated more acres in existing applications and used higher rates per treated acre as Roundup(R) became more economical. The company marketed the following biotechnology-related plant sciences products during 1999: Roundup Ready(R) corn, canola, cotton and soybeans; corn and cotton protected from certain insects; potatoes protected from certain insects and viruses; and cotton and corn that are both insect-protected and Roundup Ready(R). These products were developed by Monsanto either alone or in partnership with biotechnology and seed production companies. 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 Roundup Ready(R) soybeans in that country. Despite these continuing concerns, Monsanto anticipates that farmers, particularly in North and South America and the Asia- Pacific region, will continue to make use of this new technology because of the economic benefits and reduced use of pesticides that it allows. The company continues to be involved in intellectual property disputes with several parties regarding biotechnology products. Management expects that such disputes will continue to occur as the agricultural biotechnology industry evolves. 13
- ---------------------------------------------------------------------------------------------------------------------------------- PHARMACEUTICALS ================================================================================================================================== - ---------------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------------- Net Sales $3,920 $2,771 $2,323 EBIT, (excluding unusual items) 655 309 286 EBITDA, (excluding unusual items) 813 451 422 Capital Expenditures 188 236 175 Depreciation and Amortization 158 142 136 - ----------------------------------------------------------------------------------------------------------------------------------
THE PHARMACEUTICALS SEGMENT REFLECTS THE OPERATIONS OF SEARLE, WHICH DEVELOPS, PRODUCES AND MARKETS PRESCRIPTION PHARMACEUTICALS. ITS MAJOR PRODUCTS INCLUDE MEDICATIONS TO RELIEVE THE SIGNS AND SYMPTOMS OF ARTHRITIS, TO CONTROL HIGH BLOOD PRESSURE, TO RELIEVE INSOMNIA AND TO PREVENT THE FORMATION OF ULCERS. In 1999, net sales for Pharmaceuticals increased to a record $3.9 billion, or 41 percent higher than 1998 net sales. The successful launch and continued strong sales of Celebrex(R) arthritis treatment were the primary drivers behind the strong sales performance. Celebrex(R) net sales totaled more than $1.5 billion in 1999 or 16 percent of total company net sales. The increase in net sales was partially offset by a 26 percent decrease in sales of Daypro(R) arthritis treatment, which recorded sales of $227 million, and a slight decrease in sales of Arthrotec(R) arthritis treatment, with full year sales of $344 million in 1999. Decreases in sales volumes of Arthrotec(R) and Daypro(R) occurred primarily because of market share shifts toward Celebrex(R). Searle remained the No. 1 provider of prescription arthritis treatments in the United States, as Celebrex(R), Arthrotec(R), and Daypro(R) arthritis treatments combined for 54 percent of the branded market share. Moreover, with the launch of Celebrex(R), Searle achieved the No. 1 sales position in prescription arthritis treatments worldwide. Celebrex(R) remains the top selective COX-2 inhibitor despite the introduction of a competing product during 1999. Net sales of arthritis treatments totaled $2.1 billion, or 23 percent of total company net sales in 1999 compared with $654 million, or 9 percent of total company net sales, in the prior year. Also contributing to the strong sales performance were sales of Ambien(R) short-term treatment for insomnia, which grew $77 million, or 17 percent, to $535 million, and sales of Covera-HS(R), a cardiovascular treatment, which grew $17 million, or 21 percent, to $98 million. Ambien(R) held a 53 percent market share of total U.S. hypnotic prescriptions. Partially offsetting these higher revenues were lower sales of Cytotec(R) ulcer preventive drug and lower sales of other individually insignificant Pharmaceutical products. Segment net sales also included licensing revenues totaling $145 million associated with several collaborative alliances compared with $335 million of licensing revenues in 1998. EBIT (excluding unusual items) for the Pharmaceuticals segment more than doubled to a record $655 million in 1999, compared with $309 million in 1998. EBITDA (excluding unusual items) totaled $813 million in 1999 compared with EBITDA (excluding unusual items) of $451 million in 1998, an increase of $362 million, or 80 percent. The improvements in EBIT (excluding unusual items) and EBITDA (excluding unusual items) in 1999 resulted primarily from sales of Celebrex(R) and from higher volumes of other key products, partially offset by lower licensing revenues and increased SG&A expenses. SG&A expenses rose $714 million, or 67 percent, primarily because of the launch and co-promotion expenses related to Celebrex(R). Technological expense of $763 million remained relatively unchanged from the prior year, as cost sharing gains were offset as several new product candidates continued to advance through the later, more expensive phases of development. Other income of $25 million decreased $60 million when compared with $85 million in 1998. The $60 million decrease was primarily caused by lower product rights sales in 1999 compared with product rights sales in 1998 ($50 million compared with $124 million). The Pharmaceuticals segment's 1999 results included an unusual pretax gain of $6 million related to the reversal of restructuring liabilities established in 1998. The restructuring liability reversal was required as a result of lower actual severance and facility shut- down costs than originally estimated. Pretax net unusual charges in 1998 totaled $29 million and included a gain of $35 million for the reversal of a prior year restructuring reserve and $64 million of charges, primarily for asset impairments ($42 million) and workforce reductions ($22 million). As a result of discussions with the staff of the United States Securities and Exchange Commission (SEC) and clarification of its interpretation regarding the classification of certain transactions, Monsanto agreed to reclassify certain revenues in the Statement of Consolidated Income (Loss). As a result, the company has reclassified revenues associated with the sales of pharmaceutical product rights from net sales to other expense (income) - net for all periods presented. The effect of this reclassification was to reduce net sales and increase other income included in other expense (income) - net by ($124) million and ($120) million in 1998 and 1997, respectively. In 1999, $50 million of sales of pharmaceutical product rights were included in other expense (income) - net. This reclassification had no effect on net income. 14 PRIOR YEAR REVIEW In 1998, net sales for Pharmaceuticals grew to $2.8 billion, 19 percent higher than 1997 net sales. Sales of Arthrotec(R) arthritis treatment more than tripled to $346 million, aided by launches in the United States and France, and by increased volume growth in other key countries. Searle ended the year as the No. 1 provider of branded arthritis treatments in the United States, as Arthrotec(R) and Daypro(R) arthritis treatments combined for 13 percent branded market share. Net sales of arthritis treatments totaled $654 million, or 9 percent of total company net sales in 1998 compared with $434 million or 7 percent of total company net sales in 1997. Ambien(R) short-term treatment for insomnia grew in market share; by year-end, it held 52 percent share of total U.S. hypnotic prescriptions. Sales for Ambien(R) increased 16 percent to a record $458 million. Segment net sales also benefited from licensing revenues totaling $335 million associated with several collaborative alliances; licensing revenues were $75 million in 1997. Partially offsetting these higher revenues were lower sales of verapamil calcium channel blockers and Cytotec(R) ulcer preventive drug. EBIT (excluding unusual items) for the Pharmaceuticals segment totaled $309 million in 1998, compared with $286 million in 1997, an increase of $23 million or 8 percent. EBITDA (excluding unusual items) totaled $451 million in 1998 compared with EBITDA (excluding unusual items) of $422 million in 1997, an increase of $29 million, or 7 percent. The improvements in EBIT (excluding unusual items) and EBITDA (excluding unusual items) in 1998 resulted primarily from higher volumes of key products and from licensing revenues, partially offset by increased SG&A and technological expenses. SG&A expenses rose primarily because of the launches of Arthrotec(R) and preparations for the launch of Celebrex(R) arthritis treatment. Other income of $85 million remained relatively unchanged compared with $81 million in 1997. Included in other income was the sale of product rights totaling $124 million in 1998 and $120 million in 1997. On Dec. 31, 1998, the U.S. Food and Drug Administration (FDA) approved Celebrex(R) for the treatment of the signs and symptoms of osteoarthritis and adult rheumatoid arthritis. Technological cost increases were driven by late-stage, more expensive clinical trials. Pretax net unusual charges in 1998 totaled $29 million and included a gain of $35 million for the reversal of a prior year restructuring reserve; and $64 million of charges, primarily for asset impairments ($42 million) and workforce reductions ($22 million). OUTLOOK As of February 25, 2000, Celebrex(R) had been approved in 41 countries, representing more than 53 percent of the worldwide prescription anti-arthritic market, and launched in 28 of these countries, covering most of the Western Hemisphere and certain European and Asia-Pacific countries. It is anticipated that, following the first European Union (EU) approval of Celebrex(R) in Sweden on Dec. 3, 1999, Celebrex(R) will be approved and launched in almost all EU countries during 2000. Searle and Pfizer Inc. will co-promote Celebrex(R) in all countries except Japan, where Searle has formed an alliance with Yamanouchi Pharmaceutical Co. to develop and commercialize the drug. On Dec. 3, 1999, the U.S. FDA approved Celebrex(R) as an oral adjunct to usual care for patients with familial adenomatous polyposis (FAP) - a rare disease which left, untreated almost, always leads to colorectal cancer. Celebrex(R) is the first pharmacological agent to be indicated to reduce the number of polyps in FAP patients. In 2000, Searle will begin commercial activities related to the new FAP indication, which represents the first oncology-related application for the product. In early 2000, Searle initiated long-term clinical studies, in collaboration with the National Cancer Institute, in four additional oncology applications: a type of colon cancer known as SAP; bladder cancer; actinic keratosis (a type of skin cancer); and Barrett's esophagus, a precursor to cancer of the esophagus. Ambien(R), a short-term treatment for insomnia, continues as the leader in the U.S. hypnotic market with a 53 percent share of total prescriptions, despite the entry of the first new product competitor in the hypnotic market in years. Ambien(R) is licensed to a joint venture in which Searle is a general partner. Under the joint venture agreement amended in 1998, Searle's share of profits will be gradually reduced from 90 percent in 1998 to 51 percent in early 2002. The partner will buy-out Searle's interest in the joint venture on April 16, 2002. Searle currently has 11 compounds in clinical trials. Searle's research-and-development (R&D) pipeline is focused on three therapeutic areas: arthritis/pain and inflammation; cardiovascular disease; and oncology. Among the arthritis/inflammation candidates are valdecoxib, which is in late Phase III trials and is being developed as a possible analgesic for pain, osteoarthritis, and rheumatoid arthritis; and parecoxib, which is also in late Phase III trials as an injectable COX-2 inhibitor for acute, moderate-to-severe pain. Three compounds are under clinical development in the cardiovascular pipeline. Eplerenone is being developed for the treatment of heart failure and high blood pressure, and has entered Phase III clinical trials for both indications. Tifacogin is entering Phase III clinical trials for treatment of patients with sepsis. An ASBT inhibitor, for treatment of high cholesterol, has recently entered clinical development. Searle also has three oncology compounds under clinical development. Celecoxib is being studied in Phase III trials as a preventive drug for certain types of cancers (outlined above). Leridistim is being developed to stimulate the replenishment of white blood cells and platelets in chemotherapy patients. Leridistim is currently in Phase III clinical trials. Progenipoietin is being developed 15 in conjunction with cancer vaccines to support cancer immune therapy and independently to stimulate blood cell replenishment in chemotherapy patients. Progenipoietin and cancer vaccine programs are in early clinical development. Management expects technological expenses and selling expenses to increase in the next few years as Searle continues its commitment to discovering and developing new products, and as it commercializes products now in the R&D pipeline. It is anticipated that these increased expense levels will be supported by increased sales from Celebrex(R) and, longer term, by additional new product launches. - ------------------------------------------------------------------------ CORPORATE AND OTHER ======================================================================== The Corporate and Other segment comprises various smaller businesses, as well as certain corporate items that are not allocated to the segments. Net sales decreased in 1999 from 1998 levels by $78 million. This decline was primarily driven by lower sales of Enviro- Chem's environmental abatement products, the divestiture of the Orcolite opthalmics business in 1998, and shutdown of the Diamonex optical products division in 1998. Also contributing to the sales decline was the divestment of the company's interest in the health and wellness business area in the first half of 1999. EBIT (excluding unusual items) for the corporate and other segment recorded a loss of $270 million in 1999 compared with a loss of $290 million in 1998. The segment loss decreased principally because of lower SG&A expenses due to fewer product lines, partially offset by increased spending associated with nutrition research operations in 1999. Unusual items from continuing operations in 1999 included a net pretax gain of $31 million primarily related to the reversal of restructuring reserves established in 1998, required because actual severance and facility shut-down costs were lower than originally estimated. PRIOR YEAR REVIEW Corporate and Other segment net sales decreased in 1998 from 1997 levels by $63 million. This change was primarily driven by lower sales of Enviro-Chem's environmental abatement products. The divestiture of the Orcolite opthalmics business in the second quarter of 1998 also contributed to the sales decline. Monsanto also shut down the Diamonex optical products division in 1998. On an EBIT (excluding unusual items) basis, the corporate and other segment recorded a loss of $290 million in 1998 compared with a loss of $218 million in 1997. The segment loss increased principally because of the sales decline in the segment and because of higher selling, general and administrative (SG&A) and technological spending, primarily related to incentive compensation and information technology expenses. In 1998, unusual charges included pretax restructuring and other special charges of $145 million, principally for the cost of facility shutdowns ($64 million) and asset impairments ($67 million). There were no unusual items in the Corporate and Other segment in 1997.
