-----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, WaWlFRCsUA3rMMTQsdVBz5R1xXNTk+zPSdbaL4XdNSqZw87C3sTb0WhCeEDmf8b7 sJNkGrfK9wYRkzkMkQ0O7w== 0001068800-99-000101.txt : 19990326 0001068800-99-000101.hdr.sgml : 19990326 ACCESSION NUMBER: 0001068800-99-000101 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990325 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MONSANTO CO CENTRAL INDEX KEY: 0000067686 STANDARD INDUSTRIAL CLASSIFICATION: CHEMICALS & ALLIED PRODUCTS [2800] IRS NUMBER: 430420020 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-02516 FILM NUMBER: 99572137 BUSINESS ADDRESS: STREET 1: 800 N LINDBERGH BLVD CITY: ST LOUIS STATE: MO ZIP: 63167 BUSINESS PHONE: 3146941000 MAIL ADDRESS: STREET 1: 800 NORTH LINDBERGH BLVD CITY: ST LOUIS STATE: MO ZIP: 63167 FORMER COMPANY: FORMER CONFORMED NAME: MONSANTO CHEMICAL CO DATE OF NAME CHANGE: 19711003 10-K 1 MONSANTO COMPANY FORM 10-K 1998 ========================================================================= FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- ------------------- COMMON STOCK $2 PAR VALUE NEW YORK STOCK EXCHANGE PREFERRED STOCK PURCHASE RIGHTS NEW YORK STOCK EXCHANGE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [ X ] NO [ ] INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [ ] STATE THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NONAFFILIATES OF THE REGISTRANT: APPROXIMATELY $29.0 BILLION AS OF THE CLOSE OF BUSINESS ON FEBRUARY 26, 1999. INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE: 628,044,729 SHARES OF COMMON STOCK, $2 PAR VALUE, OUTSTANDING AT FEBRUARY 26, 1999. DOCUMENTS INCORPORATED BY REFERENCE 1. PORTIONS OF MONSANTO COMPANY ANNUAL REPORT TO SECURITY HOLDERS FOR THE YEAR ENDED DECEMBER 31, 1998. (PARTS I AND II OF FORM 10-K.) 2. PORTIONS OF MONSANTO COMPANY NOTICE OF ANNUAL MEETING AND PROXY STATEMENT DATED MARCH 15, 1999. (PART III OF FORM 10-K.) ======================================================================== PART I ITEM 1. BUSINESS. Monsanto Company is a life sciences company, committed to finding solutions to the growing global needs for food and health by applying common forms of science and technology among agriculture, nutrition and health. Monsanto makes and markets high-value agricultural products, pharmaceuticals and food ingredients. Monsanto Company was incorporated in 1933 under Delaware law and is the successor to a Missouri corporation, Monsanto Chemical Works, organized in 1901. "Monsanto" and the "Company" are used interchangeably to refer to Monsanto Company or to Monsanto Company and its subsidiaries, as appropriate to the context. Trademarks and service marks owned or licensed by Monsanto and its subsidiaries are indicated by special type. For 1998, Monsanto reported its business under four segments: Agricultural Products, Nutrition and Consumer Products, Pharmaceuticals, and Corporate and Other. The tabular and narrative information appearing under "Geographic Data" and "Segment Data" on pages 30 and 31, and the two paragraphs immediately following the Table of Contents on page 24, of the Company's Annual Report to shareowners for the year ended December 31, 1998 (the "1998 Annual Report") is incorporated herein by reference. PRINCIPAL PRODUCTS Monsanto's principal products, categorized by the segments in which they were reported for 1998, include the following:
AGRICULTURAL PRODUCTS MAJOR PRODUCTS END-USE PRODUCTS AND APPLICATIONS - -------------- --------------------------------- Roundup(R) herbicide and other glyphosate-based Nonselective agricultural and industrial applications herbicides - --------------------------------------------------------------------------------------------------------------------- Lasso(R) and Harness(R) herbicides and other Corn, soybean, peanut and milo (sorghum) crops acetanilide-based herbicides Corn only - --------------------------------------------------------------------------------------------------------------------- Avadex(R) BW herbicide, Far-Go(R) herbicide Wheat crops - --------------------------------------------------------------------------------------------------------------------- Machete(R) herbicide Rice crops - --------------------------------------------------------------------------------------------------------------------- Permit(R), Manage(R) and Sempra(R) herbicides Postemergence control of sedges and broadleaf weeds in corn and grain sorghum, turf and sugarcane crops - --------------------------------------------------------------------------------------------------------------------- Roundup Ready(R) canola, Crops tolerant of Roundup(R) herbicide Roundup Ready(R) cotton, Roundup Ready(R) soybeans Roundup Ready(R) corn - --------------------------------------------------------------------------------------------------------------------- Bollgard(R)insect-protected cotton, Crops protected against certain insect pests NewLeaf(R) insect-protected potatoes, YieldGard(R)insect-protected corn - --------------------------------------------------------------------------------------------------------------------- AgriPro(R), Agroceres(TM), Asgrow(R), Cargill(R), Corn hybrids, soybean varieties, alfalfa, grain sorghum and DEKALB(R), Hartz(R), Hybritech(R), Monsoy(TM) and forage varieties, sunflowers, oilseed rape and barley Stoneville(R) branded seeds; Holden's(TM) and PBi(R) varieties, cotton varieties, wheat varieties and hybrids foundation seed The Company has announced its intention to sell this business. - --------------------------------------------------------------------------------------------------------------------- Posilac(R) bovine somatotropin Increase efficiency of milk production in dairy cows - --------------------------------------------------------------------------------------------------------------------- NUTRITION AND CONSUMER PRODUCTS MAJOR PRODUCTS END-USE PRODUCTS AND APPLICATIONS - -------------- --------------------------------- NutraSweet(R) brand sweetener High-intensity sweetener used primarily in beverages and food products - --------------------------------------------------------------------------------------------------------------------- 1 NUTRITION AND CONSUMER PRODUCTS (CONT'D) MAJOR PRODUCTS END-USE PRODUCTS AND APPLICATIONS - -------------- --------------------------------- Alginate products, under various tradenames Soups, sauces, gravies, dressings, beverages, snack foods, such as Keltone(R) and Manugel(R) sodium alginates, breadings, batters, bakery products, dairy products, pet and Kelcoloid(R) propylene glycol alginate; foods Xanthan gum products under various tradenames such as Keltrol(R); Kelcogel(TM) gellan gum The Company has announced its intention to sell the algins business. - --------------------------------------------------------------------------------------------------------------------- Equal(R), Canderel(R), NutraSweet(R), SweetMate(R), Tabletop sweeteners Chuker(R), Misura(R) and other tabletop sweeteners - --------------------------------------------------------------------------------------------------------------------- Alginate products, under various tradenames Cleaners, textile printing, paper sizings and coatings, such as Manutex(R) and Kelgin(R) sodium alginates; firefighting foams Xanthan gum products, under various tradenames such as Kelzan(R) AR The Company has announced its intention to sell the algins business. - --------------------------------------------------------------------------------------------------------------------- Xanthan gum products, under various Oil and gas well drilling applications tradenames such as Kelzan(R) and Xanvis(R); Biozan(R) welan gum - --------------------------------------------------------------------------------------------------------------------- Roundup(R) herbicide Residential lawn and garden applications - --------------------------------------------------------------------------------------------------------------------- PHARMACEUTICALS MAJOR PRODUCTS END-USE PRODUCTS AND APPLICATIONS - -------------- --------------------------------- Daypro(R) (oxaprozin), Anti-inflammatory Arthrotec(R) (misoprostol/diclofenac) - --------------------------------------------------------------------------------------------------------------------- Aldactone(R) (spironolactone), Cardiovascular Aldactazide(R)(spironolactone/hydrochlorothiazide), Calan(R) formulations and Covera-HS(R)(verapamil hydrochloride) - --------------------------------------------------------------------------------------------------------------------- Ambien(R) (zolpidem tartrate) Central nervous system (sleep) - --------------------------------------------------------------------------------------------------------------------- Cytotec(R) (misoprostol), Gastrointestinal Lomotil(R)(diphenoxylate hydrochloride) - --------------------------------------------------------------------------------------------------------------------- Demulen(R) (ethynodiol diacetate), Women's health Flagyl(R) formulations (metronidazole), Synarel(R) (nafarelin acetate) - --------------------------------------------------------------------------------------------------------------------- CORPORATE AND OTHER MAJOR PRODUCTS END-USE PRODUCTS AND APPLICATIONS - -------------- --------------------------------- Enviro-Chem(R) engineering and construction Processing plants for fertilizer producers, basic metals management services for processing plants using production, oil refining sulfuric acid; proprietary equipment and air pollution control systems - ---------------------------------------------------------------------------------------------------------------------
On December 31, 1998, G. D. Searle & Co. ("Searle"), a subsidiary of the Company, received approval from the U.S. Food and Drug Administration ("FDA") to market Celebrex(TM), a new arthritis treatment for the signs and symptoms of osteoarthritis and adult rheumatoid arthritis. Celebrex(TM) was launched in the United States in February 2 1999 and is expected to be launched in more than a dozen other countries in 1999. In early 1999, Searle also received approval to market the drug in Brazil and Mexico. PRINCIPAL EQUITY AFFILIATES Monsanto participates in a number of joint ventures in which it shares management control with other companies. For example, aspartame is manufactured and sold in Europe by fifty percent-owned joint ventures; and Monsanto has a 60% ownership interest in a joint venture with Solutia Inc., from which it purchases elemental phosphorus. In addition, on January 7, 1999, Monsanto and Cargill Incorporated formed Renessen LLC, a worldwide joint venture in which Monsanto has a 50% interest, to create and market new products enhanced through biotechnology for the crop processing and animal feed markets. SALE OF PRODUCTS Monsanto's products are sold directly to customers in various industries, to wholesalers and other distributors, to retailers and to the ultimate user or consumer, principally by its own sales force, or, in some cases, through third parties. With respect to pharmaceuticals, such sales force concentrates on detailing to physicians and managed health care providers. The Pharmaceuticals segment's new anti-arthritis product Celebrex(TM) will be co-promoted with Yamanouchi Pharmaceutical Co. Ltd. in Japan and with Pfizer Inc. in most other countries of the world. As indicated on page 46 of the 1998 Annual Report, Monsanto's net income has been historically higher during the first half of the year, primarily because of the concentration of generally more profitable sales of the Agricultural Products segment during that part of the year. Monsanto's marketing and distribution practices do not result in unusual working capital requirements on a consolidated basis, although the seasonality of sales of the Agricultural Products segment results in short- term borrowings to finance customer accounts receivable and inventories. Inventories of finished goods, goods in process and raw materials are maintained to meet customer requirements and Monsanto's scheduled production. In general, Monsanto does not manufacture its products against a backlog of firm orders; production is geared primarily to the level of incoming orders and to projections of future demand. Monsanto generally is not dependent upon one or a group of customers. The Nutrition and Consumer Products segment, however, makes significant sales to a few companies for use in carbonated soft drinks. Monsanto has no material contracts with the government of the United States or any state, local or foreign government. However, pursuant to contracts executed under U.S. federal and state laws, the Pharmaceuticals segment pays rebates to state governments for pharmaceuticals sold under state Medicaid programs and under state-funded programs for the indigent. The Pharmaceuticals segment also grants discounts to certain managed health care providers. Sales through managed health care providers constitute an increasing percentage of that segment's sales. Introduction of new products by the Agricultural Products and Pharmaceuticals segments typically is, and introduction of new products by other segments may be, subject to prior review and approval by the FDA, the U.S. Environmental Protection Agency and/or the U.S. Department of Agriculture (or comparable agencies of governments outside the United States) before they can be sold. Such reviews are often time- consuming and costly. These agencies also have continuing jurisdiction over many existing products of these segments. Governmental actions may also affect or determine the pricing of certain products, particularly in the Pharmaceuticals segment. RAW MATERIALS AND ENERGY RESOURCES Monsanto is both a producer and significant purchaser of a wide spectrum of its basic and intermediate raw material requirements. Major requirements for key raw materials and fuels are typically purchased pursuant to long-term contracts. Monsanto is not dependent on any one supplier for a material amount of its raw materials or fuel requirements, but certain important raw materials are obtained from a few major suppliers. Monsanto purchases its North American supply, and has the option to purchase its ex-North American supplies, of elemental phosphorus, a key raw material for the production of Roundup(R) brand herbicides, from P4 Production, L.L.C., a joint venture between the Company and Solutia Inc. In general, where Monsanto has limited sources of raw materials, it has developed contingency plans to minimize the effect of any interruption or reduction in supply. While temporary shortages of raw materials and fuels may occasionally occur, these items are generally sufficiently available to cover current and projected requirements. However, their continuing availability and price are subject to unscheduled plant interruptions occurring during periods of high demand, or due to domestic and world market and political conditions, as well as to the direct or indirect effect of U.S. and other countries' 3 government regulations. The impact of any future raw material and energy shortages on Monsanto's business as a whole or in specific world areas cannot be accurately predicted. Operations and products may, at times, be adversely affected by legislation, shortages or international or domestic events. PATENTS, TRADEMARKS, LICENSES, FRANCHISES AND CONCESSIONS Monsanto owns a large number of patents which relate to a wide variety of products and processes and has pending a substantial number of patent applications. In addition, Monsanto holds a number of licenses granted by other parties, some of which may be significant. Also, Monsanto owns a considerable number of established trademarks in many countries under which it markets its products. Monsanto's patents and trademarks in the aggregate are of material importance in the operation of its business, particularly in the Agricultural Products and Pharmaceuticals segments and with respect to NutraSweet(R) brand sweetener. Certain proprietary products such as Roundup(R) herbicide are covered by patents. Certain of Monsanto's patents and licenses are currently the subject of litigation; see "Legal Proceedings" below. Although patents protecting Roundup(R) herbicide have expired in most countries, compound per se patent protection for the active ingredient in Roundup(R) herbicide continues in the United States until September 20, 2000. Monsanto's insect-resistant plant products (including NewLeaf(R) potato, YieldGard(R) corn and Bollgard(R) cotton) are protected by patents which extend until at least 2013. Monsanto's herbicide-resistant plant products, Roundup Ready(R) cotton, corn, canola and soybeans, are protected by patents which extend until at least 2014. Posilac(R) bovine somatotropin is protected by a United States patent that expires in 2008, and by corresponding patents in other countries, most of which expire in 2005. Other patents protect various aspects of bovine somatotropin manufacture in the United States and expire as late as 2012; corresponding patents in other countries have varying terms. All patents covering the use of aspartame as a sweetener have expired. NutraSweet(R) brand sweetener is currently manufactured under several patents owned or licensed by The NutraSweet Company, a subsidiary of the Company. Calan(R) SR, an antihypertensive pharmaceutical, is licensed through the year 2004 to Searle by a third party, which has retained co- marketing rights. The product no longer has patent protection nor non- patent regulatory exclusivity conferred by the Waxman-Hatch amendments to the U.S. Food, Drug and Cosmetics Act. Cytotec(R) ulcer preventive drug is protected by a U.S. composition patent until July 29, 2000. Ambien(R) short-term treatment for insomnia is licensed to a joint venture, of which Searle is a general partner for the duration of the venture. Pursuant to the joint venture agreement, the other partner will purchase Searle's interest and thereby terminate the venture in April 2002. Ambien(R) is protected by a U.S. patent until October 21, 2006. Daypro(R) once-a-day arthritis treatment is licensed to Searle until January 5, 2003 in the U.S. and varying dates in other countries. This product is protected by a U.S. process patent that expires on February 26, 2002, and by non-patent regulatory exclusivity extending to October 29, 1999. Arthrotec(R) an arthritis treatment is protected by a U.S. patent until February 11, 2014. Celebrex(TM), a COX-2 inhibitor for the treatment of osteoarthritis and rheumatoid arthritis is protected by a U.S. patent to November 30, 2013 and by regulatory exclusivity under the Waxman-Hatch Act to December 31, 2003. Monsanto leases or subleases a number of kelp beds off the coast of California from the State of California and several private parties. Monsanto also has leases to harvest seaweed off the coasts of Scotland and (through a joint venture) Ireland. None of these leases taken individually is deemed by Monsanto to be material, although the leases to harvest seaweed in the aggregate are significant to the Nutrition and Consumer Products segment. The leases relate to the algins business and have varying terms. COMPETITION Monsanto encounters substantial competition in each of its industry segments. This competition, from other manufacturers of the same products and from manufacturers of different products designed for the same uses, is expected to continue in both U.S. and ex-U.S. markets. Depending on the product involved, various types of competition are encountered, including price, delivery, service, performance, product innovation, product recognition and quality. The number of Monsanto's principal competitors varies from product to product. It is not practical to discuss Monsanto's numerous competitors because of the large variety of Monsanto's products, the markets served and the worldwide business interests of Monsanto. Overall, however, Monsanto regards its principal product groups to be 4 competitive with many other products of other producers and believes that it is an important producer of many of such product groups. RESEARCH AND DEVELOPMENT Research and development constitute an important part of Monsanto's activities. See "Review of Consolidated Results of Operations--Development and Commercialization of New Products Remain Priorities," "Agricultural Products--Outlook," "Nutrition and Consumer Products," "Pharmaceutical Products" and "Notes to Financial Statements-- Supplemental Data" on pages 29, 33-34, 34-35, 36-37 and 57, respectively, of the 1998 Annual Report, incorporated herein by reference. ENVIRONMENTAL MATTERS Monsanto remains strongly committed to complying with various laws and government regulations concerning environmental matters and employee safety and health in the United States and other countries. Monsanto is dedicated to long-term environmental protection and compliance programs that reduce and monitor emissions of hazardous materials into the environment, as well as to the remediation of identified existing environmental concerns. While the costs of compliance with environmental laws and regulations cannot be predicted with certainty, Monsanto does not expect such costs to have a material adverse effect upon its capital expenditures, earnings, or competitive position. See information regarding remediation of waste disposal sites appearing under "Notes to Financial Statements--Commitments and Contingencies" on page 57 of the 1998 Annual Report, incorporated herein by reference. EMPLOYEE RELATIONS As of December 31, 1998, Monsanto had approximately 31,800 employees worldwide. Satisfactory relations have prevailed between Monsanto and its employees. INTERNATIONAL OPERATIONS Monsanto and affiliated companies are engaged in manufacturing, sales and/or research and development in the United States, Europe, Canada, Latin America, Australia, Asia and Africa. A number of products are manufactured abroad. Ex-U.S. operations are potentially subject to a number of unique risks and limitations, including: fluctuations in currency values; exchange control regulations; import and trade restrictions, including embargoes; governmental instability; economic conditions in other countries; and other potentially detrimental domestic and foreign governmental practices or policies affecting U.S. companies doing business abroad. See "Geographic Data" on page 30 of the 1998 Annual Report, incorporated herein by reference. LEGAL PROCEEDINGS Because of the size and nature of its business, Monsanto is a party to numerous legal proceedings. Most of these proceedings have arisen in the ordinary course of business and involve claims for money damages or seek to restrict the Company's business activities. While the results of litigation cannot be predicted with certainty, Monsanto does not believe these matters or their ultimate disposition will have a material adverse effect on Monsanto's financial position, profitability or liquidity in any one year, as applicable. In 1974, Searle introduced in the United States an intrauterine contraceptive product, commonly referred to as an intrauterine device ("IUD"), under the name Cu-7(R). Following extensive testing by Searle and review by the FDA, the Cu-7(R) was approved for sale as a prescription drug in the United States. It was marketed internationally as the Gravigard(R). Searle has been named as a defendant in a number of product liability lawsuits alleging that this IUD caused personal injury resulting from pelvic inflammatory disease, perforation, pregnancy or ectopic pregnancy. As of March 9, 1999, there were 3 cases pending in various U.S. state and federal courts and approximately 270 in the Supreme Court of New South Wales, Australia. On February 22, 1999, Searle received a defense verdict after a trial of the nine lead Australian plaintiffs. Though not technically a class action, these nine individuals are considered representative of the entire group of Australian plaintiffs. They have indicated their intention to appeal that verdict. The lawsuits seek damages in varying amounts, including compensatory and punitive damages, with most suits seeking at least $50,000 in damages. Searle believes it has meritorious defenses and is vigorously defending each of these lawsuits. On January 31, 1986, Searle voluntarily discontinued the sale of the Cu-7(R) in the United States, citing the cost of defending such litigation. Ex-U.S. sales were discontinued in 1990. 5 Searle has been named, together with numerous other prescription pharmaceutical manufacturers and in some cases wholesalers or distributors, as a defendant in a large number of related actions brought in federal and/or state court, based on the practice of providing discounts or rebates to managed care organizations and certain other large purchasers. The federal cases have been consolidated for pre-trial proceedings in the Northern District of Illinois. The federal suits include a certified class action on behalf of retail pharmacies representing the majority of retail pharmacy sales in the United States. The class plaintiffs alleged an industry-wide agreement in violation of the Sherman Act to deny favorable pricing on sales of brand-name prescription pharmaceuticals to certain retail pharmacies in the United States. The other federal suits, brought as individual claims by several thousand pharmacies, allege price discrimination in violation of the Robinson-Patman Act as well as Sherman Act claims. Several defendants, not including Searle, settled the federal class action case. Trial of the federal class action case commenced on September 14, 1998. On November 30, 1998, Searle and its co-defendants received a verdict for the defense and all claims were dismissed. On January 4, 1999, the class plaintiffs filed a notice of appeal with the U. S. Court of Appeals for the Seventh Circuit. In addition, consumers and a number of retail pharmacies have filed suit in various state courts throughout the country alleging violations of state antitrust and pricing laws. While most of these suits have been settled, suits remain pending in California and Alabama. In 1996 the Company was the first to commercially introduce cotton containing a gene encoding for Bacillus thuringiensis ("Bt") endotoxin. Monsanto is a leader in this scientific field and has engaged in Bt research and biotechnology development over many years and owns a number of present and pending patents which relate to this technology. On October 22, 1996, Mycogen Corporation ("Mycogen") filed suit in U.S. District Court in Delaware seeking damages and injunctive relief against the Company, DEKALB Genetics Corporation ("DEKALB") (subsequently acquired by Monsanto) and Delta & Pine Land Company alleging infringement of Bt related U.S. Patent Nos. 5,567,600 and 5,567,862 issued to Mycogen on that date. Jury trial in this matter concluded on February 3, 1998 with a verdict in favor of all defendants. The patents of Mycogen were found invalid on the basis that Monsanto was a prior inventor. On February 20, 1998 Mycogen filed motions requesting that the Court set aside the jury's verdict. Due to the other pending Bt litigation before the Delaware court, no ruling has been issued regarding any post trial motion and final judgment has not yet been entered for defendants. The Company has several meritorious defenses in the case including non-infringement, lack of validity of Mycogen's patent and prior invention by the Company. The Company will continue to vigorously defend against Mycogen's lawsuit and will take all appropriate action to support the verdict in favor of all defendants. On May 19, 1995, Mycogen initiated suit in U.S. District Court in California against the Company alleging infringement of U.S. Patent No. 5,380,831 involving synthetic Bt genes and seeking damages and injunctive relief. The District Court has granted motions dismissing virtually all of Mycogen's patent claims on the basis that products containing Bt genes made prior to January 1995 do not infringe the patent. The Company has various meritorious defenses to the claims of Mycogen including non-infringement, lack of validity, prior invention and collateral estoppel as a result of the outcome in the jury trial in which Mycogen's related patents were found invalid. This litigation has been stayed pending a final judgment determination in the related Delaware litigation between the parties. The Company is also a party in interference proceedings against Mycogen in the U.S. Patent and Trademark Office to determine the first party to invent certain inventions related to Bt technology. In all of the foregoing actions the Company is vigorously litigating its position. In 1997 the Company commercially introduced corn containing a gene encoding for Bt endotoxin. Monsanto is a leader in this scientific field and has engaged in Bt research and biotechnology development over many years and owns a number of present and pending patents which relate to this technology. On January 21, 1997, Novartis Seeds, Inc. ("Novartis") filed suits in U.S. District Court in Delaware seeking damages and injunctive relief against the Company and DEKALB, alleging infringement of Bt related U.S. Patent No. 5,595,733 issued to Ciba-Geigy Corporation (Seed Division) and now held by Novartis. The cases of Monsanto and DEKALB were consolidated and tried to jury verdict in favor of defendants on November 9, 1998. The jury determined that the Novartis patent was invalid and not enabled. The matter remains pending on post trial motions seeking entry of judgment as a matter of law. The Company and DEKALB have several meritorious defenses to support the verdict including non-infringement and lack of validity of Novartis' patent. The Company and/or DEKALB are vigorously defending against Novartis' lawsuit and will take all appropriate action to support the verdict in favor of all defendants. The Company and/or DEKALB is the plaintiff in various legal actions involving Bt: (a) The most significant of the DEKALB-initiated actions have been filed in federal district court in the Northern District of Illinois and allege 6 infringement of one or up to five of DEKALB's biotechnology related patents. The DEKALB patents involved are U.S. patent No. 5,484,956 covering fertile, transgenic corn plants expressing genes encoding Bacillus thuringiensis (Bt) insecticidal proteins, U.S. patent No. 5,489,520 covering the microprojectile method for producing fertile, transgenic corn plants covering a bar or pat gene, as well as the production and breeding of progeny of such plants; U.S. patent Nos. 5,538,880 and 5,538,877 directed to methods of producing either herbicide-resistant or insect-resistant transgenic corn; and U.S. patent no. 5,550,318 directed to transgenic corn plants containing a bar or pat gene. In each such case DEKALB has asked the court to determine that infringement has occurred, to enjoin further infringement and to award unspecified compensatory and exemplary damages. Lawsuits were initially filed on April 30, 1996 against Pioneer Hi-Bred International, Inc., Mycogen Corporation (and two of its subsidiaries) and Ciba-Geigy Corporation. A similar lawsuit was filed against Northrup King Co. on June 10, 1996. In addition, DEKALB sued Beck's Hybrids, Inc. and Countrymark Cooperative, Inc. on July 23, 1996 and filed against several Hoechst Schering AgrEvo GmbH entities on August 27, 1996. All lawsuits related to patent No. 5,550,318 have been stayed pending resolution to an interference proceeding involving that patent at the U.S. Patent and Trademark Office. (b) On March 19, 1996, Monsanto was issued U.S. Patent No. 5,500,365 and filed suit in U.S. District Court in Delaware seeking damages and injunctive relief against Mycogen Plant Science, Inc., Agrigenetics, Inc. and Ciba-Geigy Corporation (Seed Division) (now Novartis Seeds, Inc.) for infringement of that patent. Trial of this matter ended June 30, 1998, with a jury verdict that while the patent was literally infringed by defendants the patent was not enforceable due to a finding of prior invention (now owned by Monsanto) by another party, and not infringed due to the defense of the reverse doctrine of equivalents. Monsanto has filed a motion for judgment as a matter of law to overturn the jury verdict and will continue to litigate vigorously its position in the matter. In 1997 the Company commercially introduced corn containing a gene providing glyphosate resistance. Monsanto is a leader in this scientific field and has engaged in such research and biotechnology development over many years and owns a number of present and pending patents which relate to this technology. On November 20, 1997, Rhone Poulenc Agrochimie S. A. ("Rhone Poulenc") filed suit in U. S. District Court in North Carolina (Charlotte) against the Company and DEKALB contending they did not have a right to license, make or sell products using Rhone Poulenc technology for glyphosate resistance. DEKALB has sublicensed to Monsanto certain technology previously licensed from Rhone Poulenc. The terms of Rhone Poulenc's license to DEKALB are now in dispute and have resulted in Rhone Poulenc's claim that the Company's sale of Roundup Ready(R) corn infringes on the Rhone Poulenc patent. Rhone Poulenc also contends that Monsanto is in violation of certain antitrust laws. Trial of this matter is set for April 5, 1999. A lawsuit with similar allegations was filed in Paris, France in the Tribunal de Grand Instance on March 13, 1998. The outcome of the North Carolina litigation will be dispositive of the claims in France. The Company has meritorious defenses to the allegations, including that the parties are licensed under an existing agreement, and is vigorously defending the litigation. On July 30, 1998, Monsanto was served with a lawsuit filed in United States 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. The complaint asserts that Zeneca will be precluded in its ability to sell a herbicide with respect to which it is seeking registration for use in application over Roundup Ready(R) seed. Regulatory approval of this Zeneca herbicide has not occurred. 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 believes that its activities have been lawful and that the allegations are without merit. Under agreement of the parties Monsanto has not been required to file an answer to the complaint. Under an agreement announced on March 18, 1999, the parties have agreed to dismiss this lawsuit. In June 1996, Mycogen Corporation, Agrigenetics Inc. and Mycogen Plant Sciences, Inc. filed suit against Monsanto in California State Superior Court in San Diego, alleging damage by an alleged failure of Monsanto to license, under an option agreement, technology relating to Bt corn and to glyphosate resistant corn, cotton and canola. 