-----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, TM24mucyOKekZUTnGYQ2xYbfVJ0sawt/IqokZOhxz2lhrnV6EYKexUP9gTLFbnx1 Gu6to25+BRVBeZuzC8YB7g== 0001068800-98-000019.txt : 19981113 0001068800-98-000019.hdr.sgml : 19981113 ACCESSION NUMBER: 0001068800-98-000019 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MONSANTO CO CENTRAL INDEX KEY: 0000067686 STANDARD INDUSTRIAL CLASSIFICATION: CHEMICALS & ALLIED PRODUCTS [2800] IRS NUMBER: 430420020 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-02516 FILM NUMBER: 98744576 BUSINESS ADDRESS: STREET 1: 800 N LINDBERGH BLVD CITY: ST LOUIS STATE: MO ZIP: 63167 BUSINESS PHONE: 3146941000 MAIL ADDRESS: STREET 1: 800 NORTH LINDBERGH BLVD CITY: ST LOUIS STATE: MO ZIP: 63167 FORMER COMPANY: FORMER CONFORMED NAME: MONSANTO CHEMICAL CO DATE OF NAME CHANGE: 19711003 10-Q 1 MONSANTO COMPANY FORM 10-Q ============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-2516 MONSANTO COMPANY ---------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 43-0420020 -------- ---------- (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 800 NORTH LINDBERGH BLVD., ST. LOUIS, MO 63167 ----------------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (314) 694-1000 -------------- (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO ----- ----- INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE. OUTSTANDING AT CLASS SEPTEMBER 30, 1998 ----- ------------------ COMMON STOCK, $2 PAR VALUE 604,046,370 SHARES -------------------------- ------------------ PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS The Statement of Consolidated Income of Monsanto Company and subsidiaries for the three months and nine months ended September 30, 1998 and 1997, the Statement of Consolidated Financial Position as of September 30, 1998 and December 31, 1997, the Statement of Consolidated Cash Flow for the nine months ended September 30, 1998 and 1997 and related Notes to Financial Statements follow. In the opinion of management, these unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position, results of operations and cash flows for the interim periods reported. This Quarterly Report on Form 10-Q should be read in conjunction with Monsanto's 1997 Annual Report on Form 10-K, Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998, and Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1998. Unless otherwise indicated by the context, "Monsanto" means Monsanto Company and consolidated subsidiaries, and "the Company" means Monsanto Company only. Unless otherwise indicated, "earnings per share" and "per share" refers to diluted earnings per share. MONSANTO COMPANY AND SUBSIDIARIES STATEMENT OF CONSOLIDATED INCOME (Dollars in millions, except per share)
Three Months Ended Nine Months Ended September 30, September 30, ------------------- ------------------- 1998 1997 1998 1997 ---- ---- ---- ---- Net Sales $1,986 $1,724 $6,500 $5,694 Costs and Expenses: Cost of Goods Sold 768 685 2,622 2,342 Selling, General and Administrative Expenses 585 512 1,746 1,466 Technological Expenses 359 264 967 718 Acquired In-Process Research and Development 189 436 189 609 Amortization of Intangible Assets 64 43 206 114 Restructuring Expense (Income) (35) ------ ------ ------ ------ Operating Income (Loss) 21 (216) 805 445 Interest Expense (72) (42) (214) (111) Interest Income 17 13 39 36 Other Income (Expense) - Net (29) (28) (27) (1) ------ ------ ------ ------ Income (Loss) from Continuing Operations Before Income Taxes (63) (273) 603 369 Income Taxes 37 (106) 250 80 ------ ------ ------ ------ Income (Loss) from Continuing Operations (100) (167) 353 289 Income from Discontinued Operations 34 176 ------ ------ ------ ------ Net Income (Loss) $ (100) $ (133) $ 353 $ 465 ------ ------ ------ ------ Basic Earnings (Loss) per Share: Continuing Operations $(0.17) $(0.29) $ 0.59 $ 0.49 Discontinued Operations 0.06 0.30 ------ ------ ------ ------ Net Income (Loss) $(0.17) $(0.23) $ 0.59 $ 0.79 ------ ------ ------ ------ Diluted Earnings (Loss) per Share: Continuing Operations $(0.17) $(0.28) $ 0.56 $ 0.47 Discontinued Operations 0.05 0.29 ------ ------ ------ ------ Net Income (Loss) $(0.17) $(0.23) $ 0.56 $ 0.76 ------ ------ ------ ------ Dividends per Share $ 0.03 $ 0.16 $ 0.09 $ 0.47 ------ ------ ------ ------
1 MONSANTO COMPANY AND SUBSIDIARIES STATEMENT OF CONSOLIDATED FINANCIAL POSITION (Dollars in millions, except per share)
September 30, December 31, 1998 1997 ---- ---- ASSETS Current Assets: Cash and cash equivalents $ 215 $ 134 Receivables, net of allowances of $64 in 1998 and $63 in 1997 2,845 1,823 Miscellaneous receivables and prepaid expenses 731 692 Deferred income tax benefit 302 243 Inventories 1,505 1,374 ------- ------- Total Current Assets 5,598 4,266 ------- ------- Property, Plant and Equipment 5,206 4,701 Less Accumulated Depreciation 2,477 2,301 ------- ------- Net Property, Plant and Equipment 2,729 2,400 ------- ------- Investments in Affiliates 359 329 Intangible Assets, net of accumulated amortization 3,127 2,837 Other Assets 1,053 942 ------- ------- Total Assets $12,866 $10,774 ------- ------- LIABILITIES AND SHAREOWNERS' EQUITY Current Liabilities: Accounts payable $ 452 $ 480 Accrued liabilities 1,819 1,333 Short-term debt 2,169 1,726 ------- ------- Total Current Liabilities 4,440 3,539 ------- ------- Long-Term Debt 2,506 1,979 Deferred Income Taxes 100 97 Postretirement Liabilities 838 735 Other Liabilities 296 320 Shareowners' Equity: Common stock (authorized: 1,000,000,000 shares, par value $2) Issued: 821,970,970 shares in 1998 and 1997 1,644 1,644 Additional contributed capital 518 321 Treasury stock, at cost (217,749,028 shares in 1998 and 226,686,302 shares in 1997) (2,500) (2,570) Reinvested earnings 5,272 4,973 Reserve for ESOP debt retirement (111) (123) Accumulated other comprehensive loss (137) (141) ------- ------- Total Shareowners' Equity 4,686 4,104 ------- ------- Total Liabilities and Shareowners' Equity $12,866 $10,774 ------- -------
2 MONSANTO COMPANY AND SUBSIDIARIES STATEMENT OF CONSOLIDATED CASH FLOW (Dollars in millions)
Nine Months Ended September 30, ---------------------- 1998 1997 ---- ---- Increase (Decrease) in Cash and Cash Equivalents Operating Activities: Income from continuing operations $ 353 $ 289 Add income taxes - continuing operations 250 80 ------- ------- Income from continuing operations before income taxes 603 369 Adjustments to reconcile to Cash Provided by Continuing Operations: Income tax refunds (payments) 49 (109) Items that did not use (provide) cash: Depreciation and amortization 450 350 Restructuring expense (income) (35) Acquired in-process research and development expense 189 609 Other 67 (24) Working capital changes that provided (used) cash: Accounts receivable (987) (662) Inventories (111) 50 Accounts payable and accrued liabilities 62 (166) Other (312) (143) Pharmaceutical licensing and product rights sales 225 Other items 16 (173) ------- ------- Cash Provided by Continuing Operations 216 101 Cash Used in Discontinued Operations (109) ------- ------- Total Cash Provided by (Used in) Operations 216 (8) ------- ------- Investing Activities: Property, plant and equipment purchases (566) (458) Acquisitions of seed companies (603) (1,237) Other acquisitions and investments (165) (358) Investment and property disposal proceeds 130 16 Discontinued Operations (44) ------- ------- Cash Used in Investing Activities (1,204) (2,081) ------- ------- Financing Activities: Net change in short-term financing 818 2,406 Long-term debt proceeds 224 13 Long-term debt reductions (68) (97) Dividend payments (54) (276) Common stock issued under employee stock plans 149 136 Cash transferred to Solutia Inc. (75) ------- ------- Cash Provided by Financing Activities 1,069 2,107 ------- ------- Increase in Cash and Cash Equivalents 81 18 Cash and Cash Equivalents: Beginning of year 134 166 ------- ------- End of period $ 215 $ 184 ------- -------
The effect of exchange rate changes on cash and cash equivalents was not material. 3 MONSANTO COMPANY AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS 1. On July 16, 1998, Monsanto acquired Plant Breeding International Cambridge Limited ("PBIC") for a purchase price of approximately $525 million. The acquisition was accounted for as a purchase, and accordingly, the results of operations for this company were included in the Statement of Consolidated Income from the date of acquisition. The purchase price allocations are based upon preliminary assumptions and are subject to revision. Monsanto recorded a pretax charge of $189 million ($0.30 per share aftertax) in the third quarter of 1998 for the write-off of acquired in-process research and development ("R&D") primarily related to this acquisition. The amount of this write-off was determined by an independent valuation. Management believes that the technological feasibility of the acquired in-process technology has not been established and that it has no alternative future uses. Accordingly, the amounts allocated to in-process research and technology are required to be expensed immediately under generally accepted accounting principles. Monsanto financed this acquisition through the issuance of short-term debt. In October 1998, Monsanto announced the acquisition of the international seed operations of Cargill Incorporated ("Cargill") in Central and Latin America, Europe (excluding certain operations in the United Kingdom), Asia and Africa for a purchase price of approximately $1.4 billion. Monsanto financed this acquisition through the issuance of short-term debt. On May 11, 1998, Monsanto announced a definitive merger agreement (the "Merger Agreement") to acquire the approximate 60 percent remaining shares of DEKALB Genetics Corporation ("DEKALB") that Monsanto did not already own. Under terms of the Merger Agreement, a subsidiary of Monsanto will make a tender offer (the "Offer") to acquire all of the common stock of DEKALB not owned by Monsanto for $100 per share in cash. This Offer will be followed by a merger in which any remaining common stock of DEKALB will be exchanged for cash at the same price per share paid in the Offer. If the shares are not accepted for purchase pursuant to the Offer by May 9, 1999, the Offer price will be increased by 50 cents per share on the 10th day of each month, starting on May 10, 1999, unless the Offer is earlier terminated in accordance with its terms. If shares are accepted for purchase pursuant to the Offer on or prior to May 9, 1999, approximately $2.3 billion will be paid to the shareowners of DEKALB, and the total cost to Monsanto of the acquisition of all shares of DEKALB (including the acquisition in 1996 of the shares Monsanto currently owns) will be approximately $2.5 billion. The Merger Agreement has been filed as an Exhibit to Schedule 13D filed by Monsanto with regard to the DEKALB common stock. This transaction is subject to regulatory approvals and other customary conditions. On May 11, 1998, Monsanto announced that it had entered into a definitive agreement with Delta and Pine Land Company ("Delta Pine") to merge Delta Pine with Monsanto. Under terms of the agreement, Delta Pine shareowners would be entitled to receive 0.8625 shares of Monsanto's common stock in exchange for each share of Delta Pine they hold. Approximately 33 million shares of Monsanto common stock are expected to be issued to Delta Pine shareowners, and, based on Monsanto's closing stock price on November 4, 1998 of $38 per common share, result in a purchase price of approximately $1.3 billion. The merger is subject to regulatory approvals, shareowner consent and other customary conditions. The Cargill transaction was accounted for under the purchase method of accounting, and the DEKALB and Delta Pine transactions are expected to be accounted for under the purchase method of accounting. Monsanto expects to recognize pretax charges, currently estimated to be between $700 million and $1 billion, for the write-off of acquired in-process R&D associated with these acquisitions. These charges will be recognized in the periods in which the transactions close. In connection with the PBIC, Cargill, DEKALB and Delta Pine transactions, Monsanto expects to recognize incremental amortization expense, currently estimated to average between $175 million and $250 million aftertax annually, from goodwill and other acquired intangible assets. The goodwill and other intangible assets 4 MONSANTO COMPANY AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS are expected to be amortized over periods ranging from 7 to 20 years. These purchase price allocations and amortization amounts are estimated based upon preliminary assumptions and could change. On September 25, 1998, Monsanto signed an agreement with Cargill to form a worldwide joint venture to create and market new products enhanced through biotechnology for the grain processing and animal feed markets. 2. On June 1, 1998, Monsanto announced that it had entered into a definitive agreement with American Home Products Corporation ("AHP") to combine the two companies in a merger of equals transaction. On October 13, 1998, Monsanto and AHP announced that they had terminated the merger agreement by mutual consent. The boards of directors of each of the two companies determined that the transaction was not in the best interest of their respective shareowners. 3. Effective January 1, 1998, Monsanto adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS 130"). FAS 130 establishes standards for reporting and display of comprehensive income and its components in financial statements. Comprehensive income includes all non-shareowner changes in equity and consists of net income, foreign currency translation adjustments, unrealized gains and losses on available- for-sale securities, and minimum pension liability adjustments. Total comprehensive income for the three months and nine months ended September 30, 1998 and 1997 was:
Three Months Ended Nine Months Ended September 30, September 30, -------------- -------------- 1998 1997 1998 1997 ---- ---- ---- ---- Net income (loss) $(100) $(133) $353 $ 465 Other comprehensive income (loss) 48 (73) 4 (178) ----- ----- ---- ----- Total comprehensive income (loss) $ (52) $(206) $357 $ 287 ----- ----- ---- -----
4. Effective January 1, 1998, Monsanto adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("FAS 131"). FAS 131 establishes standards for defining operating segments and reporting information about operating segments in financial statements. It also establishes standards for related disclosures about products, geographic areas and major customers. This standard is not required to be applied to interim financial statements in the year of adoption, but will be applied to Monsanto's annual 1998 financial statements. Monsanto's current reporting of segments and related information is essentially in compliance with the provisions of FAS 131, and any additional disclosure required by this statement is expected to be minimal. Also effective January 1, 1998, Monsanto adopted the American Institute of Certified Public Accountants' Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides guidance on when costs incurred for internal-use computer software are and are not capitalized. Monsanto's previous accounting policies were essentially in compliance with the provisions of this statement, therefore adoption of SOP 98-1 did not have a material effect on the Company's results of operations. 5. 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, 5 MONSANTO COMPANY AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS depending on the designated purpose of the derivative. This statement is effective for Monsanto January 1, 2000. Monsanto does not expect FAS 133 to have a material effect on results of operations or financial position in any one year. 6. Basic earnings per share (EPS) from continuing operations were computed using the weighted average number of common shares outstanding each period (600.4 million in 1998 and 588.7 million in 1997). Diluted EPS from continuing operations were computed taking into account the effect of dilutive potential common shares (26.4 million in 1998 and 20.9 million in 1997). Dilutive potential common shares consist of outstanding stock options. As of September 30, 1998, options to purchase less than 1 million shares of common stock were outstanding, but they were not included in the computation of diluted EPS because the exercise prices of the options were greater than the average market price of the common shares. These options expire through 2008. 7. Components of inventories at September 30, 1998 and December 31, 1997 were as follows:
September 30, December 31, 1998 1997 ---- ---- Finished goods $ 727 $ 762 Goods in process 316 265 Raw materials and supplies 497 390 ------ ------ Inventories, at FIFO cost 1,540 1,417 Excess of FIFO over LIFO cost (35) (43) ------ ------ Total $1,505 $1,374 ------ ------