- ---------------------------------------------------------------------------------------------------------------------------------- DISCONTINUED OPERATIONS ================================================================================================================================== 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------------- Net Sales $980 $1,288 $3,279 Income (Loss) from Discontinued Operations Before Income Tax 150 (158) 506 Income Tax Expense (Benefit) 58 (39) 185 Net Income (Loss) from Discontinued Operations 92 (119) 321 - ----------------------------------------------------------------------------------------------------------------------------------
DISCONTINUED OPERATIONS INCLUDE THE ALGINATES, ARTIFICIAL SWEETENERS, ORTHO LAWN-AND-GARDEN AND BIOGUMS BUSINESSES. THESE BUSINESSES MANUFACTURE AND MARKET SWEETENERS (INCLUDING NUTRASWEET(R) BRAND SWEETENER AND EQUAL(R) AND CANDEREL(R) TABLETOP SWEETENERS), LAWN-AND-GARDEN PRODUCTS, ALGINS, BIOGUMS, AND OTHER FOOD INGREDIENTS. DISCONTINUED OPERATIONS FOR 1997 ALSO INCLUDES THE CHEMICALS BUSINESS WHICH WAS SPUN OFF TO SHAREHOLDERS ON SEPT. 1, 1997. Net sales for discontinued operations decreased in 1999 compared with 1998 primarily because of the Jan. 1999 divestiture of the Ortho lawn-and-garden products business. In Jan. 1999, the company sold its lawn-and-garden products business, exclusive of Roundup(R) herbicide, to The Scotts Company. Revenues for NutraSweet(R), the company's trademark aspartame product, and for tabletop sweeteners declined in 1999 compared with 1998 reflecting increased competition. Biogum sales declined modestly as sales of xanthan and gellan gum products declined due to a recession in the oil field industry. 16 Income from discontinued operations was $92 million, net of tax of $58 million, compared with a loss of $119 million, net of tax benefit of $39 million in the prior year. This increase of $211 million was primarily because 1998 discontinued operations included restructuring charges of $220 million aftertax ($298 million pretax), principally for the cost of facility shutdowns ($187 million pretax), asset impairments ($84 million pretax), and workforce reductions ($27 million pretax). Unusual items in 1999 included a net gain of $2 million aftertax which included the reversal of $27 million aftertax of 1998 restructuring reserves and charges of $25 million aftertax associated with cost to exit the alginates business. Income tax expense for discontinued operations for 1999 and 1998 exceeded the 35 percent U.S. federal statutory rate primarily because of a nondeductible write-off of intangibles assets associated with the alginates business. Income tax expense for discontinued operations for 1997 exceeded the U.S. federal statutory amount primarily because of nondeductible exit costs incurred to separate the chemicals business. In October 1999, the company completed the sale of the alginates business for proceeds of $40 million, which resulted in an aftertax loss of $25 million on the sale from discontinued operations. Offsetting this loss on disposal were restructuring liability reversals of $27 million aftertax, representing severance and facility shut-down costs originally estimated which were no longer required as a result of the sale of the business on terms more favorable than originally anticipated. On Feb. 4, 2000, Monsanto announced the signing of a definitive agreement to sell the tabletop sweetener business, including the Equal(R), Canderel(R) and NutraSweet(R) tabletop brands, to Tabletop Acquisition Corp. (TAC). Expected proceeds of $570 million from the sale will primarily be used to reduce debt. On February 22, 2000, Monsanto announced the signing of a definitive agreement to sell the biogums business to a joint venture between Hercules Inc. and Lehman Brothers Merchant Banking Partners II, L.P. Expected proceeds of $685 million will primarily be used to reduce debt. PRIOR YEAR REVIEW Net sales for discontinued operations decreased in 1998 compared with net sales in 1997, primarily because of the spinoff to shareholders of the chemicals business in Sept. of 1997. Sales of NutraSweet(R), the company's trademark aspartame product, decreased 17 percent in 1998 compared with sales in 1997, because of lower sales volumes. Sales of tabletop sweeteners rose modestly in 1998, reflecting market share gains in the United States and higher sales of sweetener products in Latin America. Biogum sales rose from sales of xanthan and gellan gum products to food manufacturers and to industrial customers. Discontinued operations reported a net loss of $119 million in 1998 compared with net income of $321 million in 1997. This decrease of $440 million is primarily because the chemical company results were no longer included in 1998 discontinued operations and unusual charges included pretax restructuring charges of $298 million, principally for the cost of facility shutdowns ($187 million), asset impairments ($84 million), and workforce reductions ($27 million). Unusual items in 1997 included $51 million of pretax charges for in-process R&D related to the acquisition of the Calgene oils business. REVIEW OF CHANGES IN FINANCIAL POSITION The company's working capital improved $622 million to $2.0 billion compared with $1.4 billion at the end of 1998, primarily because of increases in cash and cash equivalents, trade receivables, and decreases in short-term debt, partially offset by increases in marketing program accruals and other miscellaneous accruals. Cash and cash equivalents at year-end 1999 increased to $284 million from $89 million in 1998. Trade receivables at year-end 1999 increased compared with those at the prior year-end primarily because of higher sales levels from both business segments. Higher collections from increased sales in 1999 enabled the company to reduce short-term debt by $289 million in 1999. Increased sales in the fourth quarter of 1999 resulted in a 46 percent increase in marketing programs and a 30 percent increase in other miscellaneous accruals compared with the prior year. Working capital as a percent of net sales was 22 percent in 1999 compared with 20 percent in 1998. Working capital requirements were lower in 1999, primarily because of higher sales levels and business divestments. The current ratio improved to 1.5 compared with 1.4 at year-end 1998. Net cash provided by continuing operations increased $657 million from the prior year primarily from improved management of working capital and increased income from continuing operations of $634 million. Cash provided by continuing operations totaled $891 million in 1999 compared with $234 million in 1998, which included the collection of $180 million of miscellaneous receivables related to 1997 Pharmaceutical licensing and product rights sales. Partly offsetting these increases in cash were tax payment increases of $128 million. Monsanto's operations have historically generated sufficient cash to fund both its existing businesses and its research and development expenses. Cash provided by continuing operations is a major source of working capital funds. Monsanto also uses financial markets worldwide to meet its financing needs. To the extent the company's cash provided by operations was not sufficient to fund its cash needs at certain times during the year, short-term borrowings were used to finance these requirements. The company has available various short and medium-term bank credit facilities, which are discussed in the Notes to Financial Statements, Note 11 - Short-Term Debt and Credit Arrangements. These credit facilities give Monsanto the financing flexibility it needs to satisfy future short 17 and medium-term funding requirements. Improved working capital management and proceeds from divestitures were used to reduce the company's long-term debt by $356 million by year-end 1999. As a result, the percentage of debt to total capitalization decreased 4 percent to 56 percent in 1999. In Dec. 1998, Monsanto issued $2.5 billion of long- term debt with various maturities; and in Nov. 1998, Monsanto issued 17,500,000 units of 6.50 percent Adjustable Conversion-rate Equity Security Units with a public offering price of $40 per unit (stated value), or $700 million. The company also issued 25 million shares of common stock for $944 million in Nov. 1998. Further details related to Monsanto's commitments and contingencies are described in the Notes to Financial Statements, Note 20 - Commitments and Contingencies. In 1999, 1998 and 1997, investment and property disposal proceeds were largely related to sales of nonstrategic properties and investments. Major uses of cash in 1999, 1998 and 1997 included investments, capital expenditures, dividends and treasury stock purchases. Investments in 1999 included acquisitions and joint ventures in plant biotechnology and equity investments. Major investments in 1998 included the acquisitions of DEKALB, certain international seed operations of Cargill, and PBIC. Major investments in 1997 were the acquisitions of Holden's, Corn States, the remaining interest in Calgene Inc., the Asgrow Agronomics business, and Agroceres Net property, plant and equipment at the end of 1999 was approximately $455 million higher than the comparable period of 1998. Capital expenditures of $1.0 billion and the effects of $121 million of acquisitions were only partially offset by 1999 non-cash charges and $472 million of divestitures. The decrease in intangible assets was attributable primarily to amortization expense for the year. SHAREOWNER MATTERS Monsanto has paid quarterly dividends on its common shares without interruption since 1928. Throughout 1999, the quarterly dividend paid was $0.03 per share. The dividend rate reflects a policy adopted by the board of directors following the spinoff of the company's chemical businesses in 1997, to fund the company's growth opportunities to create long-term economic value for shareowners. Monsanto's common stock is traded principally on the New York Stock Exchange. The number of shareowners of record as of Feb. 25, 1999, was 54,251. The high and low common stock prices for the year were $50 13/16 and $32 3/4, respectively. - ------------------------------------------------------------------------ ADDITIONAL FINANCIAL INFORMATION ======================================================================== RISK MANAGEMENT Monsanto continually evaluates risk retention and insurance levels for product liability, property damage, and other potential areas of risk. Monsanto devotes significant efforts to maintaining and improving safety and internal control programs, which reduce its exposure to certain risks. Management decides the amount of insurance coverage to purchase from unaffiliated companies and the appropriate amount of risk to retain based on the cost and availability of insurance and the likelihood of a loss. Since 1986, Monsanto's liability insurance has been a "claims made" policy form. Management believes that the current levels of risk retention are consistent with those of comparable companies in the industries in which Monsanto operates. There can be no assurance that Monsanto will not incur losses beyond the limits of, or outside the coverage of, its insurance. Monsanto's liquidity, financial position, and profitability are not expected to be affected materially by the levels of risk retention that the company accepts. Y2K - STATE OF READINESS Monsanto's preparations for the year 2000 were successfully completed. The company remediated and tested its internal business application systems and information technology infrastructure and embedded systems components vital to serving customer needs. It also monitored the year 2000 compliance efforts of its key suppliers and customers and developed and tested business continuity plans. The total costs associated with this three-year effort are projected at approximately $35 million, with almost all that amount incurred prior to Jan. 2000. Monsanto has not experienced any significant disruptions in its business due to year 2000 problems to date and is committed to making certain that its systems and processes continue to function properly in the future. EURO CONVERSION On Jan. 1, 1999, 11 of the 15 member countries of the European Union established fixed conversion rates between their national currencies and the euro. During the transition period, from Jan. 1, 1999, until June 30, 2002, both the national currencies and the euro will be legal currencies. Beginning July 1, 2002, the national currencies of the participating countries no longer will be legal tender for any transactions. In September 1997, Monsanto formed a cross-functional team and engaged a consultant to address issues associated with the 18 euro conversion. As of Jan. 1, 1999, Monsanto began to engage in euro- denominated transactions and was legally compliant. Monsanto expects to have all affected information systems fully converted by April 2002. Monsanto does not expect the euro conversion to have a material effect on its competitive position, business operations, financial position or results of operations. MARKET RISK MANAGEMENT Monsanto is exposed to market risk, including changes in interest rates, currency exchange rates, and commodity prices. To manage the volatility relating to these exposures, the company enters into various derivative transactions. Monsanto does not hold or issue derivative financial instruments for trading purposes. For more information about how Monsanto manages specific risk exposures, see the currency translation note, the inventories note, and the long-term debt note, in Notes to Financial Statements. The tables below provide information about the company's derivative instruments and other financial instruments that are sensitive to changes in interest rates, currency exchange rates and commodity prices. The financial instruments are grouped by market risk exposure category. Instrument denominations are indicated in parentheses. For instruments denominated in currencies other than the U.S. dollar, the information is presented in U.S. dollar equivalents, which is the company's reporting currency. Significant interest rate risk sensitive instruments as of Dec. 31, 1999, were:
EXPECTED MATURITY DATE - ---------------------------------------------------------------------------------------------------------------------------------- (Dollars in millions, except average interest rate) 2000 2001 2002 2003 2004 THEREAFTER TOTAL FAIR VALUE - ---------------------------------------------------------------------------------------------------------------------------------- LONG-TERM DEBT: Fixed rate ($US) Principal amount $ 533 $ 19 $ 738 $ 22 $2,774 $4,086 $3,724 Average interest rate 5.6% 8.3% 6.1% 8.1% 6.7% 6.5% Fixed rate (Japanese yen) Principal amount $ 99 $ 99 $ 136 Average interest rate 5.6% 5.6% Variable rate ($US) Principal amount $1,070 $ 107 $ 333 $ 7 $ 201 $1,718 $1,746 Average interest rate 5.9% 5.0% 5.3% 5.7% 5.6% 5.7% SHORT-TERM DEBT: Fixed rate ($US) Principal amount $ 161 $ 161 $ 161 Average interest rate 6.1% 6.1% Variable rate ($US) Principal amount $ 562 $ 562 $ 565 Average interest rate 6.2% 6.2% - ---------------------------------------------------------------------------------------------------------------------------------- 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 1999 year-end variable rates. Actual rates in future years may be higher or lower.
19 Significant currency exchange rate risk sensitive instruments as of Dec. 31, 1999 (dollars in millions):
AVERAGE NOTIONAL EXCHANGE FAIR EXPECTED MATURITY 2000 AMOUNT RATE VALUE - ---------------------------------------------------------------------------------------------------------------------------------- FORWARD CONTRACTS: Sale of British pound $382 0.609 $375 Sale of Canadian dollar 41 1.467 41 Sale of Australian dollar 48 1.566 48 Sale of South African rand 32 6.135 32 Sale of Mexican peso 14 9.561 14 Sale of Polish zloty 47 4.210 47 Sale of Czech crown 29 35.471 29 Sale of Philippine peso 10 40.460 10 Sale of Hungarian forint 8 249.100 8 Sale of Indonesian rupiah 24 8057.988 27 Sale of European Euro 113 0.948 109 Purchase of Japanese yen 78 104.083 80 - ---------------------------------------------------------------------------------------------------------------------------------- Average contract exchange rates are stated in currency units per U.S. dollar.
As of Dec. 31, 1999, Monsanto had purchased currency option contracts to sell $72 million of various currencies which had a fair value of approximately $1 million. Significant commodity price risk sensitive instruments as of Dec. 31, 1999:
- ---------------------------------------------------------------------------------------------------------------------------------- EXPECTED MATURITY FAIR 2000 VALUE - ---------------------------------------------------------------------------------------------------------------------------------- PURCHASED CORN FUTURES CONTRACTS: Contract volumes (million bushels) 13.6 Weighted average price (per bushel) $ 2.05 Contract amount ($US in millions) $ 28 $ 28 PURCHASED SOYBEAN FUTURES CONTRACTS: Contract volumes (million bushels) 15.9 Weighted average price (per bushel) $ 4.89 Contract amount ($US in millions) $ 78 $ 75 SOLD LEAN HOGS FUTURES CONTRACTS: Contract volumes (million hundred weight) 0.2 Weighted average price (per hundred weight) $ 54.40 Contract amount ($US in millions) $ (9) $ (9) - ---------------------------------------------------------------------------------------------------------------------------------- Contract amounts are used to calculate the contractual payments and quantity of the commodity to be exchanged.
20 - ------------------------------------------------------------------------ CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING INFORMATION ======================================================================== Under the Private Securities Litigation Reform Act of 1995, companies are provided with a "safe harbor" for making forward-looking statements about the potential risks and rewards of their strategies. Monsanto believes it is in the best interest of its shareowners to use these provisions in discussing future events. Forward-looking statements include Monsanto's plans for growth; the potential for the development, regulatory approval, and public acceptance of new products; and other factors that could affect Monsanto's future operations or financial position. Such statements often include the words "believes," "expects," "anticipates," "intends," "plans," "estimates," or similar expressions. Monsanto's ability to achieve its goals depends on many known and unknown risks and uncertainties, including changes in general economic and business conditions. These factors could cause the anticipated performance and results of the company to differ materially from those described or implied in forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below. FACTORS AFFECTING THE AGRICULTURAL PRODUCTS SEGMENT Roundup(R) 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 Roundup Ready(R) crops, and continuing to encourage the practice of conservation tillage. In addition, Monsanto will continue to 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 Roundup Ready(R) crops and economically produce glyphosate in sufficient quantities to allow it to market to such producers. Pricing Strategy: Monsanto has 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, and to date in the United States, has been that price reductions have stimulated volume growth. However, such volume increases 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 experienced to date by Monsanto, may or may not continue. 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. Biotechnology has enjoyed and continues to enjoy substantial support from the scientific community, regulatory agencies and many governmental officials around the world (including in the United States). 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 21 economic practices. For instance, consumer groups have brought lawsuits in various countries seeking to halt industry activities with respect to products developed through biotechnology. Securing governmental approvals for, and consumer confidence in, such products poses numerous challenges, particularly outside the United States. Some countries also have labeling requirements. In some markets, because these crops are not yet approved for import, growers in other countries may be restricted from introducing or selling their grain. In these cases, the grower may have to arrange to sell the grain only in the domestic market or to use the grain for feed on his or her farm. The market success of Monsanto's products developed through biotechnology could be delayed or impaired in certain geographical areas because of such factors. Technological Change and Competition: A number of companies are engaged in plant biotechnology research. Technological advances by others could render Monsanto's products less competitive. In addition, the ability to be first to market a new product can result in a significant competitive advantage. Monsanto believes that competition will intensify, not only from agricultural biotechnology firms but from major agrichemical, seed and food companies with biotechnology laboratories. Some of Monsanto's agricultural competitors have substantially greater financial, technical and marketing resources than Monsanto does. Successful Integration of Recent Transactions: Monsanto has made significant acquisitions, mergers and joint ventures involving seed, agricultural biotechnology and grain processing companies. These transactions are designed to strengthen Monsanto's capability to bring important new life sciences products to customers worldwide, and to contribute to the company's long-term growth. It is anticipated that the acquisitions of DEKALB Genetics Corporation, Plant Breeding International Cambridge Limited, and certain international seed operations of Cargill, Incorporated, 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 synergy's 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 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. 22 Competition: Pharmaceutical research is intense and highly competitive. It is characterized by rapid technological change. Depending on the product involved, competition may be encountered in price, delivery, service, performance, innovation, brand recognition and quality. Many of Monsanto's pharmaceutical competitors have greater research, financial, marketing and other resources than Monsanto does. Some of Monsanto's trademarked pharmaceutical products also face increasing pressures from producers of lower-priced generic products and from new products entering the marketplace. Finally, as the company introduces new products intended for use in the treatment of the same conditions as existing Monsanto products, sales of such existing products may suffer. Pricing: Managed care groups, health care organizations and government agencies worldwide actively seek discounts and lower prices on pharmaceutical products. Monsanto's challenge is to provide overall economic benefits to health care providers and negotiate prices for specific products that will allow it to profit at acceptable levels. FACTORS AFFECTING ALL SEGMENTS Financial Requirements: 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. 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 38 percent of the company's 1999 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. Divestitures: In 1999, Monsanto announced its intention to sell several non-strategic business, including many of the businesses comprising the Nutrition & Consumer Sector. Since that announcement, Monsanto has sold several of these businesses and has reached agreements to sell others. Monsanto's success in selling the remaining businesses included in its divestiture plan will depend on its ability to negotiate acceptable sales prices for such businesses which in turn is largely dependent on the long-term prospects and strategic value of the businesses and the availability of buyers with sufficient financial resources. 23 ================================================================================================================================ STATEMENT OF CONSOLIDATED INCOME (LOSS) ================================================================================================================================
Year Ended Dec. 31, (Dollars in millions, except per share amounts) 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------------------- NET SALES $9,146 $7,237 $6,058 Costs, expenses and other: Cost of goods sold 3,272 2,912 2,382 Selling, general and administrative expenses 2,984 2,129 1,745 Technological expenses 1,373 1,308 1,049 Acquired in-process research and development 402 633 Amortization and adjustment of intangible assets 374 286 121 Restructuring and other special items (15) 153 Interest expense 345 210 135 Interest income (45) (47) (45) Other expense (income) - net 107 (31) (89) - -------------------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 751 (85) 127 Income taxes (benefits) 248 46 (22) - -------------------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM CONTINUING OPERATIONS $ 503 $ (131) $ 149 - -------------------------------------------------------------------------------------------------------------------------------- Income (Loss) from Discontinued Operations, Net of income taxes (benefits) of $30, ($39) and $185, respectively 57 (119) 321 Gain on Sale of Discontinued Operations, Net of taxes of $28 million 35 - -------------------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE $ 595 $ (250) $ 470 Cumulative Effect of a Change in Accounting Principle, Net of a tax benefit of $12 million (20) ================================================================================================================================ NET INCOME (LOSS) $ 575 $ (250) $ 470 ================================================================================================================================ BASIC EARNINGS (LOSS) PER SHARE: Continuing operations $ 0.79 $(0.22) $ 0.26 Discontinued operations 0.09 (0.19) 0.54 Gain on sale of discontinued operations 0.06 Cumulative effect of accounting change (0.03) - -------------------------------------------------------------------------------------------------------------------------------- Net Income (Loss) $ 0.91 $(0.41) $ 0.80 ================================================================================================================================ DILUTED EARNINGS (LOSS) PER SHARE: Continuing operations $ 0.77 $(0.22) $ 0.24 Discontinued operations 0.09 (0.19) 0.53 Gain on sale of discontinued operations 0.05 Cumulative effect of accounting change (0.03) - -------------------------------------------------------------------------------------------------------------------------------- Net Income (Loss) $ 0.88 $(0.41) $ 0.77 ================================================================================================================================ The above statement should be read in conjunction with Notes to Financial Statements.