7 On September 9, 1996, Monsanto successfully demurred to all claims but plaintiffs were permitted to amend to file a damage claim seeking recovery under a theory of continuing breach. On October 20, 1997, the court construed the contract as involving only a license to receive genes rather than a license to receive germplasm. Jury trial of the remaining damage claim for lost future profits from the alleged delay in performance ended March 20, 1998, with a verdict against the company awarding damages totaling $174.9 million. The case is now on appeal as Appeal No. D031336 before the California Court of Appeal for the Fourth Appellate District. Mycogen and Agrigenetics Inc. have filed a cross appeal seeking to reinstate claims for damages that were dismissed prior to trial. This cross appeal has been consolidated for all purposes on appeal. The Company has numerous meritorious defenses and grounds to overturn the award, including the speculative nature of the damages for lost future profits, improper splitting of the causes of action, lack of continuing breach, and trial error in directing a verdict against the company on the issue of liability. Mycogen is also seeking to overturn an award of sanctions against it in connection with this litigation and to obtain a determination that the contract entititles Mycogen to a license to germplasm not genes from Monsanto. The Company will continue to vigorously litigate its position. On February 4, 1999, Pioneer Hi-Bred International Inc. ("Pioneer") filed suit against Monsanto Company, (Civil Action No. 4-99-CV-90063) in U.S. District Court for the Southern District of Iowa. The suit seeking equitable relief and jury trial alleges that Monsanto has misappropriated trade secrets through the acquisition and purchase of certain international seed operations of Cargill International ("Cargill"). Pioneer alleges that Cargill's employees misappropriated (via theft) germplasm belonging to Pioneer's corn seed business and then bred the Pioneer germplasm into the corn lines of Cargill. A related lawsuit, Civil Action No. 4-98-CV-90576 has been filed by Pioneer against Cargill. On February 2, 1999 a joint statement issued by Pioneer and Cargill indicated that a former Cargill employee may have misappropriated technology of Pioneer and that efforts were underway between those Companies to resolve this issue. Monsanto purchased the Cargill seed operations pursuant to the warranty and representation of Cargill's parent that all intellectual property and seed lines were the property of the business and not any third party. A study is underway to ascertain the scope of the seed lines that may be affected by the allegations raised by Pioneer. In the lawsuit Pioneer seeks the return of its alleged trade secrets, injunction against Monsanto's further use of the material, an accounting and damages for any sales of the misappropriated material and other relief. Monsanto will maintain that it is not liable for damages from its unknowing acquisition of the Cargill International business. Monsanto has meritorious defenses against liability and will vigorously defend this action and may assert claims for indemnity, breach and other causes against Cargill. On October 28, 1998, two related lawsuits were filed in U.S. District Court in Iowa: one against Asgrow Seed Company, L.L.C., a subsidiary of the Company (No. 4-98-CV-70577); and the other against DEKALB (since acquired by the Company) (No. 4-98-CV-90578). The lawsuits allege that defendants misappropriated trade secrets of Pioneer in their corn breeding programs. In addition to claims under Iowa state law for trade secret misappropriation, Pioneer alleges violations of the Lanham Act. Actual and exemplary damages and injunctive relief are sought. Pioneer also asserts that defendants have violated an unspecified contractual obligation not to breed with Pioneer germplasm. No answer has been filed by defendants but motions to dismiss were filed on or about January 22, 1999 asserting that the claims of Pioneer are preempted by federal law (the Plant Variety Protection Act) which expressly permits the activities of breeding and research with germplasm sold in commerce. The Company has meritorious defenses including preemption, laches, statute of limitations, lack of trade secret, ownership of the germplasm at issue and other defenses. Following the announcement of the merger agreement between Monsanto and American Home Products Corporation ("AHP"), six alleged holders of Monsanto common stock filed suits in the Delaware Court of Chancery in and for New Castle County (the "Delaware Actions") against Monsanto, members of the Monsanto Board of Directors (the "Monsanto Board") and AHP. Seeking to represent a purported class of Monsanto shareowners, plaintiffs in each of the Delaware Actions alleged 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. By agreement of the parties this litigation has been dismissed. Following the announcement on May 11, 1998, of the merger agreement between Monsanto and Delta and Pine Land Company ("Delta and Pine Land"), five alleged holders of Delta and Pine Land common stock filed suits, now consolidated (the "Delta and Pine Land Suit"), in the Delaware Court of Chancery in and for New Castle County against Monsanto, Delta and Pine Land, and members of the Delta and Pine Land Board of Directors (the "Delta and Pine Land Board"). Seeking to represent a purported class of Delta and Pine Land shareowners, plaintiffs in the 8 Delta and Pine Land Suit allege that the consideration to be received by holders of Delta and Pine Land common stock in the merger is unfair and inadequate, that the members of the Delta and Pine Land Board have breached their fiduciary duties by approving the transaction and that Monsanto has aided and abetted such breaches. Plaintiffs in the Delta and Pine Land Suit seek judgment declaring that each Delaware Action is maintainable as a class action, preliminarily and permanently enjoining consummation of the merger or rescinding the transaction in the event that it is consummated, awarding unspecified compensatory damages against defendants, and awarding plaintiffs their attorneys' fees and expenses. Plaintiffs and defendants have reached a memorandum of understanding to settle and resolve the litigation. This agreement will require court approval which the parties reasonably expect will occur. RISK MANAGEMENT Monsanto continually evaluates risk retention and insurance levels for product liability, property damage and other potential areas of risk. Monsanto devotes significant effort to maintaining and improving safety and internal control programs, which reduce its exposure to certain risks. Management decides the amount of insurance coverage to purchase from unaffiliated companies and the appropriate amount of risk to retain, based on the cost and availability of insurance and the likelihood of a loss. Since 1986, Monsanto's liability insurance has been on the "claims made" policy form. Management believes that the current levels of risk retention are consistent with those of other companies in the various industries in which Monsanto operates and are reasonable for Monsanto. There can be no assurance that Monsanto will not incur losses beyond the limits of, or outside the coverage of, its insurance. Monsanto's liquidity, financial position and profitability are not expected to be affected materially by the levels of risk retention that the Company accepts. DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS Information regarding forward-looking statements, and factors that could cause actual performance or results to differ materially from those described, are set forth in Exhibit 99.2, accompanying this Report and incorporated herein by reference. ITEM 2. PROPERTIES. The General Offices of the Company are located on a 285-acre tract of land in St. Louis County, Missouri. The Company also owns a 210-acre tract in St. Louis County on which additional research facilities are located. In addition, Monsanto and its subsidiaries own or lease manufacturing facilities, laboratories, agricultural facilities, office space, warehouses, and other land parcels in North America, South America, Europe, Asia, Australia and Africa. In addition to the facilities in St. Louis County, Missouri, Monsanto's principal properties include the following locations, serving the sectors noted: Alvin, Texas (Agricultural Products); Antwerp, Belgium (Agricultural Products); Augusta, Georgia (Agricultural Products, Nutrition and Consumer Products, Pharmaceuticals); Barceloneta, Puerto Rico (Pharmaceuticals); Caguas, Puerto Rico (Pharmaceuticals); Davis, California (Nutrition and Consumer Products); Fayetteville, North Carolina (Agricultural Products); Feucht, Germany (Pharmaceuticals); Luling, Louisiana (Agricultural Products); Mt. Prospect, Illinois (Nutrition and Consumer, Pharmaceuticals); Morpeth, United Kingdom (Pharmaceuticals); Muscatine, Iowa (Agricultural Products); Okmulgee, Oklahoma (Nutrition and Consumer Products); San Diego, California (Nutrition and Consumer Products); Sao Jose dos Campos, Brazil (Agricultural Products); Skokie (Old Orchard), Illinois (Pharmaceuticals, Corporate and Other); Skokie (Searle Parkway), Illinois (Pharmaceuticals); and Zarate, Argentina (Agricultural Products). All of these properties are manufacturing facilities, except for the research and office building in Davis, California, the research buildings in Mt. Prospect, Illinois and Skokie (Searle Parkway), Illinois, and the office building in Skokie (Old Orchard), Illinois. Monsanto's principal properties are suitable and adequate for their use. Utilization of these facilities may vary with seasonal, economic and other business conditions, but none of the principal properties is substantially idle. The facilities generally have sufficient capacity for existing needs and expected near-term growth, and expansion projects are undertaken as necessary to meet future needs. Most of these properties are owned in fee. However, major portions of the San Diego, California plant and the Davis, California facilities are leased. In addition, a portion of a plant at Augusta, Georgia is currently leased with an option to purchase, pursuant to an industrial revenue bond financing. The Company also leases the land underlying facilities that it owns at Alvin, Texas. In certain instances, Monsanto has granted leases on portions of plant sites not required for current operations. 9 ITEM 3. LEGAL PROCEEDINGS. For information concerning certain legal proceedings involving Monsanto, see "Business--Environmental Matters", "Business--Legal Proceedings" and "Business--Disclosure of Forward-Looking Statements" in Item 1 of this Report. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to the security holders during the fourth quarter of 1998. EXECUTIVE OFFICERS OF THE REGISTRANT. Information regarding executive officers is contained in Item 10 of Part III of this Report (General Instruction G) and is incorporated herein by reference. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The narrative information appearing under "Review of Cash Flow-- Dividend Policy is Unchanged" on page 41, and the tabular information regarding Dividends Per Share and Common Stock Price (for the years 1997 and 1998) appearing under "Quarterly Data" on page 46, of the 1998 Annual Report are incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA. The tabular information under "Financial Summary--Operating Results, Earnings (Loss) per Share and Year-End Financial Position" and the amounts of Dividends per Share, all for the years 1994 through 1998, appearing on page 61, and the two paragraphs immediately following the Table of Contents on page 24, of the 1998 Annual Report, is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. The tabular and narrative information appearing under "Review of Consolidated Results of Operations" on pages 27 through 29, "Review of Consolidated Results of Operations--Analysis of Change in Earnings (Loss) Per Share from Continuing Operations" on page 30, "Segment Data" and information regarding segments on pages 31 through 37, "Review of Changes in Financial Position" on page 39, "Review of Cash Flow" on page 41 and "Additional Financial Information" on pages 42-43, and the narrative information appearing under "Geographic Data" on page 30, "Disclosure of Forward-Looking Statements" on pages 58-60, and the two paragraphs immediately following the Table of Contents on page 24, of the 1998 Annual Report is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS. The tabular and narrative information appearing under "Financial Instruments" on page 44 of the 1998 Annual Report is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The consolidated financial statements of Monsanto appearing on pages 26, 38, 40, 41, 45 and 47 through 57; the Independent Auditors' Report appearing on page 25; the tabular and narrative information appearing under "Quarterly Data" on page 46; and the two paragraphs immediately following the Table of Contents on page 24, of the 1998 Annual Report are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 10 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information regarding directors and executive officers appearing under "Election of Directors" on pages 2 through 4, and "Other Information Regarding Management--Section 16(a) Beneficial Ownership Reporting Compliance" on pages 18-19, of the Monsanto Company Notice of Annual Meeting and Proxy Statement (the "1999 Proxy Statement") dated March 15, 1999, is incorporated herein by reference. The following information with respect to the Executive Officers of the Company on March 1, 1999, is included pursuant to Instruction 3 of Item 401(b) of Regulation S-K:
Year First Became An Present Position Executive Name--Age with Registrant Officer Other Business Experience since January 1, 1994 - ---------------------- --------------------------- ---------- ----------------------------------------------------- Bruce P. Bickner, 55 Co-President, Global Seed 1999 Chairman and Chief Executive Officer - DEKALB Energy Group - Monsanto Company Co., 1986; Chairman and Chief Executive Officer - DEKALB Genetics Corporation, 1988 to present. Martin E. Blaylock, 58 Vice President, 1999 Director, Manufacturing Operations - Monsanto Manufacturing Operations - Company, 1993; and present position, 1995. Monsanto Company Gary L. Crittenden, Senior Vice President, 1998 Executive Vice President and Chief Financial Officer - 45 Chief Financial Officer Melville Corp., 1994; Executive Vice President, - Monsanto Company Strategy and Business Development - Sears Roebuck & Co., 1996; President, Hardware Stores Division - Sears Roebuck & Co., 1996; Executive Vice President and Chief Financial Officer - Sears Roebuck & Co., 1998; and present position, 1998. Richard U. Vice Chairman- Monsanto 1995 President and Chief Operating Officer - G.D. Searle De Schutter, 57 Company; Chairman, Chief & Co., 1993; Chairman, Chief Executive Officer and Executive Officer and President - G.D. Searle & Co.; Advisory Director- President - G.D. Searle & Co. Monsanto Company, 1995; and present position, 1997. Arnold W. Donald, 44 Senior Vice President; 1998 Group Vice President North America Division - Co-President, Nutrition and Monsanto Company, 1993; Group Vice President and Consumer Products - General Manager - Monsanto Company, 1994; President, Monsanto Company Crop Protection - Monsanto Company, 1995; Co- President, Agricultural Sector - Monsanto Company, 1997; Senior Vice President - Monsanto Company, 1998; and present position, 1999. Steven L. Engelberg, Senior Vice President 1995 Partner-in-Charge, Keck, Mahin & Cate Washington, 55 - Monsanto Company D.C. office, 1986; Chief of Staff of Office of the United States Trade Representative (on leave from Keck, Mahin & Cate until May 1993), 1993; Vice President, Worldwide Government Affairs - Monsanto Company, 1994; and present position, 1996. 11 Year First Became An Present Position Executive Name--Age with Registrant Officer Other Business Experience since January 1, 1994 - ---------------------- --------------------------- ---------- ----------------------------------------------------- Patrick J. Fortune, 50 Vice President and Chief 1997 Corporate Vice President, Information Management - Knowledge Officer - Bristol-Myers Squibb, 1991; President and Chief Monsanto Company Operation Officer - Coram Healthcare Corporation, 1994; Vice President, Information Technology - Monsanto Company, 1995; Vice President and Chief Information Officer - Monsanto Company, 1997; and present position, 1998. Robert Fraley, 46 Co-President, Agricultural 1999 Group Vice President and General Manager, New Products Sector - Monsanto Company Division - Monsanto Company, 1993; President, Ceregen - Monsanto Company, 1995; and present position, 1997. Hugh Grant, 40 Co-President, Agricultural 1999 Director, Global Roundup(R) Product Strategy - Sector - Monsanto Company Monsanto Company, 1994; General Manager, Agricultural Sector for Southeast Asia, Australia, New Zealand & South Korea - Monsanto Company, 1995; and present position, 1998. Alan L. Heller, 45 Chief Operating Officer - 1999 Vice President, Sales - G.D. Searle & Co., 1992; G.D. Searle & Co. Vice President, Finance - G.D. Searle & Co., 1994; President, Americas, G.D. Searle & Co., 1995; and present position, 1997. R. William Ide III, 58 Senior Vice President, 1996 President, American Bar Association, 1993-1994; General Counsel and partner, Long, Aldridge & Norman, 1993; and present Secretary - Monsanto Company position, 1996. Madonna A. Kindl, 40 Vice President, Human 1996 Director of Human Resources, Staff of the Vice Resources - Monsanto Company Chairman - Monsanto Company, 1993; Director, Human Resources, Crop Protection Business Unit - Monsanto Company, 1995; and present position, 1996. Ganesh M. Kishore, 45 Co-President, Nutrition and 1999 Director of Technology, Agricultural Sector - Consumer Products - Monsanto Monsanto Company, 1994; Director of Technology, Company Ceregen - Monsanto Company, 1995; Director of Crop Enhancement, Ceregen - Monsanto Company, 1996; Distinguished Science Fellow - Monsanto Company, 1996; and present position, 1997. Philip Needleman, 60 Senior Vice President, 1991 Vice President, Research and Development; Advisory Research and Development and Director - Monsanto Company; President, Research and Chief Scientist; Co-President, Development - G.D. Searle & Co., 1992; Senior Vice Pharmaceuticals Sector - President, Research and Development and Chief Scientist - Monsanto Company Monsanto Company; President, Research and Development - G.D. Searle & Co., 1993; and present position, 1996. Robert W. Reynolds, 54 Vice Chairman - Monsanto 1994 Vice President and Managing Director, Latin America Company World Area - Monsanto Company, 1992; Vice President, International Operations and Development - Monsanto Company, 1995; and present position, 1997. 12 Year First Became An Present Position Executive Name--Age with Registrant Officer Other Business Experience since January 1, 1994 - ---------------------- --------------------------- ---------- ----------------------------------------------------- Nicholas E. Rosa, 47 Co-President, Nutrition and 1999 President - NutraSweet Europe, 1991; Executive Vice Consumer Products - Monsanto President - The NutraSweet Company, 1994; President, Company Benevia - Monsanto Company, 1996; President, Nutrition and Consumer Products - Monsanto Company, 1997; and present position, 1999. Robert B. Shapiro, 60 Director; Chairman and Chief 1987 Director, President and Chief Operating Officer - Executive Officer - Monsanto Monsanto Company, 1993; Director, Chairman, Chief Company Executive Officer and President - Monsanto Company, 1995; and present position, 1997. Hendrik A. Verfaillie, President - Monsanto Company 1993 Vice President and Advisory Director - Monsanto 53 Company; President - The Agricultural Group - Monsanto Company, 1993; Vice President and Advisory Director - Monsanto Company, 1995; Executive Vice President and Advisory Director - Monsanto Company, 1995; and present position, 1997.
Mr. Reynolds has announced his intention to retire April 30, 1999. 13 ITEM 11. EXECUTIVE COMPENSATION. Information appearing under "Directors' Fees and Other Arrangements" on pages 8-9, and under "Executive Compensation" beginning on page 15 and continuing through "Certain Agreements" on page 18 of the 1999 Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information appearing under "Stock Ownership of Management and Certain Beneficial Owners" on pages 5 and 6 of the 1999 Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information appearing under "Other Information Regarding Management--Transactions and Relationships" and "--Indebtedness" on pages 18 through 20 of the 1999 Proxy Statement is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) Documents filed as part of this Report: 1. The financial statements set forth at pages 26, 38, 40, 41, 45 and 47 through 57 of the 1998 Annual Report (See Exhibit 13 under Paragraph (a)3 of this Item 14) 2. Financial Statement Schedules None required 3. Exhibits--See the Exhibit Index beginning at page 17 of this Report. For a listing of all management contracts and compensatory plans or arrangements required to be filed as exhibits to this Form 10-K, see the Exhibits listed under Exhibit No. 10, items 4 through 29 on pages 17 through 19 of the Exhibit Index. The following Exhibits listed in the Exhibit Index are filed with this Report: 13 The Company's 1998 Annual Report to shareowners 21 Subsidiaries of the registrant (See page 20) 23 Consent of Independent Auditors (See page 21) 24 1. Powers of attorney submitted by Robert M. Heyssel, Michael Kantor, Gwendolyn S. King, Philip Leder, Jacobus F.M. Peters, John S. Reed, John E. Robson, William D. Ruckelshaus, Robert B. Shapiro, Gary L. Crittenden and Richard B. Clark. 2. Certified copy of Board resolution authorizing Form 10-K filing utilizing powers of attorney 27 Financial Data Schedule (part of electronic submission only) 99.1 Computation of the Ratio of Earnings to Fixed Charges for Monsanto Company and Subsidiaries (See page 22) 99.2 Disclosure Regarding Forward-Looking Statements (See page 23) (b) Reports on Form 8-K during the quarter ended December 31, 1998: The following reports on Form 8-K were filed by the Company on the dates indicated: October 13, 1998 (termination of merger agreement with American Home Products Corporation); October 19, 1998 (information presented to the financial community); October 30, 1998 (financial information for quarter ended September 30, 1998); November 13 and 16, 1998; (announcement of financing plans); November 27, 1998 (offerings of common stock and Adjustable Conversion-rate Equity Security Units); December 8, 1998 (acquisition of DEKALB Genetics Corporation); and December 14, 1998 (closings of financings and filing of related documents). 14 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. MONSANTO COMPANY ------------------------------ (Registrant) By /s/ RICHARD B. CLARK ------------------------------ Richard B. Clark Vice President and Controller (Principal Accounting Officer) Date: March 25, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, the Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- * _______________________ Chairman, President and March 25, 1999 (Robert B. Shapiro) Director (Principal Executive Officer) * ________________________ (Robert M. Heyssel) Director March 25, 1999 * ________________________ (Michael Kantor) Director March 25, 1999 * ________________________ (Gwendolyn S. King) Director March 25, 1999 * ________________________ (Philip Leder) Director March 25, 1999 * ________________________ (Jacobus F. M. Peters) Director March 25, 1999 * ________________________ (John S. Reed) Director March 25, 1999 * ________________________ (John E. Robson) Director March 25, 1999 * ________________________ (William D. Ruckelshaus) Director March 25, 1999 * ________________________ Senior Vice President, March 25, 1999 (Gary L. Crittenden) Chief Financial Officer (Principal Financial Officer) /s/ RICHARD B. CLARK ____________________________ Vice President and March 25, 1999 (Richard B. Clark) Controller (Principal Accounting Officer) 15 *Barbara L. Blackford, by signing her name hereto, does sign this document on behalf of the above noted individuals, pursuant to powers of attorney duly executed by such individuals which have been filed as an Exhibit to this Report. /s/ BARBARA L. BLACKFORD ------------------------------ Barbara L. Blackford Attorney-in-Fact 16 EXHIBIT INDEX These Exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K. EXHIBIT NO. DESCRIPTION - ----------- ----------- 2 Omitted--Inapplicable 3 1. Restated Certificate of Incorporation of the Company as of October 28, 1997 (incorporated herein by reference to Exhibit 3(i) of the Company's Form 10-Q for the quarter ended September 30, 1997) 2. By-Laws of the Company, as amended effective February 26, 1999 (incorporated herein by reference to Exhibit 3.2 of the Company's Registration Statement on Form S-4 filed March 2, 1999) 4 1. Form of Rights Agreement, dated as of January 26, 1990 between the Company and First Chicago Trust Company as successor to The First National Bank of Boston (incorporated herein by reference to Form 8-A filed on January 31, 1990) 2. Registrant agrees to furnish to the Securities and Exchange Commission upon request copies of instruments defining the rights of holders of certain long-term debt not being registered of the registrant and all subsidiaries for which consolidated or unconsolidated financial statements are required to be filed. 9 Omitted--Inapplicable 10 1. Distribution Agreement by and between Monsanto Company and Solutia Inc., as of September 1, 1997, plus identification of contents of omitted schedules and exhibits and agreement to furnish supplementally a copy of any omitted schedule or exhibit to the Securities and Exchange Commission upon request (incorporated herein by reference to Exhibit 2.1 of the Company's Form 8-K filed September 16, 1997) 2. Employee Benefits and Compensation Allocation Agreement between Monsanto Company and Solutia Inc., dated as of September 1, 1997 (incorporated herein by reference to Exhibit 99.1 of the Company's Form 8-K filed September 16, 1997) 3. Tax Sharing and Indemnification Agreement dated as of September 1, 1997, by and between Monsanto Company and Solutia Inc. (incorporated herein by reference to Exhibit 99.2 of the Company's Form 8-K filed September 16, 1997) 4. Monsanto Company Non-Employee Director Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.3 of the Company's Form 10-Q for the quarter ended September 30, 1997) 5. Monsanto Company Non-Employee Director Equity Incentive Compensation Plan (incorporated herein by reference to Exhibit 10.4 of the Company's Form 10-Q for the quarter ended September 30, 1997) 6. Non-Employee Directors Stock Plan, as amended in 1991 (incorporated herein by reference to Exhibit 19(ii)1 of the Company's Form 10-Q for the quarter ended June 30, 1991) 7. Amendment to Non-Employee Directors Stock Plan (incorporated herein by reference to Exhibit 10.8 of the Company's Form 10-Q for the quarter ended June 30, 1997) 8. Charitable Contribution Program effective April 1, 1992 (incorporated herein by reference to Exhibit 19(i)1 of the Company's Form 10-K for the year ended December 31, 1991) 9. Deferred Compensation Plan for Non-Employee Directors, as amended in 1983 and 1991 (incorporated herein by reference to Exhibit 19(ii)1 of the Company's Form 10-K for the year ended December 31, 1991) 17 EXHIBIT INDEX (CONT'D) EXHIBIT NO. DESCRIPTION - ----------- ----------- 10. Excerpt of Resolutions of Monsanto Company Board of Directors Regarding Directors' Compensation, adopted by Unanimous Consent effective August 4, 1997 (incorporated herein by reference to Exhibit 10.5 of the Company's Form 10-Q for the quarter ended September 30, 1997) 11. Consulting Agreement between the Company and Philip Leder dated January 17, 1990 (incorporated herein by reference to Exhibit 19(i)3 of the Company's Form 10-K for the year ended December 31, 1989) 12. Monsanto Management Incentive Plan of 1988/I, as amended in 1988, 1989, 1991, 1992, April 1997 and July 1997 (incorporated herein by reference to Exhibit 10.3 of the Company's Form 10-Q for the quarter ended June 30, 1997) 13. Monsanto Management Incentive Plan of 1988/II, as amended in 1989, 1991, 1992, April 1997 and July 1997 (incorporated herein by reference to Exhibit 10.4 of the Company's Form 10-Q for the quarter ended June 30, 1997) 14. Monsanto Management Incentive Plan of 1994, as amended in April 1997 and July 1997 (incorporated herein by reference to Exhibit 10.5 of the Company's Form 10-Q for the quarter ended June 30, 1997) 15. Monsanto Management Incentive Plan of 1996 as amended April 1997, July 1997, August 1997, February 1998 and September 1998 (incorporated herein by reference to Exhibit 10.1 of the Company's Form 10-Q for the quarter ended September 30, 1998) 16. Monsanto Executive Stock Purchase Incentive Plan (incorporated herein by reference to Appendix B of the Monsanto Company Notice of Annual Meeting and Proxy Statement dated March 14, 1996) 17. Form of Non-Qualified Purchased and Year 2000 Premium Stock Option Certificate (incorporated herein by reference to Exhibit 10.2 of the Company's Form 10-Q for the quarter ended March 31, 1998) 18. Form of Non-Qualified Premium Stock Option Certificate (incorporated herein by reference to Exhibit 10.2 of the Company's Form 10-Q for the quarter ended June 30, 1998) 19. Annual Incentive Program for Executive Officers (incorporated herein by reference to the description on pages 25-26 of the Monsanto Company Notice of Annual Meeting and Proxy Statement dated March 15, 1999) 20. Long-Term Incentive Program and Premium Option Purchase Program for Executive Officers (incorporated herein by reference to the description on pages 12-13 of the Monsanto Company Notice of Annual Meeting and Proxy Statement dated March 15, 1999) 21. Split-dollar Life Insurance Plan (incorporated herein by reference to Exhibit 10(iii)19 of the Company's Form 10-K for the year ended December 31, 1987) 22. Form of Employment Agreement for Executive Officers (incorporated herein by reference to Exhibit 10.7 of the Company's Form 10-Q for the quarter ended September 30, 1997) 23. Letter Agreement between the Company and Robert B. Shapiro entered into as of July 23, 1990 (incorporated herein by reference to Exhibit 19(i)3 of the Company's Form 10-Q for the quarter ended September 30, 1990) 24. Amendment to Letter Agreement between the Company and Robert B. Shapiro entered into as of July 23, 1990 (incorporated herein by reference to Exhibit 10.23 of the Company's Form 10-K for the year ended December 31, 1996) 18 EXHIBIT INDEX (CONT'D) EXHIBIT NO. DESCRIPTION - ----------- ----------- 25. Letter Agreement between the Company and Hendrik A. Verfaillie entered into as of June 27, 1988 (incorporated herein by reference to Exhibit 10.20 of the Company's Form 10-K for the year ended December 31, 1996) 26. Supplemental Retirement Plan regarding Richard U. De Schutter (incorporated herein by reference to Exhibit 10.26 of the Company's Form 10-K for the year ended December 31, 1996) 27. Searle/Monsanto Stock Plan of 1994, as amended in 1995, April 1997 and July 1997 (incorporated herein by reference to Exhibit 10.6 of the Company's Form 10-Q for the quarter ended June 30, 1997) 28. G. D. Searle & Co. Split Dollar Life Insurance Plan, as amended in 1989 (incorporated herein by reference to Exhibit 19(ii)3 of the Company's Form 10-Q for the quarter ended June 30, 1989) 29. G. D. Searle & Co. Legal/Tax/Financial Counseling Plan (incorporated herein by reference to Exhibit 19(i)8 of the Company's Form 10-Q for the quarter ended June 30, 1988) 11 Omitted--Inapplicable; see "Earnings per Share" on page 60 of the 1997 Annual Report 12 Statement re Computation of the Ratio of Earnings to Fixed Charges--See Exhibit 99.1 below 13 The Company's 1998 Annual Report to shareowners. (The electronic submission includes only the financial report section of the Annual Report, appearing on pages 25 through 61 of that Report.) Only those portions expressly incorporated by reference into this Form 10-K are deemed "filed"; other portions are furnished only for the information of the Commission. 18 Omitted--Inapplicable 21 Subsidiaries of the registrant (See page 20) 22 Omitted--Inapplicable 23 Consent of Independent Auditors (See page 21) 24 1. Powers of attorney submitted by Robert M. Heyssel, Gwendolyn S. King, Philip Leder, Jacobus F.M. Peters, John S. Reed, John E. Robson, William D. Ruckelshaus, Robert B. Shapiro, Gary L. Crittenden and Richard B. Clark 2. Certified copy of Board resolution authorizing Form 10-K filing utilizing powers of attorney 27 Financial Data Schedule (part of electronic submission only) 99 1. Computation of the Ratio of Earnings to Fixed Charges for Monsanto Company and Subsidiaries (See page 22) 2. Disclosure Regarding Forward-Looking Statements (See page 23) _________ Only Exhibits Nos. 13, 21, 23, 99.1 and 99.2 have been included in the printed copy of this Report. 19
EX-13 2 PORTIONS OF ANNUAL REPORT Financial Section CONTENTS - ------------------------------------------------------------------------- MANAGEMENT REPORT Page 24 FINANCE COMMITTEE REPORT, INDEPENDENT AUDITORS' REPORT Page 25 STATEMENT OF CONSOLIDATED INCOME (LOSS) Page 26 STATEMENT OF CONSOLIDATED FINANCIAL POSITION Page 38 STATEMENT OF CONSOLIDATED CASH FLOW Page 40 STATEMENT OF CONSOLIDATED COMPREHENSIVE INCOME (LOSS) Page 41 STATEMENT OF CONSOLIDATED SHAREOWNERS' EQUITY Page 45 NOTES TO FINANCIAL STATEMENTS Page 47 FINANCIAL SUMMARY Page 61 "Monsanto" and "the company" are used interchangeably to refer to Monsanto Company or to Monsanto Company and consolidated subsidiaries, as appropriate to the context. Unless otherwise indicated, "earnings per share" means diluted earnings per share. In tables, all dollars are in millions, except per share data. EBIT (earnings before interest expense and income taxes) and EBITDA (earnings before interest expense, income taxes, depreciation and amortization, and excluding unusual charges) are used as financial performance measures throughout this publication. For Monsanto's business segments, EBIT also excludes the effects of unusual charges. MANAGEMENT REPORT Monsanto Company's management is responsible for the fair presentation and consistency, in accordance with generally accepted accounting principles, of all the financial information included in this annual report. Where necessary, the information reflects management's best estimates and judgments. Management is also responsible for maintaining a system of internal accounting controls with the objectives of providing reasonable assurance that Monsanto's assets are safeguarded against material loss from unauthorized use or disposition and that authorized transactions are properly recorded to permit the preparation of accurate financial information. An important consideration in this regard is the cost of control vs. the risk of loss. The effectiveness of internal controls is maintained by personnel selection and training, division of responsibilities, establishment and communication of policies, and ongoing internal review programs and audits. Management believes that Monsanto's system of internal accounting controls as of Dec. 31, 1998, was effective and adequate to accomplish the objectives described above. /s/ Robert B. Shapiro Robert B. Shapiro Chairman and Chief Executive Officer /s/ Gary L. Crittenden Gary L. Crittenden Senior Vice President and Chief Financial Officer Feb. 26, 1999 24 1998 Monsanto Annual Report - ------------------------------------------------------------------------ FINANCE COMMITTEE REPORT The finance committee, composed of four nonemployee members of the board of directors, reviews and monitors Monsanto's financial planning and structure to ensure compatibility with the company's requirements for growth and sound operations. This committee provides advice regarding the worldwide financing programs of the company and specific financing plans as requested by management. The finance committee makes recommendations to the board of directors concerning the increase or retirement of debt, issuance and repurchase of capital stock, foreign currency management, dividend policy, and commercial and investment banking relationships. The committee also oversees operation of the company's pension and benefit plans, and monitors investment performance of the plans. The finance committee met eight times during 1998. As part of its duties, the committee reviews and monitors Monsanto's internal accounting controls, financial reports, accounting practices, and the scope and effectiveness of the audits performed by the independent auditors and internal auditors. The committee also recommends to the full board of directors the appointment of Monsanto's principal independent auditors, and it approves in advance all significant audit and nonaudit services provided by such auditors. As ratified by shareowner vote at the 1998 annual meeting, Deloitte & Touche LLP was appointed independent auditor to examine, and to express an opinion as to the fair presentation of, the consolidated financial statements. This report follows. The finance committee discusses audit and financial reporting matters with representatives of the company's financial management, its internal auditors, and Deloitte & Touche. The internal auditors and Deloitte & Touche meet with the committee, with and without management representatives present, to discuss the results of their examinations, the adequacy of Monsanto's internal accounting controls, and the quality of its financial reporting. The committee encourages the internal auditors and Deloitte & Touche to communicate directly with the committee. The finance committee has reviewed the financial section of this annual report. Pursuant to the recommendation of the committee, the board of directors has approved the financial section. /s/ John S. Reed John S. Reed Chair, Finance Committee Feb. 26, 1999 INDEPENDENT AUDITORS' REPORT To the shareowners of Monsanto Company: We have audited the accompanying statement of consolidated financial position of Monsanto Company and subsidiaries as of Dec. 31, 1998 and 1997, and the related statements of consolidated income (loss), cash flow, shareowners' equity and comprehensive income (loss) for each of the three years in the period ended Dec. 31, 1998. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Monsanto Company and subsidiaries as of Dec. 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended Dec. 31, 1998, in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP Deloitte & Touche LLP St. Louis, Missouri Feb. 26, 1999 1998 Monsanto Annual Report 25 Statement of Consolidated INCOME (LOSS) - ------------------------------------------------------------------------------------------------
(Dollars in millions, except per share amounts) Year Ended Dec. 31, - ------------------------------------------------------------------------------------------------ 1998 1997 1996 - ------------------------------------------------------------------------------------------------ NET SALES $8,648 $7,514 $6,348 Costs, expenses and other: Cost of goods sold 3,593 3,091 2,684 Selling, general and administrative expenses 2,421 2,023 1,860 Technological expenses 1,358 1,044 702 Acquired in-process research and development 402 684 Amortization and adjustment of intangible assets 487 173 151 Restructuring and special charges 272 356 Interest expense 312 170 119 Interest income (50) (45) (51) Other expense (income) -- net 96 8 (26) - ------------------------------------------------------------------------------------------------ INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (243) 366 553 Income taxes 7 72 140 - ------------------------------------------------------------------------------------------------ INCOME (LOSS) FROM CONTINUING OPERATIONS (250) 294 413 - ------------------------------------------------------------------------------------------------ INCOME (LOSS) FROM DISCONTINUED OPERATIONS 176 (28) - ------------------------------------------------------------------------------------------------ NET INCOME (LOSS) $ (250) $ 470 $ 385 ================================================================================================ BASIC EARNINGS (LOSS) PER SHARE: Continuing operations $(0.41) $ 0.50 $ 0.71 Discontinued operations 0.30 (0.05) - ------------------------------------------------------------------------------------------------ NET INCOME (LOSS) $(0.41) $ 0.80 $ 0.66 ================================================================================================ DILUTED EARNINGS (LOSS) PER SHARE: Continuing operations $(0.41) $ 0.48 $ 0.69 Discontinued operations 0.29 (0.05) - ------------------------------------------------------------------------------------------------ NET INCOME (LOSS) $(0.41) $ 0.77 $ 0.64 ================================================================================================ The above statement should be read in conjunction with pages 47-57 of this report. KEY FINANCIAL STATISTICS (Unaudited) 1998 1997 1996 - ------------------------------------------------------------------------------------------------ AS A PERCENT OF NET SALES: Selling, General and Administrative Expenses 28% 27% 29% Technological Expenses 16 14 11 Research and Development Expenses 15 12 10 Income from Continuing Operations 4 7 ================================================================================================ Research and development expenses are included in total technological expenses. This financial statistic is not meaningful for 1998 because Monsanto reported a loss from continuing operations.
