-----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, SSChR/fNqXJ0NbpTqXut97kgTEJ+mYy6+Et4BxLkdRMoRSebNORdGORCfo5PeIGi gziCNQvTozsp/pQYQGXuDA== 0000950152-98-009683.txt : 19981222 0000950152-98-009683.hdr.sgml : 19981222 ACCESSION NUMBER: 0000950152-98-009683 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19981218 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PIONEER HI BRED INTERNATIONAL INC CENTRAL INDEX KEY: 0000078716 STANDARD INDUSTRIAL CLASSIFICATION: AGRICULTURE PRODUCTION - CROPS [0100] IRS NUMBER: 420470520 STATE OF INCORPORATION: IA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: S-3 SEC ACT: SEC FILE NUMBER: 333-69285 FILM NUMBER: 98772441 BUSINESS ADDRESS: STREET 1: 700 CAPITAL SQ STREET 2: 400 LOCUST ST CITY: DES MOINES STATE: IA ZIP: 50309 BUSINESS PHONE: 5152453500 MAIL ADDRESS: STREET 1: 6800 PIONEER PKWY STREET 2: PO BOX 316 CITY: JOHNSTON STATE: IA ZIP: 50131 S-3 1 PIONEER HI-BRED INTERNATIONAL, INC. S-3 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 18, 1998. REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ PIONEER HI-BRED INTERNATIONAL, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) IOWA (STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) 42-0470520 (I.R.S. EMPLOYER IDENTIFICATION NUMBER) 800 CAPITAL SQUARE 400 LOCUST STREET DES MOINES, IOWA 50309 (515) 248-4800 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) William J. DeMeulenaere, Corporate Counsel 800 Capital Square 400 Locust Street Des Moines, Iowa 50309 (515) 248-4800 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE FOR REGISTRANT) PLEASE SEND COPIES OF ALL COMMUNICATIONS TO: William Appleton, Esq. Joseph A. Stern, Esq. Baker & Hostetler LLP Fried, Frank, Harris, Shriver & Jacobson 312 Walnut Street, Suite 2650 One New York Plaza Cincinnati, Ohio 45202 New York, New York 10004-1980 (513) 929-3400 (212) 859-8000
------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable following the effective date of the Registration Statement. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [ ] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED PER UNIT(B) PRICE(B) REGISTRATION FEE - -------------------------------------------------------------------------------------------------------------------------------- % Senior Notes due ........ $200,000,000(a) 100% $200,000,000 $55,600 - -------------------------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------------------------
(a) In U.S. dollars or the equivalent thereof in foreign denominated currencies or composite currencies. (b) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457 under the Securities Act of 1933. THE REGISTRANT HEREBY AMENDS THE REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED DECEMBER , 1998 [LOGO] $200,000,000 PIONEER HI-BRED INTERNATIONAL, INC. % SENIOR NOTES DUE , 200 The % Senior Notes due 200 (the "Notes") of Pioneer Hi-Bred International, Inc. will mature on , 200 . Interest on the Notes will accrue from , and is payable semi-annually on and of each year, commencing . The indebtedness evidenced by the Notes will rank pari passu in right of payment with all of our other senior, unsecured indebtedness, but will be effectively subordinated to indebtedness of our subsidiaries. In addition, the indebtedness evidenced by the Notes will be subordinated to any of our senior, secured indebtedness to the extent of the value of the assets securing such indebtedness. We may redeem all or part of the Notes at any time at a redemption price equal to the greater of (i) 100% of their principal amount or (ii) the sum of the present values of the remaining scheduled payments of principal and interest on the Notes discounted to the redemption date on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus basis points, plus, in each case, accrued but unpaid interest on the Notes to the Redemption Date. We have applied to list the Notes on the New York Stock Exchange under the symbol " ". ------------------------
PER NOTE TOTAL -------------- Public Offering Price....................................... Underwriting Discount....................................... Proceeds, before expenses, to Pioneer Hi-Bred International, Inc.......................................................
Neither the Securities and Exchange Commission nor any state commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. We expect the Notes will be ready for delivery in book-entry form only through the facilities of the Depository Trust Company against payment in New York, New York on or about , 1999. ------------------------ LAZARD FRERES & CO. LLC CHASE SECURITIES INC. ------------------------ The date of this prospectus is , 1999 3 NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO REPRESENT ANYTHING NOT CONTAINED IN THIS PROSPECTUS. YOU MUST NOT RELY ON ANY UNAUTHORIZED INFORMATION OR REPRESENTATIONS. THIS PROSPECTUS IS AN OFFER TO SELL ONLY THE NOTES OFFERED HEREBY, BUT ONLY UNDER CIRCUMSTANCES AND IN JURISDICTIONS WHERE IT IS LAWFUL TO DO SO. THE INFORMATION CONTAINED IN THIS PROSPECTUS IS CURRENT ONLY AS OF ITS DATE. TABLE OF CONTENTS
PAGE ---- Prospectus Summary.......................................... 3 Use of Proceeds............................................. 5 Capitalization.............................................. 5 Selected Consolidated Financial Data........................ 6 Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 7 Business.................................................... 19 Description of the Notes.................................... 22 Underwriting................................................ 34 Experts..................................................... 34 Legal Matters............................................... 35 Available Information....................................... 35 Incorporation of Certain Documents by Reference............. 35 Index to Financial Statements............................... F-1
FORWARD-LOOKING STATEMENTS. This prospectus contains forward-looking statements relating to the Company's operations that are based on management's current expectations, estimates, and projections. Words such as "expects", "anticipates", "plans", "intends", "projects", and similar expressions are used to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict. In addition to other factors discussed in this report, some of the important factors that could cause actual results to vary significantly from management's expectations noted in forward-looking statements include the weather, government programs and approvals, commodity prices, changes in corn acreage, intellectual property positions, product performance, product returns, customer preferences, currency fluctuations, costs, the Year 2000 issue, and industry consolidations. 2 4 PROSPECTUS SUMMARY This summary is qualified in its entirety by the more detailed information and consolidated financial statements appearing herein and in the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1998, which we incorporate by reference. THE COMPANY Pioneer Hi-Bred International, Inc. ("Pioneer" or the "Company") is a leading plant science company and supplier of agricultural seed genetics. During fiscal year 1998, we recorded sales of $1.8 billion and net income of $270 million. Our two principal products are hybrid seed corn and soybeans. These two products accounted for 89% of our world sales and substantially all of our worldwide operating income in the last five years. In addition, we develop, produce and market hybrids of sorghum, sunflowers and canola, varieties of alfalfa and wheat, and microorganisms that are useful in crop and livestock production. We have sales in nearly 100 countries, but the primary markets for our products are the United States and Canada (the North America region) and Europe. Sales in North America accounted for approximately 71% of 1998 sales, and sales in Europe accounted for approximately 20% of 1998 sales. Pioneer also has operations in Latin America, Mexico, Africa, Asia, the Middle East and the Pacific region. Our market share in the North American hybrid seed corn market in 1998 was approximately 42%. The next seven competitors in the market had a combined share of approximately 34%, with the largest at approximately 11%. We also hold a leading share in most of the countries in which we operate outside of North America. The principal market for soybean seed is North America, where our share of the market was approximately 16% in 1998. Demand for improved seed genetics is expected to continue to rise as world food demand grows and the availability of prime agricultural land declines in most areas. Improved genetics offer the most efficient way to produce more food products on the same or a reduced amount of land. In addition, improved genetics allow farmers to meet rising food demand without opening fragile land for production. Our strategy is to deliver products that consistently out-perform those of our competitors and are able to command a premium price. We are the industry leader in research and product development and own what we believe is the industry's finest collection of crop genetics ("germplasm"). Our germplasm has provided the base for our growth. Our researchers, many of whom are well-established experts in the science of crop genetics, focus on continually improving our germplasm using the latest technologies to perform research and testing around the world. Our research skill is used to develop superior products that deliver outstanding yields and have defensive characteristics that help plants resist damage from insects, disease and other factors. We also have several key research collaborations that allow us to leverage our research investments. In addition to delivering higher yields to our customers, we are increasingly delivering value by incorporating into our seed products quality genetic traits that make our products more valuable to livestock feeders, grain processors and other end-users of grain. Our efforts in this area have been strengthened through a research alliance with DuPont, initiated in early fiscal 1998. The alliance, in part, is designed to facilitate the development of corn, soybeans and other oilseeds that contain quality traits to make them more valuable to these end-users. In addition, Pioneer and DuPont formed a joint venture called Optimum Quality Grains L.L.C., which will seek to create, maximize and capture value for quality traits in seed, grain, grain products and plant materials delivered through corn, soybeans and other selected oil seeds. A key component of this joint venture is a preferred seed support agreement between the joint venture and us. The joint venture is not in the seed business and will look to us to be its preferred worldwide provider and preferred marketer of quality trait seeds. Pioneer, an Iowa corporation founded in 1926, maintains its principal executive offices at 800 Capital Square, 400 Locust Street, Des Moines, Iowa 50309, and its telephone number is (515) 248-4800. Our common stock is traded on the New York Stock Exchange under the symbol PHB. 3 5 THE OFFERING Securities Offered............ $200,000,000 aggregate principal amount of % Senior Notes due 200 . Maturity Date................. , 200 . Interest Payment Dates........ and of each year, commencing , 1999. Ranking....................... The indebtedness evidenced by the Notes will rank pari passu in right of payment with all of our other senior, unsecured indebtedness, but will be effectively subordinated to indebtedness of our subsidiaries. In addition, the indebtedness evidenced by the Notes will be effectively subordinated to any of our senior, secured indebtedness to the extent of the value of the assets securing such indebtedness. Redemption.................... We may redeem all or part of the Notes at any time at a redemption price equal to the greater of (i) 100% of their principal amount or (ii) the sum of the present values of the remaining scheduled payments of principal and interest on the Notes discounted to the redemption date on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus basis points, plus, in each case, accrued but unpaid interest on the Notes to the Redemption Date. Certain Covenants............. The Indenture under which the Notes will be issued (the "Indenture") will limit our ability and the ability of our restricted subsidiaries to: (i) create liens, (ii) enter into sale and leaseback transactions and (iii) consolidate, merge or transfer all or substantially all of our assets or the assets of our subsidiaries. However, these limitations are subject to a number of important qualifications and exceptions. See "Description of the Notes -- Certain Covenants" commencing on page . Use of Proceeds............... The net proceeds received from the sale of the Notes will be used by Pioneer for general corporate purposes, which may include capital expenditures, working capital requirements (inventory and receivables), reduction of outstanding indebtedness, repurchase of shares and acquisitions. The precise amount and timing of the application of such proceeds will depend upon the funding requirements of the Company and the availability and cost of other funds. Pending such application, the net proceeds will be invested in short-term investment grade securities. 4 6 USE OF PROCEEDS The net proceeds received from the sale of the Notes will be used by Pioneer for general corporate purposes, which may include capital expenditures, working capital requirements (inventory and receivables), reduction of outstanding indebtedness, repurchase of shares and acquisitions. The precise amount and timing of the application of such proceeds will depend upon the funding requirements of the Company and the availability and cost of other funds. Pending such application, the net proceeds will be invested in short-term investment grade securities. CAPITALIZATION The following table sets forth the consolidated capitalization of the Company as of August 31, 1998, and on a pro forma, as adjusted basis giving effect to the sale of the Notes. See "Use of Proceeds." This table should be read in conjunction with, and is qualified by reference to, the Company's consolidated financial statements and related notes contained herein.