8. 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 believes that the final outcome of such litigation will not have a material adverse effect on Monsanto's consolidated financial position, profitability or liquidity in any one year, as applicable. 6 MONSANTO COMPANY AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS 9. Segment data for the three months and nine months ended September 30, 1998 and 1997 were as follows:
Three Months Ended September 30, 1998 1997 ------------------------ ------------------------ Net Operating Net Operating Sales Income (Loss) Sales Income (Loss) ----- ------------- ----- ------------ Segment: Agricultural Products $ 794 $ (129) $ 672 $ (295) Nutrition and Consumer Products 332 46 342 37 Pharmaceuticals 790 133 605 77 Corporate and Other 70 (29) 105 (35) ------- ------- ------- ------ Total $ 1,986 $ 21 $ 1,724 $ (216) ------- ------- ------- ------ Nine Months Ended September 30, 1998 1997 ------------------------ ------------------------ Net Operating Net Operating Sales Income (Loss) Sales Income (Loss) ----- ------------- ----- ------------ Segment: Agricultural Products $ 3,169 $ 597 $ 2,603 $ 268 Nutrition and Consumer Products 1,162 203 1,148 139 Pharmaceuticals 1,903 186 1,633 147 Corporate and Other 266 (181) 310 (109) ------- ------ ------- ------ Total $ 6,500 $ 805 $ 5,694 $ 445 ------- ------ ------- ------
Financial information for the first nine months of 1998 and 1997 should not be annualized. Monsanto's sales and operating income are historically higher during the first half of the year, primarily because of the concentration of generally more profitable sales from the Agricultural Products segment in the first half of the year. 10. During the second quarter of 1998, Monsanto reclassified $475 million of outstanding commercial paper from short-term to long-term debt because Monsanto has the ability and intent to renew these obligations beyond September 30, 1999. At September 30, 1998, commercial paper of $1,000 million was classified as long-term debt. In October 1998, Monsanto mandated Citibank, N.A. and Salomon Smith Barney Inc. to arrange an additional $2 billion 364-day revolving credit facility. The facility will be used to support the issuance of commercial paper. Interest on amounts borrowed under this agreement is expected to be at money market rates. Covenants under this credit facility will restrict maximum borrowings. Monsanto does not anticipate that future borrowings will be limited by the terms of this agreement. 11. In the second quarter of 1998, Monsanto recorded a net charge of $13 million related to the exit from the Company's optical products business and a gain from the reversal of past restructuring reserves. As a part of Monsanto's efforts to focus on life science businesses, in May 1998 the Board of Directors approved a decision to exit Monsanto's optical products business, which included the Orcolite(R) and Diamonex(R) optical products businesses and the Diamonex(R) performance products business. Monsanto recognized a $20 million pretax gain on the sale of the Orcolite(R) business and recorded pretax charges of $68 million for the rationalization of the Diamonex(R) businesses, primarily for severance costs and the write-off of manufacturing facilities and intangible assets. Also during the second quarter of 1998, Monsanto recognized a gain of $35 7 MONSANTO COMPANY AND SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS million from the reversal of a restructuring reserve that was no longer needed due to a decision not to rationalize a European pharmaceutical production facility. Due to recent changes in the business and regulatory environment and successes in the R&D pipeline, rationalization of the facility was no longer economically beneficial. The restructuring reserve for the closure of this facility was originally recorded in December 1996. The pretax expenses (income) related to the restructuring, write-off of acquired in-process R&D, and other unusual items were recorded in the Statement of Consolidated Income in the following categories:
Nine Months Ended September 30, 1998 ------------------ Cost of Goods Sold $ 44 Acquired In-Process Research and Development 189 Amortization of Intangible Assets 24 Restructuring Expense (Income) (35) ------ Decrease in Operating Income 222 Other (Income) - Net (20) ------ Total decrease in Income from Continuing Operations Before Taxes $ 202 ------
8 MONSANTO COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Note 9 of the Notes to Financial Statements indicates operating results by operating unit, including the concentration of the generally more profitable sales of Agricultural Products in the first half of the year. RECENT EVENTS See Note 1 of the Notes to Financial Statements for a discussion of major transactions that were entered into or were completed during the nine months ended September 30, 1998. RESULTS OF OPERATIONS--THIRD QUARTER 1998 COMPARED WITH THIRD QUARTER 1997 Monsanto recorded a loss from continuing operations of $100 million, or $0.17 cents per share, in the third quarter of 1998 compared with a loss from continuing operations of $167 million, or $0.28 per share, in the third quarter of 1997. However, results for both years included unusual items. The loss from continuing operations for the third quarter of 1998 included an aftertax charge of $187 million, or $0.30 per share, for the write-off of in-process research and development ("R&D") principally related to the acquisition of Plant Breeding International Cambridge Limited ("PBIC"). The prior-year loss from continuing operations included an aftertax charge of $270 million, or $0.45 per share, for the write-off of in-process R&D related to the acquisitions of Holden's Foundation Seeds ("Holden's") and Corn States Hybrid Service, Inc. ("Corn States"). If the unusual charges were excluded in 1998 and 1997, income from continuing operations would have been $87 million, or $0.13 per share, in 1998, versus $103 million, or $0.17 per share, in 1997, a decrease of $16 million, or $0.04 per share. The decrease was primarily attributable to increased operating expenses and interest costs, partially offset by the effect of higher sales. Quarterly sales grew $262 million, or 15 percent, as a result of sales increases in the Agricultural Products and Pharmaceuticals segments. Selling, general and administrative ("SG&A") and technological expenses rose in the third quarter of 1998 compared with expenses in the year-ago quarter, principally because of increased expenses in the Agricultural Products and Pharmaceuticals segments. Amortization of intangible assets increased because of the increase in intangible assets related to seed company acquisitions made in 1997 and the PBIC acquisition. The increase in interest expense in quarter-to-quarter comparisons was caused by a greater amount of debt outstanding during the third quarter of 1998 versus the comparable prior-year quarter. The effective tax rate increased in quarter-to-quarter comparisons primarily because of the effect of the PBIC acquisition. Net sales for Agricultural Products grew to $794 million in the third quarter of 1998, compared with sales of $672 million in the third quarter of last year. The $122 million, or 18 percent, net sales increase was fueled primarily by higher worldwide sales volumes for the family of Roundup(R) herbicides, reflecting increased use of Roundup(R) herbicide in conservation tillage applications and with Roundup Ready(R) crops. Quarterly volumes for Roundup(R) herbicide continued above the trend-line growth of 20 percent annually, more than offsetting lower average prices. In September 1998, Monsanto reduced the prices of Roundup(R) herbicide in the United States. The price reduction is expected to drive increased volumes, especially in conservation tillage uses. Sales volumes for the third quarter of 1998 increased substantially in most world areas, led by gains in Latin America and the United States. Sales decreased in southeast Asia, where economic conditions depressed average prices. Quarterly segment sales also benefited from the inclusion of sales of Sementes Agroceres S.A. which was acquired in the fourth quarter of 1997, and from higher sales volumes of Posilac(R) bovine somatotropin. The segment reported an operating loss of $129 million for the third quarter of 1998 compared with a loss of $295 million for the comparable year-ago quarter. However, results for both years included unusual charges. The operating loss for the third quarter of 1998 included $189 million of pretax charges for the write-off of in-process R&D primarily related to the PBIC acquisition, and the operating loss for the third quarter of 1997 included $436 million of pretax charges for the write-off of in-process R&D related to the Holden's and Corn States acquisitions. If these charges were excluded, segment operating income would have totaled $60 million in the 1998 quarter versus $141 million in the 1997 quarter. This decrease was attributable to increased technology, SG&A and amortization expenses, partly offset by the effect of higher sales in quarter-to-quarter comparisons. Technological expenses grew due to higher spending on biotechnology and genomics research, primarily at the seed companies. 9 MONSANTO COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SG&A expenses rose principally because of the inclusion in 1998 of SG&A expenses from the acquired seed companies. Amortization expense increased because of the increase in intangible assets related to seed company acquisitions made during the fourth quarter of 1997 and the acquisition of PBIC. Quarterly net sales for the Nutrition and Consumer Products segment declined $10 million, or 3 percent, from sales in the year-ago third quarter primarily because of a drop in sales of bulk aspartame, partially offset by payments for the marketing agreement related to Roundup(R) herbicide. Third quarter 1998 sales volumes of bulk aspartame were down because of higher shipments to several large customers in the second quarter. Revenues for the segment included $32 million in payments as part of the agency agreement with The Scotts Company to market Roundup(R) herbicide for lawn and garden uses. Operating income for the Nutrition and Consumer Products segment rose $9 million, or 24 percent, in the third quarter of 1998 versus the comparable 1997 period primarily because of the payments received for the Roundup(R) marketing agreement, partially offset by increased operating expenses. The largest increase was in technological expenses, which was driven by increased research spending on nutrition programs. Pharmaceutical net sales for the third quarter of 1998 totaled a record $790 million and included $140 million in milestone payments from Pfizer Inc. as part of the partnering agreement between Searle, Monsanto's pharmaceutical subsidiary, and Pfizer for the development and launch of Searle's celecoxib, a proposed member of a new class of drugs known as specific COX-2 inhibitors. This agent is under priority review by the U.S. Food and Drug Administration for acute or chronic use in the treatment of the signs and symptoms for osteoarthritis and rheumatoid arthritis and for the management of pain. Searle changed the proposed brand name for this drug from Celebra(TM) to Celebrex(TM), at the FDA's request. Even without the partnering sales revenues, segment sales would have reached a new quarterly high. Substantially higher sales of Arthrotec(R) arthritis treatment, which was launched in the United States in 1998, also contributed to the segment's sales growth. Operating income for the Pharmaceuticals segment rose $56 million in the third quarter of 1998 compared with operating income in the prior-year quarter, as the increase in quarterly revenues was partially offset by higher SG&A and technological expenses. SG&A and technological expenses rose because of the Arthrotec(R) launch and the continued development of and launch preparation for the new product pipeline. Net sales for the Corporate and Other segment decreased $35 million, or 33 percent, in quarter-to-quarter comparisons. The sales decrease primarily resulted from lower sales at Enviro-Chem and the absence of sales from the optical products business which was divested in the second quarter of 1998. RESULTS OF OPERATIONS--FIRST NINE MONTHS OF 1998 COMPARED WITH FIRST NINE MONTHS OF 1997 Net income and income from continuing operations totaled $353 million, or $0.56 per share, for the first nine months of 1998 compared with net income of $465 million, or $0.76 per share, and income from continuing operations of $289 million, or $0.47 per share, for the first nine months of 1997. However, results for both years included unusual items. Net income and income from continuing operations for the first nine months of 1998 included an aftertax net charge of $13 million, or $0.02 per share, for the net cost of exiting the Company's optical products business and a restructuring reserve reversal, and an aftertax charge of $187 million, or $0.30 per share, for the write-off of in-process R&D primarily related to the acquisition of PBIC. Prior-year income from continuing operations included aftertax charges totaling $405 million, or $0.67 per share, for the write-off of in-process R&D, principally related to the acquisitions of Asgrow Agronomics ("Asgrow"), Calgene, Inc. ("Calgene"), Holden's and Corn States. Excluding the unusual items in 1998 and 1997, income from continuing operations would have totaled $553 million, or $0.88 per share, in 1998, versus $694 million, or $1.14 per share, in 1997, a decrease of $141 million, or $0.26 per share. The decrease in income from continuing operations, excluding unusual items, was primarily attributable to increased operating expenses and interest costs, which more than offset the effect of higher sales. Year-to-date sales grew $806 million, or 14 percent, led by substantially higher sales in the Agricultural Products segment. SG&A and technological expenses rose in the first nine months of 1998 compared with expenses in the year-ago period, driven by increased expenses in the Agricultural Products and Pharmaceuticals segments. The increase in amortization of intangible assets was caused by the increase in intangible assets related to seed company acquisitions made in 1997 and the acquisition of PBIC, and by the write-off of goodwill related to the Company's exit from the optical products business. Year-to-date interest 10 MONSANTO COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS expense increased because of a greater amount of debt outstanding during the first nine months of 1998 versus the prior-year nine-month period. The decline in other income was principally caused by decreased income from equity affiliates in the 1998 period and small gains from asset sales that were included in the 1997 period. The effective tax rate of 41.5 percent for the nine months ended September 30, 1998 was higher than the effective tax rate of 21.7 percent for the year-ago period primarily because of the effect of the PBIC acquisition and changes in the mix of pretax income outside the United States. Strong sales for the family of Roundup(R) herbicides led to a substantial increase in year-to-date net sales for the Agricultural Products segment. Segment sales grew $566 million, or 22 percent, in the first nine months of 1998 versus sales in the comparable prior- year period. The increase in sales of Roundup(R) was caused by substantial growth in worldwide sales volumes, which more than offset the year-to-date worldwide average price decline. The higher sales volumes, led by increases in the United States, Latin America and Canada, were primarily driven by increased use of Roundup(R) herbicide in conservation tillage applications and with Roundup Ready(R) crops. Economic conditions in Southeast Asia caused sales volumes and prices of Roundup(R) to decline in that region. Net sales for the Agricultural Products segment also benefited from the inclusion of sales from seed companies Monsanto acquired during 1997; from higher licensing revenues from crops developed through biotechnology, principally Roundup Ready(R) soybeans and canola; and from increased sales of Posilac(R) bovine somatotropin. Year-to-date operating income for the Agricultural Products segment increased $329 million in 1998 versus 1997. However, results for both years included unusual items. Operating income for the first nine months of 1998 included a $189 million pretax charge for the write-off of in-process R&D related to the PBIC acquisition, and operating income for the first nine months of 1997 included $558 million of pretax charges for the write-off of in-process R&D principally related