26 1998 Monsanto Annual Report Review of Consolidated RESULTS OF OPERATIONS - ----------------------------------------------------------------------- MONSANTO ACHIEVES RECORD SALES, BUT INCOME EXCLUDING UNUSUAL CHARGES DECLINES In 1998, Monsanto completed several critical steps in its life sciences strategy. The company acquired three major seed companies -- Plant Breeding International Cambridge Limited (PBIC), a leading European plant breeder with an emphasis in wheat; certain international seed operations of Cargill(R) Inc., which includes germplasm, and a broad marketing and distribution network; and DEKALB(R) Genetics Corp., a worldwide leader in agricultural genetics and biotechnology for corn and soybeans. In addition, the company announced an agreement to merge Delta and Pine Land Co. (D&PL), a leading breeder, producer and marketer of cotton seed, with Monsanto. In December 1998, Monsanto's board of directors approved a restructuring plan to continue the commitment to life sciences, to exit from nonstrategic businesses and to reduce costs. The company also issued debt and equity of approximately $4.5 billion in 1998. Sales reached a record in 1998, as sales of key products continued to grow. However, the company recorded a loss from continuing operations of $250 million, or $0.41 per share. Results included aftertax charges of $830 million, or $1.33 per share, for restructuring charges, write- offs of in-process research and development (R&D) related to acquisitions, and other unusual charges. If these unusual charges were excluded, income from continuing operations would have totaled $580 million, or $0.93 per share. Income from continuing operations totaled $294 million, or $0.48 per share, in 1997. Excluding unusual aftertax charges of $455 million, or $0.75 per share, for write-offs of in-process R&D, income from continuing operations in 1997 would have been $749 million, or $1.23 per share. Without the unusual items in 1998 and 1997, income from continuing operations would have declined $169 million. The decrease in income from continuing operations, excluding unusual items, was caused by increased selling, general and administrative (SG&A) expenses, technological expenses and interest costs, which more than offset the 15 percent increase in net sales. SALES BOOSTED BY AGRICULTURAL AND PHARMACEUTICAL BUSINESSES Net sales reached a record $8.6 billion in 1998, surpassing last year's net sales of $7.5 billion by 15 percent. The sales increase came primarily from continued strong performances by the Agricultural Products and Pharmaceuticals segments. Net sales for Agricultural Products set a record in 1998, led by significant sales volume increases for the family of Roundup(R) herbicides. Volume gains for Roundup(R) of more than 20 percent were driven by increased use of Roundup(R) for conservation tillage and other applications, including the use of Roundup(R) over the top of Roundup Ready(R) soybeans, canola, corn and cotton. The increase in 1998 net sales for the Agricultural Products segment also reflected higher technology fee revenues from crops developed through biotechnology. Demand for Roundup Ready(R) soybeans, cotton and canola, Bollgard(R) insect-protected cotton, and Yieldgard(R) insect-protected corn rose substantially in 1998. In addition, record sales volumes of Posilac(R) bovine somatotropin and the successful introduction of Roundup Ready(R) corn in the United States in 1998 contributed to the sales increase. An increase in seed sales was driven by higher sales at the company's Asgrow subsidiary and by the inclusion of sales from seed companies Monsanto acquired in 1998 and late 1997. Net sales for the Pharmaceuticals segment also grew to record levels, increasing $451 million, or 18 percent, from 1997 net sales. The increase was driven by significantly higher sales volumes of Arthrotec(R) arthritis treatment, which was launched in the United States and France in 1998. With Arthrotec(R) and Daypro(R) arthritis treatments, Searle ended the year as the No. 1 provider of branded prescription arthritis treatments in the United States. Sales of Ambien(R) short-term treatment for insomnia also grew, holding 52 percent of the total U.S. prescription market share at the end of 1998. Higher segment sales year- to-year also came from increased licensing revenues from several collaborative alliances. Lower sales of verapamil calcium channel blockers and Cytotec(R) ulcer preventive drug partially offset these increases. Net sales for the Nutrition and Consumer Products segment decreased slightly in 1998 vs. sales in 1997, primarily because of lower sales volumes of NutraSweet(R) brand sweetener, the company's trademark aspartame product. This was partially offset by higher sales of tabletop sweeteners, including Equal(R) and Canderel(R) brand sweeteners, and increased revenues from lawn-and-garden products. Monsanto's net sales in markets outside the United States represented 45 percent of 1998 net sales, compared with 44 percent in 1997. An analysis of the company's sales change, along with comparative data, follows:
SALES ANALYSIS 1998 1997 - ----------------------------------------------------------------------------------- Selling prices --% (3)% Sales volumes and mix 13 9 Acquisitions 1 10 Pharmaceutical product rights sales and licensing revenues 4 2 Exchange rates (3) -- - ----------------------------------------------------------------------------------- TOTAL CHANGE 15% 18% ===================================================================================
EVENTS AFFECT COMPARABILITY As part of the overall strategy to reduce costs and continue the commitment to the core life sciences businesses, Monsanto's board of directors approved a restructuring plan in December 1998. Pretax restructuring charges and other unusual charges of $625 million ($446 million aftertax) were recorded to cover the costs of work force reductions, the exit from nonstrategic businesses, the closure or rationalization of certain facilities, and asset impairments. Approximately 1,700 jobs are expected to be eliminated by these actions, primarily in manufacturing and administrative functions. These actions are expected to increase future net earnings and aftertax cash flows. 1998 Monsanto Annual Report 27 REVIEW OF CONSOLIDATED RESULTS OF OPERATIONS (continued) - ----------------------------------------------------------------------- Also in 1998, Monsanto acquired several seed companies, including PBIC, DEKALB, and certain international seed operations of Cargill. The company recorded pretax charges of $422 million ($371 million aftertax) related to these acquisitions, primarily for the write-off of acquired in-process R&D. Management believes that the technological feasibility of the acquired in-process R&D has not been established and that the research has no alternative future uses. Accordingly, the amounts allocated to in-process R&D are required to be expensed immediately under generally accepted accounting principles. In May 1998 the board of directors approved a decision to exit Monsanto's optical products business, which included the Orcolite and Diamonex optical products businesses and the Diamonex performance products business. Monsanto recognized a $20 million pretax gain on the sale of the Orcolite business. The company recorded pretax charges of $68 million for the rationalization of the Diamonex 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 pretax gain of $35 million ($21 million aftertax) from the reversal of a restructuring reserve that was no longer needed because of the decision not to rationalize a European pharmaceutical production facility. The result of the actions was a net pretax charge of $13 million ($13 million aftertax) in the second quarter of 1998. During 1997, Monsanto acquired several seed companies that specialize in various stages of seed production. These acquisitions included the Asgrow Agronomics seed business, a global leader in soybean research and seeds; Holden's Foundation Seeds Inc., a global leader in the development and growth of corn germplasm and a supplier of parent seed to retail seed companies; Corn States Hybrid Service Inc., the exclusive marketer and distributor for Holden's products; and Sementes Agroceres S.A., the leading seed corn company in Brazil. Monsanto also acquired the remaining interest in Calgene Inc., which has done significant biotechnology research in oils, cotton and produce. The company recorded pretax charges of $684 million ($455 million aftertax) for the write-off of acquired in-process R&D related to these acquisitions. ACQUISITIONS AND PRODUCT LAUNCH PREPARATIONS DRIVE EXPENSES HIGHER, EBIT LOWER EBIT was $69 million in 1998 vs. $536 million in 1997. EBIT for 1998 included $1.06 billion of restructuring and special charges, write-offs for acquired in-process R&D, and charges for the cancellation of DEKALB(R) stock options. EBIT for 1997 included unusual charges of $684 million for in-process R&D write-offs. Excluding these unusual charges, EBIT would have been $1.13 billion in 1998, vs. $1.22 billion in 1997. The $91 million, or 7 percent, decrease in EBIT excluding unusual items was caused by increased SG&A expenses, technological costs, and amortization expense. These items were partially offset by the aforementioned growth in sales. EBITDA grew to $1.77 billion in 1998, a $58 million, or 3 percent, increase from EBITDA of $1.71 billion in 1997. Total SG&A expenses increased $398 million, or 20 percent, in 1998 compared with expenses in 1997, principally because of increased spending in the Agricultural Products and Pharmaceuticals segments. SG&A expenses for Agricultural Products rose primarily because of the inclusion in 1998 of SG&A expenses from the acquired seed companies, and were partially offset by the effect of licensing fees for technical data on glyphosate. SG&A expenses for Pharmaceuticals increased as Searle expanded its sales infrastructure to accommodate the launch of Arthrotec(R) in 1998 and the launch of Celebrex(TM) arthritis treatment in early 1999. Total technological expenses in 1998 grew $314 million, or 30 percent, compared with those in 1997, primarily because of higher expenses in the Agricultural Products and Pharmaceuticals segments. Technological expenses for the Agricultural Products segment rose principally because of higher spending on genomics and crop biotechnology initiatives, and the inclusion of expenses from the acquired seed companies. Searle's technological expenses increased markedly, as several product candidates in the pipeline advanced through the later, more expensive phases of development. Expenses for amortization and adjustment of intangible assets, which are included in income from continuing operations and EBIT, increased year-to-year because of the increase in intangible assets related to seed company acquisitions made in 1998 and late 1997, and because of the write-offs of goodwill related to the company's exit from noncore businesses. Interest expense -- included in income (loss) from continuing operations -- rose as the amount of debt outstanding increased during 1998. Other expense (income) -- net increased principally because of unusual charges, primarily for asset impairments and lower income from equity affiliates in 1998. Income tax expense for 1998 of $7 million declined from income tax expense for 1997 of $72 million, primarily because of the decrease in pretax income caused by restructuring charges and other unusual items. If the unusual items in 1998 and 1997 were excluded, the effective tax rate would have been 29 percent in both 1998 and 1997. COST SAVINGS CONTINUE In prior years, Monsanto took steps to make its worldwide operations more focused, productive and cost-effective. The effect of these actions benefited EBIT by more than $400 million in 1998. The company invested the savings in its core businesses, new product development, and strategic acquisitions and investments to enhance its long-term profitability. These savings are in line with management's original expectations, and are expected to continue. These initiatives will continue as Monsanto responds to increased global competition and higher customer expectations. 28 1998 Monsanto Annual Report - ----------------------------------------------------------------------- DEVELOPMENT AND COMMERCIALIZATION OF NEW PRODUCTS REMAIN PRIORITIES New product discovery, development and commercialization continue to be strategic priorities for Monsanto. Recent efforts include insect- protected and herbicide-tolerant crops; Celebrex(TM), a new arthritis treatment; and neotame, a new sweetener currently under development. Monsanto's R&D expenditures were $1.26 billion in 1998, or 15 percent of net sales, a level that reflects management's strong long-term commitment to research. The discovery and development of pharmaceutical, agricultural and science-based nutritional products continue to be the focus of most of these expenditures. Significant research and development activity in existing product technologies and new product applications also continues across all business sectors. Genomics is a critical enabling technology for this effort, especially for agricultural and nutritional products. Additionally, Monsanto's research program includes new technologies and proprietary information obtained through licensing and strategic acquisitions. As a result, Monsanto has more than four dozen products in the R&D pipeline and expects many of them to be commercialized in the next few years. PRIOR YEAR REVIEW Income from continuing operations in 1997 totaled $294 million, or $0.48 per share, vs. $413 million, or $0.69 per share, in 1996. Both years' results, however, were affected by unusual items. Results for 1997 included pretax charges of $684 million ($455 million aftertax, or $0.75 per share) for the write-off of acquired in-process R&D related to the acquisition of several seed companies, including Asgrow, Holden's, Corn States, and Agroceres, and the remaining interest in Calgene. In December 1996, the company recorded pretax restructuring charges associated with the closure or rationalization of certain facilities, asset write-offs, and work force reductions totaling $376 million ($257 million aftertax, or $0.43 per share). Without the unusual items in 1997 and 1996, income from continuing operations would have been $749 million for 1997, compared with $670 million for the prior year, an increase of 12 percent. Earnings per share from continuing operations would have been $1.23 in 1997, a 10 percent increase from comparable 1996 results of $1.12 per share. The increases were driven by higher sales, which more than offset increased expenses. Sales grew primarily because of higher sales volumes, licensing revenues, and sales of product rights. These increases were partially offset by increased SG&A expenses, higher technological spending, additional intangible amortization expense, and increased interest expense. EBIT totaled $536 million in 1997, compared with $672 million in 1996. EBIT for 1997 included pretax unusual charges of $684 million for in-process R&D write-offs. EBIT for 1996 included pretax unusual charges of $376 million for restructuring and other unusual items. EBITDA totaled $1.71 billion in 1997 vs. $1.47 billion in 1996, an increase of 16 percent. Net sales were $7.5 billion in 1997, up $1.2 billion, or 18 percent, from sales in 1996. The increase came primarily from continued strong performances by the Agricultural Products and Pharmaceuticals segments. The $708 million increase in net sales for the Agricultural Products segment was driven by significant sales volume increases for the family of Roundup(R) herbicides; the inclusion of sales from Asgrow; higher sales volumes of Posilac(R) bovine somatotropin and Harness(R) herbicide; and increased demand for crops developed through biotechnology -- including Roundup Ready(R) soybeans, cotton and canola; Bollgard(R) insect-protected cotton; and Yieldgard(R) insect-protected corn. Net sales for the Pharmaceuticals segment in 1997 increased $428 million, or 21 percent, from 1996 net sales. The increase was attributable primarily to higher sales volumes of Ambien(R) short-term treatment for insomnia and Daypro(R) and Arthrotec(R) arthritis treatments. Sales of these key growth products grew 26 percent from sales in the prior year. Sales also benefited from licensing revenues of $75 million related to a collaborative alliance, and from sales of product rights, which totaled $117 million. Lower sales of verapamil calcium channel blockers partially offset these increases. Lower net sales for the Nutrition and Consumer Products segment partially offset the sales increases in the other segments. Nutrition and Consumer Products sales declined 4 percent in 1997 vs. sales in 1996, primarily because of lower sales volumes of Equal(R) and Canderel(R) tabletop sweeteners. These decreases were partially offset by higher sales volumes of biogums and Roundup(R) herbicide for lawn-and-garden use. Sales of NutraSweet(R), the company's trademark aspartame product, were essentially flat compared with sales in the prior year. Total SG&A expenses increased $163 million, or 9 percent, in 1997 compared with expenses in 1996, principally because of spending increases in the Agricultural Products and Pharmaceuticals segments. Total technological expenses increased $342 million, or 49 percent, compared with those in 1996. Technological expenses increased in all segments because of new product development. Amortization and adjustment of intangible assets increased in 1997 compared with amortization in the prior year, principally because of the increase in intangible assets related to seed company acquisitions. The increase in interest expense from that in 1996 was caused by a greater amount of debt outstanding during 1997. If $31 million of unusual income in 1996 were excluded, other expense (income) -- net would have shown a small increase in 1997. This increase was caused by significantly higher exchange losses, principally from Southeast Asia, partially offset by increased income from equity affiliates, largely from European aspartame joint ventures and DEKALB(R). The 1997 effective tax rate of 20 percent was lower than the 1996 effective tax rate of 25 percent, primarily because of the decrease in pretax income, which gave tax benefits a greater relative effect in 1997. If the unusual items in 1997 and 1996 were excluded, the effective tax rate would have been 29 percent in 1997 vs. 28 percent in 1996. 1998 Monsanto Annual Report 29 REVIEW OF CONSOLIDATED RESULTS OF OPERATIONS (continued) - ----------------------------------------------------------------------- ANALYSIS OF CHANGE IN EARNINGS (LOSS) PER SHARE FROM CONTINUING OPERATIONS
BETTER (WORSE) ------------------------ 1998 VS. 1997 VS. 1997 1996 - ----------------------------------------------------------------------------------------------- SALES-RELATED FACTORS: Selling prices $(0.02) $(0.23) Sales volumes and mix 0.79 0.66 Pharmaceutical product rights sales and licensing revenues 0.31 0.14 - ----------------------------------------------------------------------------------------------- TOTAL SALES-RELATED FACTORS 1.08 0.57 =============================================================================================== COST-RELATED FACTORS: Raw material and manufacturing costs (0.05) (0.07) Selling, general and administrative expenses (0.45) (0.03) Technological expenses (0.34) (0.33) Amortization of intangible assets (0.07) -- - ----------------------------------------------------------------------------------------------- TOTAL COST-RELATED FACTORS (0.91) (0.43) =============================================================================================== OTHER FACTORS: Change in shares outstanding, taxes (0.03) (0.03) Exchange rates (0.17) -- Acquisitions and divestitures (0.14) -- Other expenses -- net (0.14) -- - ----------------------------------------------------------------------------------------------- TOTAL OTHER FACTORS (0.48) (0.03) =============================================================================================== Change in earnings (loss) per share before unusual items (0.31) 0.11 Unusual items (0.58) (0.32) - ----------------------------------------------------------------------------------------------- CHANGE IN EARNINGS (LOSS) PER SHARE FROM CONTINUING OPERATIONS $(0.89) $(0.21) ===============================================================================================
GEOGRAPHIC DATA
NET SALES TO UNAFFILIATED CUSTOMERS (Excluding Interarea Sales) TOTAL ASSETS -------------------------------------------------------------------- 1998 1997 1996 1998 1997 - ----------------------------------------------------------------------------------------------- United States $4,975 $4,384 $3,648 $10,558 $ 7,286 Europe-Africa 1,621 1,425 1,345 2,796 1,826 Asia-Pacific 621 655 569 564 455 Canada 330 285 271 216 153 Latin America 1,101 765 515 2,590 1,054 - ----------------------------------------------------------------------------------------------- TOTAL $8,648 $7,514 $6,348 $16,724 $10,774 ===============================================================================================
The data above are prepared on an "entity basis," which means that net sales, and assets of each legal entity are assigned to the geographic area where that legal entity is located. For example, a sale from the United States to Latin America is reported as a U.S. export sale. Direct export sales from the United States to third-party customers outside the United States were $245 million for 1998, $200 million for 1997, and $177 million for 1996. Net sales and assets attributable to an individual country, other than the United States, were not material for disclosure. The Brazilian economy continued to experience lower inflation rates during 1997 and 1998. Monsanto designated the Brazilian economy as nonhyperinflationary as of Jan. 1, 1998, and established the Brazilian real as the functional currency for Monsanto's Brazilian operations. In January 1999, Brazil devalued the real due to worsening economic conditions. A continuing decline in value of the Brazilian real may adversely affect future income. Monsanto could experience additional foreign currency transactional losses from the area. Also, future sales may decrease because the decline in the Brazilian economy could cause customers to purchase fewer goods in general, and also because the company's products may become more expensive for customers in that region to purchase in their local currency. In addition, the economic conditions could increase Monsanto's credit risk in Brazil. 30 1998 Monsanto Annual Report SEGMENT Data - -----------------------------------------------------------------------------------------------------------------------------
NET SALES EBIT EBITDA ----------------------------------------------------------------------------------------- 1998 1997 1996 1998 1997 1996 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------- Agricultural Products $4,032 $3,274 $2,566 $ 737 $ 731 $ 671 $1,092 $ 939 $ 820 Nutrition and Consumer Products 1,533 1,552 1,613 278 322 365 405 440 490 Pharmaceuticals 2,894 2,443 2,015 309 286 253 451 422 383 Corporate and Other 189 245 154 (195) (119) (241) (183) (94) (222) Unusual (1,060) (684) (376) - ----------------------------------------------------------------------------------------------------------------------------- TOTAL $8,648 $7,514 $6,348 $ 69 $ 536 $ 672 $1,765 $1,707 $1,471 ============================================================================================================================= DEPRECIATION TOTAL ASSETS CAPITAL EXPENDITURES AND AMORTIZATION --------------------------------------------------------------------------------------- 1998 1997 1998 1997 1996 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------- Agricultural Products $10,278 $ 4,308 $468 $315 $265 $355 $208 $149 Nutrition and Consumer Products 2,477 2,624 130 67 89 127 118 125 Pharmaceuticals 2,778 2,668 236 175 81 142 136 130 Corporate and Other 1,191 1,174 145 87 65 12 25 19 - ----------------------------------------------------------------------------------------------------------------------------- TOTAL $16,724 $10,774 $979 $644 $500 $636 $487 $423 ============================================================================================================================= Reconciliation of EBIT to income (loss) from continuing operations follows: ------ 1998 1997 1996 - ---------------------------------------------------------------------------------------------- EBIT $ 69 $ 536 $ 672 Less: Interest expense (312) (170) (119) Income taxes (7) (72) (140) - ---------------------------------------------------------------------------------------------- Income (Loss) from Continuing Operations $(250) $ 294 $ 413 ============================================================================================== The unusual charges in 1998, 1997 and 1996 included restructuring and special charges, write-offs for acquired in-process research and development, and charges for the cancellation of DEKALB(R) stock options. The net total unusual items by segment were as follows: INCOME (EXPENSE) --------------------------------------------- SEGMENT 1998 1997 1996 - ---------------------------------------------------------------------------------------------- Agricultural Products $ (587) $(633) $(124) Nutrition and Consumer Products (307) (51) (108) Pharmaceuticals (29) (125) Corporate and Other (137) (19) - ---------------------------------------------------------------------------------------------- TOTAL $(1,060) $(684) $(376) ==============================================================================================
In 1998, Monsanto changed its publicly reported measure of segment profitability from operating income to EBIT excluding unusual items as a result of adopting Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information." In addition, various smaller businesses were transferred between segments. Segment information for 1997 and 1996 has been restated to conform to the current presentation. Although inflation is relatively low in most of Monsanto's major markets, it continues to affect operating results. To mitigate the effect of inflation, Monsanto has implemented measures to control costs, to improve productivity, to manage new fixed and working capital, and to raise selling prices when government regulations and competitive conditions permit. In addition, the current costs of replacing certain assets are estimated to be greater than the historical costs presented in the financial statements. Accordingly, the depreciation expense reported in the Statement of Consolidated Income (Loss) would be greater if it were stated on a current-cost basis. 1998 Net Sales [GRAPH] Sales between segments were not significant. Certain corporate expenses, primarily those related to the overall management of Monsanto, were not allocated to the segments or geographic areas. Corporate assets are primarily investments in affiliates. The principal factors that accounted for the segments' performances in 1998 and 1997, along with the factors that are expected to affect operating results in the near term, are described on the following pages. 1998 Monsanto Annual Report 31 AGRICULTURAL Products - ---------------------------------------------------------------------------
------ 1998 1997 1996 - ---------------------------------------------------------------------------- Net Sales $4,032 $3,274 $2,566 EBIT (excluding unusual charges) 737 731 671 EBITDA (excluding unusual charges) 1,092 939 820 Capital Expenditures 468 315 265 Depreciation and Amortization 355 208 149 - ----------------------------------------------------------------------------