24 ================================================================================================================================ STATEMENT OF CONSOLIDATED FINANCIAL POSITION ================================================================================================================================
(Dollars in millions, except per share amounts) ASSETS 1999 1998 - -------------------------------------------------------------------------------------------------------------------------------- CURRENT ASSETS: Cash and cash equivalents $ 284 $ 89 Trade receivables, net of allowances of $167 in 1999 and $87 in 1998 2,618 2,119 Miscellaneous receivables, prepaid expenses and other 711 777 Deferred income tax asset 446 488 Inventories 1,728 1,722 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 5,787 5,195 - -------------------------------------------------------------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT: Land 121 135 Buildings 1,196 1,133 Machinery and equipment 3,415 3,175 Construction in progress 1,022 742 - -------------------------------------------------------------------------------------------------------------------------------- Total property, plant and equipment 5,754 5,185 Less accumulated depreciation 2,434 2,320 - -------------------------------------------------------------------------------------------------------------------------------- NET PROPERTY, PLANT AND EQUIPMENT 3,320 2,865 - -------------------------------------------------------------------------------------------------------------------------------- Goodwill, net of accumulated amortization of $257 in 1999 and $125 in 1998 3,776 4,496 Other intangible assets, net of accumulated amortization of $368 in 1999 and $269 in 1998 894 785 Other Assets 1,201 1,120 Net Assets of Discontinued Operations 1,557 1,924 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $16,535 $16,385 ================================================================================================================================ LIABILITIES AND SHAREOWNERS' EQUITY - -------------------------------------------------------------------------------------------------------------------------------- CURRENT LIABILITIES: Short-term debt $ 780 $ 1,069 Accounts payable $ 874 $ 823 Accrued marketing programs 487 334 Compensation and benefits 394 436 Restructuring reserves 52 222 Miscellaneous accruals 1,163 896 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 3,750 3,780 - -------------------------------------------------------------------------------------------------------------------------------- LONG-TERM DEBT 5,903 6,259 POSTRETIREMENT LIABILITIES 962 848 OTHER LIABILITIES 571 512 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 1,504 1,389 Treasury stock, at cost (210,694,577 shares in 1999 and 217,632,240 shares in 1998) (2,430) (2,508) Reinvested earnings 5,150 4,652 Reserve for ESOP debt retirement (82) (106) Accumulated other comprehensive loss (487) (135) - -------------------------------------------------------------------------------------------------------------------------------- TOTAL SHAREOWNERS' EQUITY 5,349 4,986 ================================================================================================================================ Total Liabilities and Shareowners' Equity $16,535 $16,385 - -------------------------------------------------------------------------------------------------------------------------------- ESOP stands for Employee Stock Ownership Plan. The above statement should be read in conjunction with Notes to Financial Statements.
25 ================================================================================================================================ STATEMENT OF CONSOLIDATED CASH FLOW ================================================================================================================================
Year Ended Dec. 31, (Dollars in millions) 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS OPERATING ACTIVITIES: - -------------------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before income taxes 751 (85) 127 Adjustments to reconcile to Cash Provided by Continuing Operations: Income tax (payments) refunds (84) 44 (134) Items that did not use (provide) cash: Depreciation and amortization 730 518 378 Acquired in-process research and development expenses 402 633 Restructuring and other unusual items 57 340 Other 92 49 (27) Working capital changes that provided (used) cash: Accounts receivable (497) (700) (230) Inventories (36) (223) (120) Accounts payable and accrued liabilities 114 (280) (238) Receivables from licensing arrangements (109) 180 (232) Other (22) (55) (73) Other items (105) 44 (83) - -------------------------------------------------------------------------------------------------------------------------------- CASH PROVIDED BY CONTINUING OPERATIONS 891 234 1 CASH PROVIDED BY DISCONTINUED OPERATIONS 171 198 215 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL CASH PROVIDED BY OPERATIONS 1,062 432 216 - -------------------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Property, plant and equipment purchases (976) (859) (583) Seed company acquisitions and investments (86) (4,061) (1,325) Other acquisitions and investments (35) (231) (358) Investment and property disposal proceeds 472 199 88 Discontinued operations 288 (143) (365) - -------------------------------------------------------------------------------------------------------------------------------- CASH USED IN INVESTING ACTIVITIES (337) (5,095) (2,543) - -------------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Net change in short-term financing (289) (282) 2,372 Long-term debt proceeds 24 3,878 208 Long-term debt reductions (380) (85) (142) Common stock issuance 944 Dividend payments (77) (73) (294) Common stock issued under employee stock plans 78 62 91 Cash transferred to Solutia Inc. (75) Other financing activities 114 174 135 - -------------------------------------------------------------------------------------------------------------------------------- CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (530) 4,618 2,295 - -------------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 195 (45) (32) CASH AND CASH EQUIVALENTS: Beginning of year 89 134 166 - -------------------------------------------------------------------------------------------------------------------------------- End of Year $ 284 $ 89 $ 134 ================================================================================================================================ The effect of exchange rate changes on cash and cash equivalents was not material. Cash payments for interest (net of amounts capitalized) were $328 million in 1999, $331 million in 1998, and $210 million in 1997. The above statement should be read in conjunction with Notes to Financial Statements.
26 ================================================================================================================================ STATEMENT OF CONSOLIDATED SHAREOWNERS' EQUITY ================================================================================================================================
(Dollars in millions) Year Ended Dec. 31, 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------------------- COMMON STOCK: Balance, Jan. 1 $ 1,694 $ 1,644 $ 1,644 Issuance of shares (24,956,250 shares in 1998) 50 - -------------------------------------------------------------------------------------------------------------------------------- Balance, Dec. 31 $ 1,694 $ 1,694 $ 1,644 - -------------------------------------------------------------------------------------------------------------------------------- ADDITIONAL CONTRIBUTED CAPITAL: Balance, Jan. 1 $ 1,389 $ 321 $ 65 Employee stock plans and ESOP 119 174 135 Issuance of shares (4) 894 Spinoff of chemical businesses 121 - -------------------------------------------------------------------------------------------------------------------------------- Balance, Dec. 31 $ 1,504 $ 1,389 $ 321 - -------------------------------------------------------------------------------------------------------------------------------- TREASURY STOCK: Balance, Jan. 1 $(2,508) $(2,570) $(2,661) Net shares issued under employee stock plans (6,937,663 in 1999; 9,054,062 shares in 1998; and 10,908,529 shares in 1997) 78 62 91 - -------------------------------------------------------------------------------------------------------------------------------- Balance, Dec. 31 $(2,430) $(2,508) $(2,570) - -------------------------------------------------------------------------------------------------------------------------------- REINVESTED EARNINGS: Balance, Jan. 1 $ 4,652 $ 4,973 $ 4,795 Net income (loss) 575 (250) 470 Dividends (net of ESOP tax benefits) (77) (71) (292) - -------------------------------------------------------------------------------------------------------------------------------- Balance, Dec. 31 $ 5,150 $ 4,652 $ 4,973 - -------------------------------------------------------------------------------------------------------------------------------- RESERVE FOR ESOP DEBT RETIREMENT: Balance, Jan. 1 $ (106) $ (123) $ (174) Allocation of ESOP shares 24 17 20 Spinoff of chemical businesses 31 - -------------------------------------------------------------------------------------------------------------------------------- Balance, Dec. 31 $ (82) $ (106) $ (123) - -------------------------------------------------------------------------------------------------------------------------------- ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS): - -------------------------------------------------------------------------------------------------------------------------------- ACCUMULATED CURRENCY ADJUSTMENT: Balance, Jan. 1 $ (116) $ (128) $ 10 Translation adjustments (350) 12 (127) Spinoff of chemical businesses (11) - -------------------------------------------------------------------------------------------------------------------------------- Balance, Dec. 31 $ (466) $ (116) $ (128) - -------------------------------------------------------------------------------------------------------------------------------- UNREALIZED NET GAINS (LOSSES) ON INVESTMENTS: Balance, Jan. 1 $ 14 $ 3 $ 11 Unrealized gains (losses) on investments (5) 11 (8) - -------------------------------------------------------------------------------------------------------------------------------- Balance, Dec. 31 $ 9 $ 14 $ 3 - -------------------------------------------------------------------------------------------------------------------------------- MINIMUM PENSION LIABILITY: Balance, Jan. 1 $ (33) $ (16) $ Additional minimum pension liability adjustment 3 (17) (16) - -------------------------------------------------------------------------------------------------------------------------------- Balance, Dec. 31 $ (30) $ (33) $ (16) - -------------------------------------------------------------------------------------------------------------------------------- TOTAL ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS): Balance, Dec. 31 $ (487) $ (135) $ (141) - -------------------------------------------------------------------------------------------------------------------------------- ESOP stands for Employee Stock Ownership Plan The above statement should be read in conjunction with Notes to Financial Statements.
27 ================================================================================================================================ STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS) ================================================================================================================================
Year Ended Dec. 31, (Dollars in millions) 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $ 575 $(250) $ 470 - -------------------------------------------------------------------------------------------------------------------------------- Other Comprehensive Loss: Foreign currency translation adjustments (350) 12 (138) Unrealized net holding gains (losses) on investments: Unrealized net holding gains (losses) arising during period, before tax (4) (1) (12) Related income tax (expense) benefit (1) 2 4 Reclassification adjustments for losses included in net income 16 Related income tax (expense) benefit (6) Additional minimum pension liability adjustment, before tax 4 (24) (27) Related income tax (expense) benefit (1) 7 11 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL OTHER COMPREHENSIVE INCOME (LOSS) (352) 6 (162) - -------------------------------------------------------------------------------------------------------------------------------- COMPREHENSIVE INCOME (LOSS) $ 223 $(244) $ 308 ================================================================================================================================ The above statement should be read in conjunction with Notes to Financial Statements. ================================================================================================================================ KEY FINANCIAL MEASURES (UNAUDITED) 1999 1998 1997 ================================================================================================================================ CURRENT RATIO (Current assets divided by current liabilities) 1.54 1.37 TRADE RECEIVABLES -- DAYS SALES OUTSTANDING 98 111 (Fourth-quarter trade receivables divided by fourth-quarter net sales times 30 days) INVENTORY TURNOVER RATIO (Cost of goods sold divided by inventory) 1.89 1.69 INTEREST COVERAGE 2.87 .60 (Income from continuing operations before interest expense and income taxes divided by total interest cost) CASH PROVIDED BY CONTINUING OPERATIONS/TOTAL DEBT 13% 4% TOTAL DEBT/TOTAL CAPITALIZATION 56% 60% AS A PERCENT OF NET SALES: Selling, General and Administrative Expenses 33% 29% 29% Technological Expenses 15 18 17 Research and Development Expenses 14 17 16 Income from Continuing Operations 5 2 ================================================================================================================================ If the effects of non-recurring expenses associated with a failed merger between Monsanto and D&PL, accelerated seed integration costs, gain on divestiture of Stoneville, and reversal of restructuring liabilities established in 1998 were excluded in 1999, the interest coverage ratio would have been 3.0. If the effects of the restructuring, in-process R&D write-offs and other unusual items were excluded in 1998, the interest coverage ratio would have been 4.0. Total capitalization is the sum of short-term debt, long-term debt and shareowners' equity. Research and development expenses are included in total technological expenses. This financial statistic is not meaningful for 1998 because Monsanto reported a loss from continuing operations.