to the Asgrow, Calgene, Holden's and Corn States acquisitions. If these unusual charges were excluded, operating income would have decreased $40 million, or 5 percent, in period-to-period comparisons, as the effect of higher sales was more than offset by increased SG&A, technological and amortization expenses. SG&A expenses rose primarily because of the inclusion in 1998 of SG&A expenses from the acquired seed companies. Technological expenses grew primarily because of higher spending on crop biotechnology initiatives, including genomics, and the inclusion of technological expenses from the acquired seed companies. Amortization of intangible assets increased principally because of the increase in intangible assets related to seed company acquisitions made in 1997. Year-to-date net sales for the Nutrition and Consumer Products segment rose slightly compared with sales in the comparable 1997 period. Segment sales reflected $32 million in payments received as part of the agency agreement with The Scotts Company to market Roundup(R) herbicide for residential uses. While sales volumes of Equal(R) sweetener increased, the effect of the increase was more than offset by decreased sales volumes of bulk aspartame. Operating income for the Nutrition and Consumer Products segment increased $64 million in the first nine months of 1998 compared with operating income in the first nine months of 1997. However, operating income for the 1997 period included $51 million of pretax charges for the write-off of in-process R&D related to the acquisition of Calgene. Excluding these charges, year-to-date 1998 operating income would have increased $13 million, or 7 percent, as the effect of higher sales was partially offset by higher expenses, particularly technological expenses which grew due to increased spending for science-based nutrition programs. Net sales for Pharmaceuticals totaled $1,903 million in the first nine months of 1998 compared with sales of $1,633 million in the prior-year period, an increase of $270 million, or 17 percent. Net sales for the 1998 period included partnering revenues of $240 million related to an alliance for the co-promotion of Celebrex(TM), Searle's new arthritis treatment currently under development, while net sales for the 1997 period included the sale of certain product rights totaling $49 million. In addition, the increase in sales in period-to-period comparisons reflected a significant increase in sales volumes of Arthrotec(R) arthritis treatment. Year-to-date sales of Arthrotec(R) more than tripled, primarily because of successful 1998 launches in the United States and France. Sales of Ambien(R) short-term treatment for insomnia also increased. Ambien(R) continued to be the leader in the U.S. sleep-aid market, as its total market share increased to 51.4 percent and its share of new prescriptions increased to 52.7 percent in August 1998. The increases in partnering revenues and in sales of Arthrotec(R) and Ambien(R) were partially offset by lower sales volumes of Cytotec(R) ulcer-preventive medication and verapamil calcium channel blockers. Sales for the family of Calan(R) calcium channel blockers continued to decline, but were partially offset by higher sales of Covera-HS(R). Year-to-date operating income 11 MONSANTO COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS for the Pharmaceuticals segment totaled $186 million compared with operating income of $147 million in the year-ago period. However, operating income for the nine months ended September 30, 1998 included a $35 million gain from the reversal of past restructuring reserves (see Note 11 of the Notes to Financial Statements). Excluding this unusual gain, year-to-date 1998 operating income would have totaled $151 million, a 3 percent increase over the prior-year, as the growth in sales was nearly offset by increased expenses. SG&A expenses rose primarily because of increased spending associated with the Arthrotec(R) launches and higher expenses related to the sales force which continued to expand during 1998 in anticipation of the launch of new products from the strong pharmaceutical pipeline. Technological expenses grew as Searle continued to develop its six new product candidates which continued to move through the final, more expensive stages of the research and development approval process. Year-to-date net sales for the Corporate and Other segment declined 14 percent in year-over-year comparisons primarily because of the absence of sales of divested businesses and a decrease in sales at Enviro-Chem, primarily caused by economic conditions in Asia. The year-to-date operating losses of $181 million in 1998 increased $72 million from the operating loss of $109 million in the comparable 1997 period. The increased operating loss primarily resulted from charges related to the Company's exit from the optical products business in the second quarter of 1998. OUTLOOK FOR AGRICULTURAL PRODUCTS - UPDATE Monsanto completed the acquisition of PBIC and announced several other strategic transactions involving agricultural seed companies in the first nine months of 1998. See Note 1 of the Notes to Financial Statements for further discussion. OUTLOOK FOR NUTRITION AND CONSUMER PRODUCTS - UPDATE On June 25, 1998, Monsanto announced that it had signed a letter of intent to sell its lawn-and-garden business exclusive of its Roundup(R) herbicide products for residential use to The Scotts Company for $300 million. Under a separate, long-term, exclusive agreement, Monsanto will continue to make Roundup(R) herbicide for residential use, and The Scotts Company will market the product. OUTLOOK FOR PHARMACEUTICALS - UPDATE Ambien(R), a short-term treatment for insomnia, is licensed to a joint venture in which Searle, Monsanto's pharmaceutical subsidiary, is a general partner. On May 26, Monsanto announced that it had signed an agreement with the other joint venture partner to continue the joint venture until April 16, 2002, at which time the other partner will acquire Searle's 51 percent interest in the joint venture. The buy-out price will be calculated on the basis of a progressive percentage of the sales achieved by the joint venture in the 12 months preceding the acquisition, and is not likely to exceed three-fourths of the sales during that period. Searle's share of profits will be reduced from 90 percent to 82 percent in 1999, 60 percent in 2000, 53 percent in 2001 and 51 percent from January 1 to April 15, 2002. On November 4, 1998, Searle announced that it ended further enrollment into a Phase III clinical trial for orbofiban, after preliminary data showed an unexpected excess of early (30 day) mortality in one of two active treatment arms. Researchers were unable to interpret the discrepancy between the two groups of patients, and variables other than the study drug may explain this unexpected finding. Orbofiban is one of Searle's antiplatelet drugs currently under development, and the trial is designed to assess the long-term safety and efficacy of orbofiban therapy. The trial will continue with approximately 8000 patients who have been part of the trial longer than 30 days. CHANGES IN FINANCIAL CONDITION - SEPTEMBER 30, 1998 COMPARED WITH DECEMBER 31, 1997 Working capital at September 30, 1998 increased to $1,158 million from $727 million at December 31, 1997, primarily because of a seasonal increase in Agricultural Products' trade receivables partially offset by higher short-term debt primarily used to fund the PBIC acquisition. The current ratio was 1.3 at September 30, 1998 and 1.2 at year-end 1997. The percent of total debt to total capitalization was 50 percent at September 30, 1998 compared with 47 percent at December 31, 1997. The total amount of debt outstanding at September 30, 1998 versus December 31, 1997 increased 12 MONSANTO COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS $970 million principally because of the acquisition of PBIC and the seasonal increase in Agricultural Products' trade receivables. During the second quarter of 1998, Monsanto reclassified $475 million of outstanding commercial paper from short-term to long-term debt because Monsanto has the ability and intent to renew these obligations. Cash provided by continuing operations totaled a net $216 million for the nine months ended September 30, 1998, compared with $101 million for the same period in 1997. The increase in cash provided by continuing operations resulted primarily from the collection in 1998 of miscellaneous receivables related to 1997 Pharmaceutical licensing and product rights sales. In addition, cash provided by continuing operations for the prior-year nine-month period included higher employee incentive payouts for the final payment of a three-year incentive plan. These positive effects on cash provided by continuing operations for the first nine months of 1998 compared with the first nine months of 1997 were partially offset by an increase in accounts receivable. Year-to-date 1998 investing activities used $1,204 million compared with $2,081 million in the comparable prior- year period. Major investing activities included the purchase of PBIC in 1998 and the purchases of Asgrow, Calgene, Holden's and Corn States in 1997. Financing activities provided $1,069 million in 1998 versus $2,107 in 1997. Financing activities in 1998 included the issuance of $100 million of fixed-rate, medium-term notes with an average interest rate of 6.2 percent, due from 2005 to 2018, and the issuance of $100 million of variable-rate notes with an average interest rate of 4.6 percent at September 30, 1998, due 2003. On July 16, 1998, Monsanto acquired PBIC for a purchase price of approximately $525 million. On October 1, 1998, Monsanto acquired certain international seed operations of Cargill for a purchase price of approximately $1.4 billion. Also, in May 1998, Monsanto entered into an agreement to acquire the remaining shares of DEKALB for approximately $2.3 billion and a merger agreement with Delta Pine. Approximately 33 million shares of Monsanto common stock are expected to be issued to Delta Pine shareowners which would result in an increase in the number of Monsanto common shares outstanding. See Note 1 of the Notes to Financial Statements for further discussion. Monsanto initially financed the PBIC and Cargill acquisitions through the issuance of short-term debt. As announced on November 11, 1998, Monsanto is in the process of implementing plans to fund these acquisitions over the longer term. The plans include a series of financing transactions, a combination of divestitures, and cost reductions. Monsanto plans to raise up to $4 billion through the issuance of approximately $1 billion of common stock, approximately $500 million of adjustable conversion-rate equity security units, and approximately $2.5 billion of long-term, unsecured debt. The plans also include the divestitures of certain non-core assets and businesses which are expected to generate approximately $1 billion pretax. These financing plans, together with the cash flow from the Company's businesses, are expected to provide sufficient liquidity for the Company's estimated financing needs for the next 12 months. Additional divestitures also are under consideration. When a decision to dispose of an asset or business is approved, that asset or business would then be classified as held for sale. This could result in impairment charges. In addition to the financing transactions and divestitures, Monsanto is planning to simplify its management structure. Monsanto expects this restructuring to eliminate between 700 and 1,000 positions beginning in the first quarter of 1999. In addition, the Company expects an additional 1,300 to 1,500 position reductions in entities to be divested. Monsanto expects to record pretax restructuring and special charges ranging from $400 million to $600 million in the fourth quarter of 1998 for these actions. The cash outlays associated with these charges are expected to be fully offset by cost savings within 18 months. Given current market conditions and financing requirements, in October 1998, Monsanto mandated Citibank, N.A. and Salomon Smith Barney Inc. to arrange an additional $2 billion 364-day revolving credit facility. The facility is expected to be used to support the issuance of commercial paper. On June 16, 1998, Monsanto announced that it had rescinded and terminated its existing share repurchase program. YEAR 2000 UPDATE Beginning in 1996, Monsanto initiated the Global Year 2000 Program (the "Y2K Program") to ensure that its business would not be adversely affected by the inability of many existing computer systems to distinguish between the year 1900 and the year 2000. The Y2K Program covers more than 100 Company sites in 33 countries. Description and Status of the Y2K Program - ----------------------------------------- Internal Systems Monsanto's Y2K Program encompasses all areas of Monsanto's internal systems including conventional information technology (IT) business applications, IT infrastructure, and embedded systems. The remediation process applied to each area consists of four-steps: identification of the systems or components that need to be replaced or fixed; assessment of the extent of the work required; prioritization of the work; and successful completion of the required remediation activity. 13 MONSANTO COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Each of the approximately 1,260 applications in Monsanto's IT applications portfolio has been assessed for Y2K compliance and this portfolio is currently 42% compliant. An additional 13% of the portfolio is believed to be compliant, but is awaiting testing for confirmation. On-schedule replacement and upgrade initiatives will remediate another 27% of this portfolio and 3% of the applications in the portfolio will be retired. The remaining applications in this portfolio are at various stages of renovation, redevelopment, or testing. The IT applications portfolio is anticipated to be compliant by the third quarter of 1999. Almost 600 IT infrastructure products have been defined and are being assessed for compliance. This process is approximately 44% complete. The IT infrastructure assessment and remediation phases are expected to be complete by the third quarter of 1999. Embedded systems include process control/manufacturing and laboratory automation systems and site-specific facility management systems. An inventory of embedded systems has been completed and approximately 7,000 unique process control systems and attached devices from nearly 1,200 manufacturers and 4,250 laboratory automation products from over 700 vendors have been identified. These systems are currently under Y2K compliance review which is approximately 40% complete. Compliance information is obtained from purchased commercial databases and from manufacturers. If such information indicates that an embedded system is not Y2K compliant, appropriate remediation plans are implemented. Current findings, as well as industry experience, indicate that a relatively small percentage of these items are subject to Y2K problems. The embedded device research phase of the Y2K Program is expected to be completed by December 1998, with any necessary remediation of embedded devices expected to be completed by the third quarter of 1999. Suppliers Monsanto has contacted its major suppliers to assess their preparations for the Year 2000. Over 650 key corporate suppliers have been identified and contacted in addition to thousands of suppliers critical to individual locations. Approximately 56% of the Company's key corporate suppliers have been identified as likely to be Y2K compliant. The status of another 14% of these key suppliers is of concern and further action is being taken by managers responsible for these suppliers or supplier contracts. At present, approximately 30% of the key suppliers have not informed the Company of their compliance status or plans. Where appropriate, Monsanto representatives may conduct an in-depth investigation of a particular supplier's ability to be compliant and site visits may be made. Contingency Plans The Company's contingency plans are continuously evolving as it proceeds with the Y2K Program. The Company will begin a major initiative to finalize its contingency plans in the fourth quarter of 1998, with a target of having all such plans in place no later than the third quarter of 1999. Where a supplier's performance is in doubt, the Company's contingency plans may include the stockpiling of raw materials or a switch to a different supplier. The Company will increase testing of pharmaceutical and nutrition products as the Year 2000 nears and may also increase production of critical product inventory. Costs - ----- The Company continues to evaluate the estimated costs associated with Y2K compliance based on actual experience. The