THE AGRICULTURAL PRODUCTS SEGMENT IS A LEADING DEVELOPER, PRODUCER AND MARKETER OF CROP PROTECTION PRODUCTS AND SEEDS. THIS GROUP ALSO DEVELOPS AND MARKETS PRODUCTS ENHANCED BY BIOTECHNOLOGY. THESE PRODUCTS IMPROVE THE EFFICIENCY OF FOOD PRODUCTION AND PRESERVE ENVIRONMENTAL QUALITY FOR AGRICULTURAL AND INDUSTRIAL USES. MORE THAN HALF OF THE UNIT'S HERBICIDE NET SALES ARE MADE OUTSIDE THE UNITED STATES. WEATHER CONDITIONS IN AGRICULTURAL MARKETS WORLDWIDE AFFECT SALES VOLUMES. Net sales for Agricultural Products set a record at $4 billion, an increase of 23 percent vs. the previous sales record set in 1997. The increase in net sales was led by the family of Roundup(R) herbicides, which delivered volume growth in 1998 above the historical 20 percent trendline. The United States, Argentina, Brazil and Australia posted record sales volumes of Roundup(R). The large gains in volumes of Roundup(R) were driven by continued adoption of conservation tillage (the practice of substituting the judicious use of herbicides for mechanical tillage), new applications, and increased use of Roundup(R) over the top of Roundup Ready(R) canola, corn, cotton and soybeans. Poor economic conditions in Asia limited liquidity and lessened the demand for herbicides, especially in Southeast Asia, where volumes of Roundup(R) declined in 1998. Lower selling prices, principally outside the United States, made Roundup(R) more cost effective in a wide range of crop and industrial uses. The effect of generic competition, especially in certain markets outside the United States, dampened selling prices modestly. However, the effect of lower selling prices was more than offset by the increased sales volumes. Agricultural Products Net Sales [GRAPH] Increased demand for crops developed through biotechnology -- especially Roundup Ready(R) soybeans, canola and cotton, and Yieldgard(R) insect-protected corn -- drove technology fee revenues from these crops substantially higher. In addition, Roundup Ready(R) corn sold out in its introductory year in the United States. Seed sales also were higher in 1998 as the company's Asgrow seed business enjoyed a strong year, particularly with seed lines containing the Roundup Ready(R) gene. Sales from Sementes Agroceres S.A. and Holden's Foundation Seeds Inc., which both were acquired in late 1997, also added to revenues. Net sales for the Agricultural Products segment also benefited from record sales of Posilac(R) bovine somatotropin, which increased 26 percent from sales in the prior year. EBIT for the Agricultural Products segment in 1998 was essentially flat compared with 1997 EBIT, while EBITDA increased $153 million, or 16 percent, from EBITDA in 1997. EBIT totaled $737 million in 1998, compared with $731 million in 1997, as the growth in net sales was nearly offset by increased operating expenses. Selling, general and administrative (SG&A) expenses rose primarily because of a full-year of inclusion of SG&A costs from the seed companies acquired in 1997, and higher global development costs, including higher information technology expenses. These increases were partially offset by $36 million of licensing fees for technical data on glyphosate. Technological expenses grew principally because of higher spending on crop biotechnology development initiatives, inclusion of recently acquired seed company technological spending, and additional genomics research. Depreciation and amortization increased by $147 million, or 71 percent, primarily because of the completion of additional manufacturing capacity for Roundup(R) and because of 1997 seed company acquisitions. Agricultural Products Operating Measures [GRAPH] Pretax unusual items in 1998 included: charges of $402 million for the write-off of in-process research and development (R&D); a $20 million charge for the cancellation of stock options in exchange for cash related to the acquisition of DEKALB Genetics Corp.; and a charge of $165 million for restructuring and other actions, principally related to the cost of work force reductions ($52 million) and asset impairments ($81 million). The in-process R&D charges were primarily associated with the acquisitions of DEKALB, Plant Breeding International Cambridge (PBIC) and certain international seed operations of Cargill Inc. In 1997, the unusual items included $633 million of pretax charges for in- process R&D write-offs associated with several seed company acquisitions. In-process R&D charges for the seed company acquistions cover numerous seed breeding projects, no single one of which was significant, as is typical in the seed breeding industry. These projects consist of conventional breeding programs for corn, wheat and other hybrids; conventional breeding for soybean varieties; and the development of transgenic crops. In-process R&D projects for the 1997 acquistion of Calgene Inc. included a project to develop naturally colored cotton fiber, and a project to control fatty acids in oil seeds. Successful commercialization of products developed through these projects is expected to occur five to nine years after program initiation. While there are risks associated with the ultimate completion and commercialization of 32 1998 Monsanto Annual Report - ------------------------------------------------------------------------ these research projects (specific risks are discussed beginning on page 58), the failure of any one project would not materially affect the total value of the overall research programs. The in-process projects were at various stages of completion at the dates of acquisition. During the next nine years, management expects to spend approximately $370 million to complete these in-process R&D projects. These costs consist primarily of salary and benefit expenses for R&D employees. Revenues from the in-process R&D projects related to the 1997 acquisitions began in 1998. Revenues from the in-process R&D projects related to the 1998 acquisitions are expected to begin in 1999. In-process projects acquired in connection with the 1997 purchases of Asgrow Agronomics, Holden's, Calgene, and Agroceres have been progressing in line with original expectations. PRIOR YEAR REVIEW Net sales were 28 percent higher in 1997 vs. 1996 net sales. The sales increase in 1997 was the result of higher worldwide sales volumes for the family of Roundup(R) herbicides, led by strong sales in Brazil, Argentina, and the United States. Sales volumes of Roundup(R) herbicide were driven to a new high by increases in the use of conservation tillage, increases in planted acres and applications of Roundup(R) on Roundup Ready(R) crops. Selling price reductions, principally in markets outside the United States, made Roundup(R) more cost effective for weed control in a broader range of uses. The effect of generic competition, especially in certain markets outside the United States, dampened selling prices modestly. However, the effect of increased sales volumes more than offset the effect of lower selling prices. Sales from seed companies acquired in 1997, particularly Asgrow, also added to segment sales. Also contributing to sales increases were record sales of Posilac(R) bovine somatotropin; increased demand for crop biotechnology traits, including Roundup Ready(R) soybeans, canola and cotton, Bollgard(R) insect- protected cotton, and Yieldgard(R) insect-protected corn; and higher sales volumes of certain acetanilide-based herbicides, particularly Harness(R). EBIT for the Agricultural Products segment increased by $60 million from 1996 to 1997, and EBITDA grew $119 million in the same period. The effect of sales volumes increases on 1997 EBIT and EBITDA was partially offset by higher technology costs for crop biotechnology initiatives, and by the inclusion of seed company SG&A expenses for the full year. EBIT was also negatively affected by higher amortization costs in 1997, principally from the acquisition of Holden's. In 1997, the unusual charges included $633 million of pretax charges for the write-offs for in-process R&D associated with the acquisition of various seed companies. In 1996, the net unusual items included $124 million of pretax charges for restructuring and other actions, principally related to the cost of work force reductions ($84 million) and asset impairments ($44 million). OUTLOOK AGRICULTURAL PRODUCTS Monsanto's family of Roundup(R) herbicides continues to face competition from generic producers in certain markets outside the United States. Patents protecting Roundup(R) expired in several countries in 1991. Compound per se patent protection for the active ingredient in Roundup(R) herbicide continues in the United States through September 2000. During 1998, Monsanto further strengthened its branding strategy for Roundup(R) with new service and formulation offerings. The company also amended, or entered into, several agreements to supply the active ingredient in Roundup(R) to third parties. Several manufacturing process enhancements were implemented in 1998 to further lower Monsanto's cost position, and to increase its capacity. In the future, management expects rapidly expanding production capacity and additional technological enhancements in manufacturing and formulations, will continue to improve Monsanto's cost structure and help maintain its leadership position. Significant growth potential remains for Roundup(R) in conservation tillage applications worldwide and in applications over-the-top of crops designed to tolerate Roundup(R). A planned price reduction for Roundup(R) in the United States was implemented in the fall of 1998 to accelerate volume growth, and to competitively position Roundup(R) long term. In numerous markets worldwide during the past 15 years, management believes that price reductions for Roundup(R) were an important factor in volume growth via price elasticity in key market segments. At lower prices in the past, more growers used more Roundup(R) in new applications (such as conservation tillage and preharvest), treated more acres in existing applications, and used higher rates per treated acre as Roundup(R) became more economical. As discussed in the Principal Acquisitions and Divestitures note in the Notes to Financial Statements, Monsanto made several strategic acquisitions of agricultural seed companies during the past two years. In 1997, Monsanto acquired the Asgrow Agronomics seed business, Holden's and Agroceres. In 1998, the company acquired PBIC, DEKALB and certain international seed operations of Cargill. In addition, Monsanto announced an agreement to merge Delta and Pine Land Company (D&PL) with Monsanto in a stock swap transaction. This transaction, already approved by D&PL shareowners, is subject to regulatory approvals and other customary conditions. These acquisitions are expected to result in earnings dilution over the next few years. Monsanto announced in January 1999 its intent to sell its Stoneville Pedigreed Seed Company. These transactions will essentially complete the network Monsanto management believes it needs in major crops to compete successfully in the global agricultural marketplace. No additional major seed company acquisitions are planned. The acquisition and successful continued on page 34 1998 Monsanto Annual Report 33 AGRICULTURAL PRODUCTS (continued) - ------------------------------------------------------------------------ AGRICULTURAL OUTLOOK CONTINUED continued from page 33 integration of these seed companies as members of Monsanto's life sciences business, and partnerships such as the Monsanto/Cargill(R) joint venture -- Renessen LLC -- are expected to enhance the company's ability to bring new products to market by helping Monsanto commercialize and distribute its own agronomic traits, and traits designed to improve the quality of food or feed, as well as traits licensed from other companies. The company marketed more than 10 biotechnology-related plant sciences products during 1998 with its licensing partners, including: Roundup Ready(R) corn, canola, cotton and soybeans; corn, cotton and potatoes protected from certain insects; and cotton that is both insect- protected and Roundup Ready(R). These products were developed by Monsanto either alone or in partnership with biotechnology and seed production companies. Although demand for biotechnology-related plant sciences products remains strong among growers, Monsanto continues to address concerns of consumers, public interest groups, and government regulators, particularly outside the United States. Such concerns are not uncommon as new technologies are commercialized. The company also is involved in intellectual property disputes with several parties. Management expects that such disputes will continue to occur as the agricultural biotechnology industry evolves. NUTRITION AND CONSUMER Products - ------------------------------------------------------------------------
------- 1998 1997 1996 - ------------------------------------------------------------------------ Net Sales $1,533 $1,552 $1,613 EBIT (excluding unusual charges) 278 322 365 EBITDA (excluding unusual charges) 405 440 490 Capital Expenditures 130 67 89 Depreciation and Amortization 127 118 125 - ------------------------------------------------------------------------
THE NUTRITION AND CONSUMER PRODUCTS SEGMENT MANUFACTURES AND MARKETS SWEETENERS (INCLUDING NUTRASWEET(R) BRAND SWEETENER AND EQUAL(R) AND CANDEREL(R) TABLETOP SWEETENERS), ALGINS, BIOGUMS AND OTHER FOOD INGREDIENTS. IT ALSO DEVELOPED, PRODUCED AND MARKETED ORTHO BRAND LAWN-AND-GARDEN PRODUCTS, AND ROUNDUP(R) HERBICIDE FOR RESIDENTIAL USE IN 1998. THE ORTHO PRODUCTS HAVE SUBSEQUENTLY BEEN SOLD. Nutrition and Consumer Products Net Sales [GRAPH] Net sales for the Nutrition and Consumer Products segment decreased slightly in 1998 vs. net sales in 1997. Sales of NutraSweet(R), the company's trademark aspartame product, decreased 17 percent in 1998 vs. sales in 1997, because of lower sales volumes. Sales of tabletop sweeteners rose modestly in 1998, reflecting market share gains in the United States and higher sales of sweetener products in Latin America. Biogum sales rose from sales of xanthan and gellan gum products to food manufacturers and to industrial customers. Revenues from lawn-and-garden products rose modestly in 1998, reflecting higher sales of the Ortho line of lawn-and-garden products and $32 million in payments associated with an agreement signed with The Scotts Company to be the marketing partner for Roundup(R) herbicide. In 1999, Roundup(R) for residential use will be marketed through Scotts along with its own broad line of residential lawn-and-garden products. In early 1999, the company sold its lawn-and- garden products business, exclusive of Roundup(R), to Scotts. In January 1999, Monsanto announced its intent to divest its algins business. These actions will result in reduced Nutrition and Consumer sector sales in 1999. EBIT for the Nutrition and Consumer Products segment decreased by $44 million, or 14 percent, in 1998 vs. 1997 EBIT, and EBITDA decreased by $35 million, or 8 percent, primarily because of the lower aspartame sales and increased technological spending. Nutrition and Consumer Products Operating Measures [GRAPH] 34 1998 Monsanto Annual Report - ------------------------------------------------------------------------ This increase was the result of late-stage development spending on neotame, a new no-calorie sweetener for which a general use petition was filed with the U.S. Food and Drug Administration (FDA) in late 1998, and of increased spending on other nutrition pipeline products. In 1998, unusual charges included pretax restructuring charges of $307 million, principally for the cost of asset impairments ($84 million) and facility shutdowns ($186 million). Unusual items in 1997 included $51 million of pretax charges for in-process research and development (R&D) related to the acquisition of the Calgene oils business. PRIOR YEAR REVIEW In 1997, net sales for the Nutrition and Consumer Products segment declined 4 percent from 1996 results, primarily because of lower sales volumes of tabletop sweeteners. The sales decrease was the result of a continued decline in market share in the United States and Europe because of lower-priced generic competition as well as a decline in the overall U.S. grocery market for tabletop sweeteners. Sales of NutraSweet(R) were essentially flat. Higher sales volumes of biogums and lawn-and- garden products partially offset the lower tabletop sweetener sales. EBIT for the Nutrition and Consumer Products segment decreased by $43 million, or 12 percent, in 1997 vs. 1996 EBIT, and EBITDA declined $50 million, or 10 percent. The decrease in both EBIT and EBITDA was caused primarily by lower sales volumes and increased technological expenses related to the development of neotame and other nutrition products. These effects were partially offset by selling expenses that were lower in 1997 than in 1996. Unusual charges in 1997 included $51 million of pretax charges for in-process R&D related to the acquisition of the Calgene oils business. In 1996, the unusual items included pretax restructuring charges of $108 million, principally for the cost of work force reductions ($88 million). OUTLOOK NUTRITION AND CONSUMER PRODUCTS In January 1999, the company sold its lawn-and-garden business, exclusive of Roundup(R), to The Scotts Company for $300 million. Monsanto also announced its intent to sell its algins business. Worldwide demand for aspartame continues to increase. Monsanto is maintaining its leading market share of aspartame sales while aggressively pursuing growth opportunities. NutraSweet(R) brand sweetener has several competitive advantages, including a low-cost position and superior quality. Other sweeteners also compete with NutraSweet(R) in markets outside the United States, and in 1998, two of these sweeteners were approved for use by the FDA. These competitive products are expected to adversely affect Monsanto's future sales of NutraSweet(R). Increased competition from lower-priced generic producers of tabletop sweeteners, a declining U.S. grocery market for tabletop sweeteners, and increased competition in the United States and Europe may adversely affect future sales and profits from tabletop sweeteners. Monsanto has filed both a limited-use food additive petition and a general-purpose use petition with the FDA for neotame, a new no-calorie sweetener. Monsanto has exclusive rights to patents covering neotame, its manufacturing processes, and its uses in food and beverages. Management expects technological and selling expenses to increase in the next few years as Monsanto continues its commitment to discovering and developing nutrition products, and as it commercializes products now in the R&D pipeline. R&D activity for the segment is geared primarily toward leveraging Monsanto's capabilities in genomics, plant biotechnology, and food technology to improve the quality and nutritive value of food. The segment is developing products to enhance human cardiovascular health, as well as new generation antioxidants. Synergies between biogums and grain-based ingredients also are being explored. 1998 Monsanto Annual Report 35 PHARMACEUTICAL Products - -----------------------------------------------------------------------
------- 1998 1997 1996 - ----------------------------------------------------------------------- Net Sales $2,894 $2,443 $2,015 EBIT (excluding unusual charges) 309 286 253 EBITDA (excluding unusual charges) 451 422 383 Capital Expenditures 236 175 81 Depreciation and Amortization 142 136 130 - -----------------------------------------------------------------------
THE PHARMACEUTICALS SEGMENT REFLECTS THE OPERATIONS OF SEARLE, WHICH DEVELOPS, PRODUCES AND MARKETS PRESCRIPTION PHARMACEUTICALS. ITS MAJOR PRODUCTS INCLUDE MEDICATIONS TO RELIEVE THE SIGNS AND SYMPTOMS OF ARTHRITIS, TO CONTROL HIGH BLOOD PRESSURE, TO RELIEVE INSOMNIA, TO PREVENT THE FORMATION OF ULCERS, AND TO PROVIDE BETTER HEALTH CARE FOR WOMEN. In 1998, net sales for Pharmaceuticals grew to a record $2.9 billion, $451 million, or 18 percent, higher than 1997 net sales. Sales of Arthrotec(R) arthritis treatment more than tripled to $346 million, aided by launches in the United States and France and increased volume growth in other key countries. Searle ended the year as the No. 1 provider of branded arthritis treatments in the United States, as Arthrotec(R) and Daypro(R) arthritis treatments combined for 13 percent branded market share. Ambien(R) short-term treatment for insomnia grew in market share; by year-end it held 52 percent share of total U.S. prescriptions. Sales increased by 16 percent, to a record $458 million. Segment net sales also benefited from licensing revenues totaling $335 million associated with several collaborative alliances, and from revenues from the sale of product rights of $128 million. This compares with $75 million of licensing revenues and $117 million of revenues from the sale of product rights in 1997. Partially offsetting these higher revenues were lower sales of verapamil calcium channel blockers and Cytotec(R) ulcer preventive drug. Pharmaceuticals Net Sales [GRAPH] EBIT for the Pharmaceuticals segment totaled $309 million in 1998 compared with $286 million in 1997, an increase of $23 million, or 8 percent. EBITDA totaled $451 million in 1998 vs. EBITDA of $422 million in 1997, an increase of $29 million, or 7 percent. The improvements in EBIT and EBITDA in 1998 resulted primarily from higher volumes of key products and from licensing revenues, partially offset by increased selling, general and administrative (SG&A) and technological expenses. SG&A expenses rose primarily because of the launches of Arthrotec(R) and the preparations for the launch of Celebrex(TM) arthritis treatment. On Dec. 31, 1998, the U.S. Food and Drug Administration (FDA) approved Celebrex(TM) for the treatment of the signs and symptoms of osteoarthritis and adult rheumatoid arthritis. Technological cost increases were driven by late- stage, more expensive clinical trials. Pharmaceuticals Operating Measures [GRAPH] Pretax net unusual charges in 1998 totaled $29 million and included a gain of $35 million for the reversal of a prior year restructuring reserve; and $64 million of charges, primarily for asset impairments ($42 million) and work force reductions ($22 million). PRIOR YEAR REVIEW Net sales for the Pharmaceuticals segment in 1997 totaled $2.4 billion, a $428 million, or 21 percent, increase vs. 1996 net sales. The sales growth was fueled by higher sales volumes, led by strong performances from Daypro(R), Arthrotec(R) and Ambien(R). In 1997, sales of these products increased 26 percent from sales in the prior year. Segment sales also benefited from $192 million of licensing revenues associated with a collaborative alliance and product rights sales. Lower sales of verapamil calcium channel blockers partially offset these increases. EBIT for the Pharmaceuticals segment in 1997 increased $33 million, or 13 percent, compared with EBIT in 1996. EBITDA totaled $422 million in 1997, an increase of $39 million, or 10 percent, from EBITDA of $383 million in 1996. The improvements in EBIT and EBITDA resulted primarily from the sales increases in key products, which was partially offset by increased technological and selling expenses. Technological expenses increased as new product candidates advanced to later, more expensive phases of development. Selling expenses rose because of expansions in Searle's sales force and new product launch preparations. In 1996, unusual charges included pretax restructuring charges of $125 million, principally for the cost of work force reductions ($77 million) and facility rationalizations ($36 million). 36 1998 Monsanto Annual Report - ------------------------------------------------------------------------ OUTLOOK PHARMACEUTICALS On Dec. 31, 1998, Searle received clearance from the FDA to market Celebrex(TM) for the signs and symptoms of osteoarthritis and adult rheumatoid arthritis. Celebrex(TM) was launched in the United States in February 1999. It is expected to be launched in more than a dozen other countries during 1999. In early 1999, Searle also received approval to market the drug in Brazil and Mexico. Registration applications are being submitted in various European and Asia-Pacific markets. Searle and Pfizer Inc. will co-promote Celebrex(TM) in all countries except Japan, where Searle has formed an alliance with Yamanouchi Pharmaceutical Co. Ltd. to develop and commercialize the drug. The addition of Celebrex(TM) further strengthens the company's presence in the arthritis market, which was built on products such as Daypro(R), and Arthrotec(R) and Condrotec - -- two therapies that each combine a nonsteroidal anti-inflammatory drug (NSAID) and an ulcer preventive drug. Ambien(R) continues as the leader in the U.S. hypnotic market with a 52 percent share of total prescriptions. Ambien(R) is licensed to a joint venture in which Searle is a general partner. Under the joint venture agreement amended in 1998, Searle's share of profits will be gradually reduced from 90 percent in 1998 to 51 percent in early 2002. The partner is expected to purchase Searle's interest in the joint venture in April 2002. Searle has Phase III product candidates in each of its four therapeutic areas: arthritis/pain and inflammation, cardiovascular disease, women's health care, and oncology. The Phase III arthritis/ pain and inflammation candidates are valdecoxib, which is being developed for the management of pain and arthritis; and parecoxib, which is an injectable COX-2 inhibitor for the management of acute pain. COX-2 is an enzyme which plays a role in pain and inflammation. In cardiovascular Phase III trials, eplerenone is being developed for the treatment of congestive heart failure and high blood pressure. In women's health care, Searle is funding and participating in research to develop hormone replacement therapy patches designed to treat menopausal symptoms and to prevent osteoporosis. These multiple product candidates are also in Phase III clinical trials. Searle also has two compounds in its Phase III oncology pipeline. Celecoxib, a COX-2 inhibitor, is in Phase III trials as a preventive drug for certain types of cancer; and leridistim is being developed to stimulate the replenishment of white blood cells and platelets in chemotherapy patients. Searle announced in January 1999 that it was no longer pursuing development of two other cardiovascular candidates -- the anti-platelet aggregation compounds orbofiban and xemilofiban -- because they were not as efficacious in long-term therapy as expected. Searle discontinued development of a second-generation blood cell growth factor, promegapoietin, after a small number of patients on the drug developed low platelet counts during clinical trials. Development of PluriStem (formerly daniplestim), a blood cell growth factor, was discontinued to focus on leridistim and progenipoietin, which are more promising alternatives. Searle's investment in R&D spending increased to 26 percent of segment sales vs. 25 percent of sales in 1997. Management expects technological expenses and selling expenses to increase in the next few years as Searle continues to discover and develop new products and as it commercializes products now in the pipeline. The company expects that new alliances, similar to those forged with Pfizer and Yamanouchi, could offset some of the costs associated with developing and marketing new pharmaceuticals. Such alliances will accelerate development and broaden the geographic reach of Searle products commercialized during the next several years. CORPORATE and Other - ------------------------------------------------------------------------ The Corporate and Other segment comprises various smaller businesses, as well as certain corporate items that are not allocated to the segments. This segment's sales decreased in 1998 from 1997 levels by $56 million. This change was primarily driven by lower sales of Enviro-Chem's environmental abatement products. The divestiture of the Orcolite opthalmics business in the second quarter of 1998 also contributed to the sales decline. Monsanto shut down the Diamonex optical products division in 1998. It also expects to divest its interests in the health and wellness area in the first half of 1999. On an EBIT basis, the corporate and other segment recorded a loss of $195 million in 1998 vs. a loss of $119 million in 1997. The segment loss increased principally because of the sales decline in the segment and because of higher selling, general and administrative (SG&A) and technological spending, primarily related to incentive compensation and information technology expenses. The segment's loss, on an EBIT basis, decreased in 1997 from that in 1996 primarily because of increased sales at Enviro-Chem and the opthalmics business. In 1998, unusual charges included pretax restructuring and other special charges of $137 million, principally for the cost of facility shutdowns ($63 million) and asset impairments ($67 million). In 1996, unusual items included pretax restructuring charges of $19 million, primarily for the cost of work force reductions ($6 million) and asset impairments ($6 million). 1998 Monsanto Annual Report 37 Statement of Consolidated FINANCIAL POSITION - ----------------------------------------------------------------------------------------------
(Dollars in millions, except share amounts) As of Dec. 31, - ---------------------------------------------------------------------------------------------- 1998 1997 - ---------------------------------------------------------------------------------------------- ASSETS - ---------------------------------------------------------------------------------------------- CURRENT ASSETS: Cash and cash equivalents $ 89 $ 134 Trade receivables, net of allowances of $91 in 1998 and $63 in 1997 2,404 1,823 Miscellaneous receivables, prepaid expenses and other 1,126 692 Deferred income tax asset 567 243 Inventories 2,004 1,374 - ---------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 6,190 4,266 - ---------------------------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT: Land 150 99 Buildings 1,213 914 Machinery and equipment 3,840 3,359 Construction in progress 819 329 - ---------------------------------------------------------------------------------------------- Total property, plant and equipment 6,022 4,701 Less accumulated depreciation 2,768 2,301 - ---------------------------------------------------------------------------------------------- NET PROPERTY, PLANT AND EQUIPMENT 3,254 2,400 - ---------------------------------------------------------------------------------------------- INTANGIBLE ASSETS, net of accumulated amortization of $758 in 1998 and $853 in 1997 6,047 2,837 OTHER ASSETS 1,233 1,271 - ---------------------------------------------------------------------------------------------- TOTAL ASSETS $16,724 $10,774 ============================================================================================== LIABILITIES AND SHAREOWNERS' EQUITY - ---------------------------------------------------------------------------------------------- CURRENT LIABILITIES: Account payable $ 918 $ 480 Wages and benefits 444 251 Restructuring reserves 273 176 Miscellaneous accruals 1,348 906 Short-term debt 1,069 1,726 - ---------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 4,052 3,539 ============================================================================================== LONG-TERM DEBT 6,259 1,979 POSTRETIREMENT LIABILITIES 848 735 OTHER LIABILITIES 579 417 SHAREOWNERS' EQUITY: Common stock (authorized: 1,000,000,000 shares, par value $2) Issued: 846,927,220 shares in 1998 and 821,970,970 shares in 1997 1,694 1,644 Additional contributed capital 1,389 321 Treasury stock, at cost (217,632,240 shares in 1998 and 226,686,302 shares in 1997) (2,508) (2,570) Reinvested earnings 4,652 4,973 Reserve for ESOP debt retirement (106) (123) Accumulated other comprehensive loss (135) (141) - ---------------------------------------------------------------------------------------------- TOTAL SHAREOWNERS' EQUITY 4,986 4,104 - ---------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREOWNERS' EQUITY $16,724 $10,774 ============================================================================================== The above statement should be read in conjunction with pages 47-57 of this report. ESOP stands for Employee Stock Ownership Plan.