AUGUST 31, 1998 --------------------- ACTUAL AS ADJUSTED ------ ----------- (DOLLARS IN MILLIONS) CASH AND CASH EQUIVALENTS(A):............................... $ 86 $ 284 ====== ====== SHORT-TERM DEBT: Short-term borrowings..................................... $ 76 $ 76 Current Maturities of long-term debt...................... 14 14 ------ ------ Total Short-Term Debt................................ $ 90 $ 90 ------ ------ LONG-TERM DEBT (EXCLUDING CURRENT MATURITIES): % Senior Notes....................................... $ -- $ 200 Credit facility........................................... 5 5 ------ ------ Total Long-Term Debt................................. $ 5 $ 205 ------ ------ SHAREHOLDERS' EQUITY: Capital Stock: Preferred-authorized 10,000,000 shares; issued none.... $ -- $ -- Common stock -- par value $1.00 per share Authorized -- 600,000,000 shares; issued 229,945,014 shares in 1998........................................ 230 230 Class B common -- stated value $1.00 per share Authorized-120,000,000 shares; issued 49,333,758 shares in 1998........................................ 49 49 Additional paid-in-capital................................ 246 246 Retained earnings......................................... 1,428 1,428 Unrealized loss on available-for-sale securities.......... (2) (2) Net cumulative translation adjustment..................... (44) (44) ------ ------ $1,907 $1,907 Less treasury stock at cost............................... (631) (631) Unearned compensation..................................... (29) (29) ------ ------ Total Shareholders' Equity................................ $1,247 $1,247 ------ ------ TOTAL CAPITALIZATION........................................ $1,342 $1,542 ====== ======
- --------------- (a) Net of offering expenses estimated to be $2 million. 5 7 SELECTED CONSOLIDATED FINANCIAL DATA The selected historical consolidated financial data presented below for each of the five years in the period ended August 31, 1998, have been derived from the Company's audited consolidated financial statements for such years and are qualified by reference to, and should be read in conjunction with, "Management's Discussion and Analysis of Financial Condition and Results of Operations," the Company's consolidated financial statements and notes thereto and the other financial information included in the Company's Annual Report on Form 10-K for the year ended August 31, 1998, which is incorporated by reference in this Prospectus.
YEARS ENDED AUGUST 31, ------------------------------------------------------------------- 1998 1997 1996 1995 1994 ----------- ----------- ----------- ----------- ----------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE AND STATISTICAL AMOUNTS) INCOME STATEMENT DATA Net Sales.......................................... $1,835 $1,784 $1,721 $1,532 $1,479 Operating costs and expenses Costs of goods sold.............................. (789) (771) (727) (642) (606) Research and product development................. (155) (146) (136) (130) (114) Selling.......................................... (395) (374) (382) (354) (335) General and administrative....................... (137) (130) (129) (126) (123) Restructuring and Settlements.................... -- -- -- -- 45 ------ ------ ------ ------ ------ Operating income................................. 359 363 347 280 346 Investment income.................................. 45 22 22 23 19 Interest expense................................... (13) (8) (11) (13) (11) Net exchange and other gains (losses).............. 16 (4) (4) 1 (5) ------ ------ ------ ------ ------ Income before items below........................ 407 373 354 291 349 Provision for income taxes......................... (134) (127) (127) (106) (134) Minority interest and other........................ (3) (3) (4) (2) (2) ------ ------ ------ ------ ------ Net income..................................... 270 243 223 183 213 Preferred stock dividend........................... (9) -- -- -- -- ------ ------ ------ ------ ------ Net income available to common shareholders........ $ 261 $ 243 $ 223 $ 183 $ 213 ====== ====== ====== ====== ====== Net income per common share Basic............................................ $ 1.13 $ 0.98 $ 0.89 $ 0.72 $ 0.80 Diluted.......................................... $ 1.08 $ 0.98 $ 0.89 $ 0.72 $ 0.80 Average shares outstanding Basic............................................ 232 247 250 254 266 Diluted.......................................... 250 248 250 254 266 SELECTED BALANCE SHEET DATA Cash and cash equivalents.......................... $ 86 $ 97 $ 99 $ 84 $ 135 Working capital(a)................................. $ 694 $ 572 $ 496 $ 490 $ 510 Total assets....................................... $1,717 $1,603 $1,422 $1,293 $1,253 Total debt......................................... $ 95 $ 116 $ 50 $ 129 $ 81 Shareholders' equity............................... $1,247 $1,148 $1,018 $ 913 $ 881 OTHER FINANCIAL DATA Ratio of earnings to fixed charges(b).............. 24.1 29.2 23.0 17.9 25.3 EBITDA(c).......................................... $ 449 $ 452 $ 424 $ 354 $ 421 Capital expenditures............................... $ 119 $ 127 $ 116 $ 86 $ 79 Depreciation and amortization...................... $ 90 $ 89 $ 77 $ 74 $ 75 Dividends declared per share....................... $ 0.37 $ 0.32 $ 0.28 $ 0.24 $ 0.20
- --------------- (a) Working capital represents the excess of current assets over current liabilities for the periods presented. (b) For purposes of this computation, earnings consist of income before income taxes less minority interest in income plus fixed charges. Fixed charges consist of (i) interest whether expensed or capitalized, (ii) amortization of deferred financing costs whether expensed or capitalized and (iii) that portion of rental expense considered to represent interest (assumed to be one-third). (c) For purposes of this computation, EBITDA consists of operating income plus depreciation and amortization. EBITDA does not represent cash flows as defined by generally accepted accounting principles (GAAP) and does not necessarily indicate that cash flows are sufficient to fund all of the Company's cash needs. EBITDA is presented because the Company believes it is a widely accepted financial indicator of a company's ability to incur and service debt. However, EBITDA should not be considered in isolation or as a substitute for net income or cash flow data prepared in accordance with GAAP or as a measure of a company's profitability or liquidity. EBITDA as defined here may differ from EBITDA as defined in other similar registration statements and as such may not be comparable. 6 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company continued record-setting financial results in 1998. Current year net income after tax totaled $270 million, or $1.08 per-diluted share, on sales of $1.8 billion. After-tax income in 1997 totaled $243 million, or $0.98 per-diluted share, on sales of $1.8 billion. The result was a per-diluted share earnings growth of 10.2% for 1998. Current year earnings produced a Return on Ending Equity (ROE) of 21.7%, the fifth consecutive year above the targeted level of 20%. This performance enabled the Company to exceed its primary financial goals: double-digit earnings growth over time and maintaining an ROE of 20% or higher. Historically, the Company's growth has primarily been driven by North American seed corn operations. The Company achieved record operating income in 1998 from its North American corn operations, in spite of an unprecedented level of discounting and promotions by competitors. The Company also maintained its 42% share of the North American corn market and improved profit margins in this aggressive environment. In addition, record sales and profits from the Company's soybean business and improved profitability from the Company's other product lines were positive factors affecting 1998 income. Foreign currency devaluations, on a worldwide basis, reduced current year operating income approximately $32 million. YEAR ENDED AUGUST 31, 1998, COMPARED TO YEAR ENDED AUGUST 31, 1997 Hybrid Seed Corn The strong operating performance in North America was offset by a decrease in regions outside North America, which were impacted by local currency devaluation, acreage reduction, and weather. Current year seed corn operating income decreased $6 million, or 1.5%, from prior year results. North America corn continues to dominate the mix of revenue and contribution margins, generating approximately 70% of companywide revenue and 73% of operating income. CORN NET SALES AND PRODUCT LINE OPERATING INCOME
INCREASE 1997 INCREASE 1996 1998 (DECREASE) ------ (DECREASE) ------ (IN MILLIONS) NET SALES: North America.......................... $ 970 $ 63 6.9% $ 907 $ (1) (0.1)% $ 908 Europe................................. 300 (27) (8.3)% 327 (1) (0.3)% 328 Other regions.......................... 123 (28) (18.5)% 151 10 7.1% 141 ------ ----- ----- ------ ---- ----- ------ Total net sales................... $1,393 $ 8 0.6% $1,385 $ 8 0.6% $1,377 ====== ===== ===== ====== ==== ===== ====== OPERATING INCOME: North America.......................... $ 290 $ 24 9.0% $ 266 $(10) (3.6)% $ 276 Europe................................. 98 (15) (13.3)% 113 13 13.0% 100 Other regions.......................... 8 (15) (65.2)% 23 (11) (32.4)% 34 ------ ----- ----- ------ ---- ----- ------ Total operating income............ $ 396 $ (6) (1.5)% $ 402 $ (8) (2.0)% $ 410 ====== ===== ===== ====== ==== ===== ====== UNIT SALES: (80,000-kernel units) North America...... 12.0 0.5 4.3% 11.5 (0.6) (4.6)% 12.1 Europe................................. 2.8 (0.1) (3.4)% 2.9 0.1 3.6% 2.8 Other regions.......................... 2.2 (0.3) (12.0)% 2.5 -- --% 2.5 ------ ----- ----- ------ ---- ----- ------ Total unit sales.................. 17.0 0.1 0.6% 16.9 (0.5) (3.0)% 17.4 ====== ===== ===== ====== ==== ===== ====== ACRES: North America.............................. 84.1 0.8 1.0% 83.3 0.6 0.7% 82.7 ====== ===== ===== ====== ==== ===== ======
The primary drivers affecting North American operations are per-unit price and cost, market share, and market size. Seed corn operating income in North America improved $24 million, or 9%, over 1997 results. The improved results were primarily due to increased revenue. Revenue increased $63 million, or 6.9%, over 1997 as 7 9 a result of two factors: (i) an increase in the average per-unit selling price, which accounted for $25.1 million of the total increase, and (ii) additional units sold of 500,000, which accounted for $37.7 million of the total increase. Higher investments in research and product development and product promotion also impacted current year results. In addition, the stronger U.S. dollar reduced operating income from Canada by approximately $2.3 million. Despite the competitive environment in North America, the average per-unit net seed corn selling price increased approximately 3%. During 1998, this increase would have been higher had the Company not implemented changes to its replant program. In previous years, the price of seed sold for replant was discounted 50%, while in 1998 replant seed was provided free of charge. In addition to the program change, adverse weather conditions resulted in significantly higher replanting in 1998. Excluding these two factors, the net selling price of seed in North America increased approximately 5% as a result of the introduction of several new premium-priced elite products and a continued shift in the sales mix to higher-priced premium products. Current year per-unit seed corn cost of sales decreased $0.30, largely due to lower inventory reserves and lower commodity costs. When combined with the sales price effect, net seed corn margins increased approximately $2.40 per unit. Provisions for inventory reserves in 1998 were $1.75 per unit compared to $1.98 per unit in 1997. The Company's policy is to provide adequate reserves for inventory obsolescence. Approximately 8% of North American unit sales were reserved in 1998 compared to 9% in 1997. An increase in North American market size impacted current year operating results. Based on information to date, North American market size was estimated at 84.1 million acres, an increase of approximately 1% from 1997. Based on current year unit sales, the Company maintained its 42% share of the North American seed corn market. Increased investments in research and product development and higher selling costs associated with the launch of an unprecedented number of new products reduced operating income approximately $18 million. New genetics accounted for more than 40% of current year unit sales, including 2.4 million units of the Company hybrids with the YieldGard(1) gene for European Corn Borer(ECB) resistance. Operating income in Europe, on a constant dollar basis, increased 2% over 1997. In Europe, seed corn operations were challenged in 1998 by reduced acreage. In addition, results reported in U.S. dollars were negatively impacted by the strengthening of the U. S. dollar against European currencies, reducing 1998 operating income by $17 million compared to 1997. Excluding this effect, the region achieved a new record in operating income. Seed corn market share gains in Italy and Spain and higher per-unit prices in Central Europe contributed to the increase. These factors more than offset the effect of a 6 to 8% reduction in hectares planted to corn. The Company achieved record operating income in several countries within the Africa, Middle East, Asia, and Pacific region. Seed corn operations in South Africa, Turkey, and Pakistan all reported record results in 1998 driven by increases in market share and per unit prices. However, overall results of operations for the region were hampered by reduced market size and by significant devaluation in the local currencies in Southeast Asia. The currency devaluation in Southeast Asia negatively impacted 1998 corn operating income by $5 million. Key markets in Asia and Africa experienced a 10 to 15% reduction in market size due to adverse weather conditions. The Company's corn operations in Latin America experienced an operating loss of $11 million compared to a $2 million loss in 1997. The Company's operations in Brazil continued to be affected by the decrease in market size reported last year. In Argentina, performance issues with key hybrids noted last year continued to impact 1998 operations. As a result, unit sales and price per unit were lower than 1997. To address these performance issues, new products were introduced in 1998 in Brazil and Argentina and additional new products will be introduced in upcoming years. - --------------- 1 Registered trademark of, and used under license from, Monsanto Company. 8 10 Operating income in Mexico decreased $3 million from 1997. This was due to drought and currency devaluation. The drought conditions resulted in fewer acres planted to corn and decreased unit sales in 1998. The stronger U. S. dollar compared to the Mexican peso reduced reported results in 1998 by $2 million. North American Seed Corn Unit Sales (in millions)
1998 1997 1996 - ---- ---- ---- 12.0.. 11.5 12.1
North American Corn Acreage (in millions)
1998 1997 1996 - ---- ---- ---- 84.1.. 83.3 82.7
Estimated North American Seed Corn Market Share
1998 1997 1996 - ---- ---- ---- 42%.. 42% 44%
Soybean Seed Soybean seed is the Company's second largest product in terms of revenue and operating income. The primary drivers for operating income are premium product sales, market size, market share, and price. Current year soybean operating income in North America improved $7 million, or 26%, over 1997 results to a record $33.7 million. Record North American soybean revenues and profits in 1998 were primarily driven by the increased demand for premium-priced glyphosate-resistant soybeans with the Roundup Ready gene. Unit sales of these soybeans more than doubled in the current year. North American Soybean Unit Sales (in millions)