28 ========================================================================= NOTES TO FINANCIAL STATEMENTS ========================================================================= The following notes relate to the continuing operations of Monsanto, unless otherwise indicated. NOTE 1: SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements are presented on the basis of accounting principles that are generally accepted in the United States of America. All professional accounting standards that are effective as of Dec. 31, 1999, have been taken into consideration in preparing the financial statements. Basis of Consolidation The consolidated financial statements pertain to the company and its majority-owned subsidiaries. Intercompany transactions have been eliminated in consolidation. Other companies in which Monsanto has a significant ownership interest (generally greater than 20 percent) are included in "Investments in Affiliates" in the Statement of Consolidated Financial Position. Monsanto's share of these companies' net earnings or losses is included in "Other expense (income) - net" in the Statement of Consolidated Income (Loss). Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and that affect revenues and expenses during the period reported. Estimates are adjusted to reflect actual experience when necessary. Significant estimates are used to account for restructuring reserves, self-insurance reserves, employee benefit plans, asset impairments, in-process R&D, business acquisitions, and contingencies. Actual results could differ from those estimates. Revenue Recognition Revenues are recognized when title to finished goods inventories is transferred and goods are delivered to customers. Where the right of return exists, sales revenues are reduced at the time of sale to reflect expected returns. In addition, charges for uncollectable receivables, approximately $90 million in 1999, are made when uncollectability is considered probable. These are estimated based on historical experience. License revenues and revenues from the sale of product rights are recognized when the rights have been contractually conferred to the licensee or purchaser. Additional conditions for recognition of revenue are that the collection of sales proceeds is reasonably assured and that Monsanto has no further performance obligations under the sale or license agreement. Technological Expenses Technological expenses consist of research and development, engineering, commercial development, and patent management costs. Research and development costs are expensed as incurred. Engineering costs for capital projects are expensed until the costs contribute directly to the final design and installation of the asset, at which time subsequent costs incurred are capitalized. Commercial development and patent management costs are also expensed as incurred. Currency Translation The financial statements for most of Monsanto's entities outside the United States are translated into U.S. dollars at current exchange rates. Unrealized currency translation adjustments in the Statement of Consolidated Financial Position are accumulated in shareowners' equity as a component of Accumulated Other Comprehensive Loss. The financial statements of ex-U.S. entities that operate in highly inflationary economies are translated at either current or historical exchange rates, as appropriate. These currency adjustments are included in net income. Gains and losses on contracts that are designated and effective as hedges are deferred and are included in the recorded value of the transaction being hedged. Gains and losses on other currency forward and option contracts are included in net income immediately. 29 Goodwill and Intangible Assets Goodwill, the excess of cost over the fair value of net assets acquired, is being amortized using the straight-line method over various periods not exceeding 40 years. Monsanto periodically reviews goodwill to evaluate whether changes have occurred that would suggest that goodwill may be impaired based on the estimated undiscounted cash flows of the assets acquired over the remaining amortization period. If this review indicates that the remaining estimated useful life of goodwill requires revision or that the goodwill is not recoverable, the carrying amount of the goodwill is reduced by the estimated shortfall of cash flows on a discounted basis. Trademarks are assessed for impairment periodically using undiscounted cash flows over the remaining useful life of the trademark. If this review indicates that the remaining estimated useful life of the trademark requires revision, the carrying amount of the trademark is reduced by the estimated shortfall of cash flows on a discounted basis. Patents obtained in a business acquisition are recorded at the present value of estimated future cash flows resulting from patent ownership. The cost of patents is amortized over their legal lives. Intangible assets are recorded at cost less accumulated amortization. The cost of other intangible assets (principally seed germplasm) is amortized over their estimated useful lives. Property, Plant and Equipment Property, plant and equipment is recorded at cost. The cost of plant and equipment is depreciated over weighted average periods of 18 years for buildings and 10 years for machinery and equipment, by the straight-line method for financial reporting purposes. Impairment tests of long-lived assets are made when conditions indicate a possible loss. Such impairment tests are based on a comparison of undiscounted cash flows to the recorded value of the asset. If an impairment is indicated, the asset value is written down to its fair market value or using an appropriate discount rate, if fair market value is not readily determinable. Investments The company has investments in securities that are classified in the Statement of Consolidated Financial Position as either short-term (with maturities of less than one year) or long-term (with maturities beyond one year). The company also has investments in equity securities, all of which are classified as non-current other assets. Investments are further categorized as being held for sale or held to maturity. Those investments classified as available-for-sale securities are recorded at their market values. When a decline in market value is deemed other than temporary, the reduction to the investment in a security is charged to expense. When a change in market value for these securities is deemed temporary, the resulting adjustment net of deferred tax is reported as a component of other comprehensive income. Investments categorized as held to maturity are carried at amortized cost, without recognition of gains or losses that are deemed to be temporary, because the company has the intent and resources to hold these investments until maturity. Inventory Inventories are stated at the lower of cost or market. Actual cost is used to value raw materials and supplies. Standard cost, which approximates actual cost, is used to value finished goods and goods in process. Standard cost includes direct labor and raw materials, and manufacturing overhead based on practical capacity. The cost of certain inventories (32 percent as of Dec. 31, 1999) is determined by using the last-in, first-out (LIFO) method, which generally reflects the effects of inflation or deflation on cost of goods sold sooner than other inventory cost methods do. The cost of other inventories generally is determined by the first-in, first-out (FIFO) method. Inventories at FIFO approximate current cost. Income Taxes Monsanto applies an asset and liability approach to accounting for income taxes. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial statement and tax basis of assets and liabilities generally using statutory tax rates. Income taxes and remittance taxes are-not recorded on undistributed earnings of subsidiaries, either because any taxes on dividends would be offset substantially by foreign tax credits or because Monsanto intends to reinvest those earnings indefinitely. Environmental Remediation Liabilities Monsanto follows SOP 96-1, "Environmental Remediation Liabilities," which provides guidance for recognizing, measuring and disclosing environmental remediation liabilities. The company accrues for these costs in which responsibility is established and when costs are probable and reasonably estimable based on current law and existing technology. Postclosure and remediation costs for 30 hazardous and other waste facilities at operating locations are accrued over the estimated life of the facility as part of its anticipated closure cost. Employee Stock Options As permitted by Statement of Financial Accounting Standard (FAS) No. 123, "Accounting for Stock-Based Compensation," the company has elected to continue following the guidance of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," for measurement and recognition of stock-based transactions with employees. Reclassifications As a result of discussions with the staff of the United States Securities and Exchange Commission (SEC) and clarification of its interpretation regarding the classification of certain transactions, Monsanto agreed to reclassify certain revenues in the Statement of Consolidated Income (Loss). As a result, the company has reclassified revenues associated with the sales of pharmaceutical product rights from net sales to other expense (income) - net for all periods presented. The effect of this reclassification was to reduce net sales and increase other income included in other expense (income) - net by ($124) million and ($120) million in 1998 and 1997, respectively. In 1999, $50 million of sales of pharmaceutical product rights were included in other expense (income) - net. This reclassification had no effect on net income. NOTE 2: NEW ACCOUNTING STANDARDS 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. Monsanto is assessing its position and has not yet determined the effect this statement will have on its consolidated financial position or results of operations. In December 1999, the SEC issued Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements" (SAB 101) which provides guidance related to revenue recognition based on interpretations and practices followed by the SEC. SAB 101 allows companies to report any changes in revenue recognition related to adopting its provisions as an accounting change at the time of implementation in accordance with APB Opinion No. 20, "Accounting Changes." Monsanto recorded a cumulative effect of a change in accounting principle, effective Jan. 1, 1999, for revenue recognized in 1998 related to the sale of marketing rights to The Scotts Company. The effect on earnings in 1999 was an aftertax loss of $20 million, net of taxes of $12 million. The pretax amount of $32 million will be amortized to income over twenty years. If Monsanto had recorded the sales of marketing rights as deferred revenues in 1998, net income (loss) would have been $595 million in 1999 and ($270) million in 1998. 31 NOTE 3: GEOGRAPHIC DATA
NET SALES TO UNAFFILIATED CUSTOMERS TOTAL ASSETS (Excluding Inter-area Sales) - -------------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 1999 1998 - -------------------------------------------------------------------------------------------------------------------------------- United States $5,635 $4,020 $3,352 $ 8,773 $ 8,780 Europe - Africa 1,365 1,371 1,185 2,231 2,437 Latin America 1,152 993 685 3,115 2,534 Asia - Pacific 601 556 589 608 520 Canada 393 297 247 251 190 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL FROM CONTINUING OPERATIONS $9,146 $7,237 $6,058 $14,978 $14,461 - -------------------------------------------------------------------------------------------------------------------------------- Discontinued Operations 1,557 1,924 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL $9,146 $7,237 $6,058 $16,535 $16,385 ================================================================================================================================ Net sales from discontinued operations are not included in this presentation. See Notes to Financial Statements, Note 20 - Discontinued Operations for further details.
The data above are prepared on an "entity basis," which means that net sales, operating income and assets of each legal entity are assigned to the geographic area where that legal entity is located. For example, a sale from the United States to Latin America is reported as a U.S. export sale. Direct export sales from the United States to third-party customers outside the United States were $72 million for 1999, $150 million for 1998, and $129 million for 1997. In 1999 and 1998, respectively, net assets of discontinued operations include net effect of current liabilities of $213 million and $272 million and noncurrent liabilities of $15 million and $67 million. NOTE 4: CURRENCY TRANSLATION Currencies in which Monsanto has significant exposures are the Euro (which, as of Jan. 1, 1999, replaced the Belgian franc, German mark, Italian lira, and eight other European currencies), Brazilian real, Argentine peso, and the U.K. pound sterling. Other currency exposures include the Japanese yen, and the Canadian dollar. Currency restrictions are not expected to have a significant effect on Monsanto's cash flow, liquidity, or capital resources. Currency option contracts are purchased to manage currency exposure for anticipated transactions (for example, expected export sales in the following year denominated in foreign currencies). Currency option and forward contracts are used to manage other currency exposures, primarily for receivables and payables denominated in currencies other than the entities' functional currencies. This hedging activity is intended to protect the company from adverse fluctuations in foreign currencies compared with the entities' functional currencies. As of Dec. 31, 1999, Monsanto had currency forward contracts to purchase $78 million and to sell $748 million, and purchased currency option contracts to sell $72 million, of various foreign currencies. Gains and losses on contracts that are designated and effective as hedges are deferred and are included in the recorded value of the transaction being hedged. Monsanto is subject to loss if the counterparties to these contracts do not perform. Net deferred hedging losses as of Dec. 31, 1999, were not material. Monsanto designated Ecuador, Turkey, Russia, Romania, and Venezuela as hyperinflationary countries as of Jan. 1, 1999. Monsanto designated the Brazilian economy as non-hyperinflationary as of Jan. 1, 1998, and established the Brazilian real as the functional currency. In January, 1999, Brazil floated its currency - the real - in response to worsening economic conditions. The value of the real fell by approximately 40% after the float with a net immaterial impact on Monsanto's 1999 results because of favorable hedge positions. Throughout the remainder of the year, the real stabilized and ended the year approximately 7% higher than its level immediately after the float. The real has recovered due to the improving economic situation in Brazil and due to the economic austerity plan implemented as a response to the currency crisis. NOTE 5: PRINCIPAL MERGERS, ACQUISITIONS, AND DIVESTITURES On Dec. 19, 1999, Monsanto announced that it had entered into a definitive agreement with Pharmacia & Upjohn Inc. (PNU) to combine the two companies in a merger-of-equals transaction. As the transaction is currently structured, Monsanto will change its 32 name to Pharmacia Corporation (Pharmacia) and holders of PNU common stock will receive 1.19 shares of Pharmacia common stock for each share of PNU common stock held on the date the transaction is consummated. Each Monsanto share outstanding prior to the transaction will represent one share of Pharmacia common stock. In conjunction with the creation of the newly combined enterprise, it was announced that up to 19.9 percent of the agricultural products business is expected to be offered in an initial public offering (IPO) as soon as practical following the closing of the merger. The agricultural products business will become a separate legal entity, with a separate board of directors and its own publicly-traded securities upon completion of the intended IPO. The transaction is subject to approval by both companies' shareowners, normal governmental reviews and other customary conditions. The merger is intended to qualify as a tax-free reorganization and to be accounted for as a pooling of interests. Completion of the proposed merger is expected to occur during the first half of 2000. Monsanto announced on Feb. 22, 2000 that a special meeting of shareholders will be held on March 23, 2000 to consider and vote upon the proposed merger. In the unlikely event that the merger agreement is terminated under specified circumstances, a party may be required to pay termination fees of $575 million to the other party. In connection with the merger agreement, Monsanto and PNU entered into reciprocal stock option agreements which become exercisable under circumstances in which a $575 million termination fee is payable. The stock option agreements limit the amount of profit either party is permitted to receive as a result of both the receipt of a termination fee and the exercise of the option to $635 million in total. In connection with the merger and intended IPO, Monsanto adopted Staff Accounting Bulletin 51, "Accounting for Sale of Stock by a Subsidiary" (SAB 51) which provides guidance related to gain recognition upon public sale of shares of a subsidiary. SAB 51 allows for the recording of gains from the sale of newly issued shares of a subsidiary directly to shareholder's equity. On July 1, 1999, Monsanto announced its intention to sell the artificial sweetener and biogum businesses. In addition, Monsanto has transferred the remaining Roundup(R) lawn-and-garden and nutrition research operations of the former Nutrition and Consumer Products segment to the Agricultural Products and Corporate and Other segments, respectively. In 1998, the company committed to a plan to sell the alginates and Ortho lawn-and-garden products businesses. In September 1997, the company spun off its chemical businesses to shareowners by distributing shares of a newly formed company called Solutia Inc. The financial results of these businesses 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. Previously reported amounts have also been reclassified to make them consistent with the current presentation. See Notes to Financial Statements, Note 24 - Discontinued Operations for further details. In 1999, Monsanto completed the sale of Stoneville Pedigreed Seed Company (Stoneville). Proceeds were $92 million, resulting in a pretax gain of $35 million. Proceeds from the sale were used to reduce debt. In April 1999, Monsanto completed the sale of NSC Technologies Company to Great Lakes Chemical Corporation for proceeds of $125 million. Proceeds from the sale were primarily used to reduce debt and resulted in a pretax gain of approximately $40 million. In December 1999, Monsanto withdrew its filing for U.S. antitrust clearance of its proposed merger with Delta and Pine Land Company (D&PL) in light of the U.S. Department of Justice's unwillingness to approve the transaction on commercially reasonable terms. On Jan. 3, 2000, Monsanto paid D&PL $80 million in cash, equal to the amount of a termination fee set forth in the merger agreement, plus reimbursement of $1 million in expenses. In addition, Monsanto recognized $4 million of related expenses in 1999 in connection with the failed merger with D&PL, resulting in a total charge of $85 million. In 1998, the company made strategic acquisitions of several seed companies. In July 1998, Monsanto acquired Plant Breeding International Cambridge (PBIC) for approximately $525 million. In October 1998, Monsanto announced the acquisition of certain international seed operations of Cargill Inc. in Asia, Africa, Central and South America, and Europe, excluding certain operations in the United Kingdom, for approximately $1.4 billion. In December 1998, Monsanto completed its acquisition of DEKALB for approximately $2.3 billion. Monsanto recorded the following pretax charges in 1998 for the write-off of acquired in- process research and development (R&D) related to these acquisitions: approximately $60 million for PBIC, approximately $150 million for DEKALB Genetics Corporation (DEKALB) and approximately $190 million for certain Cargill Inc. seed operations. Management believes that the technological feasibility of the acquired in-process R&D has not been established and that it has no alternative future uses. Accordingly, the amounts allocated to in-process R&D are required to be expensed immediately under generally accepted accounting principles. Monsanto accounted for the 1998 acquisitions as purchases. On October 20, 