38 1998 Monsanto Annual Report Review of Changes in FINANCIAL POSITION - ------------------------------------------------------------------------ FINANCIAL POSITION REMAINS STRONG During 1998, Monsanto acquired several seed companies at a cost of $4.2 billion. These acquisitions included DEKALB Genetics Corp., Plant Breeding International Cambridge Limited, and certain international seed operations of Cargill Inc. Monsanto issued $944 million of common stock, net of issuance costs, and $3.3 billion of long-term debt in 1998, to fund these acquisitions. Monsanto's financial position remained strong following the debt and common stock issuances, as evidenced by the company's "A" debt rating. The ratio of total debt to total capitalization was 60 percent at year-end 1998, compared with 47 percent at year-end 1997. Various alternatives that the company is considering for several of its nonstrategic businesses may result in cash proceeds to reduce the company's debt. At the end of 1998, working capital was $1.4 billion higher than at the end of 1997, primarily because of increases in inventories, trade receivables, and other current assets, and decreases in short-term debt levels. These were partially offset by increases in other short-term liabilities, primarily accounts payable and miscellaneous accruals. Inventories at year-end 1998 increased, principally in the Agricultural Products segment because of seed company acquisitions. Trade receivables at year-end 1998 increased compared with those at the prior year-end, primarily because of seed company acquisitions, higher sales levels, and changes in credit terms for the Agricultural Products segment. Miscellaneous receivables, prepaid expenses, and other assets increased because the net assets of businesses held for sale at year-end 1998 were classified as a single amount in other current assets rather than in various categories of assets and liabilities at year-end 1997. During 1998, Monsanto refinanced a portion of its short-term debt with long- term debt, which resulted in lower short-term debt outstanding at year- end 1998 than at year-end 1997. The amount of net property, plant and equipment at year-end 1998 was higher than the comparable 1997 amount, as $979 million in capital additions and the effects of acquisitions exceeded 1998 depreciation expense and divestitures. The increase in intangible assets was attributable primarily to the seed acquisitions. Total deferred tax assets, both current and noncurrent, of $892 million at year-end 1998 were related primarily to U.S. operations, which generally have a strong earnings history. Monsanto uses financial markets worldwide for its financing needs. It has available various short- and medium-term bank credit facilities, which are discussed in the Short-Term Debt and Credit Arrangements note under the Notes to Financial Statements. These credit facilities give Monsanto the financing flexibility it needs to satisfy future short- and medium-term funding requirements. To maintain adequate financial flexibility and access to debt markets worldwide, Monsanto management intends to maintain an "A" debt rating. Monsanto's commitments and contingencies are described in the Commitments and Contingencies note under the Notes to Financial Statements.
------ KEY FINANCIAL STATISTICS 1998 1997 1996 - ---------------------------------------------------------------------------------------------- CURRENT RATIO (Current assets divided by current liabilities) 1.5 1.2 1.3 TRADE RECEIVABLES -- DAYS SALES OUTSTANDING 104 95 99 (Fourth-quarter trade receivables divided by fourth-quarter net sales times 30 days) INVENTORY TURNOVER RATIO (Cost of goods sold divided by inventory) 1.8 2.2 2.3 INTEREST COVERAGE 0.2 2.9 5.3 (Income (Loss) from continuing operations before interest expense and income taxes divided by total interest cost) CASH PROVIDED BY CONTINUING OPERATIONS/TOTAL DEBT 6% 10% 42% TOTAL DEBT/TOTAL CAPITALIZATION 60% 47% 38% ============================================================================================== If the effects of the restructuring, in-process research and development (R&D) write-offs, and other unusual charges were excluded in 1998, the interest coverage ratio would have been 3.5. If the effects of the in-process R&D write-offs were excluded in 1997, the interest coverage ratio would have been 6.6. If the effects of the restructuring and other unusual charges were excluded in 1996, the interest coverage ratio would have been 8.2. Total capitalization is the sum of short-term debt, long-term debt and shareowners' equity.
1998 Monsanto Annual Report 39 Statement of Consolidated CASH FLOW - -------------------------------------------------------------------------------------------------
(Dollars in millions) Year Ended Dec. 31, - ------------------------------------------------------------------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS - ------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Income (loss) from continuing operations $ (250) $ 294 $ 413 Add income taxes -- continuing operations 7 72 140 - ------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before income taxes (243) 366 553 Adjustments to reconcile to Cash Provided by Continuing Operations: Income tax refunds (payments) 44 (134) (308) Items that did not use cash: Depreciation and amortization 636 487 423 Acquired in-process research and development expenses 402 684 Restructuring and special charges 638 376 Other 58 (16) 50 Working capital changes that provided (used) cash: Accounts receivable (652) (268) (330) Inventories (282) (113) (86) Accounts payable and accrued liabilities (288) (288) 198 Receivables from asset sales and licensing arrangements 180 (232) (9) Other (63) (81) 12 Other items 2 (51) 61 - ------------------------------------------------------------------------------------------------- CASH PROVIDED BY CONTINUING OPERATIONS 432 354 940 CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS (138) 263 - ------------------------------------------------------------------------------------------------- TOTAL CASH PROVIDED BY OPERATIONS 432 216 1,203 - ------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Property, plant and equipment purchases (979) (644) (500) Seed company acquisitions and investments (4,061) (1,325) (470) Other acquisitions and investments (254) (618) (250) Investment and property disposal proceeds 199 88 165 Discontinued operations -- other (44) (200) - ------------------------------------------------------------------------------------------------- CASH USED IN INVESTING ACTIVITIES (5,095) (2,543) (1,255) - ------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Net change in short-term financing (282) 2,372 297 Long-term debt proceeds 3,878 208 122 Long-term debt reductions (85) (142) (177) Common stock issuance 944 Treasury stock purchases (253) Dividend payments (73) (294) (343) Common stock issued under employee stock plans 62 91 142 Cash transferred to Solutia Inc. (75) Other financing activities 174 135 133 - ------------------------------------------------------------------------------------------------- CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 4,618 2,295 (79) - ------------------------------------------------------------------------------------------------- DECREASE IN CASH AND CASH EQUIVALENTS (45) (32) (131) CASH AND CASH EQUIVALENTS: Beginning of year 134 166 297 - ------------------------------------------------------------------------------------------------- END OF YEAR $ 89 $ 134 $ 166 =================================================================================================
The above statement should be read in conjunction with pages 47-57 of this report. The effect of exchange rate changes on cash and cash equivalents was not material. Cash payments for interest (net of amounts capitalized) were $331 million in 1998, $210 million in 1997, and $195 million in 1996. 40 1998 Monsanto Annual Report Review of CASH FLOW - ------------------------------------------------------------------------ CASH FLOW REMAINS STRONG Cash provided by continuing operations totaled $432 million in 1998, compared with $354 million in 1997. EBITDA excluding unusual charges was slightly higher in 1998 than in 1997, and cash flow benefited from the collection in 1998 of amounts related to 1997 Pharmaceutical licensing and product rights sales. Working capital needs were higher in 1998, primarily because of seed company acquisitions, higher sales levels, and changes in credit terms for the Agricultural Products segment. Working capital as a percent of net sales was 25 percent in 1998, compared with 10 percent in 1997. Higher interest payments in 1998 were partially offset by the collection of income tax refunds. Cash provided by continuing operations in 1997 included higher employee incentive payouts for the final payment of certain deferred amounts in a three-year incentive plan. Cash Provided by Continuing Operations [GRAPH] Monsanto's operations have historically generated sufficient cash to fund both its existing businesses and its research and development expenses. In 1998, 1997 and 1996, investment and property disposal proceeds came primarily from sales of nonstrategic properties and investments. Major uses of cash in 1998, 1997 and 1996 included investments, capital expenditures and dividends. Major investments in 1998 included the acquisitions of DEKALB Genetics Corp., Plant Breeding International Cambridge Limited, and certain international seed operations of Cargill Inc. Major investments in 1997 were the acquisitions of the Asgrow Agronomics seed business, Holden's Foundation Seeds Inc., Corn States Hybrid Service Inc., and Sementes Agroceres S.A. seed companies, and the remaining interest in Calgene Inc. Major investments in 1996 were an equity investment in DEKALB, an investment in Calgene, and the acquisition of the plant biotechnology assets of Agracetus. Monsanto's capital expenditures, which focused on improved technology and capacity expansions, totaled $979 million in 1998. To the extent the company's cash provided by operations was not sufficient to fund its cash needs during 1998, debt and common stock were issued to finance these requirements. Significant debt issuances included $2.5 billion of long-term debt with various maturities issued in December 1998, and 17,500,000 units of 6.5 percent Adjustable Conversion-rate Equity Security (ACES) units with a public offering price of $40 per unit (stated value), or $700 million total, issued in November 1998. The company issued 25 million shares of common stock for $944 million in November 1998. DIVIDEND POLICY IS UNCHANGED Monsanto has paid quarterly dividends on its common shares without interruption since 1928. Throughout 1998, the quarterly dividend paid was $0.03 per share. The dividend rate reflects a policy set by the board of directors following the spinoff of the company's chemical businesses in 1997. That policy was adopted in order to fund appropriately the company's growth opportunities and to create long-term economic value for shareowners. Monsanto's dividend policy also reflects the company's expectations of future growth, profitability, financial position, the need to finance acquisitions, working and fixed capital needs, scheduled debt repayments, and economic conditions, including inflation. Monsanto's common stock is traded principally on the New York Stock Exchange. The number of shareowners of record as of Feb. 12, 1999, was 63,013. The high and low common stock prices on that date were 48 7/8 and 46 15/16, respectively. Statement of Consolidated COMPREHENSIVE INCOME (LOSS) - -----------------------------------------------------------------------------------------------
(Dollars in millions) Year Ended Dec. 31, - ----------------------------------------------------------------------------------------------- 1998 1997 1996 - ----------------------------------------------------------------------------------------------- NET INCOME (LOSS) $(250) $ 470 $ 385 - ----------------------------------------------------------------------------------------------- Other Comprehensive Income (Loss): Foreign currency translation adjustments 12 (138) (91) Unrealized net gains (losses) on investments: Unrealized net holding gains (losses) arising during period, before tax (1) (12) (37) Related income tax benefit 2 4 14 Reclassification adjustments for losses included in net income 16 Related income tax expense (6) Additional minimum pension liability adjustment, before tax (24) (27) Related income tax benefit 7 11 - ----------------------------------------------------------------------------------------------- TOTAL OTHER COMPREHENSIVE INCOME (LOSS) 6 (162) (114) - ----------------------------------------------------------------------------------------------- COMPREHENSIVE INCOME (LOSS) $(244) $ 308 $ 271 ===============================================================================================
The above statement should be read in conjunction with pages 47-57 of this report. 1998 Monsanto Annual Report 41 Additional FINANCIAL INFORMATION - ------------------------------------------------------------------------ RISK MANAGEMENT Monsanto continually evaluates risk retention and insurance levels for product liability, property damage and other potential risk areas. The company devotes significant efforts to maintaining and improving safety and internal control programs, which reduce its exposure to certain risks. Management's decision about the amount of insurance coverage to purchase from unaffiliated companies and the appropriate amount of risk to retain is based on the cost and availability of insurance and the likelihood of a loss. Since 1986, Monsanto's liability insurance has been a "claims made" policy form. Management believes that the current levels of risk retention are consistent with those of comparable companies in the various industries in which Monsanto operates, and are reasonable for Monsanto. There can be no assurance that the company will not incur losses beyond the limits of, or outside the coverage of, its insurance. Monsanto's liquidity, financial position and profitability are not expected to be materially affected by the levels of risk retention that the company accepts. COMPANY PREPARES FOR YEAR 2000 Beginning in 1996, the company initiated the Global Year 2000 program (Y2K program) to ensure that its business would not be adversely affected by the inability of many existing computer systems to distinguish between the year 1900 and the year 2000. The Y2K program covers more than 100 company sites in 33 countries. DESCRIPTION AND STATUS OF THE Y2K PROGRAM INTERNAL SYSTEMS: The company's Y2K program encompasses all internal systems, including conventional information technology (IT) business applications, IT infrastructure and embedded systems. Embedded systems include process control and manufacturing, and laboratory automation systems, as well as site-specific facility management systems, such as elevator service and heating and cooling equipment. The remediation process applied to each area consists of four-steps: identification of the systems or components that need to be replaced or fixed, assessment of the work required, prioritization of the work, and successful completion of the required remediation activity. The target date for completion of all remediation work for internal systems is the third quarter of 1999. The following list summarizes the status of the Y2K program with respect to internal systems:
IT APPLICATIONS PORTFOLIO: - -------------------------------------------------------------------------------------------- AS OF DEC. 31, AS OF SEPT. 30, 1998 1998 - -------------------------------------------------------------------------------------------- Number of applications identified 1,280 1,260 Applications assessed for Y2K compliance 100% 100% Applications compliant 55% 43% Applications to be remediated through replacements and upgrades 23% 27% Anticipated retirements 3% 3% Applications at various stages of renovation, redevelopment or testing 19% 27% -------------- IT INFRASTRUCTURE PRODUCTS: - -------------------------------------------------------------------------------------------- AS OF DEC. 31, AS OF SEPT. 30, 1998 1998 - -------------------------------------------------------------------------------------------- Number of products identified 530 530 Products researched for compliance 93% 43% Products compliant 56% 18% Products to be remediated with minor upgrades 10% 1% Noncompliant products to be remediated or retired 27% 24% -------------- EMBEDDED SYSTEMS: - -------------------------------------------------------------------------------------------- AS OF DEC. 31, AS OF SEPT. 30, 1998 1998 - -------------------------------------------------------------------------------------------- Number of process control products identified 7,600 4,600 Products researched for compliance 66% 31% Products compliant 54% 24% Products application dependent 4% 4% Noncompliant products to be remediated or retired 8% 3% Number of laboratory automation products identified 5,000 3,900 Products researched for compliance 75% 0% Products compliant 52% Products application dependent 10% Noncompliant products to be remediated or retired 13% Number of site facilities products identified 700 300 Products researched for compliance 69% 9% Products compliant 56% 7% Products application dependent 7% 2% Noncompliant products to be remediated or retired 6% --------------
42 1998 Monsanto Annual Report - ------------------------------------------------------------------------ SUPPLIERS: Monsanto has contacted its major suppliers to assess their preparations for the year 2000. More than 650 key corporate suppliers have been identified and contacted in addition to numerous suppliers critical to individual locations. Approximately 50 percent of the company's key corporate suppliers have been identified as likely to be Y2K compliant. The status of another 24 percent of these key suppliers is of concern and further action is being taken by managers responsible for these suppliers or supplier contracts. Approximately 26 percent of the key suppliers have not informed the company of their compliance status or plans. Where appropriate, Monsanto representatives will conduct in-depth investigations or make on-site visits to determine the ability of certain suppliers to be Y2K compliant. CONTINGENCY PLANS: The company's contingency plans are evolving as it proceeds with the Y2K program. Monsanto began a major initiative in November 1998 with the establishment of the Y2K business continuity team. The team's assignment is to clearly define critical, global infrastructure components and failure modes; to assume Y2K related failure or a high risk of critical failure; and to draft appropriate contingency plans. The team will expand existing contingency plans as appropriate. Its goal is to have all plans in place no later than the third quarter of 1999. Where a supplier's performance is in doubt, Monsanto's contingency plans may include the stockpiling of raw materials or obtaining supplies from a different vendor. The company will increase the number of tests for pharmaceutical and nutrition products as the year 2000 nears, and it also may increase production of critical product inventory. COSTS The costs associated with Y2K compliance for Monsanto are currently projected at approximately $30.5 million. Through Dec. 31, 1998, the company spent $15.3 million. The remaining estimated costs are expected to be funded from ongoing operations. These costs encompass only the company's Y2K remediation efforts and do not include expenses such as overtime wages, additional warehouse space, or increased finance costs that may be incurred upon implementation of the company's contingency plans. Monsanto does not expect the costs associated with its year 2000 efforts to be materially adverse to the company's business operations, financial position, profitability or liquidity. RISKS Monsanto believes that the Y2K program follows both prudent and best demonstrated practices (including contingency planning) and makes use of appropriate internal and external skills to minimize the effect of any failures. However, because the year 2000 problem is unprecedented in scope and complexity, no complete assurance of risk avoidance can be given. Failure to correct a material year 2000 problem could result in lost profits or breach of contract claims if the company is unable to deliver its products pursuant to the terms of its agreements, or if such products fail to meet contract specifications, or if claims for personal injury or property damage at its facilities are made and upheld. Monsanto also may experience lost revenues if any of its customers experience Y2K problems which cause them to order less product, or otherwise causes them financial difficulties that result in a breach of their payment obligations. Readers are cautioned that forward-looking statements contained in this section should be read in conjunction with the company's disclosures under the heading "Disclosure of Forward-Looking Statements." EURO CONVERSION On Jan. 1, 1999, 11 of the 15 member countries of the European Union established fixed conversion rates between their national currencies and the euro. During the transition period, from Jan. 1, 1999, until June 30, 2002, both the national currencies and the euro will be legal currencies. Beginning July 1, 2002, the national currencies of the participating countries no longer will be legal tender for any transactions. In September 1997, Monsanto formed a cross-functional team and engaged a consultant to prepare for the euro conversion. As of Jan. 1, 1999, Monsanto began to engage in euro-denominated transactions and was legally compliant. Monsanto expects to have all affected information systems fully converted by April 2001. Monsanto does not expect the euro conversion to have a material effect on its competitive position, business operations, financial position or results of operations. 1998 Monsanto Annual Report 43 FINANCIAL Instruments - ------------------------------------------------------------------------ MARKET RISK MANAGEMENT Monsanto is exposed to market risk, including changes in interest rates, currency exchange rates, and commodity prices. To manage the volatility relating to these exposures, the company enters into various derivative transactions. Monsanto does not hold or issue derivative financial instruments for trading purposes. For more information about how Monsanto manages specific risk exposures, see the Currency Translation note, the Inventories note, and the Long-Term Debt note in Notes to Financial Statements. The tables below provide information about the company's derivative instruments and other financial instruments that are sensitive to changes in interest rates, currency exchange rates, and commodity prices. The financial instruments are grouped by market risk exposure category. Instrument denominations are indicated in parentheses. For instruments denominated in currencies other than the U.S. dollar, the information is presented by its equivalent in U.S. dollars, the company's reporting currency. - ------------------------------------------------------------------------ Significant interest rate risk sensitive instruments as of Dec. 31, 1998, were:
EXPECTED MATURITY DATE -------------------------------------------------------------------------------------------- (Dollars in millions, except average interest rate) 1999 2000 2001 2002 2003 THEREAFTER TOTAL FAIR VALUE - --------------------------------------------------------------------------------------------------------------------------------- LONG-TERM DEBT: Fixed rate ($US) Principal amount $164 $ 543 $ 33 $797 $2,813 $4,350 $4,632 Average interest rate 6.1% 5.6% 7.5% 6.1% 6.6% 6.5% Fixed rate (Japanese yen) Principal amount $ 86 $ 86 $ 125 Average interest rate 5.6% 5.6% Variable rate ($US) Principal amount $ 8 $1,009 $ 16 $575 $ 208 $1,816 $1,816 Average interest rate 4.3% 5.3% 4.2% 4.3% 4.4% 4.8% SHORT-TERM DEBT: Fixed rate ($US) Principal amount $276 $ 276 $ 277 Average interest rate 7.5% 7.5% Variable rate ($US) Principal amount $542 $ 542 $ 542 Average interest rate 5.3% 5.3% - --------------------------------------------------------------------------------------------------------------------------------- Includes $1.0 billion of commercial paper that is assumed to be renewed through 2001, when the company's $1.0 billion credit facility expires. Average variable rates are based on 1998 year-end variable rates. Actual rates may be higher or lower.
- ---------------------------------------------------------------------- Significant currency exchange rate risk sensitive instruments as of Dec. 31, 1998 (dollars in millions, except average exchange rate):
AVERAGE NOTIONAL EXCHANGE FAIR EXPECTED MATURITY 1999 AMOUNT RATE VALUE - -------------------------------------------------------------------------------- FORWARD CONTRACTS: Sale of British pound $381 0.600 $379 Sale of Brazilian real 128 1.254 125 Sale of Canadian dollar 64 1.542 64 Sale of Australian dollar 42 1.562 40 Sale of South African rand 30 5.900 29 Sale of Mexican peso 15 10.430 15 Sale of Polish zloty 21 3.532 21 Sale of Czech crown 11 30.130 11 Sale of Philippine peso 4 46.880 5 Purchase of Japanese yen 26 117.560 27 - -------------------------------------------------------------------------------- Average contract exchange rates are stated in currency units per U.S. dollar.
Significant commodity price risk sensitive instruments as of Dec. 31, 1998:
EXPECTED MATURITY FAIR 1999 VALUE - -------------------------------------------------------------------------------- CORN FUTURES CONTRACTS: Contract volumes (million bushels) 16.4 Weighted average price (per bushel) $ 2.31 Contract amount ($US in millions) $ 38 $ 35 SOYBEAN FUTURES CONTRACTS: Contract volumes (million bushels) 24.0 Weighted average price (per bushel) $ 5.64 Contract amount ($US in millions) $135 $132 - --------------------------------------------------------------------------------
Contract amounts are used to calculate the contractual payments and quantity of the commodity to be exchanged. 44 1998 Monsanto Annual Report Statement of Consolidated SHAREOWNERS' EQUITY - --------------------------------------------------------------------------------------------------------------------------------
(Dollars in millions) Year Ended Dec. 31, - -------------------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 - -------------------------------------------------------------------------------------------------------------------------------- COMMON STOCK: Balance, Jan. 1 $ 1,644 $ 1,644 $ 329 Issuance of shares (24,956,250 shares in 1998) 50 Par value of stock issued in five-for-one stock split 1,315 - -------------------------------------------------------------------------------------------------------------------------------- BALANCE, DEC. 31 $ 1,694 $ 1,644 $ 1,644 - -------------------------------------------------------------------------------------------------------------------------------- ADDITIONAL CONTRIBUTED CAPITAL: Balance, Jan. 1 $ 321 $ 65 $ 902 Employee stock plans and ESOP 174 135 133 Issuance of shares 894 Par value of stock issued in five-for-one stock split (970) Spinoff of chemical businesses 121 - -------------------------------------------------------------------------------------------------------------------------------- BALANCE, DEC. 31 $ 1,389 $ 321 $ 65 - -------------------------------------------------------------------------------------------------------------------------------- TREASURY STOCK: Balance, Jan. 1 $(2,570) $(2,661) $(2,550) Shares purchased (8,244,500 shares in 1996) (253) Net shares issued under employee stock plans (9,054,062 shares in 1998; 10,908,529 shares in 1997; and 15,269,164 shares in 1996) 62 91 142 - -------------------------------------------------------------------------------------------------------------------------------- BALANCE, DEC. 31 $(2,508) $(2,570) $(2,661) - -------------------------------------------------------------------------------------------------------------------------------- REINVESTED EARNINGS: Balance, Jan. 1 $ 4,973 $ 4,795 $ 5,097 Net income (loss) (250) 470 385 Dividends (net of ESOP tax benefits) (71) (292) (342) Par value of stock issued in five-for-one stock split (345) - -------------------------------------------------------------------------------------------------------------------------------- BALANCE, DEC. 31 $ 4,652 $ 4,973 $ 4,795 - -------------------------------------------------------------------------------------------------------------------------------- RESERVE FOR ESOP DEBT RETIREMENT: Balance, Jan. 1 $ (123) $ (174) $ (181) Allocation of ESOP shares 17 20 7 Spinoff of chemical businesses 31 - -------------------------------------------------------------------------------------------------------------------------------- BALANCE, DEC. 31 $ (106) $ (123) $ (174) ================================================================================================================================ ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS): - -------------------------------------------------------------------------------------------------------------------------------- ACCUMULATED CURRENCY ADJUSTMENT: Balance, Jan. 1 $ (128) $ 10 $ 101 Translation adjustments 12 (127) (91) Spinoff of chemical businesses (11) - -------------------------------------------------------------------------------------------------------------------------------- BALANCE, DEC. 31 (116) (128) 10 - -------------------------------------------------------------------------------------------------------------------------------- UNREALIZED NET GAINS ON INVESTMENTS: Balance, Jan. 1 3 11 34 Unrealized net gains (losses) on investments, net of reclassification adjustment 11 (8) (23) - -------------------------------------------------------------------------------------------------------------------------------- BALANCE, DEC. 31 14 3 11 - -------------------------------------------------------------------------------------------------------------------------------- ADDITIONAL MINIMUM PENSION LIABILITY: Balance, Jan. 1 (16) Additional minimum pension liability adjustment (17) (16) - -------------------------------------------------------------------------------------------------------------------------------- BALANCE, DEC. 31 (33) (16) TOTAL ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS): - -------------------------------------------------------------------------------------------------------------------------------- BALANCE, DEC. 31 $ (135) $ (141) $ 21 ================================================================================================================================ The above statement should be read in conjunction with pages 47-57 of this report. ESOP stands for Employee Stock Ownership Plan.
1998 Monsanto Annual Report 45 QUARTERLY Data (unaudited) - ------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH TOTAL QUARTER QUARTER QUARTER QUARTER YEAR (Dollars in millions, except share amounts) - ------------------------------------------------------------------------------------------------------------------------------ NET SALES ============================================================================================================================== 1998 $2,044 $2,470 $1,986 $2,148 $8,648 1997 1,875 2,095 1,724 1,820 7,514 1996 1,612 1,847 1,442 1,447 6,348 - ------------------------------------------------------------------------------------------------------------------------------ INCOME (LOSS) FROM CONTINUING OPERATIONS ============================================================================================================================== 1998 196 257 (100) (603) (250) 1997 206 250 (167) 5 294 1996 222 316 107 (232) 413 - ------------------------------------------------------------------------------------------------------------------------------ NET INCOME (LOSS) ============================================================================================================================== 1998 196 257 (100) (603) (250) 1997 274 324 (133) 5 470 1996 260 365 170 (410) 385 - ------------------------------------------------------------------------------------------------------------------------------ DILUTED EARNINGS (LOSS) PER SHARE -- CONTINUING OPERATIONS ============================================================================================================================== 1998 0.32 0.41 (0.17) (1.00) (0.41) 1997 0.34 0.41 (0.28) 0.01 0.48 1996 0.37 0.53 0.18 (0.39) 0.69 - ------------------------------------------------------------------------------------------------------------------------------ DILUTED EARNINGS (LOSS) PER SHARE ============================================================================================================================== 1998 0.32 0.41 (0.17) (1.00) (0.41) 1997 0.45 0.54 (0.23) 0.01 0.77 1996 0.43 0.62 0.28 (0.69) 0.64 - ------------------------------------------------------------------------------------------------------------------------------ DIVIDENDS PER SHARE ============================================================================================================================== 1998 0.030 0.030 0.030 0.030 0.120 1997 0.150 0.160 0.160 0.030 0.500 1996 0.138 0.150 0.150 0.150 0.588 - ------------------------------------------------------------------------------------------------------------------------------ COMMON STOCK PRICE ============================================================================================================================== 1998 HIGH 53 1/16 60 3/8 63 15/16 55 7/8 63 15/16 LOW 38 5/16 51 5/16 50 1/2 33 3/4 33 3/4 - ------------------------------------------------------------------------------------------------------------------------------ 1997 High 42 1/4 46 1/2 52 5/16 45 3/4 52 5/16 Low 34 3/4 37 36 3/8 38 34 3/4 - ------------------------------------------------------------------------------------------------------------------------------ 1996 High 31 3/4 34 1/2 37 7/8 43 1/4 43 1/4 Low 23 28 1/8 26 1/8 36 1/2 23 - ------------------------------------------------------------------------------------------------------------------------------ Because Monsanto reported a loss from continuing operations for the fourth quarter and the year ended Dec. 31, 1998, generally accepted accounting principles require diluted loss per share to be calculated using weighted average common shares outstanding, excluding common stock equivalents. As a result, the quarterly earnings (loss) per share do not total to the full year amount. Stock prices were not restated to reflect the spinoff of the chemical businesses on Sept. 1, 1997.