current estimated total cost is expected to be approximately $25 million, with $13 million expended through September 30, 1998. Such costs encompass only the Company's Y2K remediation efforts and do not include expenses such as overtime wages, additional warehouse space or increased finance costs which may be incurred upon implementation of the Company's contingency plans. Monsanto does not expect the costs associated with its Year 2000 efforts to be materially adverse to the Company's business operations, financial position, profitability or liquidity. Risks - ----- Monsanto believes that its Y2K Program follows both prudent and best demonstrated practices (including contingency planning) and makes use of appropriate internal and external skills at the proper level and in the proper amount to minimize the impact of any failures. However, since the Year 2000 problem is unprecedented in scope or complexity, no complete assurance of risk avoidance can be given. In the Company's case, failure to correct a material Year 2000 14 MONSANTO COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS problem could result in lost profits or breach of contract claims in the event Monsanto is unable to deliver its products pursuant to the terms of its agreements or such products fail to meet contract specifications as well as claims for personal injury or property damage at its facilities. Monsanto may also experience lost revenues in the event any of its customers experience Y2K problems which cause them to order less product from Monsanto or which cause financial difficulties resulting in a breach of their payment obligations to Monsanto. Readers are cautioned that forward-looking statements contained in this section should be read in conjunction with the Company's disclosures under the heading "Disclosure of Forward-Looking Statements" on beginning on page 19 of this Form 10-Q. EURO CONVERSION On January 1, 1999, more than two-thirds of the member countries of the European Union are scheduled to establish fixed conversion rates between their existing sovereign currencies and the euro as common legal currency. During the transition period from January 1, 1999 until June 30, 2002, both the existing sovereign currencies of the participating countries and the euro will be legal currency. Beginning July 1, 2002, the existing sovereign currencies of the participating countries will no longer be legal tender for any transactions. In September 1997, Monsanto formed a cross-functional team and has engaged a consultant to address issues associated with the euro conversion. Monsanto expects to be able to engage in euro- denominated transactions and to be legally compliant by January 1, 1999, and to have all affected information systems fully converted by April 2001. Monsanto does not expect the euro conversion to have a material effect on its competitive position, business operations, financial position or results of operations. 15 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Monsanto is exposed to market risk, including changes in interest rates, currency exchange rates and commodity prices. To manage the volatility relating to these exposures, the Company enters into various derivative transactions. Monsanto does not hold or issue derivative financial instruments for trading purposes. For more information about how Monsanto manages specific risk exposures, see the currency translation note, the inventory valuation note, and the long-term debt note in Notes to Financial Statements in Monsanto's annual report for the year ended December 31, 1997 ("1997 Annual Report"), incorporated by reference in Monsanto's Annual Report on Form 10-K for the year ended December 31, 1997 ("1997 Form 10-K"). The tables under Market Risk Management in the Management's Discussion and Analysis section of the 1997 Annual Report, incorporated by reference in the 1997 Form 10-K, provide information about the Company's derivative instruments and other financial instruments that are sensitive to changes in interest rates, currency exchange rates and commodity prices. There have been no material changes to the information provided in the tables in the 1997 Annual Report and Form 10-K except as noted in the following paragraphs. Interest rate risk sensitive financial instruments that appeared in the 1997 Annual Report and Form 10-K but were no longer outstanding at September 30, 1998 included $1,208 million of short-term, variable-rate debt (denominated in U.S. dollars) and $244 million of short-term, fixed-rate debt (denominated in Brazilian real). Significant interest rate risk instruments that were not outstanding at December 31, 1997, but that were outstanding at September 30, 1998 included (all denominated in U.S. dollars): $100 million of long-term, fixed-rate debt with an average interest rate of 6.2 percent, due after 2002; $1,754 million of short-term, variable-rate debt with an average interest rate of 5.6 percent due 1998 through 1999; $475 million of long-term, variable-rate debt with an average interest rate of 5.6 percent, due 2001; and $196 million of short-term, fixed-rate debt with an average interest rate of 7.75 percent, due 1998 through 1999. The fair value of these instruments approximated their book values at September 30, 1998. The total $1,100 million of long-term, variable-rate debt outstanding at September 30, 1998 included $1,000 million of commercial paper that is assumed to be renewed through 2001, when Monsanto's $1,000 million credit facility expires. The instruments in the table of significant currency exchange rate risk sensitive instruments that appeared in the 1997 Annual Report and Form 10-K were no longer outstanding at September 30, 1998. At September 30, 1998, the following significant forward contracts were outstanding (all expected to mature by September 30, 1999): sales of Brazilian real with a notional amount of $108 million and an average exchange rate of 1.252 Brazilian real per U.S. dollar; sales of Canadian dollars with a notional amount of $66 million and an average exchange rate of 1.509 Canadian dollars per U.S. dollar; purchases of British pounds with a notional amount of $59 million and an average exchange rate of 0.594 British pounds per U.S. dollar; sales of Australian dollars with a notional amount of $38 million and an average exchange rate of 1.718 Australian dollars per U.S. dollar; sales of Polish zlotys with a notional amount of $26 million and an average exchange rate of 3.621 Polish zlotys per U.S. dollar; purchases of Japanese yen with a notional amount of $15 million and an average exchange rate of 134.140 Japanese yen per U.S. dollar; sales of South African rand with a notional amount of $13 million and an average exchange rate of 6.710 South African rand per U.S. dollar; sales of Czech koruny with a notional amount of $10 million and an average exchange rate of 30.890 Czech koruny per U.S. dollar; sales of Mexican pesos with a notional amount of $10 million and an average exchange rate of 10.670 Mexican pesos per U.S. dollar; sales of Philippine pesos with a notional amount of $10 million and an average exchange rate of 46.010 Philippine pesos per U.S. dollar; and sales of Hong Kong dollars with a notional amount of $5 million and an average exchange rate of 7.955 Hong Kong dollars per U.S. dollar. The fair market values of these contracts approximated the notional amounts at September 30, 1998. The instruments in the table of significant commodity price risk sensitive instruments that appeared in the 1997 Annual Report and Form 10-K were no longer outstanding at September 30, 1998. At September 30, 1998, the following significant commodity price risk sensitive instruments were outstanding: contracts for soybean futures totaling $60 million (9.8 million bushels at a weighted average price per bushel of $6.10) with a fair value of $51 million, and soybean put option contracts originally purchased for $1 million (17.8 million bushels at a weighted average strike price per bushel of $5.70) with a fair value of $9 million. 16 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Because of the size and nature of its business, Monsanto is a party to numerous legal proceedings. Most of these proceedings have arisen in the ordinary course of business and involve claims for money damages or seek to restrict the Company's business activities. While the results of litigation cannot be predicted with certainty, Monsanto does not believe these matters or their ultimate disposition will have a material adverse effect on Monsanto's financial position, profitability or liquidity in any one year, as applicable. As described in the Company's Report on Form 10-K for the year ended December 31, 1997, G. D. Searle & Co., a subsidiary of the Company ("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 allege 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, have settled the federal class action case. Searle has entered into an agreement that would significantly limit its liability (based generally on its share of the relevant market) should the federal class action result in an adverse judgment. Trial of the federal class action case commenced on September 16, 1998, with jury selection and is expected to last approximately two to three months. 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. Searle believes it has meritorious defenses and is vigorously defending each of these lawsuits. As described in the Company's Reports on Form 10-Q for the quarters ended March 31 and June 30, 1998, 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 corn containing the Bacillus thuringiensis ("Bt") gene and to glyphosate resistant corn, cotton and canola. Monsanto is currently appellant in Appeal No. D031336 before the California Court of Appeal for the Fourth Appellate District in an appeal arising out of this litigation. Mycogen and Agrigenetics Inc. have filed a cross appeal seeking to reinstate claims for damages that were dismissed prior to trial. This cross appeal has been consolidated for all purposes on appeal. The initial brief on appeal by Monsanto is due December 28, 1998. The Company has numerous meritorious defenses and grounds to overturn the award, including the speculative nature of the damages which are exclusively for lost future profits, improper splitting of the causes of action, lack of continuing breach, and trial error in directing a verdict against the Company on this issue of liability. In addition, on October 14, 1998, MPS filed a notice of appeal specifying a nunc pro tunc order rendered August 20, 1998, with regard to certain claims by MPS seeking access to germplasm of Monsanto and to overturn an order imposing monetary sanctions on MPS. Monsanto intends to file a motion to dismiss this appeal on the basis that it is after the jurisdictional deadline for appeal. Monsanto will continue in all of these matters to litigate vigorously its position on appeal. As described in the Company's Annual Report on Form 10-K for the year ended December 31, 1997, in 1997 the Company commercially introduced corn containing a gene encoding for Bt endotoxin. Monsanto is a leader in this scientific field and has engaged in Bt research and biotechnology development over many years and owns a number of present and pending patents which relate to this technology. On January 21, 1997, Novartis Seeds, Inc. ("Novartis") filed suit in U.S. District Court in Delaware seeking damages and injunctive relief against the Company, alleging infringement of Bt related U.S. Patent No. 5,595,733 issued to Ciba-Geigy Corporation (Seed Division) and now held 17 by Novartis. Monsanto is now a co-defendant with DEKALB Genetics Corporation ("DEKALB") in a consolidated jury trial under C.A. No. 97-39 (RRM) and 97-40 (RRM) pending in U.S. District Court in Delaware. Trial ended on November 9, 1998, with a verdict in favor of both defendants and a finding that the '733 patent was invalid for failure to meet the written description and enablement requirements under the patent law. In addition, the jury found that defendants had not directly infringed or induced infringement of the patent. In the lawsuit Novartis sought compensatory damages of $55 million, and equitable relief, including an injunction. District Judge Roderick R. McKelvie severed for later trial issues pertaining to legal issues, including Monsanto's defense of license. The current Yieldgard(R) corn products of Monsanto and DEKALB were alleged to have infringed the patent of Novartis. It is expected that Novartis will appeal the adverse jury verdict. As described in the Company's Report on Form 10-Q for the second quarter of 1998, on July 30, 1998, Monsanto was served with a lawsuit filed in U.S. District Court in Delaware by Zeneca Inc. ("Zeneca"). The complaint alleges that Monsanto has violated Sections 3, 4 and 16 of the Clayton Act and Sections 1 and 2 of the Sherman Act and Zeneca seeks treble damages. In addition to the antitrust allegations, the complaint seeks a declaration that certain United States patents assigned to Monsanto (U.S. Patent Nos. 4,940,835; 5,352,605; 4,535,060) are invalid, unenforceable or have not been infringed by Zeneca. The complaint also asserts a claim for tortious acts of unfair competition with prospective economic advantage. The allegations in the complaint center on Monsanto's technology related to Roundup Ready(R) seed and marketing activity associated with soybeans. On August 12, 1998, the complaint was amended, adding Pioneer Hi-Bred International, Inc. ("Pioneer") as a plaintiff. Pioneer seeks a declaratory judgment that it did not breach its license agreement with Monsanto by providing Roundup Ready(R) soybean seed to Zeneca for testing. The complaint was also amended to add an additional claim for relief by Zeneca, seeking a declaratory judgment that its obtaining the Roundup Ready(R) soybean seed from Zeneca was not improper. Monsanto has moved to dismiss the litigation for lack of jurisdiction. The motion to dismiss is set for hearing on November 12, 1998, before Judge Roderick R. McKelvie. Monsanto believes that its activities have been lawful and that the allegations are without merit. Monsanto intends to vigorously defend itself against the action. As described in the Company's Report on Form 10-Q for the second quarter of 1998, following the announcement of a merger agreement between Monsanto and American Home Products Corporation ("AHP"), alleged holders of Monsanto common stock filed suits in the Delaware Court of Chancery in and for New Castle County (the "Delaware Action") against Monsanto, members of the Monsanto Board of Directors (the "Monsanto Board") and AHP alleging that the consideration to be received by holders of Monsanto common stock in the merger was unfair and inadequate, that the members of the Monsanto Board breached their fiduciary duties by approving the merger, and that AHP aided and abetted such breaches; and an additional action was filed against Monsanto and members of the Monsanto Board in the Missouri Circuit Court for St. Louis County (the "Missouri Action"). The actions taken by AHP and Monsanto to terminate the merger have resulted in the initiation of action by the parties to secure court approval to dismiss the Delaware Action. In addition, the Missouri Action had previously been dismissed with leave to refile as part of the Delaware Action. Monsanto and the Monsanto Board believe that the Delaware Action is without merit, and now rendered moot, and intend to take all necessary action to secure the prompt dismissal of the Delaware Action. As described in the Company's Report on Form 10-Q for the second quarter of 1998, following the announcement on May 11, 1998, of the merger agreement between Monsanto and Delta and Pine Land Company ("Delta Pine"), five alleged holders of Delta Pine common stock filed suits, now consolidated (the "Delta Pine Suit"), in the Delaware Court of Chancery in and for New Castle County against Monsanto, Delta Pine, and members of the Delta Pine Board of Directors (the "Delta Pine Board"). Seeking to represent a purported class of Delta Pine shareowners, plaintiffs in the Delta Pine Suit allege that the consideration to be received by holders of Delta Pine common stock in the merger is unfair and inadequate, that the members of the Delta Pine Board have breached their fiduciary duties by approving the transaction and that Monsanto has aided and abetted such breaches. Plaintiffs in the Delta Pine Suit seek judgment declaring that each Delaware action is maintainable as a class action, preliminarily and permanently enjoining consummation of the merger or rescinding the transaction in the event that it is consummated, awarding unspecified compensatory damages against defendants, and awarding plaintiffs their attorneys' fees and expenses. Monsanto has been notified of