1999, Monsanto and Cargill reached an agreement that resolves outstanding issues related to Monsanto's purchase of certain international seed operations of Cargill. Under terms of the agreement, Cargill made a cash payment of $335 million to Monsanto for the lost use of certain germplasm and damages caused by the delay in integrating certain international seed operations and legal expenses. Additionally, Monsanto and Pioneer Hi-Bred International, Inc. (Pioneer) announced a resolution of the litigation between them stemming from Monsanto's purchase of Cargill's international seed operations. Under terms of this agreement, Monsanto was required to destroy genetic material derived from Pioneer's seed lines and pay damages of $42 million to Pioneer. As a result, the purchase price for certain international seed operations of Cargill was reduced by $265 million. Monsanto's final purchase price allocations for the principal acquisitions made during 1998 are to goodwill, $2,868 million; germplasm and core technology, $323 million; trademarks, $222 million; in-process research and development, $402 million; exit costs and employee termination liabilities, ($64) million; inventories and other individually insignificant tangible assets and liabilities, $212 million. The final purchase price allocations were based on final valuation studies. The 33 net balance ($28 million) of the Cargill and Pioneer settlements was recorded in the 1999 Statement of Consolidated Income (Loss) as reimbursement of incremental cost incurred. At the time of and in connection with the 1998 seed company acquisitions, Monsanto established a plan to integrate the acquired businesses. Monsanto is in the process of closing, or rationalizing, (consolidating, shutting down or moving facilities to achieve more efficient operations) certain assets or facilities and eliminating approximately 1,400 jobs, primarily in manufacturing and administrative functions, as part of this integration plan. Approximately 300 of these positions were related to Monsanto's existing seed operations and were therefore included in the Dec. 1998 restructuring plan. The costs related to the 1,000 of the positions and the other actions, were originally estimated to be $78 million, and were recognized as liabilities in 1998. As of December 31, 1999, over 900 positions have been eliminated at a cost of approximately $50 million. The remaining 200 positions (including an estimated 100 additional positions identified in 1999) are expected to be eliminated by the third quarter of 2000 at a cost of $14 million which will complete the original plan. In addition, the original liability established in 1998 was reduced by $14 million as a result of lower actual severance costs and attrition resulting in an adjustments and was recorded as an adjustment to the final purchase price allocations to goodwill. The in-process R&D charges for the 1998 and 1997 seed company acquisitions cover numerous seed breeding projects, no single one of which was significant, as is typical in the seed industry. These projects consist of conventional breeding programs for corn, wheat and other hybrids; conventional breeding for soybean varieties; and the development of transgenic crops. Successful commercialization of products developed through these projects is expected to occur five to nine years after program initiation. The in-process projects were at various stages of completion at the dates of acquisition. Revenues from the in-process R&D projects related to the 1997 acquisitions began in 1998. Revenues from the in-process R&D projects related to the 1998 acquisitions began in 1999. On average, a new seed technology is in the research process or developmental stage for eight years before it is launched in a commercial product. Additionally, based on historical experience, Monsanto assumed that one eighth of the products in the 'in- process pipeline' would be released or launched each year for the next eight years. From this information, a weighted-average percent complete was computed. The present value of future cash flows was then multiplied by the estimated percentage complete as of the valuation date to determine the value of the acquired in-process R&D. The in-process R&D projects were valued using a discounted cash flow method with risk- adjusted discount rates generally ranging from 12 percent to 20 percent, which took into account the stage of completion and the appropriate development cycle of each in-process R&D category. 34 NOTE 6: RESTRUCTURING AND UNUSUAL ITEMS In 1999, the company recorded a consolidated net aftertax charge of $75 million associated with restructuring and other non-recurring items. A net aftertax charge of $57 million, or $0.09 per share, from continuing operations resulted from the failed merger between Monsanto and D&PL, combined with costs associated with the accelerated integration of agricultural chemical and seed operations. These charges were net of the reversal of restructuring liabilities established in 1998 and the gain on the divestiture of Stoneville. The company recorded a net aftertax gain of $2 million from discontinued operations for the reversal of restructuring reserves related to the alginates business which were partially offset by the loss on disposal of the alginates business. Additionally, Monsanto recognized a loss of $20 million for the cumulative effect of a change in accounting principle, effective Jan. 1, 1999. The 1999 net unusual charges were recorded in the Statement of Consolidated Income (Loss) in the following categories:
- -------------------------------------------------------------------------------------------------------------------- Unusual Restructuring Total Charges Reversals - -------------------------------------------------------------------------------------------------------------------- Cost of goods sold $ 20 $ 20 Amortization / adjustment of intangible assets 8 8 Restructuring and special items 39 $(54) (15) Other expense (income) - net 51 51 ---- ---- ---- (Income) loss from continuing operations before tax 118 (54) 64 Income taxes (benefit) (26) 19 (7) ---- ---- ---- (INCOME) LOSS FROM CONTINUING OPERATIONS 92 (35) 57 Income from Discontinued Operations, Net of tax of $15 (27) (27) Loss on sale of discontinued operations, net of tax of $13 25 25 Cumulative effect of accounting change 20 20 - -------------------------------------------------------------------------------------------------------------------- NET (INCOME) LOSS $137 $(62) $ 75 ====================================================================================================================
During 1999, Monsanto recorded in "Other expense (income) - net" a one-time pretax charge of $85 million equal to the amount of a termination fee and other expenses associated with the failed merger between Monsanto and D&PL. Monsanto also recorded a pretax charge of $67 million from continuing operations, principally associated with the company's continued focus on improving operating efficiency through accelerated integration of the agricultural chemical and seed operations. The charge of $67 million was comprised of facility shut- down charges of $39 million, workforce reduction costs of $18 million, and asset impairments of $10 million, and was recorded in the Statement of Consolidated Income (Loss) as cost of goods sold of $20 million, amortization of intangible assets of $8 million and restructuring expense of $39 million. The affected employees are entitled to receive severance benefits pursuant to established severance policies or by governmentally mandated labor regulations. The facility shut-down charges included $14 million for contractual research and other commitments, $9 million for intangible assets, $8 million for inventories, $6 million for leasehold termination costs, and $2 million for property, plant and equipment write-offs. These actions resulted in cash payments of $2 million for contractual obligations, asset write-offs of $19 million, and reclassifications of $18 million of commitments to other liabilities. The workforce reduction charge included involuntary employee separation costs for 360 employees worldwide and included charges of $14 million for positions in administration, and $4 million for positions in research and development. As of Dec. 31, 1999, 150 of the planned employee eliminations were completed; 80 of these employees received cash severance payments totaling $6 million during 1999 and 70 employees elected deferred payments of $4 million which were paid in Jan. 2000. At Dec. 31, 1999, these deferred payments were classified in the Statement of Consolidated Financial Position as other liabilities. The remaining balance for employee severance related to the approximately 210 positions was $8 million at Dec. 31, 1999. The company expects these employee reductions to be completed by June 2000. Cash payments to complete the remaining accelerated integration actions will be funded from operations and are not expected to significantly impact Monsanto's liquidity. Offsetting the unusual item charges from continuing operations in 1999 was a pretax gain of $54 million from the reversal of restructuring liabilities established in 1998. The restructuring liability reversals were required as a result of lower actual severance and 35 facility shut-down costs than originally estimated. In addition, the Company recognized a pretax gain of $35 million for the divestiture of Stoneville and miscellaneous other expense of $1 million which was recorded in "Other expense (income) - net". In Oct. 1999, the company completed the sale of the alginates business for proceeds of $40 million, which resulted in an after tax loss of $25 million from the sale of discontinued operations. Offsetting this loss on disposition were reversals of restructuring liabilities established in 1998 of $27 million aftertax which were no longer required as a result of the sale of the alginates business on terms more favorable than originally anticipated. In 1998, the company recorded net restructuring and other unusual charges of $340 million ($239 million aftertax) as part of the company's overall strategy to reduce costs and continue the commitment to its core businesses. The 1998 net restructuring and unusual charges were taken in the second and fourth quarters of 1998 and were recorded in the Statement of Consolidated Income (Loss) in the following categories:
================================================================================================================================ WORKFORCE FACILITY ASSET REDUCTIONS CLOSURES IMPAIRMENTS OTHER TOTAL - -------------------------------------------------------------------------------------------------------------------------------- Cost of goods sold $ 6 $ 8 $ 84 $ 98 Amortization and adjustment of intangible assets 3 63 66 Restructuring and other special items 103 64 $(14) 153 Other expense (income) - net 43 (20) 23 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL $109 $75 $190 $(34) $340 - --------------------------------------------------------------------------------------------------------------------------------
In December 1998, the board of directors approved a plan to close certain facilities, reduce the current workforce and exit nonstrategic businesses. The activities Monsanto planned to exit in connection with this plan principally comprised a tomato business, and a business involved in the operation of membership-based health and wellness centers. This plan also contemplated exiting several small, embryonic business activities, none of which had a significant effect on the restructuring reserve. The company recorded pretax restructuring charges and other unusual items of $327 million ($226 million aftertax) to cover the costs associated with these actions in 1998. The charges reflected the elimination of approximately 1,400 jobs, primarily in manufacturing and administrative functions. Included in these actions were approximately 190 positions that had been part of a restructuring plan approved in 1996. The affected employees are entitled to receive severance benefits pursuant to established severance policies or by governmentally mandated labor regulations. The charges also reflect pretax amounts for asset impairments, primarily for property, plant and equipment; intangible assets; and certain investments, totaling $130 million. The asset impairments were recorded primarily because of the company's decision to sell certain nonstrategic businesses. As a result, the net assets of these businesses were classified as assets held for sale and were carried at their net realizable value, estimated to be approximately $36 million ($33 million in the Agricultural Products segment, and $3 million in the Corporate and Other segment) at Dec. 31, 1998. These businesses were sold during 1999. The effect of net income and the aftertax effect of suspending depreciation on assets held for sale was not material in 1999, 1998 or 1997. Other impairment charges totaling $40 million were recorded in Dec. 1998 because of management's decision to exit certain long-term investments. Fair values of the impaired assets and the businesses held for sale were recorded at their current market values or on estimated sale proceeds, based on either discounted cash flows or sales contracts. The December 1998 restructuring amounts also included pretax charges of $99 million for the shutdown or other rationalization of certain production and administrative facilities. Rationalization entails the consolidation, shutdown or movement of facilities to achieve more efficient operations. Approximately 80 facilities, located primarily in the United States, Europe and Latin America, were affected by these actions. Charges for these shutdowns included $21 million for property, plant and equipment, $15 million for intangible assets, $26 million for miscellaneous investments, and $6 million for inventories. Leasehold termination costs of $13 million and various facility closure costs of $18 million, principally for facilities shutdown costs, equipment dismantling and contract cancellation payments, were also included in the shutdown charges. The closure or rationalization of these facilities was completed by Dec. 31, 1999. As of Dec. 31, 1999, cash payments of $81 million were made to eliminate approximately 1,100 positions and deferred employee severance payment of $9 million were incurred and expected to be paid in Jan. 2000. In addition, $20 million in facility shut-down costs were incurred in connection with the Dec. 1998 restructuring plan. As of Dec. 31, 1999, the remaining reserve balance for employee severance related to the approximately 175 positions was $31 million, and $4 million for contractual obligations. The company expects these employee reduction obligations to be completed by 36 June 2000. An additional 125 positions originally contemplated in the plan were eliminated through attrition. Cash payments to complete the 1998 plan will be funded from operations and are not expected to significantly impact Monsanto's liquidity. In May 1998, the company's board of directors approved a plan to exit Monsanto's optical products business, which included the Orcolite and Diamonex optical products business and the Diamonex performance products business (both reported in the Corporate and Other segment), and recorded net pretax charges of $48 million ($34 million aftertax). Monsanto recognized a $20 million pretax gain on the sale of the Orcolite business and recorded pretax charges of $68 million for the rationalization of the Diamonex business, primarily for severance costs and the write-off of manufacturing facilities and intangible assets. In connection with this rationalization, certain Diamonex product lines were sold, and others were shut down. In connection with the shutdown of the Diamonex business approximately 200 jobs, primarily in manufacturing and administrative functions, were eliminated at a total cost of $6 million. These actions, including workforce reductions and payment of severance, were complete by Dec. 31, 1999. The sale of the remaining assets, which were classified as assets held for sale as of Dec. 31, 1998 and carried at their net realizable value of $7 million, was completed during 1999. Fair values of the impaired assets and the businesses held for sale were recorded at their current market values, based on estimated cash flows, appraisals or sales contracts. Net income generated by the optical products businesses in 1998 and 1997 totaled $2 million, and $5 million, respectively. Also during the second quarter of 1998, Monsanto recognized a pretax gain of $35 million ($21 million aftertax) primarily related to the reversal of a restructuring reserve based on a decision not to rationalize a European pharmaceutical production facility. There were approximately 70 jobs scheduled to be eliminated as part of this rationalization plan. The decision was driven by changes in the business and regulatory environment, and successes in the R&D pipeline. The net result of the actions was a pretax charge of $13 million (also, $13 million aftertax) in the second quarter of 1998, recorded in the Statement of Consolidated Income (Loss) in the following categories:
================================================================================================================================ WORKFORCE FACILITY ASSET REDUCTIONS CLOSURES IMPAIRMENTS OTHER TOTAL - -------------------------------------------------------------------------------------------------------------------------------- Cost of goods sold $6 $ 2 $36 $ 44 Amortization and adjustment of intangible assets 24 24 Restructuring and other special items (26) (9) (35) Other expense (income) - net (20) (20) - -------------------------------------------------------------------------------------------------------------------------------- TOTAL INCREASE IN LOSS FROM OPERATIONS BEFORE INCOME TAXES $6 $(24) $60 $(29) $ 13 ================================================================================================================================
37 Activity related to the accelerated integration action, 1998 and 1996 restructuring plan and special charges balances were as follows:
================================================================================================================================== RESTRUCTURING & UNUSUAL CHARGES: WORKFORCE FACILITY ASSET REDUCTIONS CLOSURES IMPAIRMENTS OTHER TOTAL - ---------------------------------------------------------------------------------------------------------------------------------- JAN. 1, 1997 RESERVE BALANCE $224 $ 41 $ 265 Costs charged against reserves (76) (39) (115) DEC. 31, 1997 RESERVE BALANCE 148 2 150 Reversal of reserves related to 1996 plan: (48) (48) Costs charged against reserves (21) (2) (23) 1998 Restructuring & Unusual Charges: May 1998 6 2 $ 60 68 Dec. 1998 103 99 130 28 360 Reclassification of reserves to other balance sheet accounts: Property (21) (73) (94) Investments (40) (40) Intangible assets (14) (66) (80) Inventory (6) (15) (21) Receivables (26) (26) Other Assets 4 (28) (24) DEC. 31, 1998 RESERVE BALANCE 188 34 222 Addition for accelerated integration costs 18 39 10 67 Costs charged against reserves: 1998 Plan (81) (20) (101) Accelerated integration (6) (2) (8) Reversal of reserves related to 1998 plan: (44) (10) (54) Reclassification of reserves to other balance sheet accounts: 1998 Plan - other liabilities (23) (23) Accelerated integration Property (2) (10) (12) Inventories (8) (8) Intangible assets (9) (9) Other liabilities (4) (18) (22) - ---------------------------------------------------------------------------------------------------------------------------------- DEC. 31, 1999 RESERVE BALANCE $ 48 $ 4 $ - $ - $ 52 ================================================================================================================================== In 1998, $33 million of restructuring reserves were reversed due to a reduction of approximately 120 job eliminations and $15 million because of a decision not to rationalize a European pharmaceutical production facility both of which had been part of the 1996 restructuring plan. Approximately $85 million of workforce reduction costs originally accrued as part of the 1996 plan were delayed, principally as a result of the failed merger with American Home Products. Monsanto remained committed to accomplishing these workforce reductions and transferred the remaining accrual to the 1998 plan. Total 1998 restructuring plan of $428 million was partially offset by $68 million from reversal of prior year restructuring reserves no longer needed and $20 million gain from the sale of Orcolite business, resulting in a net charge to earnings of $340 million. Restructuring liability reversals were required in 1999 as a result of lower actual severance and facility shut-down costs than originally estimated.