Historically, Monsanto's income from continuing operations has been higher during the first half of the year, primarily because of the concentration of generally more profitable sales by the Agricultural Products segment during that part of the year. Income from continuing operations for the second quarter of 1998 included a net aftertax charge of $13 million, or $0.02 per share, for the cost of exiting the company's optical products business offset by a restructuring reserve reversal. Income from continuing operations for the third quarter of 1998 included an aftertax charge of $187 million, or $0.30 per share, for the write-off of in-process research and development (R&D) for the acquisition of Plant Breeding International Cambridge Limited (PBIC). Income from continuing operations for the fourth quarter of 1998 included an aftertax charge of $630 million, or $1.01 per share, for restructuring and special charges, write-offs for acquired in-process R&D, and charges for the cancellation of DEKALB stock options. The write-off of in-process R&D in the fourth quarter of 1998 was for the acquisition of DEKALB Genetics Corp. and certain international seed operations of Cargill Inc., net of a revision of the amount of in-process R&D written off in the third quarter related to the PBIC acquisition. A revision in the estimate was made in accordance with the U.S. Securities and Exchange Commission's (SEC) recently clarified guidance on in-process R&D. This revision was made as an adjustment to the initial purchase price allocation, which was not yet finalized because of outstanding information, primarily related to intangible asset valuations and liabilities assumed. Income from continuing operations for each quarter in 1997 was affected by the write-off of in-process R&D from acquisitions. First- quarter 1997 included an aftertax charge of $63 million, or $0.11 per share, principally for the acquisition of the Asgrow Agronomics seed business. Second-quarter 1997 included an aftertax charge of $72 million, or $0.11 per share, for the Calgene Inc. acquisition. Third- quarter 1997 included an aftertax charge of $270 million, or $0.45 per share, for the Holden's Foundation Seeds Inc. acquisition. Fourth- quarter 1997 included $50 million, or $0.08 per share, for the Sementes Agroceres S.A. acquisition. Net income for the fourth quarter of 1996 included an aftertax charge of $500 million, or $0.84 per share, associated with the company's spinoff of the chemical businesses and other unusual items. The aftertax expense related to continuing operations for these actions was $257 million, or $0.43 per share. 46 1998 Monsanto Annual Report NOTES to Financial Statements - ------------------------------------------------------------------------ SIGNIFICANT ACCOUNTING POLICIES Monsanto's significant accounting policies are italicized in the following Notes to Financial Statements. BASIS OF PRESENTATION Previously reported amounts have been reclassified to make them consistent with the current presentation. BASIS OF CONSOLIDATION The consolidated financial statements include the company and its majority-owned subsidiaries. Intercompany transactions have been eliminated in consolidation. Other companies in which Monsanto has a significant ownership interest (generally greater than 20 percent) are included in other assets in the Statement of Consolidated Financial Position. Monsanto's share of these companies' net earnings or losses is included in other expense (income) -- net in the Statement of Consolidated Income (Loss). USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and that affect revenues and expenses during the period reported. Estimates are adjusted to reflect actual experience when necessary. Significant estimates are used to account for restructuring reserves, self-insurance reserves, employee benefit plans, asset impairments, in-process research and development (R&D), business acquisitions, and contingencies. NEW ACCOUNTING STANDARDS Effective Jan. 1, 1998, Monsanto adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (FAS 130). FAS 130 establishes standards for the reporting and display of comprehensive income and its components in financial statements. Comprehensive income includes all nonshareowner changes in equity, and consists of net income, foreign currency translation adjustments, unrealized gains and losses on available-for-sale securities, and additional minimum pension liability adjustments. Effective Jan. 1, 1998, Monsanto adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (FAS 131). FAS 131 establishes standards for defining operating segments and for reporting information about operating segments in financial statements. It also establishes standards for related disclosures about products, geographic areas, and major customers. Monsanto's reportable operating segments did not change as a result of adopting FAS 131. However, Monsanto changed its publicly reported measure of segment profitability from operating income to EBIT excluding unusual items to make it consistent with its internally reported measure of segment profitability. Effective Jan. 1, 1998, Monsanto adopted the American Institute of Certified Public Accountants' Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" (SOP 98-1). SOP 98-1 provides guidance about when to capitalize costs incurred for internal-use computer software. Monsanto's previous accounting policies were essentially in compliance with the provisions of this statement, therefore adoption of SOP 98-1 did not have a material effect on the company's results of operations. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS 133). FAS 133 requires all derivatives to be recognized as assets or liabilities on the balance sheet and measured at fair value. Changes in the fair value of derivatives should be recognized in either net income or other comprehensive income, depending on the designated purpose of the derivative. This statement is effective for Monsanto on Jan. 1, 2000. Because of the effect of recent acquisitions, Monsanto is reassessing its position and has not yet determined the effect this statement will have on its consolidated financial position or results of operations. CURRENCY TRANSLATION The financial statements for most of Monsanto's entities outside the United States are translated into U.S. dollars at current exchange rates. Unrealized currency translation adjustments in the Statement of Consolidated Financial Position are accumulated in shareowners' equity as a component of Accumulated Other Comprehensive Loss. The financial statements of entities outside the United States that operate in highly inflationary economies are translated at either current or historical exchange rates, as appropriate. These currency adjustments are included in net income. Currencies in which Monsanto has significant exposures are the euro (which, as of Jan. 1, 1999, replaced the Belgian franc, German mark, Italian lira and eight other European currencies), Japanese yen and U.K. pound sterling. Other currency exposures include the Argentine peso, Brazilian real, and Canadian dollar. Currency restrictions are not expected to have a significant effect on Monsanto's cash flow, liquidity or capital resources. Currency option contracts are purchased to manage currency exposure for anticipated transactions (for example, expected export sales in the following year denominated in foreign currencies). Currency option and forward contracts are used to manage other currency exposures, primarily for receivables and payables denominated in currencies other than the entities' functional currencies. This hedging activity is intended to protect the company from adverse fluctuations in foreign currencies vs. the entities' functional currencies. 1998 Monsanto Annual Report 47 NOTES TO FINANCIAL STATEMENTS (continued) - ------------------------------------------------------------------------ As of Dec. 31, 1998, Monsanto had currency forward contracts to purchase $26 million and to sell $697 million of other currencies, and purchased currency option contracts to sell $85 million of other currencies. Gains and losses on contracts that are designated and effective as hedges are deferred and are included in the recorded value of the transaction being hedged. Net deferred hedging losses as of Dec. 31, 1998, were not material. Gains and losses on other currency forward and option contracts are included in net income immediately. Monsanto is subject to loss if the counterparties to these contracts do not perform. PRINCIPAL ACQUISITIONS AND DIVESTITURES In 1998, the company made strategic acquisitions of several seed companies. In July 1998, Monsanto acquired Plant Breeding International Cambridge Limited (PBIC) for approximately $525 million. In October 1998, Monsanto announced the acquisition of certain international seed operations of Cargill Inc. in Asia, Africa, Central and South America, and Europe, excluding certain operations in the United Kingdom, for approximately $1.4 billion. In December 1998, Monsanto completed its acquisition of DEKALB Genetics Corp. for approximately $2.3 billion. Monsanto recorded the following pretax charges in 1998 for the write-off of acquired in-process research and development (R&D) related to these acquisitions: approximately $60 million for PBIC, approximately $150 million for DEKALB and approximately $190 million for certain Cargill seed operations. The amounts of these write-offs were determined by an independent valuation. Management believes that the technological feasibility of the acquired in-process R&D has not been established and that it has no alternative future uses. Accordingly, the amounts allocated to in-process R&D are required to be expensed immediately under generally accepted accounting principles. In 1997, Monsanto also acquired several other seed companies. In February 1997, the company completed its acquisition of the Asgrow Agronomics seed business for approximately $250 million. In May 1997, the company completed its acquisition of the remaining shares of Calgene Inc. that the company did not already own for approximately $270 million. In September 1997, Monsanto completed the acquisitions of Holden's Foundation Seeds Inc. and Corn States Hybrid Service Inc. for approximately $1.0 billion. In December 1997, the company acquired controlling interest in Sementes Agroceres S.A., a Brazilian seed company, for approximately $160 million. Monsanto recorded the following pretax charges in 1997 for the write-off of acquired in-process R&D related to these acquisitions: approximately $60 million for Asgrow, approximately $70 million for Calgene, approximately $270 million for Holden's and Corn States, and approximately $50 million for Agroceres. The in-process R&D charges for the 1998 and 1997 seed company acquisitions cover numerous seed breeding projects, no single one of which was significant, as is typical in the seed industry. These projects consist of conventional breeding programs for corn, wheat and other hybrids; conventional breeding for soybean varieties; and the development of transgenic crops. In-process R&D charges for the Calgene acquisition included a project to develop naturally colored cotton fiber ($25 million) and a project to control fatty acids in oil seeds ($34 million). The in-process R&D projects were valued using a discounted cash flow method with risk-adjusted discount rates ranging from 12 percent to 17 percent, which took into account the stage of completion and the appropriate development cycle of each in-process R&D category. These 1998 acquisitions were accounted for as purchases. Accordingly, the results of operations for these companies were included in the Statement of Consolidated Income (Loss) from the dates of acquisition. The excess of the purchase price over the estimated fair value of net assets acquired was recorded as goodwill and is being amortized over periods ranging from 20 to 30 years. The purchase price allocations are based on preliminary assumptions and are subject to revision, pending final appraisal and valuation studies. Monsanto financed these acquisitions by issuing debt, common stock, and hybrid securities. In connection with the 1998 acquisitions, Monsanto established a plan in 1998 to integrate the acquired businesses as members of the company's life sciences business. Monsanto plans to close or rationalize certain assets or facilities and eliminate approximately 1,300 jobs as part of the integration plan. The costs of these actions, estimated at $78 million, were recognized as liabilities in connection with the business combinations. This plan is expected to be completed by the second quarter of 2000. As this integration plan is completed, additional liabilities may be recognized. The following unaudited pro forma information combines the consolidated results of operations of Monsanto with those of PBIC, DEKALB, and certain Cargill operations as if these acquisitions had occurred at the beginning of each period presented:
-------- 1998 1997 - -------------------------------------------------------------------------------- Sales $9,346 $8,208 Income (loss) from continuing operations (78) 42 Earnings (loss) per share -- continuing operations (0.12) 0.07 - --------------------------------------------------------------------------------
The pro forma results give effect to certain purchase accounting adjustments, including additional amortization expense from goodwill and other identified intangible assets, and increased interest expense and additional shares outstanding related to debt and common stock issued to finance the acquisitions. Pro forma loss from continuing operations for 1998 excludes unusual aftertax charges of $351 million, primarily for the write-offs of in-process R&D related to these acquisitions, and $20 million for the cancellation of stock options in exchange for cash related to the DEKALB acquisition. These charges were excluded because of their nonrecurring nature. This pro forma financial information is presented for comparative purposes only. It is not necessarily indicative of the operating results that actually would have occurred had the acquisitions occurred on the earliest day of the periods presented. In addition, these results are not intended to be a projection of future results. Pro forma loss from continuing operations for 1998 includes aftertax restructuring and special charges of $459 million. Pro forma income from continuing operations for 1997 includes aftertax unusual charges of $455 million related to in-process R&D. 48 1998 Monsanto Annual Report - ------------------------------------------------------------------------ In 1998, Monsanto announced that it had entered into a definitive agreement with Delta and Pine Land Company (D&PL) to merge it with Monsanto. Under terms of the agreement, D&PL shareowners would be entitled to receive 0.8625 shares of Monsanto's common stock in exchange for each share of D&PL they hold. Approximately 33 million shares of Monsanto common stock would be issued to D&PL shareowners. Based on Monsanto's closing stock price of $53 1/2 per common share on May 8, 1998, the date of the merger agreement, this would result in a purchase price of approximately $1.8 billion. The merger, already approved by D&PL shareowners, is subject to regulatory approvals and other customary conditions. This transaction would be accounted for as a purchase. In September 1997, the company spun off its chemical businesses to shareowners by distributing shares of a newly formed company called Solutia Inc. Monsanto's financial statements present the results of operations and cash flow of the chemical businesses as discontinued operations. In March 1996, Monsanto acquired significant equity positions in Calgene and DEKALB(R). In November 1996, Monsanto acquired a controlling interest in Calgene. In May 1996, Monsanto acquired the plant biotechnology assets of Agracetus. RESTRUCTURING AND SPECIAL CHARGES In 1998, the company recorded net restructuring and other unusual charges of $638 million ($459 million aftertax) as part of the company's overall strategy to reduce costs and continue the commitment to life sciences. The 1998 net restructuring and unusual charges were recorded in the Statement of Consolidated Income (Loss) in the following categories:
FACILITY CLOSURES OTHER WORK FORCE AND ASSET EXPENSE REDUCTIONS IMPAIRMENTS (INCOME) TOTAL - ------------------------------------------------------------------------------------------- Cost of goods sold $ 6 $112 $118 Amortization and adjustment of intangible assets 217 217 Restructuring and special charges 130 156 $(14) 272 Other expense (income) -- net 51 (20) 31 - ------------------------------------------------------------------------------------------- TOTAL INCREASE IN LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES $136 $536 $(34) $638 ===========================================================================================
In December 1998, the board of directors approved a plan to close certain facilities, exit nonstrategic businesses and reduce the current work force. The company recorded pretax restructuring charges and other unusual items of $625 million ($446 million aftertax) to cover the costs associated with these actions. Approximately 1,700 jobs are expected to be eliminated by these actions by the end of 1999. Included in these actions are approximately 240 positions that had been part of the 1996 restructuring plan. The affected employees are entitled to receive severance benefits based on established severance policies or by governmentally mandated employment regulations. The charges also reflect pretax amounts for asset impairments, primarily for property, plant and equipment; intangible assets; and certain investments, totaling $214 million. The asset impairments were recorded primarily because of the company's decision to sell certain nonstrategic businesses. As a result, the net assets of these businesses have been classified as assets held for sale and are carried at their net realizable value, estimated to be approximately $51 million ($33 million in the Agricultural Products segment, $15 million in the Nutrition and Consumer Products segment and $3 million in the Corporate and Other segment). These businesses are expected to be sold by the end of 1999. They produced net income of $2 million in 1998, a net loss of $12 million in 1997, and a net loss of $26 million in 1996. The aftertax effect of suspending depreciation on assets held for sale was not material. Other impairment charges totaling $40 million were recorded because of management's decision to exit certain long-term investments. Fair values of the impaired assets and the businesses held for sale were recorded at their current market values or on estimated sale proceeds, based on either discounted cash flows or sales contracts. The December restructuring amounts also included pretax charges of $286 million for the shutdown or rationalization of certain production and administrative facilities. Charges for these shutdowns included $63 million for property, plant and equipment, $117 million for intangible assets, $29 million for miscellaneous investments, and $23 million for inventories. Leasehold termination costs of $18 million are also included in the shutdown charges. The closure or rationalization of these facilities is expected to be completed by the end of 1999. In May 1998, the board of directors approved a decision to exit Monsanto's optical products business, which included the Orcolite and Diamonex optical products businesses and the Diamonex performance products business, and recorded net pretax charges of $48 million ($34 million aftertax). Monsanto recognized a $20 million pretax gain on the sale of the Orcolite business and recorded pretax charges of $68 million for the rationalization of the Diamonex businesses, primarily for severance costs and the write-off of manufacturing facilities and intangible assets. In connection with the shutdown of the Diamonex businesses approximately 200 jobs were eliminated at a total cost of $6 million. These work force reductions were completed (including payment of severance) by Dec. 31, 1998. Net income generated by the optical products businesses in 1998, 1997 and 1996 totaled $2 million, $5 million and $2 million, respectively. Also during the second quarter of 1998, Monsanto recognized a pretax gain of $35 million ($21 million aftertax) from the reversal of a restructuring reserve that was no longer needed because of a decision not to rationalize a European pharmaceutical production facility. There were approximately 70 jobs scheduled to be eliminated as part of this rationalization plan. The decision was driven by changes in the business and regulatory environment and successes in the R&D pipeline. 1998 Monsanto Annual Report 49 NOTES TO FINANCIAL STATEMENTS (continued) - ------------------------------------------------------------------------ In December 1996, the company recorded pretax restructuring charges and other unusual items related to continuing operations of $376 million ($257 million aftertax) to cover the closure or rationalization of certain facilities, asset write-offs, and work force reductions. The 1996 net restructuring and unusual charges were recorded in the Statement of Consolidated Income (Loss) in the following categories:
FACILITY CLOSURES WORK FORCE AND ASSET OTHER REDUCTIONS IMPAIRMENTS COSTS TOTAL - -------------------------------------------------------------------------------------------- Cost of goods sold $ 28 $ 28 Amortization and adjustment of intangible assets 23 23 Restructuring and special charges $255 57 $ 44 356 Other expense (income) -- net (31) (31) - -------------------------------------------------------------------------------------------- TOTAL DECREASE IN INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES $255 $108 $ 13 $376 ============================================================================================
Approximately 1,520 jobs were expected to be eliminated by these actions. The affected employees were entitled to receive severance benefits based on established severance policies or by governmentally mandated employment regulations. As of June 30 ,1998, the company had eliminated approximately 1,020 jobs associated with these actions. In addition, approximately 140 jobs to be eliminated in the original plan were accomplished through attrition, business divestitures, employee outsourcing arrangements, or normal retirements. The original plan approved by the board of directors called for completion of substantially all of the work force reductions during 1998. However, implementation of the plan was delayed during 1998 due to the contemplated merger between the company and American Home Products Corp. (AHP), which was announced on June 1, 1998. The anticipated organizational changes required to integrate these two companies caused management to delay the timing of the original 1996 plan. Following the termination of the proposed merger agreement with AHP on Oct. 13, 1998, management reconsidered the remaining actions originally contemplated in the December 1996 plan, and resumed implementation of the plan with approximately 240 jobs to be eliminated by the end of 1999. Included in the shutdown charges for 1996 were asset impairments of $40 million for property, plant and equipment, and leasehold termination costs of $8 million. Pretax charges for asset impairments of $51 million were related to write-offs for intangible assets for products no longer marketed and for certain rights to production capacity that will not be used. Assets were written down to their estimated fair values, using appropriate discounted cash flows and appropriate discount rates. Activity in the restructuring and other expense reserve balances were as follows:
FACILITY CLOSURES WORK FORCE AND ASSET OTHER REDUCTIONS IMPAIRMENTS COSTS TOTAL - -------------------------------------------------------------------------------------------- Reserve balance as of Jan. 1, 1996 $ 141 $ 52 $ 193 Establishment of reserves, net of reversals 255 108 $ 13 376 Write-offs of assets against reserves (128) 31 (97) Costs charged against reserves (12) (12) - -------------------------------------------------------------------------------------------- Reserve balance as of Dec. 31, 1996 384 32 44 460 Costs charged against reserves (168) (28) (29) (225) - -------------------------------------------------------------------------------------------- Reserve balance as of Dec. 31, 1997 216 4 15 235 Establishment of reserves, and special charges, net of reversals 136 536 (34) 638 Write-offs of assets against reserves (475) 34 (441) Costs charged against reserves (133) (4) (137) - -------------------------------------------------------------------------------------------- RESERVE BALANCE AS OF DEC. 31, 1998 $ 219 $ 65 $ 11 $ 295 ============================================================================================
The restructuring and special charges established in 1998 and 1996 were based on estimates prepared at the time the actions were approved by the board of directors. Management believes that the balance of these reserves as of Dec. 31, 1998, is adequate for completion of the actions. In December 1996, $21 million of restructuring reserves were reversed due to the successful completion of actions at costs less than originally estimated. In May 1998, $35 million of restructuring reserves were reversed because of a decision not to rationalize a European pharmaceutical production facility. In December 1998, $33 million of restructuring reserves were reversed due to changes in estimates in the fourth quarter of 1998. These reversals have been reported as a reduction to the new reserves established in each year. 50 1998 Monsanto Annual Report - ---------------------------------------------------------------------------- DEPRECIATION AND AMORTIZATION
------ 1998 1997 1996 - ---------------------------------------------------------------------------- Depreciation $335 $299 $276 Amortization of intangible assets 270 173 128 Obsolescence 31 15 19 - ---------------------------------------------------------------------------- TOTAL $636 $487 $423 ============================================================================
Property, plant and equipment is recorded at cost. The cost of plant and equipment is depreciated over weighted average periods of 18 years for buildings and 10 years for machinery and equipment, by the straight-line method. Intangible assets are recorded at cost less accumulated amortization. Total amortization and adjustment of intangible assets reflected in the Statement of Consolidated Income (Loss) includes $217 million of charges for asset impairments in 1998 and $23 million of charges for asset impairments in 1996. The components of intangible assets were:
-------- 1998 1997 - ---------------------------------------------------------------------- Goodwill $5,102 $1,835 Patents and other intangible assets 945 1,002 - ---------------------------------------------------------------------- TOTAL $6,047 $2,837 ======================================================================
Goodwill is the cost of acquired businesses in excess of the fair value of their identifiable net assets and is amortized over the estimated periods of benefit (five to 40 years). Patents obtained in a business acquisition are recorded at the present value of estimated future cash flows resulting from patent ownership. The cost of patents is amortized over their legal lives. The cost of other intangible assets (principally seed germplasm, product rights and trademarks) is amortized over their estimated useful lives. Impairment tests of long-lived assets are made when conditions indicate a possible loss. Such impairment tests are based on a comparison of undiscounted cash flows to the recorded value of the asset. If an impairment is indicated, the asset value is written down to its discounted cash value, using an appropriate discount rate. INVESTMENTS Certain investments in equity securities, other than investments in equity affiliates, are classified as available-for-sale securities, and are recorded at their market values. When a decline in market value is deemed other than temporary, the reduction to the investment in a security is charged to expense. As of Dec. 31, these equity securities were detailed as follows:
------ 1998 1997 - ----------------------------------------------------------------- Aggregate fair value $75 $72 Gross unrealized holding: Gains 36 27 Losses 14 20 - -----------------------------------------------------------------
Debt securities held are recorded at amortized cost, because the company has the ability and intent to hold these securities to their maturity date. These securities mature in less than five years. As of Dec. 31, 1998 and 1997, the total amortized cost of these securities was $90 million and $116 million, respectively. NVENTORIES Inventories are stated at lower of cost or market. Actual cost is used to value raw materials and supplies. Standard cost, which approximates actual cost, is used to value finished goods and goods in process. Standard cost includes direct labor and raw materials, and manufacturing overhead based on practical capacity. The cost of certain inventories (33 percent as of Dec. 31, 1998) is determined by using the last-in, first-out (LIFO) method, which generally reflects the effects of inflation or deflation on cost of goods sold sooner than other inventory cost methods do. The cost of other inventories generally is determined by the first-in, first-out (FIFO) method. Inventories at FIFO approximate current cost. The components of inventories were:
-------- 1998 1997 - ---------------------------------------------------------------- Finished goods $1,179 $ 762 Goods in process 561 265 Raw materials and supplies 298 390 - ---------------------------------------------------------------- Inventories, at FIFO cost 2,038 1,417 Excess of FIFO over LIFO cost (34) (43) - ---------------------------------------------------------------- TOTAL $2,004 $1,374 ================================================================
Commodity futures and options contracts are used to hedge the price volatility of certain commodities, primarily soybeans and corn. This hedging activity is intended to manage the price paid to production growers for corn and soybean seeds. Gains and losses on contracts that are designated and effective as hedges are deferred and are included in cost of goods sold when the underlying seeds are sold. As of Dec. 31, 1998, Monsanto had futures contracts to purchase $173 million of corn and soybeans. INCOME TAXES The components of income (loss) from continuing operations before income taxes were:
------- 1998 1997 1996 - ------------------------------------------------------------------------------- United States $(149) $(55) $313 Outside United States (94) 421 240 - ------------------------------------------------------------------------------- TOTAL $(243) $366 $553 ===============================================================================
The components of income tax expense charged to operations were:
------- 1998 1997 1996 - ------------------------------------------------------------------------------- Current: U.S. federal $ 278 $ 138 $ 42 U.S. state 31 20 14 Outside United States 16 124 91 - ------------------------------------------------------------------------------- 325 282 147 - ------------------------------------------------------------------------------- Deferred: U.S. federal (301) (194) 10 U.S. state (10) (17) (6) Outside United States (7) 1 (11) - ------------------------------------------------------------------------------- (318) (210) (7) - ------------------------------------------------------------------------------- TOTAL $ 7 $ 72 $140 ===============================================================================
1998 Monsanto Annual Report 51 NOTES TO FINANCIAL STATEMENTS (continued) - -------------------------------------------------------------------- Factors causing Monsanto's income taxes to differ from the U.S. federal statutory rate were:
------ 1998 1997 1996 - ------------------------------------------------------------------------------------------- U.S. federal statutory rate $(85) $128 $194 U.S. export earnings (29) (26) (32) Puerto Rican operations (16) (14) (20) U.S. R&D tax credit (35) (25) (8) Higher (lower) rates outside the United States 42 (12) (5) Nondeductible goodwill 40 11 12 Other nondeductible expenses 6 4 6 Valuation allowances (15) (8) Acquired in-process R&D 71 25 Equity income 5 (6) 13 Other 8 2 (12) - ------------------------------------------------------------------------------------------- INCOME TAXES $ 7 $ 72 $140 ===========================================================================================
Deferred income tax balances were related to:
------- 1998 1997 - ------------------------------------------------------------------------------------------- Property $(286) $(180) Pension and postretirement benefits 267 231 Restructuring reserves 232 71 Inventories 86 6 Net operating tax loss and tax credit carryforwards 282 138 Acquired in-process R&D 233 207 Other 14 (53) Valuation allowances (13) (22) - ------------------------------------------------------------------------------------------- NET DEFERRED TAX ASSETS $ 815 $ 398 ===========================================================================================
Deferred tax balances were:
------ 1998 1997 - ------------------------------------------------------------------------------------------- Deferred tax assets $892 $495 Deferred tax liabilities 77 97 - ------------------------------------------------------------------------------------------- NET DEFERRED TAX ASSETS $815 $398 ===========================================================================================
The change in valuation allowances in 1998 was primarily related to the utilization of the state net operating loss carryforwards. As of Dec. 31, 1998, Monsanto had available approximately $400 million in remaining net operating loss carryforwards in the United States. These expire from 1999 through 2012. As of Dec. 31, 1998, Monsanto also had available roughly $110 million in remaining net operating loss carryforwards outside the United States, which do not expire. Income taxes and remittance taxes have not been recorded on $1.4 billion in undistributed earnings of subsidiaries, either because any taxes on dividends would be offset substantially by foreign tax credits or because Monsanto intends to reinvest those earnings indefinitely. It is not practical to estimate the income tax liability that might be incurred if such earnings were remitted to the United States. SHORT-TERM DEBT AND CREDIT ARRANGEMENTS Short-term debt was:
-------- 1998 1997 - ------------------------------------------------------------------------------- Notes payable to banks $ 328 $ 312 Commercial paper 541 1,200 Bank overdrafts 134 126 Current portion of long-term debt 66 88 - ------------------------------------------------------------------------------- TOTAL $1,069 $1,726 =============================================================================== Weighted average interest rates of notes payable as of Dec. 31: Banks 9.5% 8.5% Commercial paper 5.3% 5.9% - ------------------------------------------------------------------------------- Includes the effect of notes in certain countries that have interest rates higher than those in the United States.
Monsanto had aggregate short-term loan facilities of $533 million, under which loans totaling $328 million were outstanding as of Dec. 31, 1998. Interest on these loans is related to various bank rates. Monsanto has a $1.0 billion credit facility, expiring in 2001, that allows the company to request that lenders increase their commitments up to an aggregate of $1.6 billion. In November 1998, Monsanto entered into a $2.0 billion, 364-day credit facility. There were no borrowings under these credit facilities as of Dec. 31, 1998. These facilities are used to support the issuance of commercial paper. Interest on amounts borrowed under these agreements is expected to be at money market rates. Covenants under these credit facilities restrict maximum borrowings. The company does not anticipate that future borrowings will be limited by the terms of these agreements. LONG-TERM DEBT Long-term debt (exclusive of current maturities) was:
-------- 1998 1997 - ------------------------------------------------------------------------------------------- Industrial revenue bond obligations, 5.5% average rate at Dec. 31, 1998, due 1999 to 2028 $ 337 $ 338 Medium-term notes, 7.5% average rate at Dec. 31, 1998, due 2000 to 2005 165 90 Commercial paper 1,000 625 6% notes due 2000 150 150 7.09% and 8.13% amortizing ESOP notes and debentures due 2000 and 2006, guaranteed by the company 91 101 5 3/8% notes due 2001 498 Adjustable conversion-rate equity security units due 2003 700 Variable-rate notes due 2003 575 5.75% notes due 2005 596 5 7/8% notes due 2008 199 8 7/8% debentures due 2009 99 99 5.6% yen note due 2016 86 77 6.5% debentures due 2018 496 8.7% debentures due 2021 100 100 8.2% debentures due 2025 150 150 6.75% debentures due 2027 198 198 6.6% debentures due 2028 694 Other 125 51 - ------------------------------------------------------------------------------------------- TOTAL $6,259 $1,979 =========================================================================================== ESOP stands for employee stock ownership plan.