the intention of counsel for plaintiffs to file an amended complaint seeking to obtain a preliminary 18 injunction to prevent completion of the transaction. Monsanto believes that the Delta Pine Suit is without merit and intends to vigorously defend against the action. On October 28, 1998, Pioneer Hi-Bred International, Inc., filed suit against Asgrow Seed Company, L.L.C. ("Asgrow"), a wholly-owned subsidiary of Monsanto, in the United States District Court for the Southern District of Iowa, Civil Action No. 4-98-CV-70577. The suit alleges violations of the Lanham Act, misappropriation of trade secrets under Iowa Code Section 550.2(4), common law misappropriation, breach of contract and common law trade secret misappropriation. The suit alleges that Asgrow is using Pioneer's proprietary germplasm and other information in the development of seed corn. Plaintiff seeks compensatory damages, exemplary damages, an accounting of gains and profits, delivery of any materials allegedly containing Pioneer's trade secrets, attorneys' fees, and a permanent injunction against the use or dissemination of plaintiff's proprietary and trade secret information. Pioneer has filed a similar suit against DEKALB Genetics Corporation, and a similar suit with additional claims against Cargill Incorporated. Other information with respect to legal proceedings appears in the Company's Report on Form 10-K for the year ended December 31, 1997, and the Company's Reports on Form 10-Q for the quarters ended March 31, 1998 and June 30, 1998. ITEM 5. OTHER INFORMATION DISCLOSURE REGARDING FORWARD LOOKING INFORMATION Under the Private Securities Litigation Reform Act of 1995, companies are provided 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, as it does in this quarterly report and other communications. These forward-looking statements include Monsanto's plans for growth, the potential for the development, regulatory approval and public acceptance of new products from its pipelines, and other factors that could affect Monsanto's future operations or financial position and may be preceded by, followed by or 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, as well as on 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 Impacting the Agricultural Products Segment - --------------------------------------------------- Generic Competition. Roundup(R) and other glyphosate-based herbicides are major products for Monsanto's agricultural products segment and are likely to face increasing competition from generic products. Patents protecting Roundup(R) in various countries expired in 1991, while compound per se patent protection for the active ingredient in Roundup(R) herbicide expires in the United States in September 2000. Monsanto believes its pricing strategy will aid it in compensating for increased generic competition in the United States. Monsanto recently significantly reduced the price of Roundup(R) herbicide brands in the United States based on its prior experience in numerous markets worldwide that price reductions on Roundup(R) have stimulated volume growth via price elasticity. This pricing strategy is expected to also result in increased demand for Roundup(R) herbicide in the United States because the lower prices will make Roundup(R) more economical, encouraging both new uses of the product and growers to expand the number of acres treated. If Monsanto's experience with price elasticity in non-United States markets does not hold true in the United States, and the increased demand for Roundup(R) products does not fully compensate for the price decreases, Monsanto will experience an associated loss of revenue. 19 Monsanto also believes that increased volumes and technological innovations will lead to improved manufacturing and cost efficiencies, thus reducing the production cost of glyphosate. Such cost reductions will be dependent on the realization of such increased volumes and innovations and the Company's ability to secure the additional resources required to expand its production of Roundup(R). Governmental and Consumer Acceptance. The commercial success of genetically engineered agricultural and food products will depend in part on governmental and public acceptance of their cultivation, distribution and consumption. Public attitudes may be influenced by media and opponents' claims that genetically engineered plant products are unsafe for consumption or pose unknown risks to the environment or to social or economic practices. The Company has expended significant efforts to foster governmental and consumer acceptance of nutritional and agricultural biotechnology products, in the latter case particularly in Europe where securing governmental approvals for, and achieving consumer confidence of, such products is posing numerous challenges. For instance, France has instituted a moratorium on the planting of certain genetically modified seeds and similar bans exist in some other member states. Many countries also have significant labeling requirements. The market success of Monsanto's genetically altered products may be delayed or impaired in certain geographical areas due to such existing or future regulatory, legislative or public acceptance issues or related litigation. Technological Change and Competition. A number of companies are engaged in research related to plant biotechnology. Technological advances by others could render Monsanto's products less competitive. Monsanto believes that competition will intensify, particularly from agricultural biotechnology firms and 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. Impact of, and Ability to Integrate, Transactions. Monsanto has completed or entered into agreements for 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 Monsanto's long-term growth. The DEKALB and Delta Pine transactions are each subject to regulatory approvals and the Delta Pine transaction is also subject to Delta Pine shareowner consent and other customary conditions. It is anticipated that the pending DEKALB and Delta Pine transactions, when consummated, and the recently consummated PBIC and Cargill transactions will result in significant dilution to Monsanto's results of operation for the next several years. Long term, Monsanto must integrate these companies into its business, realize projected synergies and fit such acquisitions, mergers and joint ventures into its growth strategy in order to realize sufficient value to justify their cost. Mergers, acquisitions and joint ventures also present integration and implementation challenges including, among other things, the necessity of coordinating geographically separated organizations, integrating personnel with diverse business backgrounds and integrating corporate cultures. The process of integrating operations could cause an interruption of, or loss of momentum in, Monsanto's business and the loss of key personnel. There can be no assurance that the diversion of management's attention and any delays or difficulties encountered in connection with completing and implementing these transactions and integrating the acquired, merged or joint venture companies' operations will not have an adverse effect on Monsanto's business, results of operations or financial condition. The Company plans to continue to frequently explore the potential benefits of possible strategic alliances, joint ventures and divestitures. However, despite its efforts, the Company may be unable to divest assets at an acceptable price or to reach agreement with third parties with whom it desires to enter into a joint venture or other alliance. Planting Decisions; Weather. The Company's agricultural products business is highly seasonal and subject to weather conditions and natural disasters, which affect commodity prices, seed yields and decisions by farmers regarding planting and herbicides. Commodity prices also affect farmers' decisions on the types and amounts of crops to plant. The results of these factors will influence sales of Monsanto's herbicide and seed products. 20 Factors Impacting the Pharmaceuticals Segment - --------------------------------------------- Ability to Realize Potential of Existing Pharmaceutical Pipeline Products. Pharmaceutical research and development is subject to inherent uncertainty, difficulties and delays including, but not limited to, successful completion of clinical trials and the ability to obtain and maintain regulatory approval for the compounds in the United States as well as other countries. Failure to timely receive and to maintain government approvals could preclude or substantially delay commercialization of products in the Company's research and development programs. Development and Commercialization of New Pharmaceutical Products. The Pharmaceuticals Segment's long-term success will depend in great part on its ability to develop and commercialize new products. Such efforts require substantial funding of R&D and launch expenses. If Monsanto is unable to generate sufficient revenues or otherwise acquire sufficient resources to fund such expenses, its ability to develop new products will suffer. Further, the results of the research and development of new pharmaceutical products is inherently difficult to predict. Anticipated research results may never materialize or may be insufficiently promising. Even if new pharmaceutical products are developed, there can be no guarantees of their commercial success because of consumer demand and competitive factors (including the availability of treatment alternatives and the indications, adverse event and other information contained on the labels for such products). In addition, the timing of completion and the results of research and development of new pharmaceutical products are difficult to forecast and to coordinate with the marshaling and deployment of the commercialization resources necessary to realize the full value of the products successfully completing development. Product Liability and Consumer Acceptance. The development, manufacture and sale of pharmaceutical products involves a risk of product liability claims and associated adverse publicity. Substantial damage awards have been made against certain pharmaceutical companies in past years based upon claims for injuries allegedly caused by the use of their products. In addition, unexpected safety or efficacy concerns arising with respect to marketed products, whether or not scientifically justified, could lead to product recalls, withdrawals or declining sales. Competition. Research in the field of pharmaceuticals is intense, highly competitive and characterized by rapid technological change. Depending on the product involved, various types of competition are encountered, including price, delivery, service, performance, innovation, recognition and quality. Many of Monsanto's pharmaceuticals competitors have greater research, financial, marketing and other resources than the Company. Further, some of Monsanto's trademarked pharmaceuticals products face increasing pressures from producers of lower-priced generic products and from new products entering the marketplace. Pricing Ability. Managed care groups, institutions and government agencies, both within the United States and abroad, actively seek price discounts or to otherwise lower prices. Monsanto's challenge is to negotiate prices with such institutions which allow it to profit at acceptable levels. Factors Impacting the Nutrition and Consumer Products Segment - ------------------------------------------------------------- Monsanto's Nutrition and Consumer Products Segment faces many challenges which are similar to those faced by the Agricultural Products and Pharmaceuticals Segments. These challenges include, among others, increased competition from generic substitutes for its aspartame-based tabletop and ingredient sweeteners, the need to keep pace with rapid technological change, realize the potential of its pipeline products, develop new products and negotiate favorable pricing terms with its major customers. Each of these challenges is subject to comparable risks and uncertainties to those described above. Factors Impacting Each of the Company's Segments - ------------------------------------------------ Financial Requirements. Monsanto's recent and planned acquisitions will require a significant commitment of the Company's financial resources and will also require the Company to seek financing from outside sources. In addition, new technological innovations generally require a significant investment for research and development and product launch. Insufficient funds available for investment in these areas could hinder the Company's ability to make technological innovations and introduce and distribute new products. Monsanto anticipates generating required capital 21 by maintaining revenues of its core businesses, seeking sufficient outside financing and containing costs. Its ability to do so will depend on the result of the factors listed elsewhere in this section and capital market conditions generally. Intellectual Property. Monsanto has devoted significant resources to its efforts to obtain and maintain patent protection, both in the United States and in other countries, for its products, to preserve its trade secrets and to operate without infringing the proprietary rights of third parties. Monsanto's patents and trademarks are of material importance in the operation of its business, particularly in the Agricultural Products and Pharmaceuticals segments. Intellectual property positions will become increasingly important within the agricultural biotechnology and pharmaceutical industries as genetically engineered products become a larger part of the product landscape. The Company generally relies upon patent and trademark laws in the United States and other countries to establish and maintain its proprietary rights in its technology and products, although there is some uncertainty about the value of available patent protection in some countries outside the United States. Moreover, the patent positions of biotechnology and pharmaceuticals companies involve complex legal and factual questions and, because of rapid technological advances and the number of companies performing research in these areas, involve an uncertain environment. Patent applications in the United States are maintained in secret and outside the United States such applications are published 18 months after filing. Accordingly, patents belonging to competitors may issue from time-to-time without any prior warning to Monsanto which may decrease the value of similar technologies currently being developed by Monsanto. Also because of this rapid pace of change, some of the Company's products may unknowingly rely on key technologies developed by others. In such event, the Company may be required to 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 as disclosed in this quarterly report and additional future litigation can be anticipated. While the outcome of such litigation cannot be predicted with certainty, Monsanto will continue to vigorously defend and litigate its positions and believes it has meritorious defenses and claims in the pending suits. Foreign Markets. Monsanto intends to continue to actively explore sales opportunities outside of the United States which made up approximately 44% of the Company's 1997 revenues. 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 the value of the southeast Asia and Brazilian currencies may, if not reversed, adversely affect future income. Also, future sales may decrease because the decline in the southeast Asia and Brazilian economies could cause customers to purchase fewer goods in general, and also because Monsanto products may become more expensive for customers to purchase in their local currency. Year 2000 Readiness. The dates on which Monsanto believes the Y2K Program will be completed are based on management's best estimates, which were derived utilizing numerous assumptions of future events. There can be no guarantee that these estimates will be achieved, or that there will not be a delay in, or increased costs associated with, the implementation of the Y2K Program. Factors which may cause delays in the Y2K Program or increased costs in connection therewith include, but are not limited to, the continued availability and cost of personnel and consultants trained in these areas, the ability to locate and correct all relevant computer code and embedded systems and the success of similar programs conducted by suppliers and other third parties. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - See the Exhibit Index. (b) No reports on Form 8-K were filed by the Company during the quarter ended September 30, 1998. 