38 As part of restructuring actions approved prior to 1998, Monsanto reorganized U.S. staff operations, closed approximately 20 production, administrative and research facilities and made final payments to complete contractual commitments as part of a U. S. production facility shutdown. These actions eliminated approximately 1,020 positions. NOTE 7: DEPRECIATION AND AMORTIZATION
- -------------------------------------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------- Depreciation $321 $269 $242 Amortization of intangible assets 366 220 121 Obsolescence 43 29 15 - -------------------------------------------------------------------- Total $730 $518 $378 ====================================================================
Total amortization of intangible assets reflected in the Statement of Consolidated Income (Loss) includes $8 million of charges for asset impairments in 1999 and $66 million of charges for asset impairments in 1998. NOTE 8: INVESTMENTS As of Dec. 31, the company had investments in securities as follows:
- -------------------------------------------------------------------- 1999 1998 - -------------------------------------------------------------------- Aggregate fair value $56 $75 Gross unrealized holding: Gains 27 36 Losses 7 14 - --------------------------------------------------------------------
Debt securities held are recorded at amortized cost, because the company has the ability and intent to hold these securities to their maturity date. These securities mature in less than five years. As of Dec. 31, 1999 and 1998, the total amortized cost of these securities was $40 million and $90 million, respectively. NOTE 9: INVENTORIES Inventories at FIFO approximate current cost. The components of inventories were:
- -------------------------------------------------------------------- 1999 1998 - -------------------------------------------------------------------- Finished goods $ 807 $1,064 Goods in process 467 469 Raw materials and supplies 477 224 - -------------------------------------------------------------------- Inventories, at FIFO cost 1,751 1,757 Excess of FIFO over LIFO cost (23) (35) - -------------------------------------------------------------------- TOTAL $1,728 $1,722 ====================================================================
Commodity futures and options contracts are used to hedge the price volatility of certain commodities, primarily soybeans and corn. This hedging activity is intended to manage the price paid to production growers for corn and soybean seeds. Gains and losses on contracts that are designated and effective as hedges are deferred in inventory and are included in cost of goods sold when the underlying seeds are sold. As of Dec. 31, 1999, Monsanto had futures contracts to purchase $106 million of corn and soybeans. The excess of FIFO over LIFO cost decreased $12 million due to reduced inventory levels and lower average cost of inventory which favorably affected 1999 net income by $7 million. 39 NOTE 10: INCOME TAXES The components of income (loss) from continuing operations before income taxes were:
- ----------------------------------------------------------------------------------- 1999 1998 1997 - ----------------------------------------------------------------------------------- United States $711 $ 51 $(91) Outside United States 40 (136) 218 - ----------------------------------------------------------------------------------- TOTAL $751 $ (85) $127 ===================================================================================
The components of income tax expense (benefit) charged to operations were:
- ----------------------------------------------------------------------------------- 1999 1998 1997 - ----------------------------------------------------------------------------------- Current: U.S. federal $111 $ 290 $ 84 U.S. state 11 22 13 Outside United States 46 (10) 59 - ----------------------------------------------------------------------------------- 168 302 156 - ----------------------------------------------------------------------------------- Deferred: U.S. federal 96 (245) (165) U.S. state 14 (4) (14) Outside United States (30) (7) 1 - ----------------------------------------------------------------------------------- 80 (256) (178) - ----------------------------------------------------------------------------------- TOTAL $248 $ 46 $ (22) ===================================================================================
Factors causing Monsanto's effective tax rate to differ from the U.S. federal statutory rate were:
- ----------------------------------------------------------------------------------- 1999 1998 1997 - ----------------------------------------------------------------------------------- U.S. federal statutory rate $263 $(30) $ 45 U.S. export earnings (22) (25) (22) Puerto Rican operations (19) (16) (14) U.S. R&D tax credit (39) (34) (23) Higher (lower) ex-U.S. rates 5 31 (6) Nondeductible goodwill 50 30 6 Other nondeductible expenses 9 4 4 Valuation allowances (15) Acquired in-process R&D 71 7 Equity loss (income) 9 (3) Other 1 6 (1) - ----------------------------------------------------------------------------------- INCOME TAXES $248 $ 46 $(22) ===================================================================================
40 Deferred income tax balances were related to:
- -------------------------------------------------------------------------------------- 1999 1998 - -------------------------------------------------------------------------------------- Pension postretirement and other employee benefits $ 314 267 Restructuring liability 31 186 Inventory 141 85 Net operating tax loss and tax credit carryforwards 407 282 Intangibles 120 180 Valuation Allowance (71) (13) Other 245 179 - -------------------------------------------------------------------------------------- TOTAL DEFERRED TAX ASSETS $1,187 $1,166 - -------------------------------------------------------------------------------------- Property 341 213 Other 106 139 - -------------------------------------------------------------------------------------- TOTAL DEFERRED TAX LIABILITIES 447 352 - -------------------------------------------------------------------------------------- NET DEFERRED TAX ASSETS $ 740 $ 814 ======================================================================================
The increase in the valuation allowance in 1999 was primarily related to the establishment of a valuation allowance in Brazil. Monsanto's management concluded that it was more likely than not that the company would not be able to recognize a portion of deferred tax assets in Brazil due to the weakening of the Brazilian economy against the U.S. dollar. This valuation allowance had no effect on the 1999 effective tax rate because it was recorded in other comprehensive income (loss) as an accumulated currency adjustment. As of December 31, 1999, Monsanto had available approximately $164 million in net operating loss carryforwards in the United States. These expire from 2000 through 2012. As of December 31, 1999, Monsanto also had available approximately $430 million in net operating loss carryforwards outside the United States, which do not expire. Income taxes and remittance taxes have not been recorded on $1.8 billion in undistributed earnings of subsidiaries, either because any taxes on dividends would be offset substantially by foreign tax credits or because Monsanto intends to reinvest those earnings indefinitely. It is not practical to estimate the income tax liability that might be incurred if such earnings were remitted to the United States. NOTE 11: SHORT-TERM DEBT AND CREDIT ARRANGEMENTS Short-term debt was:
- ----------------------------------------------------------------------- 1999 1998 - ----------------------------------------------------------------------- Notes payable to banks $ 42 $ 328 Commercial paper 455 541 Bank overdrafts 57 134 Current portion of long-term debt 226 66 - ----------------------------------------------------------------------- Total $780 $1,069 ======================================================================= Weighted average interest rates of notes payable as of Dec. 31: Banks 9.7% 9.5% Commercial paper 6.0% 5.3% - ----------------------------------------------------------------------- Includes the effect of notes in certain countries which have interest rates which are higher than those in the United States.
Monsanto had aggregate short-term loan facilities of $191 million, under which loans totaling $42 million were outstanding as of Dec. 31, 1999. Interest on these loans is related to various bank rates. Monsanto has a $1.0 billion credit facility, expiring in 2001, which allows the company to request that lenders increase their commitments up to an aggregate of $1.6 billion. In August 1999, Monsanto entered into a $1.5 billion, 364-day credit facility. There were no borrowings under these credit facilities as of Dec. 31, 1999. These facilities are used to support the issuance of commercial paper. Interest on amounts borrowed under these agreements is expected to be at money market rates. Covenants under these credit facilities restrict maximum borrowings. The company does not anticipate that future borrowings will be limited by the terms of these agreements. 41 NOTE 12: LONG-TERM DEBT Long-term debt (exclusive of current maturities) was:
- ----------------------------------------------------------------------- 1999 1998 - ----------------------------------------------------------------------- Industrial revenue bond obligations, 5.7% average rate at Dec. 31, 1999, due 2001 to 2028 $ 324 $ 337 Medium-term notes, 7.0% average rate at Dec. 31, 1999, due 2001 to 2018 165 165 Commercial paper 1,000 1,000 6% notes due 2000 150 8.13% amortizing ESOP debentures due 2006, guaranteed by the company 80 91 5 3/8% notes due 2001 500 498 Adjustable conversion-rate equity security units due 2003 700 700 Variable - rate notes due 2003 480 575 5.75% notes due 2005 599 596 5 7/8% notes due 2008 199 199 8 7/8% debentures due 2009 99 99 5.6% yen note due 2016 99 86 6.5% debentures due 2018 498 496 8.7% debentures due 2021 100 100 8.2% debentures due 2025 150 150 6.75% debentures due 2027 199 198 6.6% debentures due 2028 697 694 Other 14 125 - ----------------------------------------------------------------------- TOTAL $5,903 $6,259 ======================================================================= ESOP stands for employee stock ownership plan.
Maturities and sinking-fund requirements on long-term debt, excluding commercial paper, are $226 million in 2000, $603 million in 2001, $127 million in 2002, $1,073 million in 2003, and $33 million in 2004. The weighted average maturity of long-term debt as of Dec. 31, 1999, was approximately 10 years. Commercial paper balances of $1.0 billion as of Dec. 31, 1999 and 1998 were classified as long-term debt. Monsanto has the ability and intent to renew these obligations beyond 2000. In November 1998, the company issued 17,500,000 units of 6.50 percent Adjustable Conversion-rate Equity Security (ACES) units at a stated value of $40 per unit, for an aggregate initial offering price of $700 million. Each unit consists of a purchase contract for the company's common stock and a junior subordinated deferrable debenture. Under the purchase contracts, in Nov. 2001, the unit holders will purchase for $40 not more than one share and not less than 0.8197 of one share of the company's common stock per unit, depending on the average trading price of the common stock during a specified period in Nov. 2001. In addition, the company pays quarterly deferrable contract fees to the unit holders at 0.55 percent of the stated amount. The junior subordinated deferrable debentures have a principal amount equal to the stated amount of the units, an interest rate of 5.95 percent, and mature in 2003 subject to a call option granted to a third party. Interest-rate swap agreements are used to reduce interest rate risks and to manage interest expense. By entering into these agreements, the company changes the fixed/variable interest-rate mix of its debt portfolio. As of Dec. 31, 1999, Monsanto was party to interest-rate swap agreements with an aggregate notional principal amount of $90 million related to existing debt. The agreements effectively convert floating-rate debt into fixed-rate debt, and the agreements end in 2000. This reduces the company's risk of incurring higher interest costs in periods of rising interest rates. Monsanto is subject to loss if the counterparties to these agreements do not perform. Interest differentials to be paid or received because of swap agreements are reflected as an adjustment to interest expense over the related debt period. 42 NOTE 13: FAIR VALUES OF FINANCIAL INSTRUMENTS The estimated fair values of Monsanto's financial instruments were:
- ------------------------------------------------------------------------------------------ 1999 1998 - ------------------------------------------------------------------------------------------ Recorded Fair Recorded Fair Amount Value Amount Value - ------------------------------------------------------------------------------------------ Long-term debt $5,903 $5,606 $6,259 $6,579 - ------------------------------------------------------------------------------------------
The recorded amounts of cash and cash equivalents, trade receivables, investments in securities, miscellaneous discounted receivables, third-party guarantees, commodity futures contracts, currency forward contracts and swaps, accounts payable, interest-rate swaps, and short-term debt approximate their fair values. Fair values are estimated by the use of quoted market prices, estimates obtained from brokers, and other appropriate valuation techniques based on information available as of Dec. 31, 1999. The fair-value estimates do not necessarily reflect the values Monsanto could realize in the current market. NOTE 14: POSTRETIREMENT BENEFITS - PENSIONS Most Monsanto employees are covered by noncontributory pension plans. The components of pension cost were:
- ------------------------------------------------------------------------------------------ 1999 1998 1997 - ------------------------------------------------------------------------------------------ Service cost for benefits earned during the year $ 65 $ 58 $ 61 Interest cost on benefit obligation 171 170 148 Assumed return on plan assets (200) (156) (167) Amortization of unrecog- nized net loss 49 22 13 - ------------------------------------------------------------------------------------------ TOTAL $ 85 $ 94 $ 55 ========================================================================================== In connection with the classification of the former Nutrition and Consumer Products segment as discontinued operations (see Notes to Financial Statements, Discontinued Operations disclosure for further details), no pension liabilities or related assets were allocated or assumed by the discontinued businesses for its active employees or for certain former employees. Monsanto has retained the pension liability and related assets for the employees of the former Nutrition and Consumer Products segment now classified as discontinued operations in the consolidated financial statements because it is uncertain, at this time, whether the pension liabilities and related assets will be assumed by the buyers of these businesses. In connection with the spinoff of the company's chemical businesses as Solutia Inc., Solutia assumed the pension liabilities and received related assets for its active employees and for certain former employees of the chemical businesses.
Pension benefits are based on an employee's years of service and/or compensation level. Pension plans are funded in accordance with the company's long-range projections of the plans' financial conditions. These projections take into account benefits earned and expected to be earned, anticipated returns on pension plan assets, and income tax and other regulations. 43 Pension costs were determined through the use of the preceding year-end rate assumptions. Assumptions used as of Dec. 31 for the principal plans were:
- ----------------------------------------------------------------------------- 1999 1998 1997 - ----------------------------------------------------------------------------- Discount rate 7.75% 6.75% 7.00% Assumed long-term rate of return on plan assets 9.50% 9.50% 9.50% Annual rates of salary increase (for plans that base benefits on final compensation level) 4.50% 4.00% 4.00% - -----------------------------------------------------------------------------
The funded status of Monsanto's pension plans at year-end was:
- ----------------------------------------------------------------------------- 1999 1998 - ----------------------------------------------------------------------------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $2,655 $2,483 Service cost 65 58 Interest cost 171 170 Plan participants' contributions 1 1 Amendments 6 10 Actuarial (gain)/loss (143) 146 Acquisitions/divestitures 9 Settlements 15 Benefits paid (248) (222) - ----------------------------------------------------------------------------- Benefit obligation at end of year $2,522 $2,655 - ----------------------------------------------------------------------------- CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year 2,146 2,029 Actual return on plan assets 411 310 Employer contribution 24 17 Plan participants' contributions 3 3 Acquisitions/divestitures 9 Settlements (4) Fair value of benefits paid (248) (222) - ----------------------------------------------------------------------------- Plan assets at end of year $2,332 $2,146 - ----------------------------------------------------------------------------- Unfunded status 190 509 Unrecognized initial net gain 9 15 Unrecognized prior service cost (82) (94) Unrecognized subsequent gain (loss) 371 (22) - ----------------------------------------------------------------------------- Accrued net pension liability $ 488 $ 408 =============================================================================
Amounts recognized in the Statement of Consolidated Financial Position were:
- ----------------------------------------------------------------------------- 1999 1998 - ----------------------------------------------------------------------------- Postretirement liabilities $515 $433 Additional minimum Pension Liability 53 61 Other assets (27) (25) Intangible asset (5) (10) Accumulated other comprehensive income (48) (51) - ----------------------------------------------------------------------------- Accrued net pension liability $488 $408 - -----------------------------------------------------------------------------
44 The projected benefit obligation, the accumulated benefit obligation (ABO) and fair value of plan assets for pension plans with ABOs in excess of plan assets were $319 million, $315 million and zero, respectively, as of Dec. 31, 1999; and $2.1 billion, $2.0 billion, and $2.0 billion, respectively, as of Dec. 31, 1998. Plan assets consist principally of common stocks and U.S. government and corporate obligations. NOTE 15: POSTRETIREMENT BENEFITS - HEALTHCARE AND OTHER Monsanto provides certain health care and life insurance benefits for retired employees. Substantially all of Monsanto's regular, full- time U.S. employees and certain employees in other countries may become eligible for these benefits if they reach retirement age while employed by Monsanto. These postretirement benefits are unfunded and generally are based on employees' years of service and/or compensation levels. The costs of postretirement benefits are accrued by the date the employees become eligible for the benefits. The components of the cost of these postretirement benefits, principally health care and life insurance, were:
- ------------------------------------------------------------------------------------------ 1999 1998 1997 - ------------------------------------------------------------------------------------------ Service cost for benefits earned during the year $16 $13 $10 Interest cost on benefit obligation 27 27 27 Amortization of unrecognized net (gain) loss 15 (1) (3) - ------------------------------------------------------------------------------------------ Total - Continuing Operations $58 $39 $34 ========================================================================================== In connection with the classification of the former Nutrition and Consumer Products segment as discontinued operations (see Notes to Financial Statements, Discontinued Operations disclosure for further details), no postretirement benefit liabilities were allocated or assumed by the discontinued business for its active employees or for former employees. Monsanto has retained the postretirement benefit liability for the employees of the former Nutrition and Consumer Products segment now classified as discontinued operations in the consolidated financial statements because it is uncertain, at this time, whether the postretirement benefit liabilities will be assumed by the buyers of these businesses. In connection with the spinoff of the company's chemical businesses as Solutia Inc., Solutia assumed the postretirement benefit liabilities for its active employees and for former employees who last worked at a chemical facility.