52 1998 Monsanto Annual Report - ------------------------------------------------------------------------ Maturities and sinking-fund requirements on long-term debt, excluding commercial paper, are $66 million in 1999, $208 million in 2000, $561 million in 2001, $92 million in 2002, and $1.3 billion in 2003. The weighted average maturity of long-term debt as of Dec. 31, 1998, was approximately 11 years. Commercial paper balances of $1.0 billion and $625 million as of Dec. 31, 1998 and 1997, respectively, were classified as long-term debt. Monsanto has the ability and intent to renew these obligations beyond 1999. In November 1998, the company issued 17,500,000 units of 6.5 percent Adjustable Conversion-rate Equity Security (ACES) units at a stated value of $40 per unit, for an aggregate initial offering price of $700 million. Each unit consists of a purchase contract for the company's common stock and a junior subordinated deferrable debenture. Under the purchase contracts, in November 2001, the unit holders will purchase for $40 not more than one share and not less than 0.8197 of one share of the company's common stock per unit, depending on the average trading price of the common stock during a specified period in November 2001. In addition, the company pays quarterly deferrable contract fees to the unit holders at 0.55 percent of the stated amount. The junior subordinated deferrable debentures have a principal amount equal to the stated amount of the units and an interest rate of 5.95 percent. They mature in 2003. Interest-rate swap agreements are used to reduce interest rate risks and to manage interest expense. By entering into these agreements, the company changes the fixed/variable interest-rate mix of its debt portfolio. As of Dec. 31, 1998, Monsanto was party to interest-rate swap agreements with an aggregate notional principal amount of $145 million related to existing debt. The agreements effectively convert floating- rate debt into fixed-rate debt. This reduces the company's risk of incurring higher interest costs in periods of rising interest rates. Monsanto is subject to loss if the counterparties to these agreements do not perform. Interest differentials to be paid or received because of swap agreements are reflected as an adjustment to interest expense over the related debt period. FAIR VALUES OF FINANCIAL INSTRUMENTS The estimated fair values of Monsanto's financial instruments were:
------------------------- 1998 1997 ------------------------------------------------------- Recorded Fair Recorded Fair Amount Value Amount Value - ---------------------------------------------------------------------------------------------- Long-term debt $6,259 $6,579 $1,979 $2,053 - ----------------------------------------------------------------------------------------------
The recorded amounts of cash, trade receivables, investments in securities, discounted receivables, third-party guarantees, commodity futures contracts, currency forward contracts and swaps, accounts payable, interest-rate swaps, and short-term debt approximate their fair values. Fair values are estimated by the use of quoted market prices, estimates obtained from brokers, and other appropriate valuation techniques based on information available as of year-end. The fair-value estimates do not necessarily reflect the values Monsanto could realize in the current market. POSTRETIREMENT BENEFITS -- PENSIONS Most Monsanto employees are covered by noncontributory pension plans. The components of pension cost were:
------- 1998 1997 1996 - ------------------------------------------------------------------------------------------------- Service cost for benefits earned during the year $ 58 $ 61 $ 83 Interest cost on benefit obligation 170 148 287 Assumed return on plan assets (156) (167) (322) Amortization of unrecognized net loss 22 13 9 - ------------------------------------------------------------------------------------------------- TOTAL $ 94 $ 55 $ 57 ================================================================================================= Continuing operations $ 94 $ 55 $ 54 Discontinued operations 3 - ------------------------------------------------------------------------------------------------- TOTAL $ 94 $ 55 $ 57 ================================================================================================= In connection with the spinoff of the company's chemical businesses as Solutia Inc., Solutia assumed the pension liabilities and received related assets for its active employees and for certain former employees of the chemical businesses. The components of pension cost for 1996 have not been restated for amounts related to continuing and discontinued operations as no detailed information was available.
Pension benefits are based on an employee's years of service and/or compensation level. Pension plans are funded in accordance with the company's long-range projections of the plans' financial conditions. These projections take into account benefits earned and expected to be earned, anticipated returns on pension plan assets, and income tax and other regulations. 1998 Monsanto Annual Report 53 NOTES TO FINANCIAL STATEMENTS (continued) - ------------------------------------------------------------------------ Pension costs were determined through the use of the preceding year-end rate assumptions. Assumptions used as of Dec. 31 for the principal plans were:
------ 1998 1997 1996 - ---------------------------------------------------------------------------------------- Discount rate 6.75% 7.00% 7.50% Assumed long-term rate of return on plan assets 9.50% 9.50% 9.50% Annual rates of salary increase (for plans that base benefits on final compensation level) 4.00% 4.00% 4.50% - ----------------------------------------------------------------------------------------
The funded status of Monsanto's pension plans at year-end was:
--------- 1998 1997 - ---------------------------------------------------------------------------------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $ 2,483 $ 4,026 Service cost 58 61 Interest cost 170 148 Amendments 11 77 Actuarial loss 146 376 Acquisitions/divestitures 9 (1,759) Benefits paid (222) (446) - ---------------------------------------------------------------------------------- Benefit obligation at end of year 2,655 2,483 - ---------------------------------------------------------------------------------- CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year 2,029 3,817 Actual return on plan assets 310 350 Employer contributions 17 (3) Plan participants' contributions 3 3 Acquisitions/divestitures 9 (1,603) Fair value of benefits paid (222) (535) - ---------------------------------------------------------------------------------- Plan assets at end of year 2,146 2,029 - ---------------------------------------------------------------------------------- Unfunded status 509 454 Unrecognized initial net gain 15 27 Unrecognized prior service cost (94) (106) Unrecognized subsequent loss (22) (70) - ---------------------------------------------------------------------------------- ACCRUED NET PENSION LIABILITY $ 408 $ 305 ==================================================================================
Amounts recognized in the Statement of Consolidated Financial Position were:
------ 1998 1997 - ---------------------------------------------------------------------------------- Postretirement liabilities: Accrued pension liability $433 $357 Additional minimum pension liability 61 33 Other assets (25) (52) Intangible asset (10) (6) Accumulated other comprehensive loss (51) (27) - ---------------------------------------------------------------------------------- ACCRUED NET PENSION LIABILITY $408 $305 ==================================================================================
As a result of employment reductions from the 1996 restructuring program, $36 million of restructuring reserves was transferred to accrued net pension liability during 1997. The accumulated benefit obligation (ABO) and fair value of plan assets for pension plans with ABOs in excess of plan assets were $1.9 billion and $1.6 billion, respectively, as of Dec. 31, 1998; and $1.8 billion and $1.6 billion, respectively, as of Dec. 31, 1997. Plan assets consist principally of common stocks and U.S. government and corporate obligations. Contributions to qualified plans were neither required nor made in 1998, 1997 and 1996 because the company's principal pension plans are adequately funded, based on the indicated assumed returns. POSTRETIREMENT BENEFITS -- HEALTH CARE AND OTHER Monsanto provides certain health care and life insurance benefits for retired employees. Substantially all of Monsanto's regular, full-time U.S. employees and certain employees in other countries may become eligible for these benefits if they reach retirement age while employed by Monsanto. These postretirement benefits are unfunded and generally are based on employees' years of service and/or compensation levels. The costs of postretirement benefits are accrued by the date the employees become eligible for the benefits. The components of the cost of these postretirement benefits, principally health care and life insurance, were:
------ 1998 1997 1996 - ----------------------------------------------------------------------------------------------- Service cost for benefits earned during the year $ 13 $ 10 $ 25 Interest cost on benefit obligation 27 27 88 Amortization of unrecognized net (gain) loss (1) (3) 2 - ----------------------------------------------------------------------------------------------- TOTAL $ 39 $ 34 $115 =============================================================================================== Continuing operations $ 39 $ 34 $ 33 Discontinued operations 82 - ----------------------------------------------------------------------------------------------- TOTAL $ 39 $ 34 $115 =============================================================================================== In connection with the spinoff of the company's chemical businesses as Solutia Inc., Solutia assumed the postretirement benefit liabilities for its active employees and for former employees who last worked at a chemical facility. The components of the cost of postretirement benefits for 1996 have not been restated for amounts related to continuing and discontinued operations as no detailed information was available.
Postretirement costs were determined by using the preceding year- end rate assumptions. Assumptions used as of Dec. 31 for the principal plans were:
------- 1998 1997 1996 - ------------------------------------------------------------------------------------------- Discount rate 6.75% 7.00% 7.50% Initial trend rate for health care costs 5.75% 7.00% 8.00% Ultimate trend rate for health care costs 4.75% 5.00% 5.00% - ------------------------------------------------------------------------------------------- The initial trend rate for health care costs declines by 1 percent per year, to 4.75 percent for years after the year 1999.
A 1 percent increase in the assumed trend rate for health care costs would have increased the cost of 1998 postretirement health care benefits by $1 million and the accumulated postretirement benefit obligation by $15 million as of Dec. 31, 1998. A 1 percent decrease in the assumed trend rate for health care costs would have decreased the cost of 1998 postretirement health care benefits by $1 million and the accumulated postretirement benefit obligation by $16 million as of Dec. 31, 1998. 54 1998 Monsanto Annual Report - ----------------------------------------------------------------------- As of Dec. 31, the status of Monsanto's postretirement health care and life insurance benefit plans and of its employee disability benefit plans was:
------ 1998 1997 - ---------------------------------------------------------------------------------------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year $383 $1,249 Service cost 13 10 Interest cost 27 27 Actuarial (gain)/loss 6 (1) Acquisitions/divestitures (830) Benefits paid (26) (72) - ---------------------------------------------------------------------------------------- Benefit obligation at end of year 403 383 - ---------------------------------------------------------------------------------------- Unfunded status 403 383 Unrecognized prior service cost 10 12 Unrecognized subsequent loss (31) (26) - ---------------------------------------------------------------------------------------- ACCRUED POSTRETIREMENT LIABILITY $382 $ 369 ========================================================================================
Amounts recognized in the Statement of Consolidated Financial Position were:
------ 1998 1997 - ---------------------------------------------------------------------------------------- Miscellaneous accruals $ 28 $ 24 Postretirement liabilities 354 345 - ---------------------------------------------------------------------------------------- Accrued postretirement liability $382 $369 - ----------------------------------------------------------------------------------------
The assumptions used to compute the accumulated benefit obligation of the principal plans were changed as of Dec. 31, 1997. That resulted in a decrease of approximately $26 million in the accrued postretirement liability. EMPLOYEE SAVINGS PLANS For some company employee savings plans, employee contributions are matched in part by Monsanto. The value of the company's contributions to such plans was $45 million in 1998, $39 million in 1997, and $30 million in 1996. Monsanto has established an Employee Stock Ownership Plan (ESOP), which held 14.7 million shares of Monsanto common stock as of Dec. 31, 1998. At its inception, the ESOP acquired shares by using proceeds from the issuance of long-term notes and debentures guaranteed by Monsanto, and the ESOP also borrowed $50 million from Monsanto. A portion of the ESOP shares are allocated each year to employee savings accounts as matching contributions. Also, in 1998, a portion of the ESOP shares were allocated to employees in connection with a change in vacation policy. In 1998, 944,215 shares were allocated to participants under the plan, leaving 9.2 million unallocated shares as of Dec. 31, 1998. Unallocated shares held by the ESOP are considered outstanding for earnings-per- share calculations. Compensation expense is equal to the cost of the shares allocated to participants, less cash dividends paid on the shares held by the ESOP. Dividends on the common stock owned by the ESOP are used to repay the ESOP borrowings, which were $129 million as of Dec. 31, 1998. In September 1997, the ESOP received Solutia shares in connection with the spinoff of the company's chemical businesses. These shares were exchanged for Monsanto shares.
------ 1998 1997 1996 - ---------------------------------------------------------------------------------------- Total ESOP expense $21 $18 $14 Interest portion of total ESOP expense 10 12 12 Cash contribution 14 6 16 Dividends paid on ESOP shares held 2 8 11 - ----------------------------------------------------------------------------------------
STOCK OPTION PLANS - ------------------------------------------------------------------------ The company grants stock options under two fixed plans. Under the company's Management Incentive Plan of 1996, the company may grant key officers and management employees stock-based awards, including stock options, of up to 71.6 million shares of common stock. Under this plan, the exercise price of each option equals not less than the market price of the company's stock on the date of grant. An option's maximum term is 10 years. Options are granted at the discretion of the board of directors' people committee or its delegate. Options generally vest upon the achievement of business performance targets or the ninth anniversary of the option grant date, whichever comes first. Certain options granted to senior management vest upon the attainment of pre-established prices within specified time periods. Under the company's Shared Success Stock Option Plan, most regular full-time and regular part-time employees of the company were granted options on 200 shares of common stock in 1996, 330 shares in 1997, and 500 shares in 1998. The maximum number of shares for which stock options may be granted under this plan is 26.8 million. The exercise price of each option is determined by the committee and generally equals the market price of the company's stock on the date of grant. An option's maximum term is 10 years. As permitted by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," (FAS 123), the company has elected to continue following the guidance of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," for measurement and recognition of stock-based transactions with employees. Accordingly, no compensation cost has been recognized for the company's option plans. Had the determination of compensation cost for these plans been based on the fair value at the grant dates for awards under these plans, consistent with the method of FAS 123, the company's income (loss) from continuing operations and earnings (loss) per share from continuing operations would have been reduced to the pro forma amounts indicated below:
-------- 1998 1997 1996 - ---------------------------------------------------------------------------------------- Income (loss) from continuing operations: As reported $ (250) $ 294 $ 413 Pro forma (458) 206 331 Earnings (loss) per share -- continuing operations: As reported $(0.41) $0.48 $0.69 Pro forma (0.75) 0.34 0.57 - ----------------------------------------------------------------------------------------
The pro forma compensation expense may not be representative of pro forma compensation expense that would be incurred in future years. 1998 Monsanto Annual Report 55 NOTES TO FINANCIAL STATEMENTS (continued) - ------------------------------------------------------------------------ In computing the pro forma compensation expense, the fair value of each option grant was estimated on the date of grant by using the Black- Scholes option-pricing model. The following weighted-average assumptions were used for grants:
------- 1998 1997 1996 - ---------------------------------------------------------------------------- Expected dividend yield 0.25% 0.29% 1.5% Expected volatility 30.0 % 27.0 % 25.0% Risk-free interest rates 5.6 % 6.4 % 6.0% Expected option lives (years) 4.0 4.3 4.0 - ----------------------------------------------------------------------------
A summary of the status of the company's stock option plans for the three-year period ended Dec. 31, 1998, follows:
OUTSTANDING --------------------------------- EXERCISABLE WEIGHTED-AVERAGE SHARES SHARES EXERCISE PRICE - ------------------------------------------------------------------------------------------- DEC. 31, 1995 45,383,790 55,269,310 $12.63 - ------------------------------------------------------------------------------------------- 1996: Granted 25,004,150 33.38 Exercised (16,327,617) 11.93 Expired (801,605) 22.59 - ------------------------------------------------------------------------------------------- DEC. 31, 1996 38,362,943 63,144,238 $20.90 - ------------------------------------------------------------------------------------------- 1997: Granted 27,740,275 37.98 Exercised (12,002,286) 13.64 Expired (3,476,815) 34.71 - ------------------------------------------------------------------------------------------- DEC. 31, 1997 45,257,512 75,405,412 $25.22 - ------------------------------------------------------------------------------------------- 1998: Granted 42,132,104 50.23 Exercised (10,770,147) 17.76 Expired (2,932,138) 45.38 - ------------------------------------------------------------------------------------------- DEC. 31, 1998 51,055,016 103,835,231 $26.21 ===========================================================================================
The weighted-average fair values of options granted during 1998, 1997 and 1996, were $16.51, $10.01 and $8.86, respectively. The following table summarizes information about stock options outstanding as of Dec. 31, 1998: OPTIONS OUTSTANDING
WEIGHTED-AVERAGE REMAINING WEIGHTED- RANGE OF CONTRACTUAL LIFE AVERAGE EXERCISE PRICES SHARES (IN YEARS) EXERCISE PRICE - ---------------------------------------------------------------------------------- $ 7.00 to 9.99 6,206,664 4.0 $ 9.31 10.00 to 14.99 40,260,354 7.5 12.32 15.00 to 19.99 329,343 6.5 16.78 20.00 to 29.99 8,773,867 7.2 26.24 30.00 to 39.99 31,182,304 7.9 34.18 40.00 to 54.99 13,544,604 9.0 49.01 55.00 to 80.00 3,538,095 9.5 57.26 - ---------------------------------------------------------------------------------- $ 7.00 to 80.00 103,835,231 8.1 $26.21 ==================================================================================
OPTIONS EXERCISABLE
WEIGHTED- RANGE OF AVERAGE EXERCISE PRICES SHARES EXERCISE PRICE - ---------------------------------------------------------------------------------- $ 7.00 to 9.99 6,206,664 $ 9.31 10.00 to 14.99 14,253,619 13.32 15.00 to 19.99 319,343 16.72 20.00 to 29.99 4,442,467 24.90 30.00 to 39.99 22,975,859 34.32 40.00 to 55.00 2,857,064 43.66 - ---------------------------------------------------------------------------------- $ 7.00 to 55.00 51,055,016 $25.01 ==================================================================================
EARNINGS PER SHARE Basic earnings (loss) per share from continuing operations were computed using the weighted average number of common shares outstanding each year (603.5 million in 1998, 590.2 million in 1997, and 581.2 million in 1996). In 1998, 23.5 million dilutive common share equivalents were not included in computing the diluted per share amounts because Monsanto recognized a loss from continuing operations. The computation of diluted earnings per share from continuing operations in 1997 and 1996 took into account the effect of dilutive common share equivalents totaling 20.3 million in 1997 and 17.7 million in 1996. Dilutive common share equivalents consisted of outstanding stock options. Other common share equivalents also were not included in the computation of 1998 diluted loss per share because the effect of their exercise or conversion is not dilutive, when based on the average market price of Monsanto common stock for the period. These included approximately 103.8 million of outstanding stock options and 17.5 million shares of common stock to be issued under the ACES described in the Long-Term Debt note. These options and ACES units expire from 2002 through 2008. CAPITAL STOCK In January 1990, the company's board of directors declared a dividend of one preferred stock purchase right on each then-outstanding share of the company's common stock. If a person or group acquires beneficial ownership of 20 percent or more, or announces a tender offer that would result in beneficial ownership of 20 percent or more of the company's outstanding common stock, the rights become exercisable. As a result of two subsequent stock splits, for every 10 rights held, the owner will be entitled to purchase one one-hundredth of a share of a new series of preferred stock for $450. If Monsanto is acquired in a business combination transaction while the rights are outstanding, for every 10 rights held, the holder will be entitled to purchase, for $450, common shares of the acquiring company having a market value of $900. In addition, if a person or group acquires beneficial ownership of 20 percent or more of the company's outstanding common stock, for every 10 rights held, the holder (other than such person or members of 56 1998 Monsanto Annual Report - ---------------------------------------------------------------------- such group) will be entitled to purchase, for $450, a number of shares of the company's common stock having a market value of $900. Furthermore, at any time after a person or group acquires beneficial ownership of 20 percent or more (but less than 50 percent) of the company's outstanding common stock, the board of directors may, at its option, exchange part or all of the rights (other than rights held by the acquiring person or group) for shares of the company's common stock on a one-share-for-every-10-rights basis. At any time prior to the acquisition of such a 20 percent position, the company can redeem each right for $0.001. The board of directors also is authorized to reduce the aforementioned 20 percent thresholds to not less than 10 percent. The rights expire in the year 2000. As of Dec. 31, 1998, 120.7 million common shares were reserved for employee stock options. In November 1998, the company issued 17,500,000 units of 6.5 percent ACES at a stated value of $40 per unit. For further information, see the Long-Term Debt note. COMMITMENTS AND CONTINGENCIES Commitments, principally in connection with uncompleted additions to property, were approximately $51 million as of Dec. 31, 1998. Excluding the ESOP notes and debentures, Monsanto was contingently liable as a guarantor for bank loans and for discounted customers' receivables totaling approximately $158 million as of Dec. 31, 1998, and $123 million as of Dec. 31, 1997. Future minimum payments under noncancelable operating leases, unconditional inventory purchases, and R&D alliances are $117 million for 1999, $76 million for 2000, $54 million for 2001, $43 million for 2002, $16 million for 2003, and $58 million thereafter. The more significant concentrations in Monsanto's trade receivables at year-end were:
------ 1998 1997 - ------------------------------------------------------------------------------- U.S. agricultural product distributors $388 $359 European agricultural product distributors 284 203 Pharmaceutical distributors worldwide 351 435 Customers in the former Soviet Union 100 75 Customers in Southeast Asia 64 31 Customers in Latin American southern cone countries 568 340 - -------------------------------------------------------------------------------
Management does not anticipate losses on its trade receivables in excess of established allowances. Costs for remediation of waste disposal sites are accrued in the accounting period in which the responsibility is established and when the cost is estimable. Postclosure and remediation costs for hazardous and other waste facilities at operating locations are accrued over the estimated life of the facility as part of its anticipated closure cost. Monsanto's Statement of Consolidated Financial Position included accrued liabilities of $21 million as of Dec. 31, 1998, and $19 million as of Dec. 31, 1997, for the remediation of identified waste disposal sites. Monsanto's future remediation expenses for waste disposal sites are affected by a number of uncertainties. These uncertainties include, but are not limited to, the method and extent of remediation, the percentage of material attributable to Monsanto at the sites relative to that attributable to other parties, and the financial capabilities of the other potentially responsible parties (PRPs). The company does not expect the resolution of such uncertainties to have a material effect on profitability. On March 20, 1998, a jury verdict was returned against Monsanto in a lawsuit filed in the California Superior Court. The lawsuit was brought by Mycogen Corp., Agrigenetics Inc., and Mycogen Plant Sciences Inc. claiming that Monsanto delayed providing access to certain gene technology under a 1989 agreement with Lubrizol Genetics Inc., a company which Mycogen Corp. subsequently purchased. The jury awarded $174.9 million in future damages. Monsanto has filed an appeal of the verdict with the California Court of Appeals for the Fourth Judicial District. No provision has been made in Monsanto's consolidated financial statements with respect to this verdict. The company intends to vigorously pursue all available means to have this verdict set aside. Monsanto is a party to a number of lawsuits and claims, which it is vigorously defending. Such matters arise in the normal course of business and relate to a variety of issues. Certain of the lawsuits and claims seek damages in very large amounts or seek to restrict the company's business activities. Although the results of litigation cannot be predicted with certainty, management's belief is that the final outcome of such litigation will not have a material adverse effect on Monsanto's consolidated financial position, profitability or liquidity in any one year. SUPPLEMENTAL DATA Supplemental income statement data were:
-------- 1998 1997 1996 - ---------------------------------------------------------------------------------------- Rent expense $ 113 $ 130 $111 ======================================================================================== Technological expenses: Research and development $1,263 $ 939 $647 Engineering, commercial development and patent 95 105 55 - ---------------------------------------------------------------------------------------- Total technological expenses $1,358 $1,044 $702 ======================================================================================== Interest expense: Total interest cost $ 327 $ 184 $128 Less capitalized interest (15) (14) (9) - ---------------------------------------------------------------------------------------- Net interest expense $ 312 $ 170 $119 ======================================================================================== Currency losses including equity in affiliates' currency gains and losses $ 24 $ 68 $ 6 ========================================================================================
SEGMENT INFORMATION Certain segment data and geographic data for 1998, 1997 and 1996 that appear on pages 30 and 31 are integral parts of the accompanying financial statements. The company's principal product lines are discussed in the segment data. 1998 Monsanto Annual Report 57 Disclosure of FORWARD-LOOKING STATEMENTS - ----------------------------------------------------------------------- Under the Private Securities Litigation Reform Act of 1995, companies are provided with a "safe harbor" for making forward-looking statements about the potential risks and rewards of their strategies. Monsanto believes it's in the best interest of its shareowners to use these provisions in discussing future events. Forward-looking statements include Monsanto's plans for growth; the potential for the development, regulatory approval and public acceptance of new products; and other factors that could affect Monsanto's future operations or financial position. Such statements often include the words "believes," "expects," "anticipates," "intends," "plans," "estimates," or similar expressions. Monsanto's ability to achieve its goals depends on many known and unknown risks and uncertainties, including changes in general economic and business conditions. These factors could cause the anticipated performance and results of the company to differ materially from those described or implied in forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below. FACTORS AFFECTING THE AGRICULTURAL PRODUCTS SEGMENT GENERIC COMPETITION: The family of Roundup(R) herbicides is a major product line for Monsanto's Agricultural Products segment. These herbicides are likely to face increasing competition from generic products. Patents protecting Roundup(R) in several countries expired in 1991. Compound per se patent protection for the active ingredient in Roundup(R) herbicide expires in the United States in September 2000. Monsanto believes its pricing strategy will help it compensate for increased generic competition in the United States. Monsanto recently significantly reduced the price of Roundup(R) in the United States. This price elasticity strategy is expected to result in increased demand for Roundup(R) in the United States because the lower prices will make Roundup(R) more economical, encouraging both new uses of the product and expansion of the number of acres treated. Monsanto's experience in numerous markets worldwide has been that price reductions have stimulated volume growth. However, the volume increases in the other countries also may have been influenced by a variety of other factors, such as weather; the increased use of conservation tillage practices; development of other new markets or applications for Roundup(R); launch of new products including Roundup Ready(R) crops; competitive products and practices; and an increase in agricultural acres planted. Conditions, and therefore volume trends, in one country may or may not be duplicated in other world areas. As a result, Monsanto's experience with price elasticity in markets outside the United States may or may not be replicated in the United States. Monsanto also believes that increased volumes and technological innovations will lead to efficiencies that will reduce the production cost of glyphosate. Such cost reductions will depend on realizing such increased volumes and innovations, and securing the resources required to expand production of Roundup(R). GOVERNMENTAL AND CONSUMER ACCEPTANCE: The commercial success of agricultural and food products developed through biotechnology will depend in part on government and public acceptance of their cultivation, distribution and consumption. Monsanto continues to work with consumers, customers and regulatory bodies to encourage understanding of nutritional and agricultural biotechnology products. However, public attitudes may be influenced by claims that genetically modified plant products are unsafe for consumption or pose unknown risks to the environment or to traditional social or economic practices. Securing governmental approvals for, and consumer confidence in, such products poses numerous challenges, particularly outside the United States. For instance, France has instituted a moratorium on the planting of certain genetically modified seeds, and consumer groups have brought lawsuits in various countries seeking to halt industry activities with respect to products developed through biotechnology. Some countries also have labeling requirements. In some markets, because these crops are not yet approved for import, growers in other countries may be restricted from introducing or selling their grain. In these cases, the grower may have to arrange to sell the grain only in the domestic market or to use the grain for feed on his or her farm. The market success of Monsanto's products developed through biotechnology could be delayed or impaired in certain geographical areas because of such factors. TECHNOLOGICAL CHANGE AND COMPETITION: A number of companies are engaged in plant biotechnology research. Technological advances by others could render Monsanto's products less competitive. Monsanto believes that competition will intensify, not only from agricultural biotechnology firms but from major agrichemical, seed and food companies with biotechnology laboratories. Some of Monsanto's agricultural competitors have substantially greater financial, technical and marketing resources than Monsanto does. SUCCESSFUL INTEGRATION OF RECENT TRANSACTIONS: Monsanto has made significant acquisitions, mergers and joint ventures involving seed, agricultural biotechnology and grain processing companies. These transactions are designed to strengthen Monsanto's capability to bring important new life sciences products to customers worldwide, and to contribute to the company's long-term growth. The Delta and Pine Land Co. (D&PL) transaction is subject to regulatory approval and other customary conditions. It is anticipated that the pending D&PL transaction, when final, and the recently completed acquisitions of DEKALB Genetics Corp., Plant Breeding International Cambridge, and certain international seed operations of Cargill Inc., will significantly dilute Monsanto's financial results for the next several years. Long term, Monsanto must integrate these companies into its business to realize projected synergies. It also must fit such acquisitions, mergers and joint ventures into its growth strategy to generate sufficient value to justify their cost. Mergers, acquisitions, and joint ventures also present other challenges, including geographical coordination, personnel integration, and the reconciliation of corporate cultures. This integration could cause a temporary interruption of or loss of momentum in Monsanto's business and the loss of key personnel from the acquired company. There can be no 58 1998 Monsanto Annual Report - ------------------------------------------------------------------------ assurance that the diversion of management's attention to such matters or the delays or difficulties encountered in connection with integrating these operations will not have an adverse effect on Monsanto's business, results of operations, or financial condition. PLANTING DECISIONS AND WEATHER: The company's agricultural products business is highly seasonal. It is subject to weather conditions and natural disasters that affect commodity prices, seed yields, and decisions by growers regarding purchases of seed and herbicides. Commodity prices also affect growers' decisions about the types and amounts of crops to plant. All of these factors influence sales of Monsanto's herbicide and seed products. FACTORS AFFECTING THE PHARMACEUTICALS SEGMENT ABILITY TO REALIZE POTENTIAL OF EXISTING PIPELINE PRODUCTS: Pharmaceutical research and development (R&D) is subject to inherent uncertainty, difficulties and delays. These include, but are not limited to, successful completion of clinical trials and the ability to obtain regulatory approval for the compounds worldwide. Failure to receive government approvals as anticipated could preclude or substantially delay commercialization of products in the company's R&D programs. DEVELOPMENT AND COMMERCIALIZATION OF NEW PRODUCTS: The Pharmaceuticals segment's long-term success will depend in great part on its ability to commercialize new products. Such efforts require substantial funding of R&D and launch expenses. If Monsanto is unable to earn or borrow sufficient resources to fund such expenses, its ability to develop new products will suffer. Further, the outcome of R&D is inherently difficult to predict. Anticipated results may never materialize, or they may not be promising enough. Even when new pharmaceutical products are marketed, there can be no guarantees of their commercial success. Consumer demand and competitive factors, including the availability and price of treatment alternatives, influence sales. In addition, timing is crucial. The results of R&D for new pharmaceutical products are difficult to forecast, and new products must be carefully deployed, with resources sufficient to realize the full value of the products. PRODUCT LIABILITY AND CONSUMER ACCEPTANCE: The sale of pharmaceutical products always involves a risk of product liability claims and associated adverse publicity. Substantial damage awards for injuries allegedly caused by the use of pharmaceuticals have been made against certain companies in past years. In addition, unexpected safety or efficacy concerns can arise with respect to marketed products. Whether or not they are scientifically justified, such concerns could lead to product recalls, withdrawals, or declining sales. COMPETITION: The pharmaceutical business is intense and highly competitive. It is characterized by rapid technological change. Depending on the product involved, competition may be encountered in price, delivery, service, performance, innovation, brand recognition and quality. Many of Monsanto's pharmaceutical competitors have greater research, financial, marketing and other resources than Monsanto does. Some of Monsanto's trademarked pharmaceutical products also face increasing pressures from producers of lower-priced generic products and from new products entering the marketplace. PRICING: Managed care groups, health care organizations and government agencies worldwide actively seek discounts and lower prices on pharmaceutical products. Monsanto's challenge is to provide overall economic benefits to health care providers and negotiate prices for specific products that will allow it to profit at acceptable levels. FACTORS AFFECTING THE NUTRITION AND CONSUMER PRODUCTS SEGMENT Monsanto's Nutrition and Consumer Products segment faces many challenges similar to those faced by the Agricultural Products and Pharmaceuticals segments. These challenges include increased competition from generic substitutes for its aspartame-based tabletop and ingredient sweeteners, rapid technological changes, the ability to realize the potential of its pipeline products, the development of new products, and the ability to negotiate favorable pricing terms with its major customers. Each of these challenges is subject to risks and uncertainties comparable to those described above. FACTORS AFFECTING ALL SEGMENTS FINANCIAL REQUIREMENTS: Monsanto's recent and planned acquisitions will require a significant commitment of the company's financial resources. In addition, new technological innovations generally require a significant investment for R&D and product launch. Lack of funds for investment in these areas could hinder the company's ability to make technological innovations and to introduce and distribute new products. Monsanto expects to generate the required capital by maintaining the revenues of its core businesses, by seeking sufficient outside financing, and by containing costs. The company's ability to do so will depend upon a variety of specific factors listed elsewhere in this report and upon general capital market conditions. 1998 Monsanto Annual Report 59 DISCLOSURE OF FORWARD-LOOKING STATEMENTS (continued) - ------------------------------------------------------------------------ INTELLECTUAL PROPERTY: Monsanto has devoted significant resources to obtaining and maintaining patent protection worldwide for its products. It seeks to preserve its trade secrets and to operate without infringing the proprietary rights of third parties. Monsanto's patents and trademarks are of material importance in the operation of its business, particularly in the Agricultural Products and Pharmaceuticals segments. Intellectual property positions are becoming increasingly important within the agricultural biotechnology and pharmaceutical industries, as products developed through biotechnology become a larger part of the product landscape. Monsanto generally relies upon patent and trademark laws worldwide to establish and maintain its proprietary rights in its technology and products. There is some uncertainty about the value of available patent protection in certain countries outside the United States. Moreover, the patent positions of biotechnology and pharmaceutical companies involve complex legal and factual questions. Rapid technological advances and the number of companies performing such research can create an uncertain environment. Patent applications in the United States are kept secret: outside the United States, patent applications are published 18 months after filing. Accordingly, competitors may be issued patents from time to time without any prior warning to the company. That could decrease the value of similar technologies under development at Monsanto. Because of this rapid pace of change, some of the company's products may unknowingly rely on key technologies developed by others. If that occurs, the company must obtain licenses to such technologies in order to continue to use them. Certain of Monsanto's germplasm and other genetic material, patents, and licenses are currently the subject of litigation and additional future litigation is anticipated. Although the outcome of such litigation cannot be predicted with certainty, Monsanto will continue to defend and litigate its positions vigorously. The company believes it has meritorious defenses and claims in the pending suits. MARKETS OUTSIDE THE UNITED STATES: Sales outside the United States made up approximately 45 percent of the company's 1998 revenues and Monsanto intends to continue to actively explore international sales opportunities. Challenges the company may face in international markets include changes in foreign currency exchange rates, changes in a specific country's or region's political or economic conditions, trade protection measures, import or export licensing requirements, and unexpected changes in regulatory requirements. In particular, the decline in the value of Southeast Asia and Brazilian currencies may, if not reversed, adversely affect future income. Also, future sales may decrease because the decline in such economies could cause customers to purchase fewer goods in general, and also because imported Monsanto products could become more expensive for customers to purchase in their local currency. JOINT VENTURES AND DIVESTITURES: 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. YEAR 2000 READINESS: The dates on which Monsanto believes the Year 2000 (Y2K) program will be completed are based on management's best estimates, which include numerous assumptions about future events. There can be no guarantee that these estimates will be achieved, or that there will not be a delay in, or increased costs associated with, the implementation of the Y2K program. Factors that may cause delays in the Y2K program or increased costs in connection with it include, but are not limited to, the continued availability and cost of experts trained in these areas, the ability to locate and correct all relevant computer code and embedded systems, and the success of similar programs conducted by suppliers and other third parties. 60 1998 Monsanto Annual Report Financial SUMMARY - ---------------------------------------------------------------------------------------------------------------------------------
(Dollars in millions, except per share and share amounts) 1998 1997 1996 1995 1994 1993 - --------------------------------------------------------------------------------------------------------------------------------- OPERATING RESULTS Net Sales $ 8,648 $ 7,514 $ 6,348 $ 5,410 $ 4,679 $ 4,304 Income (Loss) from Continuing Operations (250) 294 413 461 454 298 As a Percent of Net Sales 4% 7% 9% 10% 7% Income (Loss) from Discontinued Operations 176 (28) 278 168 196 Net Income (Loss) (250) 470 385 739 622 494 - --------------------------------------------------------------------------------------------------------------------------------- EARNINGS (LOSS) PER SHARE: Income (Loss) from Continuing Operations $ (0.41) $ 0.48 $ 0.69 $ 0.79 $ 0.78 $ 0.50 Net Income (Loss) (0.41) 0.77 0.64 1.27 1.06 0.82 - --------------------------------------------------------------------------------------------------------------------------------- YEAR-END FINANCIAL POSITION Total Assets $16,724 $10,774 $11,237 $10,731 $ 9,103 $ 8,788 Working Capital 2,138 727 939 1,493 1,448 1,377 - --------------------------------------------------------------------------------------------------------------------------------- Property, Plant and Equipment: Gross $ 6,022 $ 4,701 $ 4,428 $ 4,111 $ 3,748 $ 3,687 Net 3,254 2,400 2,095 1,893 1,673 1,669 - --------------------------------------------------------------------------------------------------------------------------------- Long-Term Debt $ 6,259 $ 1,979 $ 1,608 $ 1,667 $ 1,405 $ 1,502 Shareowners' Equity 4,986 4,104 3,690 3,732 2,948 2,855 - --------------------------------------------------------------------------------------------------------------------------------- Current Ratio 1.5 1.2 1.3 1.5 1.6 1.6 Percent of Total Debt to Total Capitalization 60% 47% 38% 35% 37% 38% - --------------------------------------------------------------------------------------------------------------------------------- OTHER DATA Stock Price: High $ 63 15/16 $52 15/16 $43 1/4 $25 $17 3/8 $15 Low 33 3/4 34 3/4 23 13 3/4 13 3/8 9 7/8 Year-End 47 1/2 42 38 7/8 24 1/2 14 1/8 14 3/4 Price/Earnings Ratio on Year-End Stock Price 55 60 19 13 18 - --------------------------------------------------------------------------------------------------------------------------------- PER SHARE: Dividends $ 0.120 $ 0.500 $ 0.588 $ 0.540 $ 0.494 $ 0.460 Shareowners' Equity 7.93 6.89 6.31 6.46 5.29 4.92 - --------------------------------------------------------------------------------------------------------------------------------- Shareowners (year-end) 62,769 61,265 54,828 50,745 53,694 56,601 - --------------------------------------------------------------------------------------------------------------------------------- Shares Outstanding (year-end, in millions) 629 595 584 575 560 580 - --------------------------------------------------------------------------------------------------------------------------------- Employees (year-end) 31,800 21,900 28,000 28,500 29,400 30,000 - --------------------------------------------------------------------------------------------------------------------------------- Loss from continuing operations for 1998 included $830 million, or $1.33 per share, for restructuring and special charges, write-offs for acquired in-process research and development (R&D), and charges for the cancellation of DEKALB(R) stock options. Income from continuing operations for 1997 included $455 million, or $0.75 per share, for the write-off of acquired in-process R&D. Income from continuing operations for 1996 included restructuring and other unusual charges of $257 million, or $0.43 per share, associated with the closure or rationalization of certain facilities, asset write-offs, and work force reductions. Income from continuing operations for 1995 included net restructuring expenses and other unusual items of $63 million, or $0.11 per share. Income from continuing operations for 1994 included a net aftertax gain for restructuring and other unusual items of $20 million, or $0.03 per share. Income from continuing operations for 1993 included a net aftertax loss for restructuring and other unusual items of $11 million, or $0.02 per share. This financial statistic is not meaningful for 1998 because Monsanto reported a loss from continuing operations. Includes sale of styrenics plastics business in 1995 and spinoff of the chemicals businesses in 1997. Amounts prior to 1997 were not restated to reflect the spinoff of the chemical businesses. The quarterly common stock dividend was reduced from $0.16 per share to $0.03 per share in the fourth quarter of 1997.