1998 1997 1996 - ---- ---- ---- 13.5.. 13.5 11.3
North American Soybean Acreage (in millions)
1998 1997 1996 - ---- ---- ---- 75.2.. 73.5 66.4
Estimated North American Soybean Market Share
1998 1997 1996 - ---- ---- ---- 15.8%.. 18.1% 17.2%
North America unit sales account for approximately 97% of worldwide soybean unit sales. Unit sales included over 5 million units of glyphosate-resistant products, compared to 2.3 million units in 1997. The Company's current year unit sales of these products totaled approximately 39% of total soybean unit sales compared to 17% in 1997. The strong demand for and available supply of glyphosate-resistant products limited the Company's market share. Higher commodity prices and additional acres available for planting due to acres coming out of conservation programs resulted in additional acres planted to soybeans in the current year. Net margins improved from a year ago despite higher commodity costs. An increase in list prices for the current year, combined with the sales price effect of glyphosate-resistant products, which are sold at a premium, more than offset the increase in unit costs. 9 11 OTHER PRODUCTS Other products' current year operating results improved $4 million over those recorded in 1997. Wheat, sunflower, and canola accounted for most of the change. Wheat operating income increased $4 million over 1997 results. Sunflower operations provided a positive impact to the current year mainly due to operations in North America and Europe. An increase in sunflower operating income of $4 million is the result of a $10 million increase in sales over 1997. Operating income for canola products in 1998 improved $2.5 million from 1997 results primarily due to the increased sales of herbicide resistant products. Operating results decreased $6 million due to the Company's equity ownership in Optimum Quality Grains, L.L.C., which began operations in 1998. OTHER PRODUCTS NET SALES AND COMBINED PRODUCT LINE OPERATING INCOME (LOSS)
INCREASE 1997 INCREASE 1996 1998 (DECREASE) ---- (DECREASE) ---- (IN MILLIONS) NET SALES Alfalfa.............................. $ 46 $ 1 2.2% $ 45 $13 40.6% $ 32 Sorghum.............................. 36 -- --% 36 5 16.1% 31 Wheat................................ 24 4 20.0% 20 (5) (20.0)% 25 Sunflower............................ 34 10 41.7% 24 2 9.0% 22 Microbial products................... 29 (1) (3.3)% 30 2 7.1% 28 Other products....................... 41 5 13.9% 36 (6) (14.3)% 42 ---- --- ---- --- ---- Total net sales.............. $210 $19 9.9% $191 $11 6.1% $180 ==== === ==== ==== === ===== ==== Total combined operating income (loss).............. $ 15 $ 4 $ 11 $14 $ (3) ==== === ==== === ====
These products provide the sales organization a full line of seed products, significantly aiding in the sale of higher-margin products. In addition, the opportunity for some of these product lines to generate greater levels of operating income in the future is promising. CORPORATE AND OTHER ITEMS Current year indirect general and administrative expenses increased $11 million, or 14%, over 1997 levels. Increased employee compensation costs and higher training and development costs resulting from investments in information systems within North America and Europe were a significant part of the current year increase. The protection of research technology through the filing of patents and the cost of litigation associated with the ownership of technology also contributed to this increase. The Company filed 187 patent applications in the United States through September of calendar year 1998 compared to 121 and 109 in calendar years 1997 and 1996, respectively. Net financial income for fiscal 1998 increased $38 million from 1997. Net exchange and other gains and losses in the current year were impacted by a $20 million gain on the sale of two million shares of Mycogen Corporation stock in 1998 compared to a $7 million gain on the sale of one million shares in 1997. The Mycogen transactions, net of expenses, increased diluted earnings per share $0.04 and $0.01 in 1998 and 1997, respectively. In addition, net financial income was impacted by interest earned on the proceeds from equity transactions with DuPont. The decrease in the effective tax rate from 34% in 1997 to 33% in 1998 was primarily attributable to the Company's operations outside the United States and an increase in research tax incentives. The decrease in the effective tax rate between years increased earnings per share by $0.02. The Company's effective tax rate will vary based on the mix of earnings and tax rates from the various countries in which it operates. 10 12 ALLIANCE WITH DUPONT In September 1997, the Company and DuPont finalized an agreement that created one of the world's largest private agricultural research and development collaborations. The companies also formed a joint venture, Optimum Quality Grains, L.L.C., that markets improved quality traits to increase the value of crops for livestock feeders, grain processors, and other end users. The joint venture does not sell seed. The Company is the preferred worldwide provider and marketer of quality trait seed for the joint venture. In connection with the above agreements, DuPont also acquired an equity interest in the Company through the purchase of 164,446 shares of preferred voting stock for $1.7 billion. Effective January 30, 1998, each preferred share was converted into 100 shares of Class B common stock with a stated value of $1.00 per share. As required by the agreement, the Company used approximately $1.5 billion of the proceeds from the DuPont investment to purchase approximately 16.4 million shares of the Company's outstanding common stock through a Dutch auction self-tender. The common shares reacquired by the Company were retired, but remain authorized and unissued. The net effect of these equity transactions, including associated transaction costs, was an increase in Class B common stock of $16.4 million, a decrease in common stock of $16.4 million, and an increase in additional paid-in capital of approximately $170 million, the use of which is unrestricted. Immediately following the completion of the Dutch auction self-tender, DuPont's equity interest in the Company was approximately 20%. The agreements include, among other things, a standstill provision that prohibits DuPont from increasing its ownership interest in the Company for 16 years from the date of the agreement without the consent of the Company. DuPont also gained two seats on the Company's Board of Directors. These agreements with DuPont will bring additional opportunities to compete for corn acres in 1999 and the potential to become a significant supplier in the rapidly growing market for high-oil corn. Financial results for the year ended August 31, 1998 were affected by the completion of the agreement with DuPont. Without the DuPont equity transactions less cash would have been available for investment, short-term borrowings would have been higher, and the Company would not have paid preferred stock dividends. Current year results, excluding the impact from the above equity transactions, were income of $257.9 million, or $1.05 per diluted share. The following table summarizes the components of income per share as reported and excludes the impact from the equity transactions with DuPont:
PRO FORMA AS REPORTED EXCLUDING EQUITY TRANSACTIONS --------------------------------- --------------------------------- SHARES SHARES INCOME (DENOM- PER-SHARE INCOME (DENOM- PER-SHARE YEAR ENDED AUGUST 31, 1998 (NUMERATOR) INATOR) AMOUNT (NUMERATOR) INATOR) AMOUNT -------------------------- ----------- ------- --------- ----------- ------- --------- (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Net income...................... $270 $270 Items resulting from the DuPont equity transactions Preferred stock dividends..... (9) -- Interest benefit from DuPont proceeds*.................. -- (12) ---- ---- Basic earnings per share Net income attributable to common shareholders........ $261 231.5 $1.13 $258 244.4 $1.06 ===== ===== Effect of dilutive securities Convertible preferred stock... 9 17.7 -- -- Stock options................. -- 1.1 -- 1.1 ---- ----- ---- ----- Diluted earnings per share Net income attributable to common shareholders........ $270 250.3 $1.08 $258 245.5 $1.05 ==== ===== ===== ==== ===== =====
- --------------- * Based on the assumption that the proceeds generated by DuPont equity transactions earned an investment return during the period on the excess funds and reduced borrowing costs at the Company's after-tax investment and borrowing rates. 11 13 YEAR ENDED AUGUST 31, 1997, COMPARED TO YEAR ENDED AUGUST 31, 1996 Hybrid Seed Corn August 31, 1997 seed corn operating income decreased $8 million, or 2% from 1996 results. Operations in North America played a significant role in the decrease, primarily the result of fewer unit sales, increased per-unit net margins, and higher investments in research and product development. Seed corn operations outside North America provided increased operating income from 1996 on higher unit sales; however, this was tempered by the stronger U.S. dollar in 1997. Seed corn market share in North America declined approximately two points in 1997, bringing the Company's estimated leading share of the North American market to approximately 42%. The Company introduced a number of new products in limited volumes in 1997 which were targeted to replace hybrids that had been leading sellers in recent years. Lower unit sales of these older hybrids were largely responsible for the estimated 1997 market share decrease. Delayed regulatory approval for the Company's ECB resistant corn products also contributed to the 1997 market share decline. Despite regulatory approval for these products coming late in the selling season, the Company sales representatives were able to place the Company seed in more than 20% of the estimated North American acres planted to ECB resistant corn in 1997. However, due to the late start, the Company was unable to attain its normal market presence for these products. The sale of two key hybrids, 3394 and 3489, accounted for approximately 23% and 28% of the Company's 1997 and 1996 North American hybrid seed corn unit sales, respectively. Corn acreage in North America during 1997 rose modestly above 1996 levels which positively affected operating income. Although operating results in North America were affected by higher per-unit seed corn costs, the average seed corn selling price also increased. In 1997, the average net seed corn selling price per unit to customers in North America increased 7% resulting from the introduction of several new elite products, which were priced at a premium, and an increase in list prices across the entire product line. However, during 1997 a change was made to the Company's commission program, which eliminated some ties between the commission and quantity savings discount programs. Reported quantity savings discounts increased and reported net commission expense decreased accordingly. As a result, reported net price for 1997 based on reported net sales only reflects an increase of approximately 5%. Net selling price per unit to customers, North American seed corn net margin per unit, and net compensation to sales representatives were essentially unaffected by this program change. Per-unit seed cost of sales increased approximately $2.50 in 1997, principally due to the prior year cost of sales mix. Fiscal 1996 cost of sales included large quantities of lower-priced carryover seed from the 1994 crop year. When combined with the sales price effect, net seed corn margins increased approximately $2.25 per unit. Provisions for inventory reserves in 1997 were $1.98 per unit, compared to $2.22 per unit in 1996. Approximately 9% of North American unit sales were reserved in 1997. North American research and product development costs for seed corn increased $11 million in 1997, or 15%, to $86 million. The increase was the result of additional spending on classical plant genetic activities and investments to access technology that will help expand and improve the Company's germplasm base. As a result of investments in research and product development, the Company research program turned out 27 new corn hybrids in limited volumes for the North American market in 1997. First-year sales of these new hybrids reached nearly 600,000 units, four times more than any previous group of new product introductions. Seed corn operating results outside North America increased $2 million compared to the prior year. European operations (Europe, CIS, and Japan) provided the largest impact, accounting for $13 million in additional operating income. Strengthening of the U.S. dollar against European currencies had a significant negative impact on 1997 reported results for European operations. Excluding this impact, the region reflected an improvement of $32 million over 1996 results. Additional unit sales in Italy, Southern Europe, and Central Europe were significant factors in the current year increase in operating income. Market size and market share increases, individually or in concert, played roles in these improvements. 12 14 Operating income in the Latin American region decreased $23 million compared to 1996. Supply availability and decreased corn acreage reduced 1997 operating income in Brazil. Also affecting 1997 results was a performance issue related to the previous year's top selling hybrids in Argentina. As a result, operating income decreased due to reduced unit sales and higher cost of sales. Operating income in Mexico improved $4 million from 1996 results as favorable weather conditions and improved water supply resulted in increased unit sales. Increased selling price per unit also favorably impacted 1997 results. Volume and price increases in several countries within Asia, Africa, and the Middle East improved this region's 1997 operating results $3 million. Soybean Seed Soybean operating income improved $11 million, or 69%, over 1996 results. The primary drivers for operating income -- market size, market share, and price -- had positive impacts on soybean operations. Unit sales in North America increased 19%, or approximately 2.2 million units, over 1996 levels as a result of increased acreage and improved market share. Favorable commodity prices drove an 11% increase in acres planted to soybeans in 1997. Continued strong product performance and the demand for glyphosate-resistant varieties contributed to market share gains. Net margin in North America improved approximately $0.60 per unit from 1996 despite higher commodity costs. An increase in list prices for 1997, combined with the sales price effect of glyphosate-resistant products that are sold at a premium, more than offset the increase in unit costs. The demand for glyphosate-resistant products in North America was strong in 1997. The Company's 1997 unit sales of these products totaled 2.3 million units, or approximately 17% of total soybean unit sales, compared to unit sales of less than 100,000 in 1996. OTHER PRODUCTS Other products' 1997 operating results improved $14 million over those recorded a year earlier. Comparisons in 1997 were affected by the elimination of 1996 losses from the sale of the Company's vegetable products line and liquidation of the specialty oils inventory in 1996 not present in 1997, which combined to improve 1997 operating results $7 million over 1996 levels. Operating income for canola products in 1997 improved $3 million from results in 1996 due to increased acreage and higher market share. Microbial product results improved $2 million for the year on strong performance of premium inoculant products. Annual results for alfalfa, sorghum, and miscellaneous other seed products in total improved $5 million from 1996. Decreased 1997 wheat sales in North America, the result of reduced acreage, lowered operating income $3 million from 1996 levels. CORPORATE AND OTHER ITEMS Indirect general and administrative expenses in 1997, which totaled $77 million, were similar to those recorded in 1996. Increased general costs and higher legal expenses, resulting from technology claims and disputes, were offset by the one-time effect of adopting FAS116 "Accounting for Contributions Made and Contributions Received" during 1996, not present in the 1997. Net financial income increased $3 million from what was recorded in 1996. The retirement of the medium-term note program in February 1996, combined with a lower average level of short-term borrowing in 1997, reduced 1997 interest expense $3 million. A gain in 1997 from the sale of one million shares of Mycogen Corporation stock improved net financial income $7 million; however, this was offset almost entirely by an increase in recorded net exchange losses, principally due to the strengthening of the U.S. dollar against European currencies. The decrease in the effective tax rate from 36% in 1996 to 34% in 1997 was primarily attributable to the Company's operations outside the United States. 