Postretirement costs were determined by using the preceding year-end rate assumptions. Assumptions used as of Dec. 31 for the principal plans were:
- ------------------------------------------------------------------------------------------ 1999 1998 1997 - ------------------------------------------------------------------------------------------ Discount rate 7.75% 6.75% 7.00% Initial trend rate for health care costs 5.25% 5.75% 7.00% Ultimate trend rate for health care costs 5.25% 4.75% 5.00% - ------------------------------------------------------------------------------------------
A one percent increase in the assumed trend rate for health care costs would have increased the cost of 1999 postretirement health care benefits by $1 million and the accumulated postretirement benefit obligation by $9 million as of Dec. 31, 1999. A one percent decrease in the assumed trend rate for health care costs would have decreased the cost of 1999 postretirement health care benefits by $1 million and the accumulated postretirement benefit obligation by $11 million as of Dec. 31, 1999. 45 As of Dec. 31, the status of Monsanto's postretirement health care and life insurance benefit plans and of its employee disability benefit plans was:
- ----------------------------------------------------------------------- 1999 1998 - ----------------------------------------------------------------------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $403 $383 Service cost 16 13 Interest cost 27 27 Actuarial (gain)/loss (10) 6 Benefits paid (16) (26) - ----------------------------------------------------------------------- Benefit obligation at end of year 420 403 - ----------------------------------------------------------------------- Unfunded status 420 403 Unrecognized prior service cost 6 10 Unrecognized subsequent gain (loss) (3) (31) - ----------------------------------------------------------------------- Accrued postretirement liability $423 $382 - -----------------------------------------------------------------------
Amounts recognized in the Statement of Consolidated Financial Position were:
- ----------------------------------------------------------------------- 1999 1998 - ----------------------------------------------------------------------- Miscellaneous accruals $ 29 $ 28 Postretirement liabilities 394 354 - ----------------------------------------------------------------------- Accrued postretirement liability $423 $382 - -----------------------------------------------------------------------
NOTE 16: EMPLOYEE SAVINGS PLANS For some company employee savings plans, employee contributions are matched in part by Monsanto. The cost of the company's contributions for such plans was $79 million in 1999, $45 million in 1998, and $39 million in 1997. Monsanto has established an Employee Stock Ownership Plan (ESOP), which held 14.7 million shares of Monsanto common stock as of Dec. 31, 1999. At its inception, the ESOP acquired shares by using proceeds from the issuance of long-term notes and debentures guaranteed by Monsanto, and the ESOP also borrowed $50 million from Monsanto. A portion of the ESOP shares is allocated each year to employee savings accounts as matching contributions. In 1999, 1,302,590 shares were allocated to participants under the plan. An additional 634,548 shares were released in 1999 awaiting allocation to participants, leaving 7.3 million unallocated shares as of Dec. 31, 1999. Allocated shares held by the ESOP are considered outstanding for earnings-per-share calculations; unallocated shares are not. Compensation expense is equal to the cost of the shares allocated to participants, less cash dividends paid on the shares held by the ESOP. Dividends on the common stock owned by the ESOP are used to repay the ESOP borrowings, which were $100 million as of Dec. 31, 1999.
- ----------------------------------------------------------------------- 1999 1998 1997 - ----------------------------------------------------------------------- Total ESOP expense $31 $21 $18 Interest portion of total ESOP expense 9 10 12 Cash contribution 37 14 6 Dividends paid on ESOP shares held 2 2 8 - -----------------------------------------------------------------------
NOTE 17: STOCK OPTION PLANS The company grants stock options under two fixed plans. Under the company's Management Incentive Plan of 1996, the company may grant key officers and management employees stock-based awards, including stock options, of up to 87.6 million shares of common stock. Under this plan, the exercise price of each option equals not less than the market price of the company's stock on the date of grant. An option's maximum term is 10 years. Options are granted at the discretion of the board of directors' People Committee 46 or its delegate. Options generally vest upon the achievement of business performance targets, or the ninth anniversary of the option grant date, or upon a change in control of the company, whichever comes first. Certain options granted to senior management vest upon the attainment of pre-established prices within specified time periods and are re-priced upon a change in control of the company. Under the company's Shared Success Stock Option Plan, most regular full-time and regular part-time employees of the company were granted options on 330 shares of common stock in 1997, 500 shares in 1998, and 300 shares in 1999. The maximum number of shares for which stock options may be granted under this plan is 27.3 million. The exercise price of each option is determined by the committee and generally equals the market price of the company's stock on the date of grant. An option's maximum term is 10 years. As permitted by Statement of Financial Accounting Standard (FAS) No. 123, "Accounting for Stock-Based Compensation," the company has elected to continue following the guidance of Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees," for measurement and recognition of stock-based transactions with employees. In accordance with APB 25, no compensation cost has been recognized for the company's option plans. Had the determination of compensation cost for these plans been based on the fair value at the grant dates for awards under these plans, consistent with the method of FAS No. 123, the company's income (loss) from continuing operations and earnings (loss) per share from continuing operations would have been reduced to the proforma amounts indicated below:
- --------------------------------------------------------------------------------------- 1999 1998 1997 - --------------------------------------------------------------------------------------- Income (loss) from continuing operations: As reported $ 503 $ (131) $ 149 Proforma 337 (339) 61 Earnings (loss) per share -- continuing operations: As reported $0.77 $(0.22) $0.24 Proforma 0.52 (0.56) 0.10 - ---------------------------------------------------------------------------------------
The proforma compensation expense may not be representative of proforma compensation expense that would be incurred in future years. In computing the proforma compensation expense, the fair value of each option grant is estimated on the date of grant by using the Black- Scholes option-pricing model. The weighted-average fair values of options granted during 1999, 1998, and 1997 were $12.57, $16.51, and $10.01, respectively. The following weighted-average assumptions were used for grants:
- --------------------------------------------------------------------------------------- 1999 1998 1997 - --------------------------------------------------------------------------------------- Expected dividend yield 0.34% 0.25% 0.29% Expected volatility 39.5% 30.0% 27.0% Risk-free interest rates 4.4% 5.6% 6.4% Expected option lives (years) 4.1 4.0 4.3 - ---------------------------------------------------------------------------------------
47 A summary of the status of the company's stock option plans for the three-year period ended Dec. 31, 1999, follows:
OUTSTANDING ------------------- Exercisable Weighted-Average Shares Shares Exercise Price - -------------------------------------------------------------------------------------------- DEC. 31, 1996 38,362,943 63,144,238 $20.90 - -------------------------------------------------------------------------------------------- 1997: Granted 27,740,275 37.98 Exercised (12,002,286) 13.64 Expired (3,476,815) 34.71 - -------------------------------------------------------------------------------------------- DEC. 31, 1997 45,257,512 75,405,412 $25.22 - -------------------------------------------------------------------------------------------- 1998: Granted 42,132,104 50.23 Exercised (10,770,147) 17.76 Expired (2,932,138) 45.38 - -------------------------------------------------------------------------------------------- DEC. 31, 1998 51,055,016 103,835,231 $26.21 - -------------------------------------------------------------------------------------------- 1999: Granted 7,016,320 48.34 Exercised (6,961,353) 21.09 Expired (4,705,226) 48.44 ============================================================================================ DEC. 31, 1999 52,446,942 99,184,972 $37.07 ============================================================================================
The following table summarizes information about stock options outstanding as of Dec. 31, 1999: OPTIONS OUTSTANDING
- -------------------------------------------------------------------------------------------- Weighted-Average Weighted- Range Of Remaining Average Exercise Prices Shares Contractual Life Exercise Price - -------------------------------------------------------------------------------------------- $ 7.00 to 9.99 5,401,629 3.1 years $ 9.32 10.00 to 14.99 11,649,481 3.6 13.41 15.00 to 19.99 312,893 5.5 16.78 20.00 to 29.99 7,195,405 6.2 26.05 30.00 to 39.99 30,012,447 7.0 34.30 40.00 to 54.99 40,213,433 8.2 49.15 55.00 to 75.00 4,399,684 8.7 61.87 $ 7.00 to 75.00 99,184,972 7.5 $37.07 ============================================================================================
48 OPTIONS EXERCISABLE
Weighted- Range Of Average Exercise Prices Shares Exercise Price - --------------------------------------------------------------------------- $ 7.00 to 9.99 5,401,629 $ 9.32 10.00 to 14.99 11,649,481 13.41 15.00 to 19.99 312,893 16.78 20.00 to 29.99 6,082,693 25.76 30.00 to 39.99 23,391,710 34.29 40.00 to 54.99 5,377,838 46.63 55.00 to 75.00 230,698 58.23 - --------------------------------------------------------------------------- $ 7.00 to 75.00 52,446,942 $27.36 ===========================================================================
NOTE 18: EARNINGS PER SHARE Basic earnings (loss) per share from continuing operations were computed using the weighted average number of common shares outstanding each year (633.4 million in 1999, 603.5 million in 1998, and 590.2 million in 1997). Diluted earnings per share from continuing operations in 1999 and 1997 were computed taking into account the effect of dilutive common share equivalents totaling 16.4 million in 1999 and 20.3 million in1997. In 1998, 23.5 million dilutive common share equivalents were not included in computing the diluted per-share amounts because Monsanto recognized a loss from continuing operations. Dilutive common share equivalents consist of outstanding stock options. Other common share equivalents also were not included in the computation of 1999 diluted earnings per share because the effect of their exercise or conversion was not dilutive, based on the average market price of Monsanto common stock for the period. These include approximately 45.5 million of outstanding stock options and up to 17.5 million shares of common stock to be issued under the Adjustable Conversion-rate Equity Security Units (ACES) described in the Long-Term Debt note. These options and ACES units expire from 2001 through 2008. NOTE 19: CAPITAL STOCK Pursuant to the company's Shareholder Rights Plan, in December 1999, the company's board of directors declared a dividend, effective as of February 5, 2000, of one preferred stock purchase right on each then- outstanding share of the company's common stock. The February 5, 2000 dividend replaced the preferred stock purchase rights which were granted in 1990 and set to expire on February 5, 2000 under the company's 1990 Shareholder Rights Plan. Pursuant to the current Shareholder Rights Plan, if a person or group acquires beneficial ownership of 20 percent or more, or announces a tender offer that would result in beneficial ownership of 20 percent or more of the company's outstanding common stock, the rights become exercisable and for every right held, the owner will be entitled to purchase one one-thousandth of a share of a Series A preferred stock for $250. If Monsanto is acquired in a business combination transaction while the rights are outstanding, for every right held, the holder will be entitled to purchase, for $250, common shares of the acquiring company having a market value of $500. In addition, if a person or group acquires beneficial ownership of 20 percent or more of the company's outstanding common stock, for every right held, the holder (other than such person or members of such group) will be entitled to purchase, for $250, a number of shares of the company's common stock having a market value of $500. At any time prior to the acquisition of such a 20 percent position, the company can redeem each right for $0.001. The board of directors also is authorized to reduce the aforementioned 20 percent thresholds to not less than 10 percent. The rights expire in the year 2010. As of Dec. 31, 1999, there were 129.8 million common shares reserved for employee stock options. In November 1998, the company issued 17,500,000 units of 6.50 percent Adjustable Conversion-rate Equity Security Units (ACES) at a stated value of $40 per unit. For further information, See the Notes to Financial Statements, Note 12 - Long-Term Debt. 49 NOTE 20: COMMITMENTS AND CONTINGENCIES Commitments, principally in connection with uncompleted additions to property, were approximately $20 million as of Dec. 31, 1999. Monsanto was contingently liable as a guarantor for bank loans and for discounted customers' receivables totaling approximately $77 million as of Dec. 31, 1999, and $158 million as of Dec. 31, 1998. Future minimum payments under noncancelable operating leases, unconditional inventory purchases, and R&D alliances are $112 million for 2000, $86 million for 2001, $71 million for 2002, $21 million for 2003, $17 million for 2004, and $37 million thereafter. The more significant concentrations in Monsanto's trade receivables at year-end were:
- -------------------------------------------------------------------------------------- 1999 1998 - -------------------------------------------------------------------------------------- U.S. agricultural product distributors $709 $514 Customers in Latin American Southern Cone Countries 827 560 European agricultural product distributors 328 305 Pharmaceutical distributors worldwide 591 351 Customers in the former Soviet Union 76 99 Customers in southeast Asia 58 60 - --------------------------------------------------------------------------------------
Management does not anticipate losses on its trade receivables in excess of established allowances. Monsanto's Statement of Consolidated Financial Position included accrued liabilities of $19 million as of Dec. 31, 1999, and $21 million as of Dec. 31, 1998, for the remediation of identified waste disposal sites. Monsanto's future remediation expenses for waste disposal sites are affected by a number of uncertainties. These uncertainties include, but are not limited to, the method and extent of remediation, the percentage of material attributable to Monsanto at the sites relative to that attributable to other parties, and the financial capabilities of the other potentially responsible parties (PRPs). The company does not expect the resolution of such uncertainties to have a material effect on profitability. In April 1999, a jury verdict was returned against DEKALB (which became a wholly-owned subsidiary of Monsanto during Dec. 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 appealed this verdict, has meritorious grounds to overturn the verdict and intends to vigorously pursue all available means to have the verdict overturned. No provision has been made in Monsanto's consolidated financial statements with respect to the award for punitive damages. On March 20, 1998, a jury verdict was returned against Monsanto in a lawsuit filed in the California Superior Court. The lawsuit was brought by Mycogen Corp., Agrigenetics Inc. and Mycogen Plant Sciences Inc. claiming that Monsanto delayed providing access to certain gene technology under a 1989 agreement with Lubrizol Genetics Inc., a company which Mycogen Corp. subsequently purchased. The jury awarded $174.9 million in future damages. Monsanto has filed an appeal of the verdict with the California Court of Appeal for the Fourth Judicial District. No provision has been made in Monsanto's consolidated financial statements with respect to this verdict. The company intends to vigorously pursue all available means to have this verdict set aside. Monsanto is a party to a number of lawsuits and claims, which it is vigorously defending. Such matters arise out of the normal course of business and relate to a variety of issues. Certain of the lawsuits and claims seek damages in very large amounts, or seek to restrict the company's business activities. Although the results of litigation cannot be predicted with certainty, management's belief is that the final outcome of such litigation will not have a material adverse effect on Monsanto's consolidated financial position, profitability or liquidity. 50 NOTE 21: SUPPLEMENTAL DATA Supplemental income statement data were:
- -------------------------------------------------------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------------------- Rent expense $ 136 $ 102 $ 117 ====================================================================================== Technological expenses: Research and development $1,290 $1,238 $ 944 Engineering, commercial development and patent 83 70 105 - -------------------------------------------------------------------------------------- Total technological expenses $1,373 $1,308 $1,049 ====================================================================================== Interest expense: Total interest cost $ 382 $ 224 $148 Less capitalized interest (37) (14) (13) - -------------------------------------------------------------------------------------- Net interest expense $ 345 $ 210 $ 135 ======================================================================================
NOTE 22: OTHER EXPENSE (INCOME) - NET
====================================================================================== Significant components of Other Expense (Income) were: 1999 1998 1997 - -------------------------------------------------------------------------------------- Equity expense (income) 31 35 (6) Minority interest expense 51 32 26 Royalty income (11) (7) (4) Foreign currency loss 36 22 52 Gain on sale of pharmaceutical product rights (50) (124) (120) Gain on sale of business and other assets (75) (19) (25) Losses on common stock investments - 40 - Merger termination costs 85 - - Other miscellaneous expense (income) 40 (10) (12) - -------------------------------------------------------------------------------------- Other expense (income) - net 107 (31) (89) ======================================================================================
51 NOTE 23: SEGMENT INFORMATION =================================================================================================================================== SEGMENT DATA ===================================================================================================================================
NET SALES EBIT - ----------------------------------------------------------------------------------------------------------------------------------- 1999 1998 1997 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------------- Agricultural Products $5,102 $4,264 $3,470 $ 775 $ 868 $ 827 Pharmaceuticals 3,920 2,771 2,323 655 309 286 Corporate and Other 124 202 265 (270) (290) (218) Unusual charges (64) (762) (633) - ----------------------------------------------------------------------------------------------------------------------------------- Total $9,146 $7,237 $6,058 $1,096 $ 125 $ 262 =================================================================================================================================== ====================================================================================== SEGMENT DATA ====================================================================================== EBITDA - -------------------------------------------------------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------------------- Agricultural Products $1,275 $1,223 $1,035 Pharmaceuticals 813 451 422 Corporate and Other (198) (269) (184) Unusual charges - -------------------------------------------------------------------------------------- Total $1,890 $1,405 $1,273 ====================================================================================== TOTAL ASSETS CAPITAL EXPENDITURES - -------------------------------------------------------------------------------------------------------------------- 1999 1998 1999 1998 1997 - -------------------------------------------------------------------------------------------------------------------- Agricultural Products $10,470 $10,337 $607 $469 $316 Pharmaceuticals 3,004 2,778 188 236 175 Corporate and Other 1,504 1,346 181 154 92 Discontinued Operations 1,557 1,924 - -------------------------------------------------------------------------------------------------------------------- Total $16,535 $16,385 $976 $859 $583 ==================================================================================================================== DEPRECIATION AND AMORTIZATION - -------------------------------------------------------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------------------- Agricultural Products $500 $355 $208 Pharmaceuticals 158 142 136 Corporate and Other 72 21 34 Discontinued Operations - -------------------------------------------------------------------------------------- Total $730 $518 $378 ====================================================================================== Reconciliation of EBIT to income (loss) from continuing operations follows: - -------------------------------------------------------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------------------- EBIT $1,096 $ 125 $ 262 Less: Interest expense (345) (210) (135) Income taxes (248) (46) 22 Income (Loss) from Continuing Operations $ 503 $(131) $ 149 ====================================================================================== EBITDA is EBIT excluding depreciation and amortization and the effects of unusual items. Unusual items in 1999, 1998 and 1997 are not included in these amounts. Such items included accelerated integration costs, restructuring charges and reversals, costs associated with failed merger between Monsanto and D&PL, gain on the sale of Stoneville, write-offs for acquired in-process research and development and other special charges. The net total unusual items from continuing operations by segment were as follows: ======================================================================================= SEGMENT 1999 1998 1997 - --------------------------------------------------------------------------------------- Agricultural Products $(101) $(588) $(633) Pharmaceuticals 6 (29) Corporate and Other 31 (145) - --------------------------------------------------------------------------------------- Total Net Unusual Items from Continuing Operations $ (64) $(762) $(633) ======================================================================================= In 1999 and 1998, respectively, net assets of discontinued operations include net effect of current liabilities of $213 million and $272 million and noncurrent liabilities of $15 million and $67 million.