1998 Monsanto Annual Report 61 APPENDIX 1. In Exhibit 13 to the printed Form 10-K, the following graph appears on page 31: a pie-chart graph entitled "1998 Net Sales" appears, depicting a percentage breakdown of Monsanto's 1998 net sales by segment. The following bar graphs depict segment net sales, EBIT and EBITDA for 1996, 1997 and 1998: on page 32, bar graphs entitled "Agricultural Products Net Sales" and "Agricultural Products Operating Measures"; on page 34, bar graphs entitled "Nutrition and Consumer Products Net Sales" and "Nutrition and Consumer Products Operating Measures"; on page 36, bar graphs entitled "Pharmaceuticals Net Sales" and "Pharmaceuticals Operating Measures". On page 41, a bar graph entitled "Cash Provided by Continuing Operations" depicts information for 1996, 1997 and 1998. 2. Throughout the electronic submission, trademarks are designated on each page by the letter "R" in parentheses or the letters "TM" in parentheses; whereas in the printed copy of the Form 10-K, all trademarks are indicated by special type. EX-21 3 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT The following is a list of the Company's subsidiaries as of December 31, 1998, except for unnamed subsidiaries which, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary. G. D. Searle & Co. (Delaware) DEKALB Genetics Corporation (Delaware) Monsanto Europe, S.A.N.V. (Belgium) 20 EX-23 4 CONSENT OF EXPERT EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS MONSANTO COMPANY: We consent to the incorporation by reference in Monsanto Company's Registration Statements on Form S-8 (Nos. 2-36636, 2-76696, 2-90152, 33-13197, 33-21030, 33-39704, 33-39705, 33-39706, 33-39707, 33-49717, 33-53363, 33-53365, 33-53367, 333-02783, 333-02961, 333-02963, 333-33531, 333-38599 and 333-45341) and Registration Statements on Form S-4 (Nos. 333-66175 and 333-73233) of our report dated February 26, 1999, incorporated by reference in this annual report on Form 10-K of Monsanto Company for the year ended December 31, 1998. /s/ DELOITTE & TOUCHE LLP Saint Louis, Missouri March 18, 1999 21 EX-24.1 5 POWER OF ATTORNEY EXHIBIT 24.1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That each person whose signature appears below, as a Director or Officer of Monsanto Company (the "Company"), a Delaware corporation with its general offices in the County of St. Louis, Missouri, does hereby make, constitute and appoint R. WILLIAM IDE III, BARBARA L. BLACKFORD, SONYA M. DAVIS or JANET L. HORGAN, or any one of them acting alone, his or her true and lawful attorneys, with full power of substitution and resubstitution, in his or her name, place and stead, in any and all capacities, to execute and sign the Annual Report on Form 10-K and the following registration statements: (i) any registration statement under the Securities Act of 1933, as amended (the "Act"), covering the issuance of debt securities, (ii) any registration statement on Form S-8 covering the registration of additional securities of the Company to be issued under the Monsanto Shared Success Stock Option Plan, the Monsanto Company ERISA Parity Savings and Investment Plan, the Monsanto Savings and Investment Plan or the Monsanto Management Incentive Plan of 1996, in each case as approved by the Board of Directors of the Company, (iii) any registration statement on Form S-8 covering the registration of securities of the Company to be issued under the DEKALB Genetics Corporation Savings and Investment Plan, the Delta and Pine Land Company Savings Plan or any new or existing stock-based incentive plans of the Company or any subsidiary; (iv) any registration statement filed pursuant to Rule 462(b) under the Act, and (v) any amendment or post- effective amendment to any registration statement previously filed by the Company, and any and all Amendments to any of the foregoing, and documents in connection therewith, all to be filed with the Securities and Exchange Commission under the Act or the Securities Exchange Act of 1934, as amended, giving and granting unto said attorneys full power and authority to do and perform such actions as fully as they might have done or could do if personally present and executing any of said documents. Dated and effective as of the 26th of February, 1999. /s/ Robert B. Shapiro /s/ Philip Leder - -------------------------------- -------------------------------- Robert B. Shapiro, Director and Philip Leder, Director Principal Executive Officer /s/ Robert M. Heyssel /s/ Jacobus F.M. Peters - -------------------------------- -------------------------------- Robert M. Heyssel, Director Jacobus F. M. Peters, Director /s/ Michael Kantor /s/ John S. Reed - -------------------------------- -------------------------------- Michael Kantor, Director John S. Reed, Director /s/ Gwendolyn S. King /s/ John E. Robson - -------------------------------- -------------------------------- Gwendolyn S. King, Director John E. Robson, Director /s/ William D. Ruckelshaus /s/ Gary L. Crittenden - -------------------------------- -------------------------------- William D. Ruckelshaus, Director Gary L. Crittenden, Principal Financial Officer /s/ Richard B. Clark - -------------------------------- Richard B. Clark, Principal Accounting Officer EX-24.2 6 CERTIFICATE EXHIBIT 24.2 MONSANTO COMPANY CERTIFICATE ----------- I, Sonya M. Davis, Assistant Secretary of Monsanto Company, hereby certify that the following is a true and correct copy of excerpts from resolutions adopted by the Board of Directors of Monsanto Company on February 26, 1999, at which meeting a quorum was present and acting throughout: 1. The Chairman of the Board, the President, any Vice Chairman of the Company, any Vice President, the Chief Financial Officer, the Secretary, the Treasurer or the Controller of the Company is hereby authorized to sign and execute, for and on behalf of the Company, Form 10-K for the year 1998 and any other report to be filed with the Securities and Exchange Commission (the "Commission") pursuant to the Securities Exchange Act of 1934, as amended. 2. Each officer and director who may be authorized or required to sign and execute Form 10-K or any document in connection therewith or any Registration Statement (whether for and on behalf of the Company, or as an officer or director of the Company, or otherwise), be and hereby is authorized to execute a power of attorney appointing R. William Ide III, Barbara L. Blackford, Sonya M. Davis or Janet L. Horgan, or any of them acting alone, his or her true and lawful attorney or attorneys, with full power of substitution and resubstitution to sign in his or her name, place and stead in any such capacity such Form 10-K or Registration Statement and any and all amendments thereto and documents in connection therewith, and to file the same with the Commission or any other governmental body, each of said attorneys to have power to act with or without the others, and to have full power and authority to do and perform, in the name and on behalf of each of said officers and directors, every act whatsoever which such attorneys, or any one of them, may deem necessary, appropriate or desirable to be done in connection therewith as fully and to all intents and purposes as such officers or directors might or could do in person. **** IN WITNESS WHEREOF, I have hereunto set my hand in my official capacity and affixed the corporate seal of Monsanto Company this 10th day of March, 1999. /s/ Sonya M. Davis ------------------------------ Sonya M. Davis [SEAL] Assistant Secretary EX-27 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENT OF CONSOLIDATED INCOME OF MONSANTO COMPANY AND SUBSIDIARIES FOR THE YEAR ENDED DECEMBER 31, 1998, AND THE STATEMENT OF CONSOLIDATED FINANCIAL POSITION AS OF DECEMBER 31, 1998. SUCH INFORMATION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS. 1,000,000 12-MOS DEC-31-1998 DEC-31-1998 89 0 2,404 0 2,004 6,190 6,022 2,768 16,724 4,052 6,259 1,694 0 0 3,312 16,274 8,648 8,648 3,593 3,593 0 0 312 (243) 7 (250) 0 0 0 (250) (.41) (.41) Reported net of allowances of $91
EX-99.1 8 COMPUTATION OF THE RATIO OF EARNINGS EXHIBIT 99.1 MONSANTO COMPANY AND SUBSIDIARIES --------------------------------- COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES (Dollars in millions)
Year Ended December 31, -------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- -------- Income from continuing operations before provision for income taxes ($243) $366 $553 $645 $636 Add Fixed charges 372 236 172 178 140 Less capitalized interest (15) (14) (9) (5) (4) Dividends from affiliated companies 8 4 6 3 2 Less equity income (add equity loss) of affiliated companies 23 (20) 42 (3) (4) ----- ---- ---- ---- ---- Income as adjusted $145 $572 $764 $818 $770 ===== ==== ==== ==== ==== Fixed charges Interest expense $312 $170 $119 $132 $100 Capitalized interest 15 14 9 5 4 Portion of rents representative of interest factor 45 52 44 41 36 ----- ---- ---- ---- ---- Fixed charges $372 $236 $172 $178 $140 ===== ==== ==== ==== ==== Ratio of earnings to fixed charges 0.39 2.42 4.44 4.60 5.50 ===== ==== ==== ==== ==== Includes charges for restructuring, acquired in-process research and development, and other unusual items of $1,060 million, $684 million, $376 million, and $90 million for the years ended December 31, 1998, 1997, 1996 and 1995 respectively. Excluding these unusual items, the ratio of earnings to fixed charges would have been 3.24, 5.32, 6.60 and 5.10 for the years ended December 31, 1998, 1997, 1996 and 1995 respectively. The ratio was not materially affected by the restructuring and other unusual items in 1994.
22 EX-99.2 9 DISCLOSURE OF FORWARD-LOOKING STATEMENTS EXHIBIT 99.2 DISCLOSURE OF FORWARD-LOOKING STATEMENTS Under the Private Securities Litigation Reform Act of 1995, companies are provided with a "safe harbor" for making forward-looking statements about the potential risks and rewards of their strategies. Monsanto believes it's in the best interest of its shareowners to use these provisions in discussing future events. Forward-looking statements include Monsanto's plans for growth; the potential for the development, regulatory approval, and public acceptance of new products; and other factors that could affect Monsanto's future operations or financial position. Such statements often include the words "believes," "expects," "anticipates," "intends," "plans," "estimates," or similar expressions. Monsanto's ability to achieve its goals depends on many known and unknown risks and uncertainties, including changes in general economic and business conditions. These factors could cause the anticipated performance and results of the company to differ materially from those described or implied in forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below. FACTORS AFFECTING THE AGRICULTURAL PRODUCTS SEGMENT GENERIC COMPETITION: The family of Roundup(R) herbicides is a major product line for Monsanto's Agricultural Products segment. These herbicides are likely to face increasing competition from generic products. Patents protecting Roundup(R) in several countries expired in 1991. Compound per se patent protection for the active ingredient in Roundup(R) herbicide expires in the United States in September 2000. Monsanto believes its pricing strategy will help it compensate for increased generic competition in the United States. Monsanto recently significantly reduced the price of Roundup(R) in the United States. This price elasticity strategy is expected to result in increased demand for Roundup(R) in the United States because the lower prices will make Roundup(R) more economical, encouraging both new uses of the product and expansion of the number of acres treated. Monsanto's experience in numerous markets worldwide has been that price reductions have stimulated volume growth. However, the volume increases in the other countries also may have been influenced by a variety of other factors, such as weather; the increased use of conservation tillage practices; development of other new markets or applications for Roundup(R); launch of new products including Roundup Ready(R) crops; competitive products and practices; and an increase in agricultural acres planted. Conditions, and therefore volume trends in one country may or may not be duplicated in other world areas. As a result, Monsanto's experience with price elasticity in markets outside the United States may or may not be replicated in the United States. Monsanto also believes that increased volumes and technological innovations will lead to efficiencies that will reduce the production cost of glyphosate. Such cost reductions will depend on realizing such increased volumes and innovations, and securing the resources required to expand production of Roundup(R). GOVERNMENTAL AND CONSUMER ACCEPTANCE: The commercial success of agricultural and food products developed through biotechnology will depend in part on government and public acceptance of their cultivation, distribution and consumption. Monsanto continues to work with consumers, customers and regulatory bodies to encourage understanding of nutritional and agricultural biotechnology products. However, public attitudes may be influenced by claims that genetically modified plant products are unsafe for consumption or pose unknown risks to the environment or to traditional social or economic practices. Securing governmental approvals for, and consumer confidence in, such products poses numerous challenges, particularly outside the United States. For instance, France has instituted a moratorium on the planting of certain genetically modified seeds, and consumer groups have brought lawsuits in various countries seeking to halt industry activities with respect to products developed through biotechnology. Some countries also have labeling requirements. In some markets, because these crops are not yet approved for import, growers in other countries may be restricted from introducing or selling their grain. In these cases, the grower may have to arrange to sell the grain only in the domestic market or to use the grain for feed on his or her farm. The market success of Monsanto's products developed through biotechnology could be delayed or impaired in certain geographical areas because of such factors. TECHNOLOGICAL CHANGE AND COMPETITION: A number of companies are engaged in plant biotechnology research. Technological advances by others could render Monsanto's products less competitive. Monsanto believes that competition will intensify, not only from agricultural biotechnology firms but from major agrichemical, seed and food 23 companies with biotechnology laboratories. Some of Monsanto's agricultural competitors have substantially greater financial, technical and marketing resources than Monsanto does. SUCCESSFUL INTEGRATION OF RECENT TRANSACTIONS: Monsanto has made significant acquisitions, mergers and joint ventures involving seed, agricultural biotechnology and grain processing companies. These transactions are designed to strengthen Monsanto's capability to bring important new life sciences products to customers worldwide, and to contribute to the company's long-term growth. The Delta and Pine Land Co. (D&PL) transaction is subject to regulatory approval and other customary conditions. It is anticipated that the pending D&PL transaction, when final, and the recently completed acquisitions of DEKALB Genetics Corp., Plant Breeding International Cambridge, and certain international seed operations of Cargill Inc., will significantly dilute Monsanto's financial results for the next several years. Long term, Monsanto must integrate these companies into its business to realize projected synergies. It must also fit such acquisitions, mergers and joint ventures into its growth strategy to generate sufficient value to justify their cost. Mergers, acquisitions, and joint ventures also present other challenges, including geographical coordination, personnel integration, and the reconciliation of corporate cultures. This integration could cause a temporary interruption of or loss of momentum in Monsanto's business and the loss of key personnel from the acquired company. There can be no assurance that the diversion of management's attention to such matters or the delays or difficulties encountered in connection with integrating these operations will not have an adverse effect on Monsanto's business, results of operations, or financial condition. PLANTING DECISIONS AND WEATHER: The company's agricultural products business is highly seasonal. It is subject to weather conditions and natural disasters that affect commodity prices, seed yields, and decisions by growers regarding purchases of seed and herbicides. Commodity prices also affect growers' decisions about the types and amounts of crops to plant. All of these factors influence sales of Monsanto's herbicide and seed products. FACTORS AFFECTING THE PHARMACEUTICALS SEGMENT ABILITY TO REALIZE POTENTIAL OF EXISTING PIPELINE PRODUCTS: Pharmaceutical research and development (R&D) is subject to inherent uncertainty, difficulties and delays. These include, but are not limited to, successful completion of clinical trials and the ability to obtain regulatory approval for the compounds worldwide. Failure to receive government approvals as anticipated could preclude or substantially delay commercialization of products in the company's R&D programs. DEVELOPMENT AND COMMERCIALIZATION OF NEW PRODUCTS: The Pharmaceuticals segment's long-term success will depend in great part on its ability to commercialize new products. Such efforts require substantial funding of R&D and launch expenses. If Monsanto is unable to earn or borrow sufficient resources to fund such expenses, its ability to develop new products will suffer. Further, the outcome of R&D is inherently difficult to predict. Anticipated results may never materialize, or they may not be promising enough. Even when new pharmaceutical products are marketed, there can be no guarantees of their commercial success. Consumer demand and competitive factors, including the availability and price of treatment alternatives influence sales. In addition, timing is crucial. The results of R&D of new pharmaceutical products are difficult to forecast, and new products must be carefully deployed, with resources sufficient to realize the full value of the products. PRODUCT LIABILITY AND CONSUMER ACCEPTANCE: The sale of pharmaceutical products always involves a risk of product liability claims and associated adverse publicity. Substantial damage awards for injuries allegedly caused by the use of pharmaceuticals have been made against certain companies in past years. In addition, unexpected safety or efficacy concerns can arise with respect to marketed products. Whether or not they are scientifically justified, such concerns could lead to product recalls, withdrawals, or declining sales. COMPETITION: Pharmaceutical research is intense and highly competitive. It is characterized by rapid technological change. Depending on the product involved, competition may be encountered in price, delivery, service, performance, innovation, brand recognition and quality. Many of Monsanto's pharmaceutical competitors have greater research, financial, marketing and other resources than Monsanto does. Some of Monsanto's trademarked pharmaceutical products also face increasing pressures from producers of lower-priced generic products and from new products entering the marketplace. 24 PRICING: Managed care groups, health care organizations and government agencies worldwide actively seek discounts and lower prices on pharmaceutical products. Monsanto's challenge is to provide overall economic benefits to health care providers and negotiate prices for specific products that will allow it to profit at acceptable levels. FACTORS AFFECTING THE NUTRITION AND CONSUMER PRODUCTS SEGMENT Monsanto's Nutrition and Consumer Products Segment faces many challenges similar to those faced by the Agricultural Products and Pharmaceuticals segments. These challenges include increased competition from generic substitutes for its aspartame-based tabletop and ingredient sweeteners, rapid technological changes, the ability to realize the potential of its pipeline products, the development of new products, and the ability to negotiate favorable pricing terms with its major customers. Each of these challenges is subject to risks and uncertainties comparable to those described above. FACTORS AFFECTING ALL SEGMENTS FINANCIAL REQUIREMENTS: Monsanto's recent and planned acquisitions will require a significant commitment of the company's financial resources. In addition, new technological innovations generally require a significant investment for R&D and product launch. Lack of funds for investment in these areas could hinder the company's ability to make technological innovations and to introduce and distribute new products. Monsanto expects to generate the required capital by maintaining the revenues of its core businesses, by seeking sufficient outside financing and by containing costs. The company's ability to do so will depend upon a variety of specific factors listed elsewhere in this report and upon general capital market conditions. INTELLECTUAL PROPERTY: Monsanto has devoted significant resources to obtaining and maintaining patent protection worldwide for its products. It seeks to preserve its trade secrets and to operate without infringing the proprietary rights of third parties. Monsanto's patents and trademarks are of material importance in the operation of its business, particularly in the Agricultural Products and Pharmaceuticals segments. Intellectual property positions are becoming increasingly important within the agricultural biotechnology and pharmaceutical industries, as products developed through biotechnology become a larger part of the product landscape. Monsanto generally relies upon patent and trademark laws worldwide to establish and maintain its proprietary rights in its technology and products. There is some uncertainty about the value of available patent protection in certain countries outside the United States. Moreover, the patent positions of biotechnology and pharmaceutical companies involve complex legal and factual questions. Rapid technological advances and the number of companies performing such research can create an uncertain environment. Patent applications in the United States are kept secret: outside the United States, patent applications are published 18 months after filing. Accordingly, competitors may be issued patents from time to time without any prior warning to the company. That could decrease the value of similar technologies under development at Monsanto. Because of this rapid pace of change, some of the company's products may unknowingly rely on key technologies developed by others. If that occurs, the company must obtain licenses to such technologies in order to continue to use them. Certain of Monsanto's germplasm and other genetic material, patents, and licenses are currently the subject of litigation and additional future litigation is anticipated. Although the outcome of such litigation cannot be predicted with certainty, Monsanto will continue to defend and litigate its positions vigorously. The company believes it has meritorious defenses and claims in the pending suits. MARKETS OUTSIDE THE UNITED STATES: Sales outside the United States made up approximately 45 percent of the company's 1998 revenues and Monsanto intends to continue to actively explore international sales opportunities. Challenges the company may face in international markets include changes in foreign currency exchange rates, changes in a specific country's or region's political or economic conditions, trade protection measures, import or export licensing requirements, and unexpected changes in regulatory requirements. In particular, the decline in the value of Southeast Asia and Brazilian currencies may, if not reversed, adversely affect future income. Also, future sales may decrease because the decline in such economies could cause customers to purchase fewer goods in general, and also because imported Monsanto products could become more expensive for customers to purchase in their local currency. 25 JOINT VENTURES AND DIVESTITURES: 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. YEAR 2000 READINESS: The dates on which Monsanto believes the Year 2000 (Y2K) Program will be completed are based on management's best estimates, which include numerous assumptions about future events. There can be no guarantee that these estimates will be achieved, or that there will not be a delay in, or increased costs associated with, the implementation of the Y2K Program. Factors that may cause delays in the Y2K Program or increased costs in connection with it include, but are not limited to, the continued availability and cost of experts trained in these areas, the ability to locate and correct all relevant computer code and embedded systems, and the success of similar programs conducted by suppliers and other third parties. 26 -----END PRIVACY-ENHANCED MESSAGE-----