13 15 Liquidity and Capital Resources Due to the seasonal nature of the agricultural seed business, the Company generates most of its cash from operations during the second and third quarters of the fiscal year. Cash generated during this time is used to repay commercial paper borrowings and accounts payable, which are the Company's primary sources of credit during the first and fourth quarters of the fiscal year. Any excess funds available are invested, primarily in short-term commercial paper. Historically, the Company has financed growth through earnings. Cash provided by operating activities was $240 million in 1998, compared to $176 million and $389 million in 1997 and 1996, respectively. The effect on cash provided by operating activities of building inventory levels and inventory liquidation have the greatest impact on the Company in any given year. Excluding this effect, cash provided by operating activities was $302 million in 1998, compared to $248 million and $346 million in 1997 and 1996, respectively. Most of the Company's financing is done through the issuance of commercial paper in the U.S., backed by revolving and seasonal lines of credit. In addition, foreign lines of credit and direct borrowing agreements are relied upon to support overseas financing needs. Short-term debt at August 31, 1998 totaled $76 million, a $15 million decrease from 1997. In 1998, short-term borrowings peaked at $128 million compared to $250 million in 1997. Short-term borrowings were lower due to the net proceeds of approximately $170 million resulting from the sale of preferred shares to DuPont and the subsequent Dutch auction self-tender. In 1998, including net proceeds available from equity transactions with DuPont, short-term domestic investments peaked at $429 million compared to $242 million in 1997. The 1998 amount does not include $1.5 billion of the proceeds from the DuPont equity transaction used in the Dutch auction self-tender due to the nonrecurring nature of the transaction. Short-term investments are made through a limited number of reputable institutions after evaluation of their investment procedures and credit quality. The Company invests in only high- quality, short-term securities, primarily commercial paper. Individual securities must meet credit quality standards, and the portfolios are monitored to ensure diversification among issuers. FISCAL 1998 AND 1999 AVAILABLE DOMESTIC LINES OF CREDIT
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER ----------- ----------- ----------- ----------- (IN MILLIONS) Revolving................................... $200 $200 $200 $200 Seasonal.................................... 100 100 -- -- ---- ---- ---- ---- Total............................. $300 $300 $200 $200 ==== ==== ==== ====
The Company believes the domestic lines of credit available in 1999 are sufficient to meet domestic borrowing needs. Revolving line of credit agreements expire August, 2001. The Company also has a seasonal revolving credit facility to meet peak borrowing needs, which expires August, 1999. At year end, cash and cash equivalents totaled $86 million, down from $97 million at August 31, 1997. It is the Company's policy to repatriate excess funds outside the U.S. not required for operating capital or to fund asset purchases. The growth in trade receivables at August 31, 1998 was primarily due to increased participation in the Company's credit programs. Capital expenditures, including business and technology investments, were $128 million in 1998 compared to $151 million in 1997 and $164 million in 1996. The Company's capital expenditures primarily represent continued investment in production capacity, technology acquisitions, and research collaborations. Capital expenditures for 1999 are expected to be approximately $160 to $170 million and are expected to be funded through earnings. The quarterly dividend paid in July of 1998 increased to $0.10 per share, up 15% from the $0.087 per-share dividend paid the prior four quarters. The Company's dividend policy is to annually pay out 40% of a four-year rolling average of earnings. 14 16 During 1998, the Company repurchased 6,627,800 shares of its stock under a Board authorized repurchase plan at a total cost of $234 million, excluding the Dutch auction self-tender. At August 31, 1998, authorized shares remaining to be purchased under the plan totaled 4.8 million. At August 31, 1998, there were 240 million shares of common stock and Class B common stock outstanding. MARKET RISKS The Company uses derivative instruments to manage risks associated with its grower compensation costs and foreign-currency-based transactions. The Company uses derivative instruments such as commodity futures and options to hedge the commodity risk involved in compensating growers. The Company contracts with independent growers to produce the Company's finished seed inventory. Contracts with growers generally allow them to settle with the Company for the market price of grain for a period of time following harvest. It is the Company's policy to hedge commodity risk prior to setting the retail price of seed. The hedge gains or losses are accounted for as inventory costs and expensed as cost of goods sold when the associated crop inventory is sold. At August 31, 1998 and 1997, net unrealized losses on these contracts for corn and soybeans totaled $13 million and $4 million, respectively. A 10% change in the market price of the commodity contracts would impact 1998 net unrealized losses by approximately $1 million. The contract volumes at year end depend upon the acreage contracted with growers, the crop yield, the percentage growers have marketed to the Company, and the percentage of crop hedged by the Company. Since these positions are a hedge to inventory costs, any change in the cost of these positions is offset by an opposite change in inventory costs. The Company uses derivative instruments such as forward exchange contracts, purchased options, and cross currency swaps to hedge foreign-currency-denominated transactions such as exports, contractual flows, and royalty payments. While derivative hedge instruments are subject to price fluctuations from exchange and interest rate movements, the Company expects these price changes to generally be offset by changes in the U.S. dollar value of foreign sales and cash flows. Therefore, hedging gains and losses are matched with the costs of the underlying exposures and accounted for in inventory, sales, or net financial costs. At August 31, 1998 and 1997, net unrealized losses from foreign-currency hedge contracts totaled $1 million and $4 million, respectively. A 10% change in exchange rates would impact 1998 net unrealized losses by approximately $14 million. The Company does not trade in commodity-based or financial instruments with the objective of earning financial gain on rate or price fluctuations, nor does it trade in these instruments when there are no underlying transaction related exposures. ACCOUNTING PRONOUNCEMENTS The Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share" effective December 31, 1997. SFAS No. 128 is retroactive to prior years; however, the adoption did not materially affect prior years' earnings per share as previously reported under APB Opinion No. 15. The Financial Accounting Standards Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income"; SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information"; and SFAS No. 132, "Employers' Disclosures About Pensions and Other Postretirement Benefits." These statements will require revised and/or additional disclosure requirements but will not have an effect on the results of operations or financial position of the Company. The Company will adopt the provisions of SFAS No. 130 in the first quarter of fiscal 1999 and the provisions of SFAS No. 131 and SFAS No. 132 for the fiscal year ended August 31, 1999. In June 1998, FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement is effective for fiscal years beginning after December 15, 1998. Therefore, the Company will adopt this statement for its fiscal year ended August 31, 2000. Due to the recent issuance and the complexity of the statement, the Company is still in the process of determining the effect of adopting the statement on the Company's operations and financial position. 15 17 EFFECTS OF INFLATION Inflation typically is not a major factor in the Company's operations. The cost of seed products is largely influenced by seed field yields and commodity prices, which are not impacted by inflation. Costs normally impacted by inflation -- wages, transportation, and energy -- are a relatively small part of the total operations. YEAR 2000 The Year 2000 issue refers to a flaw in software design that results in (a) errors when systems process dates after December 31, 1999 or (b) a failure to recognize 2000 as a leap year. The Year 2000 issue presents a unique challenge to organizations, not because it is technically difficult to resolve, but rather because it is so difficult to manage. The problem is pervasive, existing throughout a wide variety of computing systems and hardware devices within organizations and within their supply chains; and corrective actions must be taken by a fixed point in time -- no later than January 1, 2000. The Company is well into its Year 2000 remediation effort, having begun this process in 1996. The Company expects to see little, if any, direct impact on operations given the nature of the business and the Company's business relationships, the corrective steps taken to date, and the contingency plans to be put in place in 1999. Additionally, the Company has long had a policy of aggressively investing in and adopting new technologies. As a result, many of the Company's core and end-user systems were developed or delivered in Year 2000 compliant form, greatly reducing the number of non-compliant legacy systems requiring corrective measures. For example, the Company recently implemented SAP AG's R/3 enterprise application software in the United States, Canada, Italy, and France. Management has established a committee to direct the Company's compliance activities. The committee meets on a regular basis and reports quarterly to the Board of Directors. The committee has segregated the Company's work on the Year 2000 issue into four phases: 1) inventory, 2) assessment, 3) remediation, and 4) testing. At August 31, 1998, the committee reported that the inventory, assessment, and remediation phases for the core-processing infrastructure and for core business applications were 90 to 95% complete. The remaining work in these phases is expected to be completed by February 1999. Integration testing of core applications and infrastructure is scheduled to begin in February 1999 and is expected to be completed by the end of September 1999. At August 31, 1998, the Company had completed an inventory of personal computer, office automation, laboratory, production, and telecommunication equipment worldwide. Inventory of building systems was in progress. Assessments had been completed for 40 to 50% of the components surveyed and should be completed by the end of 1998. At this point in time, the Company estimates that a small percentage of the equipment inventory will require remediation and that upgrades or replacements will be completed by the end of June 1999. The Company is also in the process of analyzing the Year 2000 readiness of material third parties (suppliers). Replacement suppliers will be found in 1999 if the Company determines some suppliers are not likely to be compliant in time. The Company has spent approximately $1 million to date in direct costs associated with reaching Year 2000 compliance. Total costs to the Company to address Year 2000 issues are currently estimated not to exceed $3 million to $5 million and consist primarily of consulting fees for software remediation activities and expected costs to replace noncompliant hardware components. These costs are expected to be funded through earnings. On the basis of research to date, the Company believes that the greatest potential for disruption lies not in the Company's internal systems but rather in the external systems of the Company's service providers. The Company believes, however, that in North America and Europe, where the Company does most of its business, disruptions in these external systems will be short-lived, and that through contingency planning the Company can minimize the impact on seed production and selling activities in the Northern Hemisphere. Analysis to date also indicates that the vast majority of the Company's supplier and customer base will likewise not be impacted by internal system problems. The Company believes, however, given the number of supplier options available, that the Year 2000 challenge will not materially impact the Company's ability to produce seed products or the ability to sell and distribute these products to customers for planting in the spring of 2000. 