22 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MONSANTO COMPANY -------------------------------- (Registrant) MICHAEL R. HOGAN -------------------------------- Vice President and Controller (On behalf of the Registrant and as Principal Accounting Officer) Date: November 12, 1998 23 EXHIBIT INDEX Exhibit Number Description - ------- ----------- 2 Omitted - Inapplicable 3 Omitted - Inapplicable 4 Omitted - Inapplicable 10 1. Monsanto Management Incentive Plan of 1996 as amended April 25, 1997, July 25, 1997, August 18, 1997, February 26, 1998 and September 25, 1998 11 Omitted - Inapplicable; see Note 6 of Notes to Financial Statements 15 Omitted - Inapplicable 18 Omitted - Inapplicable 19 Omitted - Inapplicable 22 Omitted - Inapplicable 23 Omitted - Inapplicable 24 Omitted - Inapplicable 27 Financial Data Schedule 99 Computation of the Ratio of Earnings to Fixed Charges for Monsanto Company and Subsidiaries 24 EX-10.1 2 MANAGEMENT INCENTIVE PLAN Exhibit 10.1 ------------ MONSANTO MANAGEMENT INCENTIVE PLAN OF 1996 As Amended April 25, 1997, July 25, 1997, August 18, 1997, February 26, 1998 and September 25, 1998 and As Adjusted to Reflect Stock Split as of May 15, 1996 and Spin-off as of September 1, 1997 I. GENERAL PROVISIONS 1. PURPOSES The Monsanto Management Incentive Plan of 1996 is designed to: * focus management on business performance that creates stockholder value, * encourage innovative approaches to the business of the Company, * reward for results, * encourage ownership of Monsanto common stock by management, and * encourage taking higher risks with an opportunity for higher reward. This Incentive Plan shall be effective April 15, 1996 ("Effective Date"), subject to the approval of this Incentive Plan by the stockholders of the Company. 2. DEFINITIONS Except where the context otherwise indicates, the following definitions apply: "Associated Company" means any corporation (or partnership, joint venture, or other enterprise), of which the Company owns or controls, directly or indirectly, 10% or more, but less than 50% of the outstanding shares of stock normally entitled to vote for the election of directors (or comparable equity participation and voting power). "Award" means any Stock Option, Stock Appreciation Right, Restricted Share, unrestricted Share, dividend equivalent unit or other award granted under this Incentive Plan. "Board" means Board of Directors of the Company. "Committee" means the ECDC, or its permitted delegate. "Compensation Committee" means one or more committees appointed by the ECDC composed of one or more senior managers of the Company or a Subsidiary to whom the ECDC may delegate its powers (or a portion thereof) to administer this Incentive Plan pursuant to Section 3(a) of this Article I. "ECDC" means the Executive Compensation and Development Committee or such other committee consisting of two or more members of the Board as may be appointed by the Board to administer this Incentive Plan pursuant to Section 3(a) of this Article I. "Company" means Monsanto Company, a Delaware corporation. "Eligible Participant" means any officer or other salaried employee (including a director who is a salaried employee) of the Company, a Subsidiary, or an Associated Company. "Incentive Plan" means the Monsanto Management Incentive Plan of 1996, set forth herein. "Fair Market Value" shall mean, with respect to any given day, the average of the highest and lowest sales prices of the Shares reported as the New York Stock Exchange-Composite Transactions for such day, or if the Shares were not traded on the New York Stock Exchange on such day, then on the next preceding day on which the Shares were traded, all as reported by The Wall Street Journal, mid-west edition, under the heading New York Stock Exchange-Composite Transactions or by such other source as the Committee may select. "Incentive Stock Option" or "Incentive Option" means an option meeting the definition of that term as set forth in Section 3 of Article II of this Incentive Plan. "1984 Plan" means the Monsanto Management Incentive Plan of 1984, as amended. "1986 Plan" means the Searle Monsanto Stock Option Plan of 1986, as amended. "1988/I Plan" means the Monsanto Management Incentive Plan of 1988/I, as amended. "1988/II Plan" means the Monsanto Management Incentive Plan of 1988/II, as amended. "1991 Plan" means the NutraSweet/Monsanto Stock Plan of 1991, as amended. "1994 NutraSweet/Monsanto Plan" means the NutraSweet/Monsanto Stock Plan of 1994, as amended. "1994 Plan" means the Monsanto Management Incentive Plan of 1994, as amended. "1994 Searle/Monsanto Plan" means the Searle/Monsanto Stock Plan of 1994, as amended. "Non-Qualified Stock Option" or "Non-Qualified Option" means an option referred to in Section 4 of Article II of this Incentive Plan. "Participant" means an Eligible Participant to whom a Stock Option or a Stock Appreciation Right has been granted, a bonus commitment made or a bonus awarded pursuant to this Incentive Plan. "Reporting Person" means a person subject to the reporting requirements of Section 16(a) of the Securities Exchange Act of 1934 (or any law, rule, regulation or other provision that may replace such statute) with respect to Shares. "Restricted Shares" means Shares that were made subject to restrictions in accordance with Section 6 of Article II of this Incentive Plan. "Shares" means shares of common stock of the Company and any shares of stock or other securities received as a result of a Share adjustment as set forth in Section 4 of this Article I. "Stock Appreciation Right" means a right referred to in Section 5 of Article II of this Incentive Plan. "Stock Appreciation Right Fair Market Value" or "SAR Fair Market Value" shall mean a value established by the Committee for the exercise of a Stock Appreciation Right. If such exercise occurs during any quarterly "window period" as specified by Rule 16b-3 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended from time to time, or any law, rule, regulation or other provision that may hereafter replace such Rule, the Committee may establish a common value for exercises during such window period. "Stock Option" or "Option" shall mean Incentive Stock Options and/or Non-Qualified Stock Options. "Subsidiary" means: (i) for the purpose of an Incentive Stock Option, any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if, at the time of the granting of the Option, each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain; and (ii) for the purposes of a Non-Qualified Stock Option, a Stock Appreciation Right or an Award of Shares (restricted or not), any corporation (or partnership, joint venture, or other enterprise) of which the Company owns or controls, directly or indirectly, 50% or more of the outstanding shares of stock normally entitled to vote for the election of directors (or comparable equity participation and voting power). "Termination of Employment" means the discontinuance of employment of a Participant for any reason other than a Transfer. "Transfer" means: (i) for the purpose of an Incentive Stock Option, a change of employment of a Participant within the group consisting of the Company and its Subsidiaries; and (ii) for the purpose of a Non- Qualified Stock Option, a Stock Appreciation Right or an Award of Shares (restricted or not), a change of employment of a Participant within the group consisting of the Company and its Subsidiaries, or, if the Committee so determines, a change of employment of a Participant within the group consisting of the Company, its Subsidiaries and Associated Companies. 3. ADMINISTRATION (a) This Incentive Plan shall be administered by the ECDC, except to the extent the ECDC delegates administration pursuant to this paragraph. The ECDC may delegate all or a portion of the administration of this Incentive Plan to one or more Compensation Committees and may authorize further delegation by the Compensation Committees to senior managers of the Company or its Subsidiaries; provided that determinations regarding the timing, pricing, amount and terms of any Award to a Reporting Person shall be made only by the ECDC. No person shall be eligible or continue to serve as a member of the ECDC unless such person is (i) a "disinterested person" within the meaning of Rule 16b-3 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended from time to time, or any law, rule, regulation or other provision that may hereafter replace such Rule and (ii) an "outside director" within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as may be amended from time to time, and no person shall be eligible for the grant of an Award under this Incentive Plan while serving as a member of the ECDC. (b) The Committee shall have the exclusive right to interpret this Incentive Plan, to select the persons who are to receive Awards, and to act in all matters pertaining to the granting of Awards under this Incentive Plan including, without limitation, the timing, pricing, amount and terms of any Award and the amendment thereof consistent with the provisions of this Incentive Plan. No Eligible Participant shall have any right to be considered for or to receive any Awards. All acts and decisions of the Committee with respect to any questions arising in connection with the administration and interpretation of this Incentive Plan, including the severability of any and all of the provisions thereof, shall be conclusive, final and binding upon all Eligible Participants. (c) The Committee may adopt and amend from time to time rules and regulations of general application for the administration of this Incentive Plan. (d) Without limiting the foregoing Sections 3(a), (b) and (c) of this Article I (and notwithstanding any other provisions of this Incentive Plan), the Committee is authorized to take such action as it determines to be necessary or advisable, and fair and equitable to Participants, with respect to Awards in the event of: a merger of the Company with, consolidation of the Company into, or the acquisition of the Company by, another corporation; a sale or transfer of all or substantially all of the assets of the Company to another corporation or any other person or entity; a separation from the Company, including any spin-off or other distribution to stockholders other than an ordinary cash dividend; a tender or exchange offer for Shares made by any corporation, person or entity (other than the Company); or other reorganization in which the Company will not survive as an independent, publicly- owned corporation. Such action may include (but shall not be limited to) establishing, amending or waiving the forms, terms, conditions and duration of Stock Options, Stock Appreciation Rights, Awards of Restricted Shares and other Awards so as to provide for earlier, later, extended or additional times for exercise or payments, differing methods for calculating payments, alternate forms and amounts of payment, accelerated release of restrictions or other modifications. The Committee may take such actions pursuant to this Section 3(d) by adopting rules and regulations of general applicability to all Participants or to certain categories of Participants, by including, amending or waiving terms and conditions in Awards (including, without limitation, agreements with respect to Restricted Shares), or by taking action with respect to individual Participants. The Committee may take such actions as part of the Awards, or before or after the public announcement of any such merger, consolidation, acquisition, sale or transfer of assets, separation, tender or exchange offer or other reorganization. 4. SHARE ADJUSTMENTS In the event that at any time or from time to time a stock dividend, stock split, recapitalization, merger, consolidation, or other change in capitalization, or a sale by the Company of all or part of its assets, or a separation from the Company, including any spin-off or other distribution to stockholders other than an ordinary cash dividend, results in (a) the outstanding Shares, or any securities exchanged therefor or received in their place, being exchanged for a different number or class of shares of stock or other securities of the Company, or for shares of stock or other securities of any other corporation; or (b) new, different or additional shares or other securities of the Company or of any other corporation being received by the holders of outstanding Shares, then: (i) the total number of Shares authorized for Awards under this Incentive Plan; (ii) the number and class of Shares (A) that may be subject to Stock Options or Stock Appreciation Rights, (B) which have not been issued or transferred under outstanding Stock Options or Stock Appreciation Rights, and (C) which have been awarded but are undelivered under this Incentive Plan; and (iii) the purchase price to be paid per Share under outstanding Stock Options and the number of Shares to be transferred in settlement of outstanding Stock Appreciation Rights; shall in each case be appropriately adjusted by the Committee in its discretion; provided, however, that all adjustments made as the result of the foregoing in respect of each Stock Option which is granted as an Incentive Stock Option shall be made so that such Stock Option shall continue to be an Incentive Stock Option as defined in Section 422 of the Internal Revenue Code of 1986, as may be amended from time to time. 5. SHARES AUTHORIZED The total number of Shares for which awards may be granted under this Incentive Plan shall not exceed 71,605,350 Shares. Notwithstanding the foregoing, the total number of Shares that shall be available for Awards of Restricted or unrestricted Shares shall be 1/2 of 1% of the total number of Shares outstanding. The limitations in this Section 5 are subject to the adjustments provided for in Section 4 of this Article I; the provisions of Section 1(b) of Article II of this Incentive Plan; and the provisions of Section 3(d) of Article III of this Incentive Plan. The total number of Shares for which Awards may be granted under this Incentive Plan to any one Eligible Participant shall not exceed in any three-year period 15% of the total number of Shares for which Awards may be made under this Incentive Plan, subject to the adjustments provided for in Section 4 of this Article I. II. AWARDS 1. SHARES USED FOR AWARDS (a) The Shares for which Options may be granted under this Option Plan may be authorized but unissued Shares, or treasury Shares, or both. (b) In the event that any unexercised Stock Option granted hereunder lapses or ceases to be exercisable for any reason other than a surrender of the Option pursuant to Section l(c) of this Article II or the exercise of a Stock Appreciation Right under Section 5 of this Article II, the Shares subject to such Option shall again be available for Option grants under this Option Plan without again being charged against the authorized Shares set forth in Section 5 of Article I if not prohibited by Rule 16b-3 under the Securities Exchange Act of 1934 (or any successor rule or provision). Any amendment of any Option or Stock Appreciation Right by the Committee pursuant to Article I, Section 3 of this Incentive Plan shall not be considered the grant of a new Option for the purpose of Section 5 of Article I. (c) In the event of death or total and permanent disability as determined by the Committee, the Committee may, with the consent of the Participant, his legal representative, or in the event of death, a beneficiary designated in writing by the Participant during his lifetime, authorize payment, in cash or in Shares, or partly in cash and partly in Shares, as the Committee may direct, of an amount equal to the difference at the time between the Fair Market Value of the Shares subject to an Option and the Option price in consideration of the surrender of the Option. In such an event the Shares subject to the Option so surrendered shall be charged against the limitations set forth in Section 5 of Article I. (d) In the event that any Award or installment thereof ceases to be payable for any reason, the Shares subject to such Award shall again be available for Award without again being charged against the limitations on the number of Shares set forth in Section 5 of Article I if not prohibited by Rule 16b-3 under the Securities Exchange Act of 1934 (or any successor rule or provision). 