Although inflation is relatively low in most of Monsanto's major markets, it continues to affect operating results. To mitigate the effect of inflation, Monsanto has implemented measures to control costs, to improve productivity, to manage new fixed and working capital, and to raise selling prices when government regulations and competitive conditions permit. In addition, the current costs of replacing certain assets are estimated to be greater than the historical costs presented in the financial statements. Accordingly, the depreciation expense reported in the Statement of Consolidated Income (Loss) would be greater if it were stated on a current-cost basis. 52 Sales between segments were not significant. Certain corporate expenses, primarily those related to the overall management of Monsanto, were not allocated to the segments or to geographic areas. Corporate assets are primarily investments in affiliates. The principal factors that accounted for the segments' performances in 1999 and 1998, along with the factors that are expected to affect operating results in the near term, are described in Management's Discussion and Analysis of Financial Condition and Results of Operations. NOTE 24: DISCONTINUED OPERATIONS On July 1, 1999, Monsanto announced its intention to sell the artificial sweetener (bulk aspartame and tabletop sweeteners) and biogum businesses. The company expects to sell these businesses for a net gain by July 2000. The results of operations, financial position, and cash flows of these businesses, and of the alginates and Ortho lawn-and- garden products businesses, the divestitures of which were 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. In addition, Monsanto transferred the Roundup(R) lawn-and-garden and nutrition research operations of the former Nutrition and Consumer Products segment to the Agricultural Products and Corporate and Other segments, respectively. Net sales and income from discontinued operations in 1999 include one month of the Ortho lawn-and-garden products business, and nine months of the alginates business for 1999. Net sales, income and net assets from discontinued operations include the Ortho lawn-and-garden products, alginates, artificial sweeteners, and biogums businesses for 1998. Net sales and income from discontinued operations in 1997 also include eight months of the chemicals business which was spun off to shareholders Sept. 1, 1997.
- -------------------------------------------------------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------------------- Net Sales $ 980 $1,288 $3,279 Income (Loss) from Discontinued Operations Before Income Tax 150 (158) 506 Income Tax Expense (Benefit) 58 (39) 185 Net Income (Loss) from Discontinued Operations 92 (119) 321 Net Assets of Discontinued Operations: Current Assets 545 994 Non-Current Assets 1,240 1,269 Total Assets 1,785 2,263 Current Liabilities 213 272 Non-Current Liabilities 15 67 Total Liabilities 228 339 Net Assets of Discontinued Operations $1,557 $1,924 - --------------------------------------------------------------------------------------
Interest expense charged to discontinued operations was $96 million in 1999, $103 million in 1998, and $74 million in 1997, based on working capital requirements and expected proceeds from the discontinued Nutrition and Consumer segment and debt assumed by the spun-off chemical business. Historically, the company did not allocate any debt to the Nutrition and Consumer Products or Chemicals businesses because the company centrally manages cash requirements for its operations. Net assets of the Nutrition and Consumer Products segment do not include pension liabilities, pension assets, and postretirement benefit liabilities associated with its active employees or former employees. Expenses related to pension and postretirement benefits have been allocated to discontinued operations based on payroll costs. Monsanto has not revised its existing retirement plans for any employment status changes associated with the divestiture of the Nutrition and Consumer Products segment. In 1997, the chemical company assumed the pension liability and related pension assets for its active employees and certain former employees of the chemical business. In January 1999, Monsanto completed the sale of the Ortho lawn- and-garden products business. Proceeds of $340 million were used to reduce debt in 1999 and for general corporate purposes. On September 7, 1999, Monsanto announced the sale of the alginates business to International Specialty Products (ISP). Proceeds of $40 million from the sale were used to reduce debt. The closing of this transaction occurred on Oct. 15, 1999, which resulted in an aftertax loss of $25 million from discontinued operations. 53 Offsetting this loss on disposal were restructuring liability reversals of $27 million aftertax, which were required as severance and facility shut-down costs were no longer required as a result of the sale on terms more favorable than originally anticipated. Monsanto announced Feb. 4, 2000, the signing of a definitive agreement to sell the tabletop sweeteners business, including the Equal(R), Canderel(R) and NutraSweet(R) tabletop brands, to Tabletop Acquisition Corp. (TAC). Expected proceeds of $570 million from the sale will primarily be used to reduce debt. On February 22, 2000, Monsanto announced the signing of a definitive agreement to sell the biogums business to a joint venture between Hercules Inc. and Lehman Brothers Merchant Banking Partners II, L.P. Expected proceeds of $685 million will primarily be used to reduce debt. NOTE 25: QUARTERLY DATA (UNAUDITED) FIRST SECOND THIRD FOURTH TOTAL QUARTER QUARTER QUARTER QUARTER YEAR - ----------------------------------------------------------------------------------------------------------------------------------- NET SALES - ----------------------------------------------------------------------------------------------------------------------------------- 1999 $2,310 $2,572 $1,922 $2,342 $9,146 1998 1,719 2,079 1,706 1,733 7,237 1997 1,542 1,736 1,369 1,411 6,058 - ----------------------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM CONTINUING OPERATIONS - ----------------------------------------------------------------------------------------------------------------------------------- 1999 120 326 10 47 503 1998 166 223 (111) (409) (131) 1997 164 208 (198) (25) 149 - ----------------------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) - ----------------------------------------------------------------------------------------------------------------------------------- 1999 112 344 49 70 575 1998 196 257 (100) (603) (250) 1997 274 324 (133) 5 470 - ----------------------------------------------------------------------------------------------------------------------------------- DILUTED EARNINGS (LOSS) PER SHARE - CONTINUING OPERATIONS - ----------------------------------------------------------------------------------------------------------------------------------- 1999 0.18 0.50 0.02 0.07 0.77 1998 0.27 0.36 (0.18) (0.67) (0.22) 1997 0.27 0.34 (0.33) (0.04) 0.24 - ----------------------------------------------------------------------------------------------------------------------------------- DILUTED EARNINGS (LOSS) PER SHARE - ----------------------------------------------------------------------------------------------------------------------------------- 1999 0.17 0.53 0.08 0.10 0.88 1998 0.32 0.41 (0.17) (1.00) (0.41) 1997 0.45 0.54 (0.23) 0.01 0.77 - ----------------------------------------------------------------------------------------------------------------------------------- DIVIDENDS PER SHARE - ----------------------------------------------------------------------------------------------------------------------------------- 1999 0.030 0.030 0.030 0.030 0.120 1998 0.030 0.030 0.030 0.030 0.120 1997 0.150 0.160 0.160 0.030 0.500 - ----------------------------------------------------------------------------------------------------------------------------------- COMMON STOCK PRICE - ----------------------------------------------------------------------------------------------------------------------------------- 1999 - ----------------------------------------------------------------------------------------------------------------------------------- HIGH 50 13/16 50 1/2 45 7/16 47 1/2 50 13/16 LOW 37 1/4 38 1/4 32 3/4 33 9/16 32 3/4 - ----------------------------------------------------------------------------------------------------------------------------------- 1998 - ----------------------------------------------------------------------------------------------------------------------------------- High 53 1/16 60 3/8 63 15/16 55 7/8 63 15/16 Low 38 5/16 51 5/16 50 1/2 33 3/4 33 3/4 - ----------------------------------------------------------------------------------------------------------------------------------- 1997 - ----------------------------------------------------------------------------------------------------------------------------------- High 42 1/4 46 1/2 52 5/16 45 3/4 52 5/16 Low 34 3/4 37 36 3/8 38 34 3/4 - ----------------------------------------------------------------------------------------------------------------------------------- Because Monsanto reported a loss from continuing operations for the fourth quarter and year ended Dec. 31, 1998, generally accepted accounting principles require diluted loss per share to be calculated using weighted average common shares outstanding, excluding common stock equivalents. As a result, the quarterly earnings (loss) per share do not total to the full year amount. Stock prices were not restated to reflect the spinoff of the chemical businesses on Sept. 1, 1997.
54 Historically, Monsanto's income from continuing operations has been higher during the first half of the year, primarily because of the concentration of sales of the Agricultural Products segment during that part of the year. Income from continuing operations for the third quarter of 1999 included a net aftertax charge of $25 million, or $0.04 per share, for the cost associated with the accelerated integration of Monsanto's agricultural chemical and seed operations of $49 million aftertax, partially offset by the reversal of $24 million aftertax of restructuring liabilities established in 1998. The restructuring liability reversals were required as a result of lower actual severance and facility shut-down costs than originally estimated. Income from continuing operations for the fourth quarter of 1999 included a net aftertax charge of $32 million, or $0.05 per share, principally for a one-time aftertax charge of $53 million associated with the failed merger between Monsanto and D&PL. This one-time charge in the fourth quarter of 1999 was offset by the reversal of $12 million aftertax of restructuring liabilities established in 1998 and an aftertax gain of $7 million from the divestiture of Stoneville. The reversal of restructuring liabilities in the fourth quarter of 1999 were required as a result of lower actual severance and facility shut-down costs than originally estimated. Income from continuing operations for the second quarter of 1998 included a net aftertax charge of $13 million, or $0.02 per share, for the cost of exiting the company's optical products business offset by a restructuring reserve reversal. Income from continuing operations for the third quarter of 1998 included an aftertax charge of $187 million, or $0.30 per share, for the write-off of in-process R&D for the acquisition of PBIC. Income from continuing operations for the fourth quarter of 1998 included an aftertax charge of $410 million, or $0.65 per share, for restructuring and special charges, write-offs for acquired in-process R&D, and charges for the cancellation of DEKALB stock options. The write-off of in-process R&D in the fourth quarter of 1998 was for the acquisition of DEKALB and certain international seed operations of Cargill, net of a revision of the amount of in-process R&D written off in the third quarter related to the PBIC acquisition. A revision in the estimate was made in accordance with the U.S. Securities and Exchange Commission's (SEC) clarified guidance on in-process R&D. This revision was made as an adjustment to the initial purchase price allocation, which was not yet finalized because outstanding information, primarily related to intangible asset valuations and liabilities assumed, was still being obtained. Income from continuing operations for each quarter in 1997 was affected by the write-off of in-process R&D from acquisitions. First- quarter 1997 included an aftertax charge of $63 million, or $0.11 per share, principally for the acquisition of the Asgrow Agronomics seed business. Second-quarter 1997 included an aftertax charge of $21 million, or $0.03 per share, for the Calgene Inc. acquisition. Third- quarter 1997 included an aftertax charge of $270 million, or $0.45 per share, for the Holden's Foundation Seeds Inc. acquisition. Fourth- quarter 1997 included $50 million, or $0.08 per share, for the Sementes Agroceres S.A. acquisition. 55 ======================================================================== INDEPENDENT AUDITORS' REPORT ======================================================================== To the shareowners of Monsanto Company: We have audited the accompanying statement of consolidated financial position of Monsanto Company and subsidiaries as of Dec. 31, 1999 and 1998, and the related statements of consolidated income (loss), cash flow, shareowners' equity and comprehensive income (loss) for each of the three years in the period ended Dec. 31, 1999. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Monsanto Company and subsidiaries as of Dec. 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended Dec. 31, 1999, in conformity with accounting principles generally accepted in the United States of America. /s/ Deloitte & Touche LLP Deloitte & Touche LLP St. Louis, Missouri Feb. 25, 2000 56 APPENDIX 1. Throughout the electronic submission, trademarks are designated on each page by the letter "R" in parentheses or the letters "TM" in parentheses. In the printed copy of Exhibit 99.1 all trademarks are indicated by special type. EX-99.2 11 COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 99.2 MONSANTO COMPANY AND SUBSIDIARIES COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES (Dollars in millions)
Year Ended December 31, ------------------------------------------------------------- 1999 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- ---- Income from continuing operations before provision for income taxes $ 751 $ (85) $127 $356 $553 $478 Add Fixed charges 423 269 188 131 133 123 Less capitalized interest (37) (14) (13) (8) (4) (3) Dividends from affiliated companies 1 1 1 3 1 -- Less equity income (add equity loss) of affiliated companies 31 35 (6) 32 (12) -- ------ ----- ---- ---- ---- ---- Income as adjusted $1,169 $ 206 $297 $514 $651 $598 ====== ===== ==== ==== ==== ==== Fixed charges Interest expense $ 345 $ 210 $135 $83 $92 $88 Capitalized interest 37 14 13 8 4 3 Portion of rents representative of interest factor 41 47 40 40 37 32 ------ ----- ---- ---- ---- ---- Fixed charges $ 423 $ 271 $188 $131 $133 $123 ====== ===== ==== ==== ==== ==== Ratio of earnings to fixed charges 2.76 0.76 1.58 3.92 4.89 4.86 ==== ==== ==== ==== ==== ==== Includes net charges for costs related to the failed merger between Monsanto and Delta and Pine Land Company, accelerated integration of agricultural chemical and seed businesses, a gain on divestiture of Stoneville Pedigreed Seed Company, and reversals of restructuring liabilities established in 1998, of $64 million for 1999 and restructuring, acquired in-process research and development, and other unusual items of $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 2.91, 3.57, 4.95, 6.42 and 5.08 for the years ended December 31, 1999, 1998, 1997, 1996 and 1995, respectively. The ratio was not materially affected by the restructuring and other unusual items in 1994.
-----END PRIVACY-ENHANCED MESSAGE-----