16 18 Some of the unique factors of the Year 2000 issue which could impact the Company's performance are inability of third parties to timely provide remediation measures, impacts of the failure of businesses other than the Company or its immediate suppliers that would ultimately have an impact on the Company, failure of governmental agencies to properly address their own Year 2000 compliance, or misrepresentations of readiness by suppliers or vendors. EURO CONVERSION The Company believes the euro conversion will not have a material impact on the Company's ability to execute transactions during the transition period, which begins January 1, 1999, and ends December 31, 2001. The significant requirement of companies during this period is the ability to invoice and accept payment in euro at a customer's request. The Company has systems and processes in place to manage euro denominated transactions if a customer makes this request. The Company continues to evaluate the impact the euro conversion will have on its business, although the Company believes it will not have a material impact on its results of operations or financial condition. The Company has performed an analysis of the readiness of applicable computer systems for the euro conversion. Plans are in place to upgrade existing systems prior to 2001 to meet the needs of full euro conversion. The cost of these upgrades is not expected to be material to the Company. In addition, the Company has analyzed changing its hedging of foreign-currency-denominated transactions in participating countries from their legacy currency to the euro. Management expects hedging in the euro to reduce the number of hedging contracts and associated administrative costs. OUTLOOK FOR 1999 AND BEYOND The Company's prospects for 1999 and beyond are encouraging. The Company plans to introduce over 50 new seed corn hybrids in North America in 1999, including high-oil products and several with the Bt gene for resistance to European Corn Borer (ECB). Approximately 70% of the units sold in 1999 are expected to be from hybrids introduced in 1997 or later. List prices of the Company's hybrid corn seed in North America will not be increased in 1999. However, the trend of customers to purchase new higher-priced, higher-value products is expected to increase North America's average per-unit seed corn selling price and per-unit margin. With the increased introduction of new products, the Company anticipates more rapid obsolescence of older products. Low commodity prices create financial stress for farmers in the United States and around the world. One potential consequence of low corn prices is a reduction in acres planted to corn, as farmers consider switching to other crops. A reduction in corn acreage would hinder the Company's ability to grow earnings. However, the Company anticipates that the 1998 fall harvest in North America will substantiate continued strong product performance, thereby positioning the Company for market share growth in 1999 and beyond. During 1998, there was an unprecedented level of discounting and promotions of hybrid seed corn by competitors. New alliances, combined with a consolidation of industry players, have increased the level of uncertainty in the industry. However, the Company is well positioned against its competitors. The Company plans to continue to aggressively demonstrate to customers the financial benefits of the yield advantage of its products. The demand for glyphosate-resistant soybeans is expected to continue to grow in 1999. The Company expects to have adequate supply available to meet the expected demand. As a result, glyphosate-resistant products are expected to represent a larger percentage of overall soybean sales in 1999, and margins are expected to improve because of their premium sales price. The Company anticipates continued growth in local currency sales and operating profits outside of North America. Therefore, declines in the value of foreign currencies against the U.S. dollar could adversely affect operating income from these operations. In 1999, the Company plans to introduce ECB resistant corn hybrids in limited volumes in several countries outside of North America. This should help position the Company for continued growth in sales and margins within these countries in the years to come. 17 19 The Company expects growth in fixed costs to be led by increased investments in research and product development, information management, and sales and marketing, as well as an increase in legal costs. The Company expects that its worldwide research and product development investments as a percentage of sales will continue to climb, as it enhances its position as the world's leading supplier of agricultural genetics and as a leading integrator of technology. Sales and marketing expenses are also expected to increase as the Company introduces an unprecedented number of new products. Legal costs will likely climb as the Company continues to protect and defend its intellectual property positions. Salary and benefits are another factor that influences fixed costs. Pioneer's commitment to the work force and responsiveness to the competitive environment is expected to raise base compensation levels faster than inflation in the next fiscal year. In addition, a change in the mix of earnings between the Company's North American seed business and other worldwide operations may put upward pressure on the effective tax rate in the future. 18 20 BUSINESS GENERAL The business of the Company is the broad application of the science of genetics. Founded in 1926 to apply then newly-discovered genetic techniques to hybridize corn, the Company has been the industry leader in research and product development for more than 70 years. The Company owns what it believes to be the industry's finest collection of crop genetics (germplasm), which has been the key to the Company's success in the past and is expected to be the key to its success in the future. The Company's research and development is focused on improving the germplasm base by integrating new technology essential to crop genetic improvements. The Company was the first commercial seed company to undertake collaborations on a wide scale with other organizations and scientists throughout the world to improve core germplasm and better understand crop genetics. The Company believes that its research collaborations improve its ability to deliver improved products. The Company emphasizes research for improving the profitability of farmers through both agronomic and end-use grain improvements. Agronomic traits increase crop yield or reduce growers' costs. The Company delivers such improvements as increased bushels per acre and increased resistance to insects, diseases and herbicides. End-use grain improvement is an area of increasing importance. The Company expects to experience increasing demand from end users such as livestock feeders, grain processors, food processors, and others for specific qualities in the crops they use as an input in developing other products. PRODUCTS The Company develops, produces, and markets hybrids of corn, sorghum, and sunflowers; varieties of soybeans, alfalfa, wheat, and canola; and microorganisms useful in crop and livestock production. Hybrids, such as corn and sorghum, are crosses of two or more unrelated inbred lines that can be reproduced only by crossing the original parent lines. As a result, it is not beneficial for customers to plant saved seed, because the seed produced will not have the same genetic attributes as the seed planted. Varietal crops, such as soybeans and wheat, will reproduce themselves with little or no genetic variation. Customers frequently plant saved seed from these products, although they are becoming increasingly aware of the advantages of purchasing new seed every year. The Company's principal products are hybrid seed corn and varietal soybean seed, which together accounted for approximately 89% of net sales and almost all operating income over the last five fiscal years. These products are expected to maintain a dominant role in the Company's operations for the foreseeable future. Seed corn, in terms of both sales and profitability, is the Company's most significant product. In fiscal 1998, sales of seed corn represented approximately 76% of total net sales. Approximately 40% of the Company's 1998 North American seed corn volume was from hybrids introduced in 1997, or those released in 1998. Seed corn net sales were $1.4 billion and seed corn operating income was $396 million in fiscal 1998. Soybean seed is the Company's second largest product in terms of sales and profitability. Soybean seed accounted for approximately 13% of total net sales in fiscal 1998. A new variety of soybean seed resistant to specific herbicides accounted for approximately 39% of fiscal 1998 soybean net sales. Soybean net sales were $232 million and soybean operating income was $36 million in fiscal 1998. The Company also develops, produces and markets other products such as wheat, canola, alfalfa, sorghum, sunflower, and microorganisms useful in crop and livestock production. These products provide the Company's sales organization with a full line of seed products, significantly aiding in the sale of higher-margin products. Other product net sales were $210 million and other product operating income was $15 million in fiscal 1998. The Company has seed production facilities located throughout the world and engages in seed production year-round. In the production of its parent and commercial seed, the Company generally provides the seed stock, detasseling and roguing labor, and certain other production inputs. The balance of the labor, equipment, and inputs are supplied by independent growers. The Company is the first major agricultural seed company in the world to attain ISO 9000 certification, which allows it to move products more easily from country to country. 19 21 MARKETS The primary markets for the Company's products are the United States, Canada and Europe. Approximately 71% of fiscal 1998 net sales were made in North America and approximately 20% of such sales were made in Europe. The Company also has operations in Latin America, Mexico, Africa, Asia, the Middle East, and the Pacific region. The Company is the industry leader in North American seed corn sales. The Company estimates that its share of this market in fiscal 1998 was approximately 42%. The next seven competitors held an estimated combined market share of approximately 34%, with the closest competitor holding approximately 11%. The remainder of the market was divided among more than 275 companies selling regionally. The Company has a leading seed corn market share in most of the countries outside North America in which it operates. The Company's market shares in France, Italy, Germany, Hungary, Austria, Mexico, and Brazil ranged from approximately 10% to more than 60% in fiscal 1998. The principal market for the Company's soybean seed is North America. The Company estimates that its share of the soybean seed market in North America in fiscal 1998 totaled approximately 16%. In North America, the majority of seed is marketed through independent sales representatives. In areas outside the traditional corn belt, seed products are often marketed through dealers and distributors who handle other agricultural supplies. The Company's products are marketed outside North America through a network of subsidiaries, joint ventures, and independent producer-distributors. DUPONT ALLIANCE On August 6, 1997, the Company and DuPont agreed to three integrated transactions involving (1) a research alliance between the two companies; (2) the formation of a joint venture to exploit business opportunities in quality grain traits; and (3) an investment by DuPont in the Company under which DuPont acquired a 20% equity interest in the Company. Pursuant to the research alliance, the Company and DuPont have agreed to a research alliance and collaboration to take advantage of the two companies' respective expertise and technology and know-how concerning quality grain traits, agronomic traits, industrial use traits, genomics and enabling technology for developing seed, grain, grain products, plant materials and other crop improvement products. The Company and DuPont also have established a commercial joint venture called Optimum Quality Grains, L.L.C. (the "Joint Venture"), in which each party owns a 50% interest, which will seek to create, maximize and capture value for quality traits in seed, grain, grain products and plant materials delivered through corn, soybeans and other selected oil seeds. A key component of the Joint Venture is the Preferred Seed Support Agreement between the Joint Venture and the Company. The Joint Venture is not in the seed business and will look to the Company to be the Joint Venture's preferred worldwide provider and preferred marketer of quality trait seeds pursuant to the Preferred Seed Support Agreement. RESEARCH AND PRODUCT DEVELOPMENT The Company's research and product development activities are directed at products with significant market potential. The Company believes it possesses the largest proprietary pool of germplasm in the world from which to develop new seed products. The Company's seed research is done through classical plant breeding and biotechnology techniques. Prior to commercial sale, each potential product passes through four- to five-year testing cycles during which it is tested in a range of soil types, stresses and climatic conditions. During the three fiscal years ended August 31, 1998, the Company expended the following amounts on research and product development:
YEARS ENDED AUGUST 31, 1998 1997 1996 ---------------------- ---- ---- ---- (IN MILLIONS) Corn.................................................. $110 $101 $ 90 Soybean............................................... 14 14 12 Other Products........................................ 31 31 34 ---- ---- ---- $155 $146 $136 ==== ==== ====
20 22 Integrating new technology is essential to crop genetic improvements. Currently, the Company manages more than 2,000 research agreements, over 200 of which are collaborations with entities specializing in technology that the Company believes help improve its core germplasm base. Existing agreements, together with a growing number of new associations and collaborations, have enabled the Company to be a leader in understanding the functions of important genes in crops such as corn and soybeans. The Company's objective is to continue to develop that understanding while improving its ability to incorporate these genes more efficiently into commercial products. PATENTS, TRADEMARKS, AND TECHNOLOGY The Company owns and controls its inbreds and varieties by means of intellectual property rights, including, but not limited to, patents, trademarks, licenses, trade secrets, and plant variety protection certificates. Within the United States, these rights essentially prohibit other parties from making, using, selling, importing, or exporting seed produced from the Company's inbreds and varieties until such protection expires, usually well after the useful life of the inbred or variety. Outside the United States, the level of protection afforded varies from country to country according to local laws and international agreements. As of August 31, 1998, the Company held over 250 domestic and 300 foreign patents and had over 900 patent applications pending on new technologies and products moving toward commercialization. RISK FACTORS IN THE BUSINESS The annual volume of seed sold and related profit can be significant affected by forces beyond the Company's control. Some of these factors are government programs/approvals, weather, and commodity prices. Government programs can affect, among other things, crop acreage and commodity prices. Government regulatory approvals can affect the timing of bringing new products to market. Weather and other factors can affect commodity prices, product performance, the Company's seed field yields, and planting decisions by customers which ultimately can impact acreage. Commodity prices impact the Company's pricing opportunities, selling strategies, and collection practices. Intellectual property positions are becoming increasingly important within the agricultural seed industry as genetically engineered products become a larger part of the product landscape. It is likely that no one company will own all patent rights within the industry for certain recent technology advancements. The competitive landscape in the seed genetics business continues to change as many chemical companies work to transform themselves into higher-value life sciences companies. The Company is unable to predict what effect the consolidations in the industry will have on pricing opportunities, selling strategies, intellectual property, or earnings. Operating as a global company exposes the Company to the risks resulting from currency fluctuations. The Company has policies in place to help manage this risk. Product performance against the competition will continue to be the key driver of long-term success for the Company. While the Company has been able to develop products that consistently out-perform the competition, rapid change in technology and customer preference may