2. INCIDENTS OF OPTIONS AND STOCK APPRECIATION RIGHTS (a) An Award of Stock Options or Stock Appreciation Rights may be made at such time or times determined by the Committee following the Effective Date to any Eligible Participant, except that Incentive Options may not be awarded to employees of Associated Companies. Each Stock Option and Stock Appreciation Right shall be granted subject to such terms and conditions, if any, not inconsistent with this Incentive Plan, as shall be determined by the Committee, including any provisions as to continued employment as consideration for the grant or exercise of such Option or Stock Appreciation Right, provisions as to performance conditions and any provisions which may be advisable to comply with applicable laws, regulations or rulings of any governmental authority. (b) An Incentive Stock Option or Stock Appreciation Right shall not be transferable by the Participant otherwise than by will, by the laws of descent and distribution, or pursuant to a written beneficiary designation, and shall be exercisable during the lifetime of the Participant only by him or by his guardian or legal representative. A Non-Qualified Stock Option or Stock Appreciation Right shall not be transferable except by will, by the laws of descent and distribution, pursuant to a written beneficiary designation, pursuant to a qualified domestic relations order as defined by the Internal Revenue Code of 1986, as amended, or Title I of the Employee Retirement Income Security Act or the rules thereunder, or in such circumstances as would not result in the failure to comply with Rule 16b-3 under the Securities Exchange Act of 1934 (or any successor rule or provision) if the transferor were a Reporting Person. (c) Shares purchased upon exercise of a Stock Option shall be paid for in such amounts, at such times and upon such terms as shall be determined by the Committee and specified in the grant of the Option. Without limiting the foregoing, the Committee may establish payment terms for the exercise of Stock Options which permit the Participant to deliver Shares (or other evidence of ownership of Shares satisfactory to the Company), including, at the Committee's option, Restricted Shares, with a Fair Market Value equal to the Option price as payment. (d) The Option price per share shall be established by the grant and shall not be decreased thereafter except pursuant to Section 4 of Article I of this Incentive Plan. (e) The Committee, in its discretion, may provide for the escalation of the Option price per Share over all or part of the term of the Option. (f) The Committee, in its discretion, may offer Participants the opportunity to elect to receive an Option grant in lieu of a salary increase or a bonus or may offer Participants the opportunity to purchase Options for cash or such other consideration as the Committee in its discretion determines. 3. INCENTIVE OPTIONS An Incentive Option shall be an "Incentive Stock Option" as that term is defined in Section 422 of the Internal Revenue Code of 1986, as may be amended from time to time, as in effect at the time of the grant of any such Option, or any statutory provision that may be enacted to replace such Section. Each provision of this Incentive Plan and of each Incentive Stock Option granted hereunder shall be construed so that each such Option shall be an Incentive Stock Option, and any provision thereof that cannot be so construed shall be disregarded. Incentive Stock Options shall be granted only to purchase unrestricted Shares and only to Eligible Participants, each of whom may be granted one or more such Options at such time or times determined by the Committee following the Effective Date until April 14, 2006, subject to the following conditions: (a) The Option price per Share shall be set by the grant but shall not be less than 100% of the Fair Market Value at the time of the grant. (b) The Option and its related Stock Appreciation Right, if any, may be exercised in full or in part from time to time within ten (10) years from the date of the grant, or such shorter period as may be specified by the Committee in the grant, provided that in any event each shall lapse and cease to be exercisable upon, or within such period following, Termination of Employment as shall have been determined by the Committee and as specified in the Option or Stock Appreciation Right; provided, however, that such period following Termination of Employment shall not exceed twelve months unless employment shall have terminated: (i) as a result of retirement as defined by the Committee or total and permanent disability as determined by the Committee, in which event such period shall not exceed-- (A) in the case of an Option, the original term of the Option; and (B) in the case of a Stock Appreciation Right, one year after such retirement or disability or after resignation as an officer or director of the Company, whichever shall last occur (unless earlier terminated pursuant to Section 5(b) of this Article II); or (ii) as a result of death, or death shall have occurred following Termination of Employment and while the Option or Stock Appreciation Right was still exercisable; and provided, further, that such period following Termination of Employment shall in no event extend the original exercise period of the Option or related Stock Appreciation Right, if any. (c) The aggregate Fair Market Value (determined at the time the Option is granted) of the Shares with respect to which Incentive Stock Options are first exercisable during any calendar year by any Eligible Participant shall not exceed $100,000; however, if the Fair Market Value of Incentive Stock Option Shares (at date of grant) exceeds $100,000 in the calendar year in which Incentive Stock Options are first exercisable, Shares with a Fair Market Value at date of grant exceeding $100,000 shall not be deemed to be Incentive Stock Options. (d) Incentive Stock Options shall be granted only to an Eligible Participant who, at the time the Option is granted, does not own stock possessing more than 10% of the total combined voting power of all classes of stock of the Company. (e) Any other terms and conditions which the Committee determines, upon advice of counsel, should be imposed for the Option to qualify as an Incentive Stock Option and any other terms and conditions not inconsistent with this Incentive Plan as determined by the Committee; including provisions making the Shares subject to such Option Restricted Shares or provisions making vesting or the ability to exercise subject to performance conditions. 4. NON-QUALIFIED OPTIONS One or more Options may be granted as Non-Qualified Options to purchase unrestricted Shares or Restricted Shares to an Eligible Participant at such time or times determined by the Committee, following the Effective Date, subject to the following terms and conditions: (a) The Option price per Share shall be established by the grant but shall not be less than 100% of the Fair Market Value at the time of the grant (or such later date as the Committee shall determine to be the grant date). (b) The Option and its related Stock Appreciation Right, if any, may be exercised in full or in part from time to time within ten (10) years from the date of the grant, or such shorter period as may be specified by the Committee in the grant, provided that in any event each shall lapse and cease to be exercisable upon, or within such period following Termination of Employment as shall have been determined by the Committee and as specified in the Option or Stock Appreciation Right; provided, however, that such period following Termination of Employment shall not exceed twelve months unless employment shall have terminated: (i) as a result of retirement as defined by the Committee or total and permanent disability as determined by the Committee, in which event such period shall not exceed-- (A) in the case of an Option, the original term of the Option; and (B) in the case of a Stock Appreciation Right, one year after such retirement or disability or after resignation as an officer or director of the Company, whichever shall last occur (unless earlier terminated pursuant to Section 5(b) of this Article II); or (ii) as a result of death, or death shall have occurred following Termination of Employment and while the Option or Stock Appreciation Right was still exercisable; and provided, further, that such period following Termination of Employment shall in no event extend the original exercise period of the Option or related Stock Appreciation Right, if any. (c) The Option grant may include any other terms and conditions not inconsistent with this Incentive Plan as determined by the Committee, including provisions making the Shares subject to such Option Restricted Shares or provisions making vesting or the ability to exercise subject to the satisfaction of performance conditions. 5. STOCK APPRECIATION RIGHTS A Stock Appreciation Right may be granted to an Eligible Participant in connection with (and only in connection with) an Incentive Stock Option or a Non-Qualified Option granted under this Incentive Plan, or under any other incentive plan of the Company or its Subsidiaries which was approved by the stockholders, subject to the following terms and conditions: (a) Such Stock Appreciation Right shall entitle a holder of an Option within the period specified for the exercise of the Option in the related Option grant to surrender the unexercised Option (or a portion thereof) and to receive in exchange therefor a payment in cash or Shares having an aggregate value equal to the product of (i) the amount by which (A) the SAR Fair Market Value of each Share exceeds (B) the Option price per Share, times (ii) the number of Shares under the Option, or portion thereof, which is surrendered. (b) Except as expressly provided herein, each Stock Appreciation Right granted hereunder shall be subject to the same terms and conditions as the related Option. It shall be exercisable only to the extent such Option is exercisable and shall terminate or lapse and cease to be exercisable when the related Option terminates or lapses. The Committee may grant Stock Appreciation Rights concurrently with grants of Options or in connection with previously granted Options under this Incentive Plan, or under any other incentive plan of the Company or its Subsidiaries which was approved by the stockholders, which are unexercised and have not terminated or lapsed. With respect to Stock Appreciation Rights granted in connection with such previously granted Options, the Committee shall provide that such Stock Appreciation Rights shall not be exercisable until the holder completes six (6) months (or such longer period as the Committee shall determine) of service with the Company, a Subsidiary, or an Associated Company immediately following the date of the grant of such Stock Appreciation Rights. (c) The Committee shall have sole discretion to determine in each case whether the payment will be in the form of all cash, all Shares (which may, at the Committee's discretion, be Restricted Shares), or any combination thereof. If payment is to be made in Shares, the number of Shares shall be determined as follows: the amount payable in Shares shall be divided by the SAR Fair Market Value of Shares. The payments to be made, in whole or in part, in cash upon the exercise of Stock Appreciation Rights by any officer of the Company shall be made in accordance with the provisions relating to the exercise of stock appreciation rights of Rule 16b-3 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect at the time of such exercise, or any law, rule, regulation or other provision that may hereafter replace such Rule. (d) Upon exercise of a Stock Appreciation Right, the number of Shares subject to exercise under the related Option shall automatically be reduced by the number of Shares represented by the Option or portion thereof which is surrendered. To the extent that a Stock Appreciation Right shall be exercised, any Shares transferred upon such exercise shall not be charged against the maximum limitations upon the grant of Options set forth in this Incentive Plan under which such Option shall have been granted but the Option in connection with which a Stock Appreciation Right shall have been granted shall be deemed to have been exercised for the purpose of such maximum limitations. (e) The Committee shall have sole discretion as to the timing of any payment made in cash, Shares, or a combination thereof upon exercise of Stock Appreciation Rights hereunder, whether in a lump sum, in annual installments or otherwise deferred and the Committee shall have sole discretion to determine whether such payments may bear amounts equivalent to interest or cash dividends. (f) For purposes of this paragraph 5(f) of Article II: (i) "Unrelated Party" means any party or group of parties acting together other than (A) the Company, its directors and officers, or (B) any nominee holder for any stock exchange; (ii) "Offer" means any tender or exchange offer made by an Unrelated Party for the Shares and shall be deemed to occur upon the first purchase or exchange of such Shares; (iii) "Change of Control" means any acquisition, beneficially or otherwise, by any Unrelated Party of 25% or more of the combined voting power of the common and preferred stock of the Company and shall be deemed to occur upon the date that the Unrelated Party attains control of said 25% or more of the combined voting power; (iv) "Change of Control Market Value" of the Shares means the higher of-- (A) the value for which such Shares may be exchanged or offered under any Offer pursuant to which Shares are actually exchanged or purchased; or (B) the Fair Market Value of such Shares on the date of exercise of a Stock Appreciation Right. Notwithstanding the foregoing provisions of this Section 5 of Article II and without limiting the provisions of Section 3 of Article I of this Incentive Plan, in the event of an Offer or Change of Control, a Participant holding an unexercised Stock Appreciation Right may exercise such Stock Appreciation Right and elect to be paid solely in cash in an amount equal to the difference between the Option price and the Change of Control Market Value of the Shares, unless within five (5) business days after receipt of notification of such election by the Secretary of the Company, the Committee acts to disapprove the cash election. Unless it acts to disapprove, the Committee's consent shall be deemed to be given at the close of business on the fifth business day after the Secretary's receipt of notification of such election and payment shall be made as soon as practicable after expiration of such five (5) business day period. The election provided herein shall apply only: (x) during the thirty (30) day period following the first exchange or purchase of Shares pursuant to an Offer; or (y) during the thirty (30) day period following the date on which sufficient Shares are acquired to constitute a Change of Control. (g) For purposes of this paragraph 5(g) of Article II: (i) "Unrelated Party" means any party or group of parties acting together other than (A) the Company, its directors and officers, or (B) any nominee holder for any stock exchange; (ii) "Alternate Change of Control" means any acquisition, beneficially or otherwise, by any Unrelated Party of a percentage of the combined voting power of the common and preferred stock of the Company specified by the Committee (but not less than 10%) and shall be deemed to occur upon the date that the Unrelated Party attains control of said percentage of the combined voting power; (iii) "Change of Control Termination of Employment" means the termination of employment of a Participant by the Company, the Subsidiaries or the Associated Companies without cause (as defined by the Committee) or by the Participant for good reason (as defined by the Committee) within a period of time specified by the Committee following an Alternate Change of Control; (iv) "Alternate Change of Control Market Value" of the Shares means the Fair Market Value of such Shares on the date of exercise of a Stock Appreciation Right. Notwithstanding the foregoing provisions of this Section 5 of Article II and without limiting the provisions of Section 3 of Article I of this Incentive Plan, in the event of an Alternate Change of Control and a Change of Control Termination of Employment, a Participant holding an unexercised Stock Appreciation Right who is selected by the Committee may exercise such Stock Appreciation Right and elect to be paid solely in cash in an amount equal to the difference between the Option price and the Alternate Change of Control Market Value of the Shares, unless within five (5) business days after receipt of notification of such election by the Secretary of the Company, the Committee acts to disapprove the cash election. Unless it acts to disapprove, the Committee's consent shall be deemed to be given at the close of business on the fifth business day after the Secretary's receipt of notification of such election and payment shall be made as soon as practicable after expiration of such five (5) business day period. The election provided herein shall apply only during the thirty (30) day period following a Change of Control Termination of Employment. 