result in short product life cycles. Speed to market with new, higher-value, products will be increasingly important. EMPLOYEES As of August 31, 1998, the Company employed approximately 5,000 people worldwide, of which approximately 1,000 were engaged in research and development. The Company believes relations with its employees to be good. 21 23 DESCRIPTION OF THE NOTES The Notes will be issued under an Indenture to be dated as of , 1999 (the "Indenture"), between the Company and The Chase Manhattan Bank and Trust Company, as trustee for the Notes (the "Trustee"). The Indenture is subject to and is governed by the Trust Indenture Act of 1939, as amended (the "TIA"), and the terms of the Notes include those made part of the Indenture by reference to the TIA as in effect on the date of the Indenture. The following is a summary of certain provisions of the Notes and the Indenture. The following description does not purport to be complete and is subject to, and qualified in its entirety by, reference to the TIA and all the provisions of the Notes and the Indenture, including the definitions stated therein. Definitions relating to certain capitalized terms are set forth under "Certain Definitions" and throughout this description. Terms that are used but not otherwise defined herein have the meanings assigned to them in the Indenture and such definitions are incorporated herein by reference. GENERAL The Notes will be senior, unsecured obligations of the Company, will be limited to, $ aggregate principal amount and, unless previously redeemed or repurchased, will mature on 20 . The Notes will bear interest at the rate per annum shown on the front cover of this prospectus from , 1999 or from the most recent interest payment date to which interest has been paid or provided for, payable semi-annually on and of each year, commencing , 1999, to the Person in whose name a Note (or any predecessor Note) is registered at the close of business on the preceding or , as the case may be. Principal of, premium, if any, and interest on the Notes will be payable, and the Notes will be transferable at the corporate trust office or agency of the Trustee in The City of New York maintained for such purposes at 55 Water Street, New York, New York 10041. No service charge will be made for the transfer, exchange or redemption of Notes, except in certain circumstances for any tax or other governmental charge that may be imposed in connection therewith. The Notes will be issued in fully registered form without coupons, in denominations of $1,000 or integral multiples thereof. The Indenture does not provide for any debt covenants that would afford Holders any protection in the event of a highly leveraged transaction involving, or a change in control of, the Company. RESTRICTED AND UNRESTRICTED SUBSIDIARIES The various restrictive provisions of the Indenture applicable to the Company and its Restricted Subsidiaries do not apply to Unrestricted Subsidiaries. The assets and liabilities of Unrestricted Subsidiaries, and investments by the Company in any Unrestricted Subsidiary, are not consolidated with those of the Company and its Restricted Subsidiaries in calculating Consolidated Net Tangible Assets under the Indenture. "Unrestricted Subsidiaries" are those Subsidiaries which are designated as Unrestricted Subsidiaries by the Board of Directors from time to time pursuant to the Indenture and Subsidiaries of Unrestricted Subsidiaries. "Restricted Subsidiary" means any Subsidiary which owns or leases a Principal Property and any other Subsidiary which has not been designated an Unrestricted Subsidiary. "Principal Property" means any real or personal property owned or leased by the Company or any Subsidiary the net book value of which on the date as of which the determination is being made exceeds 2% of the Consolidated Net Tangible Assets of the Company and its Restricted Subsidiaries, provided that Principal Property shall not include any real or personal property owned or leased by the Company or any Subsidiary which the Company's Board of Directors has in good faith determined pursuant to a written resolution is not material, either singly or together with all other real and personal property owned or leased by all Unrestricted Subsidiaries, to the Company and its Subsidiaries, taken as a whole. RANKING The indebtedness evidenced by the Notes will rank pari passu in right of payment with all other senior, unsecured indebtedness of the Company, but will be effectively subordinated to indebtedness of the Company's 22 24 subsidiaries. In addition, the indebtedness evidenced by the Notes will be effectively subordinated to any senior, secured indebtedness of the Company to the extent of the value of the assets securing such indebtedness. OPTIONAL REDEMPTION The Notes will be redeemable, as a whole or in part, at the option of the Company at any time, at a redemption price (a "Redemption Price") equal to the greater of (i) 100% of the principal amount of such Notes and (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the redemption date (the "Redemption Date") on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate plus basis points, plus, in each case, accrued interest thereon to the Redemption Date. "Treasury Rate" means, with respect to any Redemption Date, the rate per annum equal to the semiannual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such Redemption Date. "Comparable Treasury Issue" means the United States Treasury security selected by an Independent Investment Banker as having a maturity comparable to the remaining term of the Notes to be redeemed that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of a comparable maturity to the remaining term of such Notes. "Independent Investment Banker" means one of the Reference Treasury Dealers appointed by the Trustee after consultation with the Company. "Comparable Treasury Price" means, with respect to any Redemption Date, (A) the average of the Reference Treasury Dealer Quotations for such Redemption Date, after excluding the highest and lowest such Reference Treasury Dealer Quotations, or (B) if the Trustee obtains fewer than four such Reference Treasury Dealer Quotations, the average of all such quotations. "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and any Redemption Date, the average, as determined by the Trustee, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Trustee by such Reference Treasury Dealer at 3:30 p.m., New York time, on the third Business Day preceding such Redemption Date. "Reference Treasury Dealer" means each of Lazard Freres & Co. LLC, Chase Securities Inc. and two other primary U.S. Government securities dealers in The City of New York to be selected by the Company, and their respective successors. Notice of any redemption will be mailed at least 30 days but not more than 60 days before the Redemption Date to each Holder of Notes to be redeemed. Unless the Company defaults in payment of the Redemption Price on and after the Redemption Date, interest will cease to accrue on the Notes or portions thereof called for redemption. If less than all of the Notes are to be redeemed, the Trustee will select the Notes to be redeemed on a pro rata basis, by lot or by such other method as the Trustee shall deem fair and appropriate. The Trustee may select for redemption Notes and portions of Notes in amounts of whole multiples of $1,000. BOOK-ENTRY DELIVERY AND FORM GLOBAL NOTES Except as set forth below, the Notes will initially be issued in the form of one or more registered Notes in global form (the "Global Notes"). Each Global Note will be deposited on the date of the closing of the sale of the Notes with, or on behalf of, The Depository Trust Company ("DTC" or the "Depositary") and registered in the name of Cede & Co., as nominee of DTC. 23 25 DTC is a limited-purpose trust company organized under the New York Banking Law, a "banking organization" within the meaning of the New York Banking Law, a member of the Federal Reserve System, a "clearing corporation" with the meaning of the New York Uniform Commercial Code and a "clearing agency" registered pursuant to the provisions of Section 17A of the Exchange Act. DTC holds securities that its participants ("Participants") deposit with DTC. DTC also facilitates the settlement among Participants of securities transactions, such as transfers and pledges, in deposited securities through electronic computerized book-entry changes in Participants' accounts, thereby eliminating the need for physical movement of securities certificates. Direct Participants include securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations ("Direct Participants"). DTC is owned by a number of its Direct Participants and by the New York Stock Exchange, Inc., the American Stock Exchange, Inc. and the National Association of Securities Dealers, Inc. Access to the DTC system is also available to others such as securities brokers and dealers, banks and trust companies that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ("Indirect Participants"). The rules applicable to DTC and its Participants are on file with the Commission. The Company expects that pursuant to procedures established by the Depositary (i) upon deposit of the Global Notes, the Depositary will credit the accounts of Participants designated by the Underwriters with an interest in the applicable Global Notes and (ii) ownership of the Notes evidenced by the Global Notes will be shown on, and the transfer of that ownership will be effected only through, records, maintained by the Depositary (with respect to Participants' interests), the Participants and the Indirect Participants. The laws of some states require that certain Persons take physical delivery in definitive form of securities that they own and that security interests in negotiable instruments can only be perfected by delivery of certificates representing the instruments. Consequently, the ability to transfer Notes evidenced by the Global Notes will be limited to such extent. So long as the Depositary or it nominee is the registered owner of a Note, the Depositary or such nominee, as the case may be, will be considered the sole owner or holder of the Notes represented by the Global Notes for all purposes under the Indenture. Except as provided below, owners of beneficial interests in a Global Note will not be entitled to have Notes represented by such Global Note registered in their names, will not receive or be entitled to receive physical delivery of Notes in certificated form ("Certificated Notes"), and will not be considered the owners or holders thereof under the Indenture for any purpose, including with respect to the giving of any directions, instructions or approvals to the Trustee thereunder. As a result, the ability of a Person having a beneficial interest Notes represented by a Global Note to pledge such interest to Persons or entities that do not participate in the Depositary's system, or to otherwise take actions with respect to such interest, may be affected by the lack of a physical certificate evidencing such interest. Neither the Company nor the Trustee will have any responsibility or liability for any aspect of the records relating to or payments made on account of Notes by the Depositary, or for maintaining, supervising or reviewing any records of the Depositary relating to such Notes. Payments with respect to the principal of, premium, if any, and interest on, any Note represented by a Global Note registered in the name of the Depositary or its nominee, on the applicable record date will be payable by the Trustee to, or at the direction of, the Depositary or it nominee in its capacity as the registered holder of the Global Note representing such Notes under the Indenture. Under the terms of the Indenture, the Company and the Trustee may treat the Persons in whose names the Notes, including the Global Notes, are registered as the owners thereof for the purpose of receiving such payments and for any and all other purposes whatsoever. Consequently, neither the Company nor the Trustee has or will have any responsibility or liability for the payment of such amounts to beneficial owners of Notes (including principal, premium, if any, or interest), or for immediately crediting the accounts of the relevant Participants with such payment, in amount proportionate to their respective holdings in principal amount of beneficial interests in the Global Note as shown on the records of the Depositary. Payments by the Participants and the Indirect Participants to the beneficial owners of Notes will be governed by standing instructions and customary practice and will be the responsibility of the Participants or the Indirect Participants. 24 26 CERTIFICATED NOTES If (i) the Company notifies the Trustee in writing that the Depositary is unwilling, unable or ineligible to act as a depositary and the Company is unable to locate a qualified successor within 90 days, (ii) the Company, at its option, notifies the Trustee in writing that it elects to cause the issuance of Notes in certificated form under the Indenture, or (iii) any Event of Default has occurred of is continuing, then, upon surrender by the Depositary of the applicable Global Notes, Certificated Notes will be issued to each Person that the Depositary identifies as the beneficial owner of the Notes represented by such Global Notes. Upon any such issuance, the Trustee is required to register such Certificated Notes in the name of such Person or Persons (or the nominee of any thereof), and cause the same to be delivered thereto. Neither the Company nor the Trustee shall be liable for any delay by the Depositary or any Direct Participant or Indirect Participant in identifying the beneficial owners of the Notes, and the Company and the Trustee may conclusively rely on, and shall be protected in relying on, instructions from the Depositary for all purposes (including with respect to the registration and delivery, and the respective principal amounts, of the Notes to be issued). The information in this section concerning the Depositary and the Depositary's book-entry system has been obtained from sources that the Company believes to be reliable. The Company will have no responsibility for the performance by the Depositary of its Participants of their respective obligations as described hereunder or under the rules and procedures governing their respective operations. SAME-DAY FUNDS SETTLEMENT Settlement for the Notes will be made by the Underwriters in immediately available funds. Payments in respect of Notes represented by Global Notes (including principal, premium, if any, and interest) will be made in immediately available funds to the accounts specified by the Depositary. With respect to Notes represented by Certificated Notes, the Company will make all payments of principal, premium, if any, and interest, by mailing a check to the registered address of each Holder. The Notes will trade in the Depositary's Same-Day Funds Settlement System until maturity, or until the Notes are issued in certificated form, and secondary market trading activity in the Notes will therefore be required by the Depositary to settle in immediately available funds. No assurance can be given as to the effect, if any, of settlement in immediately available funds on trading activity in the Notes. SINKING FUND The Notes will not be entitled to the benefit of any sinking fund. CERTAIN COVENANTS Limitation on Liens The Company will not, and will not permit any Restricted Subsidiary of the Company to, incur any Lien upon property or assets of the Company or any Restricted Subsidiary of the Company to secure Indebtedness without making, or causing such Restricted Subsidiary to make, effective provision for securing the Notes equally and ratably with (or prior to) such Indebtedness as to such property for as long as such Indebtedness will be so secured unless such Indebtedness is subordinate in right of payment to the Notes, in which case the Notes will be secured prior to such Indebtedness as to such property for as long as such Indebtedness will be so secured. The foregoing restrictions will not apply to (a) Permitted Liens or (b) Liens securing Indebtedness if, after giving pro forma effect to the Incurrence of such Indebtedness (and the receipt and application of the proceeds therefrom) or the securing of outstanding Indebtedness, the sum of (without duplication) (A) all Indebtedness (valued at the lesser of the outstanding obligation of such secured Indebtedness or the fair market value of the properties securing such Indebtedness) of the Company and its Restricted Subsidiaries secured by Liens (other than Permitted Liens) and (B) all Attributable Indebtedness of the Company and its Restricted Subsidiaries in respect of Sale and Leaseback Transactions, at the time of determination, does not exceed 15% of Consolidated Net Tangible Assets. 25 27 Limitation on Sale and Leaseback Transactions The Company will not, and will not permit any Restricted Subsidiary of the Company to, enter into any Sale and Leaseback Transaction unless (i) the Company or such Restricted Subsidiary would be entitled to create a Lien securing Indebtedness in an amount equal to the Attributable Indebtedness with respect to such Sale and Leaseback Transaction without securing the Notes or (ii) the Company or such Restricted Subsidiary, within six months from the effective date of such Sale and Leaseback Transaction, applies to the voluntary defeasance, prepayment (in whole or in part) or retirement (excluding retirement of Notes and other Indebtedness ranking pari passu with the Notes as a result of conversion or pursuant to mandatory sinking fund or mandatory prepayment provisions or by payment at maturity) of Notes or other Indebtedness ranking senior to or pari passu with the Notes an amount equal to the Attributable Indebtedness in respect of such Sale and Leaseback Transaction. CONSOLIDATION, MERGER AND SALE OF ASSETS The Company will not, in a single transaction or through a series of transactions, consolidate, amalgamate or combine with or merge with or into or, directly or indirectly, sell, assign, convey, lease, transfer or otherwise dispose of all or substantially all of its properties and assets to any Person or Persons, and the Company will not permit any of the Restricted Subsidiaries to enter into any such transaction or series of transactions if such transaction or series of transactions, in the aggregate, would result in the sale, assignment, conveyance, lease, transfer or disposition of all or substantially all of the properties and assets of the Company and its Restricted Subsidiaries taken as a whole, to any Person or Persons, unless at the time and after giving effect thereto (a) either (i) the Company shall be the continuing Person in the case of a merger or consolidation or (ii) the resulting, surviving or transferee Person, if other than the Company (the "Successor Company"), shall be a corporation organized and existing under the laws of the United States, any state thereof or the District of Columbia and shall expressly assume by a supplemental indenture all of the obligations of the Company under the Notes and the Indenture, and in each case, the Indenture shall remain in full force and effect; (b) immediately after giving effect to such transaction or series of transactions on a pro forma basis (including, without limitation, any Indebtedness Incurred or anticipated to be Incurred in connection with or in respect of such transaction or series of transactions), no Default or Event of Default would occur or be continuing and the Company shall have delivered to the Trustee an officer's certificate to that effect; and (c) the Company or the Successor Company, as the case may be, shall have delivered to the Trustee an officer's certificate and an opinion of counsel stating that such transaction or series of transactions, and, if a supplemental indenture is required in connection with such transaction or series of transactions to effectuate such assumption, such supplemental indenture, complies with this covenant and that all conditions precedent in the Indenture relating to the transaction or series of transactions have been satisfied. Notwithstanding the foregoing, any Restricted Subsidiary may consolidate, amalgamate or combine with or merge with or into or, directly or indirectly, sell, assign, convey, lease, transfer or otherwise dispose of all or substantially all of its properties and assets to the Company or, subject to the condition set forth in clause (b) in the preceding sentence, to any other Restricted Subsidiary. EVENTS OF DEFAULT AND REMEDIES The following events are "Events of Default" with respect to the Notes: (a) Default in the payment of any installment of interest on any Note as and when the same shall become due and payable and continuance of such default for a period of 30 days; (b) Default in the payment of all or any part of the principal or premium, if any, with respect to any Note as and when the same shall become due and payable, whether at maturity, upon redemption, by declaration, upon required purchase or otherwise; (c) Failure on the part of the Company to comply with the provisions of the Indenture relating to consolidations, mergers or sales of all or substantially all of its assets; (d) Failure on the part of the Company or any Restricted Subsidiary duly to observe or perform any other of the covenants or agreements on the part of the Company or any Restricted Subsidiary in the 26 28 Indenture or the Notes continuing for a period of 60 days after the date on which written notice to the Company specifying such failure and requiring the Company or any Restricted Subsidiary to remedy the same shall have been given to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in aggregate principal amount of the Notes at the time outstanding; (e) Indebtedness of the Company or any Restricted Subsidiary of the Company is not paid within any applicable grace period after final maturity or is accelerated by the holders thereof because of a default, the total amount of such Indebtedness unpaid or accelerated exceeds $20 million at the time and such default remains uncured or such acceleration is not rescinded for 10 days; (f) Certain voluntary or involuntary events of bankruptcy, insolvency or reorganization of the Company or any of its "Significant Subsidiaries" (defined as any subsidiary of the Company that would be a "significant subsidiary" as defined in Rule 405 under the Securities Act as in effect on the date of the Indenture); and (g) Any final judgment or decree for the payment of money in excess of $20 million at the time is entered against the Company or any Significant Subsidiary of the Company by a court or courts of competent jurisdiction, which judgment is not covered by insurance, and is not discharged and either (A) an enforcement proceeding has been commenced by any creditor upon such judgment or decree or (B) there is a period of 60 days following the entry of such judgment or decree during which such judgment or decree is not discharged, vacated, waived or the execution thereof stayed. If an Event of Default described in clause (a), (b), (c), (d), (e) or (g) above occurs and is continuing, unless the principal and interest with respect to the Notes shall have already become due and payable, either the Trustee or the holders of not less than 25% in aggregate principal amount of the Notes then outstanding may declare the principal amount of and interest on all the Notes due and payable immediately. If an Event of Default described in clause (f) above occurs, unless the principal and interest with respect to all the Notes have become due and payable, the principal amount of and interest on the Notes then outstanding shall become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. In the event of a declaration of acceleration because of an Event of Default set forth in clause (e) above has occurred and is continuing, such declaration of acceleration shall be automatically rescinded and annulled if the event of default triggering such Event of Default pursuant to clause (e) above shall be remedied or cured by the Company or the relevant Subsidiary or waived by the holders of the relevant Indebtedness within 60 days after the declaration of acceleration with respect thereto. If an Event of Default occurs and is continuing, the Trustee shall be entitled and empowered to institute any action or proceeding for the collection of the sums so due and unpaid or to enforce the performance of any provision of the Notes or the Indenture, to prosecute any such action or proceeding to judgment or final decree, and to enforce any such judgment or final decree against the Company or any other obligor on the Notes. In addition, if there shall be pending proceedings for the bankruptcy or reorganization of the Company or if a receiver, trustee, or similar official shall have been appointed for its property, the Trustee shall be entitled and empowered to file and prove a claim for the whole amount of principal, premium, if any, and interest owing and unpaid with respect to the Notes. No Holder shall have any right to institute any action or proceeding upon or under or with respect to the Indenture, for the appointment of a receiver or trustee, or for any other remedy, unless (a) such Holder previously shall have given to the Trustee written notice of an Event of Default with respect to the Notes and of the continuance thereof, (b) the Holders of not less than 25% in aggregate principal amount of the outstanding Notes shall have made written request to the Trustee to institute such action or proceeding with respect to such Event of Default and shall have offered to the Trustee such reasonable indemnity as it may require against the costs, expenses, and liabilities to be incurred therein or thereby, and (c) the Trustee, for 60 days after its receipt of such notice, request, and offer of indemnity shall have failed to institute such action or proceeding and no direction inconsistent with such written request shall have been given to the Trustee pursuant to the provisions of the Indenture. Prior to the acceleration of the maturity of the Notes, the Holders of a majority in aggregate principal amount of the Notes at the time outstanding may, on behalf of the holders of all Notes, waive any past default or 27 29 Event of Default and its consequences for that series, except (a) a default in the payment of the principal, premium, if any, interest with respect to the Notes or (b) a default with respect to a provision of the Indenture that cannot be amended without the consent of each Holder affected thereby. In case of any such waiver, such default shall cease to exist, any Event of Default arising therefrom shall be deemed to have been cured for all purposes, and the Company, the Trustee, and the Holders shall be restored to their former positions and rights under the Indenture. The Trustee shall, within 90 days after the occurrence of a default known to it with respect to the Notes, give to the Holders notice of all uncured defaults with respect to such series known to it, unless such defaults shall have been cured or waived before the giving of such notice; provided, however, that except in the case of default in the payment of principal, premium, if any, or interest with respect to the Notes, the Trustee shall be protected in withholding such notice if it in good faith determines that the withholding of such notice is in the interest of the Holders. MODIFICATION OF THE INDENTURE The Company and the Trustee may enter into supplemental Indentures without the consent of the Holders for one or more of the following purposes: (a) To evidence the succession of another Person to the Company pursuant to the provisions of the Indenture relating to consolidations, amalgamations, combinations, mergers, and sales of assets and the assumption by such successor of the covenants, agreements, and obligations of the Company in the Indenture and in the Notes; (b) To surrender any right or power conferred upon the Company by the Indenture, to add to the covenants of the Company such further covenants, restrictions, conditions, or provisions for the protection of the Holders as the Board of Directors of the Company shall consider to be for the protection of the Holders, and to make the occurrence, or the occurrence and continuance, of a default in any of such additional covenants, restrictions, conditions, or provisions a default or an Event of Default under the Indenture (provided, however, that with respect to any such additional covenant, restriction, condition, or provision, such supplemental Indenture may provide for a period of grace after default, which may be shorter or longer than that allowed in the case of other defaults, may provide for an immediate enforcement upon such default, may limit the remedies available to the Trustee upon such default, or may limit the right of Holders of a majority in aggregate principal amount of the Notes to waive such default); (c) To cure any ambiguity or to correct or supplement any provision contained in the Indenture, in any supplemental Indenture, or in the Notes that may be defective or inconsistent with any other provision contained therein, to convey, transfer, assign, mortgage, or pledge any property to or with the Trustee, or to make such other provisions in regard to matters or questions arising under the Indenture as shall not adversely affect the interests of any Holders; (d) To modify or amend the Indenture in such a manner as to permit the qualification of the Indenture or any supplemental Indenture under the Trust Indenture Act as then in effect; (e) To comply with the provisions of the Indenture relating to consolidations, amalgamations, combinations, mergers, and sales of assets; (f) To add guarantees with respect to the Notes or to secure the Notes; (g) To make any change that does not adversely affect the rights of any Holder; and (h) To evidence and provide for the acceptance of appointment by a successor or separate Trustee with respect to the Notes and to add to or change any of the provisions of the Indenture as shall be necessary to provide for or facilitate the administration of the Indenture by more than one Trustee. With the consent of the Holders of a majority in aggregate principal amount of the outstanding Notes, the Company and the Trustee may from time to time and at any time enter into a supplemental Indenture for the purpose of adding any provisions to, changing in any manner, or eliminating any of the provisions of the 28 30 Indenture or of any supplemental Indenture or modifying in any manner the rights of the Holders; provided, however, that without the consent of the Holders of each Note so affected, no such supplemental Indenture shall (a) reduce the percentage in principal amount of Notes whose Holders must consent to an amendment, (b) reduce the rate of or extend the time for payment of interest on the Notes or reduce the amount of any payment of interest on the Notes, (c) reduce the principal of or extend the Stated Maturity of the Notes, (d) reduce the premium payable upon the redemption of the Notes or change the time at which the Notes may or shall be redeemed, (e) make the Notes payable in a currency other than U.S. dollars, (f) release any security that may have been granted with respect to the Notes, or (g) make any change in the provisions of the Indenture relating to waivers of defaults or amendments that require unanimous consent. SATISFACTION AND DISCHARGE OF THE INDENTURE; DEFEASANCE The Indenture shall generally