6. BONUS SHARES AND RESTRICTED SHARES (a) An Award of Shares or Restricted Shares may be made at such time or times determined by the Committee following the Effective Date to any person who is an Eligible Participant. The Committee shall have full discretion to determine the terms and conditions of payment of any Award, including without limitation, what part of such Award shall be paid in unrestricted Shares or Restricted Shares, the time or times of payment of any Award, and the time or times of the lapse of the restrictions on Restricted Shares. (b) For the purpose of determining the number of Shares to be used in payment of an Award, the amount of the Award payable in Shares shall be divided by the Fair Market Value of the Shares on the date of the determination of the amount of the Award by the Committee, or if the Committee so directs, the date immediately preceding the date the Award is paid. (c) The portion of an Award payable in Restricted Shares shall be paid at the time of the Award either by book-entry registration or by delivering to the Participant, or a custodian or escrow designated by the Committee and the Participant, a certificate or certificates for such Restricted Shares, registered in the name of such Participant. The Participant shall have all of the rights of a stockholder with respect to such Shares, subject to such terms and conditions, including withholding of dividends, forfeitures or resale to the Company, if any, as may be determined by the Committee. The Committee and the Participant may designate the Company or one or more of its employees to act as custodian or escrow for the certificates. (d) Restricted Shares shall be subject to such terms and conditions, including forfeiture, if any, and to such restrictions against sale, transfer or other disposition as may be determined by the Committee at the time a Non-Qualified Option for the purchase of Restricted Shares is granted, at the time a Stock Appreciation Right to be settled with Restricted Shares is granted or at the time of making a bonus award of Restricted Shares. Any new or additional or different Shares or other securities resulting from any adjustment of such Shares of the type described in Section 4 of Article I shall be subject to the same terms, conditions, and restrictions as the Restricted Shares prior to such adjustment. The Committee may, in its discretion, remove, modify or accelerate the release of restrictions on any Restricted Shares in the event of hardship or disability of the Participant while employed, in the event that the Participant ceases to be an employee of the Company, a Subsidiary or Associated Company, as the result of death or otherwise, in the event of a relocation of a Participant to another country or for such other reasons as the Committee may deem appropriate. In the event of the death of a Participant following the transfer of Restricted Shares to him, the legal representative of the Participant, the beneficiary designated in writing by the Participant during his lifetime, or the person receiving such Shares under his will or under the laws of descent and distribution shall take such Shares subject to the same restrictions, conditions and provisions in effect at the time of his death, to the extent applicable. 7. DIVIDENDS, DIVIDEND EQUIVALENTS AND INTEREST EQUIVALENTS (a) No cash dividends shall be paid on Shares which have been awarded but not registered or delivered. The Committee may provide, however, that a Participant to whom an Option has been awarded which is exercisable in whole or in part at a future time for Shares or a Participant who has been awarded Shares payable in whole or in part at a future time, shall be entitled to receive an amount per Share, equal in value to the cash dividends, if any, paid per Share on issued and outstanding Shares, as of the dividend record dates occurring during the period between the date of the award and the time each such Share is delivered. Such amounts (herein called "dividend equivalents") may, in the discretion of the Committee, be: (i) paid in cash or Shares either from time to time prior to or at the time of the delivery of such Shares or upon expiration of the Option if it shall not have been fully exercised (except that payment of the dividend equivalents on Incentive Options may not be made prior to exercise); or (ii) converted into contingently credited Shares (with respect to which dividend equivalents shall accrue) in such manner, at such value, and deliverable at such time or times, as may be determined by the Committee. Such Shares (whether delivered or contingently credited) shall be charged against the limitations set forth in Section 5 of Article I. (b) The Committee, in its discretion, may authorize payment of interest equivalents on any portion of any Award payable at a future time in cash, and interest equivalents on dividend equivalents which are payable in cash at a future time. (c) The Committee, in its discretion, may provide that dividends paid on restricted Shares shall, during the applicable restricted period, be held by the Company to be paid upon the lapse of restrictions or to be forfeited upon forfeiture of the Shares. III. MISCELLANEOUS PROVISIONS 1. Neither a Stock Option nor a Stock Appreciation Right shall be transferable except as provided for herein. If any Participant makes such a transfer in violation hereof, any obligation of the Company with respect to such Stock Option or Stock Appreciation Right shall forthwith terminate. 2. Nothing in this Incentive Plan or any booklet or other document describing or referring to this Incentive Plan shall be deemed to confer on any employee or Participant the right to continue in the employ of his employer or affect the right of his employer to terminate the employment of any such person with or without cause. 3. Nothing contained herein shall require the Company to segregate any monies from its general funds, or to create any trusts, or to make any special deposits for any immediate or deferred amounts payable to any Participant. 4. This Incentive Plan and all actions taken hereunder shall be governed by the laws of the State of Delaware. 5. The Company may make such provisions and take such steps as it may deem necessary or appropriate for the withholding of any taxes which the Company is required by any law or regulation of any governmental authority, whether federal, state or local, domestic or foreign, to withhold in connection with any Stock Option or the exercise thereof, any Stock Appreciation Right or the exercise thereof, or the payment of any bonus award, including, but not limited to, the withholding of cash or Shares which would be paid or delivered pursuant to such exercise or award or another exercise or award under this Incentive Plan until the Participant reimburses the Company for the amount the Company is required to withhold with respect to such taxes, or cancelling any portion of such award or another award under this Incentive Plan in an amount sufficient to reimburse itself for the amount it is required to so withhold, or selling any property contingently credited by the Company for the purpose of paying such award or another award under this Incentive Plan, in order to withhold or reimburse itself for the amount it is required to so withhold. The Committee may permit a Participant (or any beneficiary or other person authorized to act) to elect to pay a portion or all of any amounts required or permitted to be withheld to satisfy federal, state, local or foreign tax obligations by directing the Company to withhold a number of whole Shares which would otherwise be distributed and which have a fair market value sufficient to cover the amount of such required or permitted withholding taxes. 6. The Committee may grant Stock Options to Eligible Participants who are foreign nationals or who are employed by the Company, a Subsidiary, or an Associated Company outside of the United States of America. In order to facilitate the granting of Stock Options, the Committee may provide for special terms and conditions for grants to employees who are foreign nationals or who are employed by the Company, a Subsidiary, or an Associated Company outside of the United States of America, as the Committee may consider necessary or appropriate to accommodate differences in local law, tax policy or custom in other countries in which the Company, a Subsidiary, or an Associated Company operates or has employees. The Committee may also provide for such substitutes for the Stock Options for employees who are foreign nationals or who are employed by the Company, a Subsidiary, or an Associated Company outside of the United States of America as may be deemed necessary or appropriate by the Committee. AVAILABLE INFORMATION: Each Malaysian Participant may request copies of the Company's most recent audited financial statements available. 7. Notwithstanding any other provision of this Incentive Plan, for purposes of any Award that is outstanding as of the date that the Company spins off the Company's chemical businesses into a new publicly traded company ("Chemicals") and is held by a Participant who in connection with such spinoff becomes an employee of Chemicals (or a subsidiary or associated company of Chemicals) rather than an employee of the Company (or a Subsidiary or Associated Company of the Company), such change of employment shall not constitute a Termination of Employment. With respect to any such Award held by such a Participant, Termination of Employment shall mean such Participant's termination of employment with Chemicals other than a Transfer, with Transfer defined as a change of employment of a Participant within the group consisting of Chemicals and its subsidiaries, or, if the Committee so determines, a change of employment of a Participant within the group consisting of Chemicals, its subsidiaries, and its associated companies. For purposes of this section, a subsidiary of Chemicals means any corporation (or partnership, joint venture, or other enterprise) of which Chemicals owns or controls, directly or indirectly, 50% or more of the outstanding shares of stock normally entitled to vote for the election of directors (or comparable equity participation and voting power) and an associated company of Chemicals means any corporation (or partnership, joint venture, or other enterprise), of which Chemicals owns or controls, directly or indirectly, 10% or more, but less than 50% of the outstanding shares of stock normally entitled to vote for the election of directors (or comparable equity participation and voting power). IV. AMENDMENTS 1. The Board, upon recommendation of the Committee but not otherwise, may from time to time amend or modify this Incentive Plan, including, but not limited to, an amendment which would authorize the Committee to make Awards payable in other securities or other forms of property of a kind to be determined by the Committee, and such other amendments as may be necessary or desirable to implement such Awards, or discontinue this Incentive Plan or any provision thereof, provided that no amendments or modifications to this Incentive Plan shall, without the prior approval of the stockholders normally entitled to vote for the election of directors of the Company: (a) permit the Company to decrease the Option price on any outstanding Option; (b) permit any change which would require the approval of stockholders under Section 16 of the Securities Exchange Act of 1934 or the rules thereunder or under Section 422 of the Internal Revenue Code of 1986, or the rules thereunder (or any law, rule, regulation or other provision that may replace such statutes or rules); or (c) change any of the provisions of this Article IV. 2. No amendment to or discontinuance of this Incentive Plan or any provision thereof by the Board or the stockholders of the Company shall, without the written consent of the Participant, adversely affect any Stock Option or Stock Appreciation Right theretofore granted or bonus commitment or bonus award theretofore made to such Participant under this Incentive Plan. V. INTERPRETATION 1. This Incentive Plan is not intended to and shall not affect any option or stock appreciation right grant or bonus commitment or award under the 1984 Plan, the 1986 Plan, the 1988/I Plan, the 1988/II Plan, the 1991 Plan, the 1994 Plan, the 1994 Searle/Monsanto Plan, or the 1994 NutraSweet/Monsanto Plan (or any other incentive plan of the Company, its Subsidiaries, and Associated Companies). No stock options or stock appreciation rights or Awards of Restricted or unrestricted Shares shall be granted under the 1994 Plan, the 1994 Searle/Monsanto Plan, or the 1994 NutraSweet/Monsanto Plan after April 14, 1996. 2. This Incentive Plan is not intended to and shall not preclude the establishment or operation by the Company or any Subsidiary of (a) any thrift, savings and investment, achievement award, stock purchase, employee recognition or other benefit plan or arrangement for any group of employees, or (b) any other incentive or bonus plan or arrangement for any employees (hereinafter "Other Plan"), and any such Other Plan may be authorized and payments made thereunder independently of this Incentive Plan; provided, however, that no such Other Plan shall provide for the granting of options or stock appreciation rights to purchase or receive the appreciation on the shares of any class of stock of the Company, or the making of bonus commitments or bonus awards payable in any class of stock of the Company, which in either form or substance are comparable to those authorized under this Incentive Plan, unless (i) such Other Plan is established or operated in connection with the assumption by the Company or a Subsidiary of the plans, options, stock appreciation rights, bonus commitments or bonus awards of another corporation, or the substitution of an Other Plan or options, stock appreciation rights, bonus commitments or bonus awards under such Other Plan in lieu of the plans, options, stock appreciation rights, bonus commitments or bonus awards of such other corporation, arising out of a merger or consolidation with, or the acquisition of assets or stock of, such other corporation, or other transaction described in Section 424(a) of the Internal Revenue Code of 1986, as may be amended from time to time, as in effect at the time, or (ii) such Other Plan provides for grants of options, stock appreciation rights, bonus commitments or bonus awards to employees substantially all of whom are not Participants. EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENT OF CONSOLIDATED INCOME OF MONSANTO COMPANY AND SUBSIDIARIES FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998, AND THE STATEMENT OF CONSOLIDATED FINANCIAL POSITION AS OF SEPTEMBER 30, 1998. SUCH INFORMATION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS. 1,000,000 9-MOS DEC-31-1998 SEP-30-1998 215 0 2,845 0 1,505 5,598 5,206 2,477 12,866 4,440 2,506 1,644 0 0 3,042 12,866 6,500 6,500 2,622 2,622 0 0 214 603 250 353 0 0 0 353 59 56
EX-99 4 COMPUTATION OF RATIO OF EARNINGS EXHIBIT 99 MONSANTO COMPANY AND SUBSIDIARIES COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES (Dollars in millions)
Nine Months Ended September 30, Year Ended December 31, ----------------- ---------------------------------------------------- 1998 1997 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- ---- ---- Income from continuing operations before provision for income taxes $603 $369 $366 $553 $645 $636 $427 Add Fixed charges 261 159 236 172 178 140 141 Less capitalized interest (8) (13) (14) (9) (5) (4) (7) Dividends from affiliated companies 10 2 4 6 3 2 5 Less equity income (add equity loss) of affiliated companies (1) (18) (20) 42 (3) (4) (20) ---- ---- ---- ---- ---- ---- ---- Income as adjusted $865 $499 $572 $764 $818 $770 $546 ==== ==== ==== ==== ==== ==== ==== Fixed charges Interest expense $214 $111 $170 $119 $132 $100 $101 Capitalized interest 8 13 14 9 5 4 7 Portion of rents representative of interest factor 39 35 52 44 41 36 33 ---- ---- ---- ---- ---- ---- ---- Fixed charges $261 $159 $236 $172 $178 $140 $141 ==== ==== ==== ==== ==== ==== ==== Ratio of earnings to fixed charges 3.31 3.14 2.42 4.44 4.60 5.50 3.87 ==== ==== ==== ==== ==== ==== ==== Includes charges for restructuring, acquired in-process research and development and other unusual items of $202 million and $609 million for the nine months ended September 30, 1998 and 1997, respectively, and $684 million, $376 million and $90 million for the years ended December 31, 1997, 1996 and 1995, respectively. Excluding these unusual items, the ratio of earnings to fixed charges would have been 4.09 and 6.97 for the nine months ended September 30, 1998 and 1997, respectively, and 5.32, 6.60 and 5.10 for the years ended December 31, 1997, 1996 and 1995, respectively. The ratio was not materially affected by the restructuring and other unusual items in 1994 and 1993.
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