cease to be of any further effect with respect to the Notes if (a) the Company has delivered to the Trustee for cancellation all the Notes (with certain limited exceptions) or (b) all Notes not theretofore delivered to the Trustee for cancellation shall have become due and payable, or are by their terms to become due and payable within one year or are to be called for redemption within one year, and the Company shall have deposited with the Trustee as trust funds the entire amount sufficient (in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee) without consideration of any reinvestment and after payment of all taxes or other charges and assessments in respect thereof payable by the Trustee, to pay at maturity or upon redemption all such Notes and any interest thereon, no default with respect to the Notes has occurred and is continuing on the date of such deposit, such deposit does not result in a breach or violation of, or constitute a default under, the Indenture or any other agreement or instrument to which the Company is a party and the Company delivers to the Trustee an officers' certificate and opinion of counsel each stating that such conditions have been complied with (and if, in either case, the Company shall also pay or cause to be paid all other sums payable under the Indenture by the Company). In addition, the Company shall have a "legal defeasance option" (pursuant to which it may terminate, with respect to the Notes, all of its obligations under the Notes and the Indenture) and a "covenant defeasance option" (pursuant to which it may terminate, with respect to the Notes, its obligations with respect to the Notes under certain specified covenants contained in the Indenture). If the Company exercises its legal defeasance option with respect to the Notes, payment of such Debt Securities may not be accelerated because of an Event of Default. If the Company exercises its covenant defeasance option with respect to the Notes, payment of the Notes may not be accelerated because of an Event of Default related to the specified covenants. The Company may exercise its legal defeasance option or its covenant defeasance option with respect to the Notes if (a) the Company irrevocably deposits in trust with the Trustee cash or U.S. Government Obligations (as defined in the Indenture) for the payment of principal, premium, if any, and interest with respect to the Notes to maturity or redemption, as the case may be, (b) the Company delivers to the Trustee a certificate from a nationally recognized firm of independent accountants expressing their opinion that the payments of principal, premium, if any, and interest when due and without reinvestment on the deposited U.S. Government Obligations plus any deposited money without investment will provide cash at such times and in such amounts as will be sufficient to pay the principal, premium, if any, and interest when due with respect to all the Notes to maturity or redemption, as the case may be, (c) 91 days pass after the deposit is made and during the 91-day period no default described in clause (f) under " -- Events of Default and Remedies" with respect to the Company occurs that is continuing at the end of such period, (d) no Default or Event of Default has occurred and is continuing on the date of such deposit and after giving effect thereto, (e) the deposit does not constitute a default under the Indenture or any other agreement binding on the Company, (f) the Company delivers to the Trustee an opinion of counsel to the effect that the trust resulting from the deposit does not constitute, or is qualified as, a regulated investment company under the Investment Company Act of 1940, as amended, (g) the Company delivers to the Trustee an opinion of counsel addressing certain Federal income tax matters relating to the defeasance, and (h) the Company delivers to the Trustee an officers' certificate and an opinion of counsel, each stating that all conditions precedent to the defeasance and discharge of the Notes as contemplated by the Indenture have been complied with. 29 31 The Trustee shall hold in trust cash or U.S. Government Obligations deposited with it as described above and shall apply the deposited cash and the proceeds from deposited U.S. Government Obligations to the payment of principal, premium, if any, and interest with respect to the Notes. THE TRUSTEE The Indenture provides that, except during the continuance of an Event of Default, the Trustee thereunder will perform only such duties as are specifically set forth in the Indenture. If an Event of Default has occurred and is continuing, the Trustee will exercise such rights and powers vested in it under the Indenture and use the same degree of care and skill in its exercise as a prudent Person would exercise under the circumstances in the conduct of such Person's own affairs. The Indenture and the provisions of the TIA incorporated by reference therein contain limitations on the rights of the Trustee thereunder, should it become a creditor of the Company, to obtain payment of claims in certain cases or to realize on certain property received by it in respect of any such claims, as security or otherwise. The Trustee is permitted to engage in other transactions; provided however, that if it acquires any conflicting interest (as defined) it must eliminate such conflict or resign. GOVERNING LAW The Indenture and the Notes will be governed by the laws of the State of New York, without regard to the principles of conflicts of law. CERTAIN DEFINITIONS Set forth below is a summary of certain of the defined terms used in the covenants and other provisions of the Indenture. Reference is made to the Indenture for a full definition of all such terms as well as any other capitalized terms used herein for which no definition is provided. "Attributable Indebtedness" is defined to mean, when used in connection with a Sale and Leaseback Transaction referred to in the "Limitation on Sale and Leaseback Transactions" covenant described above, at any date of determination, the present value (discounted according to GAAP at the cost of indebtedness implied in the lease) of the total obligations of the lessee for rental payments during the remaining term of the lease included in such Sale and Leaseback Transaction (including any period for which such lease has been extended). "Board of Directors" is defined to mean either the Board of Directors of the Company or any duly authorized committee or subcommittee of such Board, except as the context may otherwise require. "Business Day" is defined to mean any day that is not a Saturday, a Sunday or a day on which banking institutions or trust companies in New York City are authorized or obligated by law to close. "Capital Stock" is defined to mean, with respect to any Person, any and all shares, interests, rights to purchase, warrants, options, participations or other equivalents of or interests (including partnership interests) in (however designated) the equity of such Person, including any Preferred Stock, but excluding any debt securities convertible into such equity. "Capitalized Lease Obligation" is defined to mean, as applied to any Person, any obligation that is required to be classified and accounted for as a capitalized lease for financial reporting purposes in accordance with GAAP; and the amount of Indebtedness represented by such obligation shall be the capitalized amount of such obligation determined in accordance with GAAP; and the Stated Maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty. "Common Stock" of any Person is defined to mean capital stock of such Person that does not rank prior, as to the payment of dividends or as to the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding up of such Person, to shares of Capital Stock of any other class of such Person. 30 32 "Consolidated Net Tangible Assets" is defined to mean, as of any date, the total amount of assets of the Company and its Restricted Subsidiaries on a consolidated basis at the end of the fiscal quarter immediately preceding such date, as determined in accordance with GAAP, less (i) Intangible Assets and (ii) appropriate adjustments on account of minority interests of other Persons holding equity investments in Restricted Subsidiaries, in the case of each of clauses (i) and (ii) above as reflected on the consolidated balance sheet of the Company and its Restricted Subsidiaries as of the end of the fiscal quarter immediately preceding such date. "Exchange Act" is defined to mean the United States Securities Exchange Act of 1934, as amended. "GAAP" is defined to mean generally accepted accounting principles in the United States of America as in effect on the Issue Date. "Guarantee" is defined to mean any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Indebtedness or other obligation of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation of such other Person (whether arising by virtue of partnership arrangements, or by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise) or (b) entered into for purposes of assuring in any other manner the obligee of such Indebtedness or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part); provided that the term "Guarantee" will not include endorsements for collection or deposit in the ordinary course of business; and the term "Guaranteed" will have a meaning correlative to the foregoing. "Hedging Obligations" of any Person is defined to mean the obligations of such Person pursuant to any interest rate protection agreement, currency exchange protection agreement, commodity price protection agreement or other similar agreement. "Holder" is deemed to mean the registered holder of any Note. "Incur" is defined to mean, issue, assume, incur or otherwise become liable for; provided, however, that any Indebtedness or Capital Stock of a Person existing at the time such Person becomes a Restricted Subsidiary (whether by merger, consolidation, acquisition or otherwise) shall be deemed to be incurred by such Restricted Subsidiary at the time it becomes a Restricted Subsidiary. The terms "Incurred," "Incurrence" and "Incurring" shall each have a correlative meaning. "Indebtedness" is defined to mean, with respect to any Person at any date of determination (without duplication), indebtedness for borrowed money or indebtedness evidenced by bonds, notes, debentures or other similar instruments given to finance the acquisition of any businesses, properties or assets of any kind (including, without limitation, capital stock or other equity interests in any Person). "Intangible Assets" is defined to mean all unamortized debt discount and expense, unamortized deferred charges, goodwill, patents, trademarks, service marks, trade names, copyrights, write-ups of assets over their carrying value at the end of the last fiscal quarter ended prior to the Issue Date or the date of acquisition, if acquired subsequent thereto, and all other items which would be treated as intangibles on the consolidated balance sheet of the Company and its Restricted Subsidiaries prepared in accordance with GAAP. "Issue Date" is defined to mean the date on which the Notes are originally issued under the Indenture. "Lien," with respect to any property or assets, is defined to mean any mortgage or deed of trust, pledge, hypothecation, assignment, deposit arrangement, security interest, lien, charge, easement (other than any easement not materially impairing usefulness or marketability), encumbrance, preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever on or with respect to such property or assets (including, without limitation, any conditional sale or other title retention agreement having substantially the same economic effect as any of the foregoing), but not including the interest of a lessor under a lease that is an operating lease under GAAP. 31 33 "Permitted Liens" is defined to mean, with respect to any Person, (a) Liens existing on or provided for under the terms of agreements existing on the Issue Date; (b) Liens on property at the time the Company or any of its Restricted Subsidiaries acquired the property or the entity owning such property, including any acquisition by means of a merger, amalgamation, combination or consolidation with or into the Company; provided, however, that any such Lien may not extend to any other property owned by the Company or any of its Restricted Subsidiaries; (c) Liens on accounts receivable, inventory or containers and returnable packaging and cases to secure working capital or revolving credit indebtedness incurred in the ordinary course of business; (d) Purchase Money Liens and Liens arising in connection with Capitalized Lease Obligations that do not arise in connection with Sale and Leaseback Transactions; (e) Liens securing only Indebtedness of a Wholly-Owned Restricted Subsidiary of the Company to the Company or one or more Wholly-Owned Restricted Subsidiaries of the Company; (f) Liens resulting from the deposit of funds or evidences of Indebtedness in trust for the purpose of defeasing Indebtedness of the Company or any of its Restricted Subsidiaries; (g) legal or equitable encumbrances deemed to exist by reason of negative pledges; (h) Liens on property or shares of stock of another Person at the time such other Person becomes a Restricted Subsidiary of such Person; provided, however, that such Liens are not created, incurred or assumed in connection with, or in contemplation of, such other Person becoming such a Restricted Subsidiary of such Person; provided further, however, that such Lien may not extend to any other property owned by such Person or any of its Restricted Subsidiaries; (i) Liens arising in connection with Capitalized Lease Obligations in Sale and Leaseback Transactions with respect to which the Attributable Indebtedness outstanding at any time shall not exceed $25 million in the aggregate; and (j) Liens to secure any refinancing, refunding, extension, substitution, renewal or replacement (or successive refinancings, refundings, extensions, substitutions, renewals or replacements), as a whole, or in part, of any Indebtedness secured by any Lien referred to in the foregoing clauses (a) through (h); provided, however, that (i) such new Lien shall be limited to all or part of the same property that secured the original Lien (plus improvements on or to such property) and (ii) the Indebtedness secured by such Lien at such time is not increased to any amount greater than the sum of (A) the outstanding principal amount or, if greater, committed amount of the Indebtedness described under clauses (a) through (h) at the time the original Lien became a Permitted Lien under this Indenture and (B) any amount necessary to pay any fees and expenses, including premiums, related to such refinancing, refunding, extension, removal or replacement. "Person" is defined to mean any individual, corporation, partnership, joint venture, trust, unincorporated organization, government or any agency or political subdivision thereof. "Preferred Stock" is defined to mean, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated, whether voting or nonvoting) of such Person's preferred or preference stock, whether now outstanding or issued after the date of the Indenture, including, without limitation, all series and classes of such preferred or preference stock. "Purchase Money Lien" is defined to mean a Lien on property securing Indebtedness Incurred by the Company or any of its Restricted Subsidiaries to provide funds for all or any portion of the cost of acquiring, constructing, altering, expanding, improving or repairing such property or assets used in connection with such property. "Related Person" of any Person is defined to mean any other Person that owns, or any controlling Affiliate of any other Person that owns, (a) 5% or more of the outstanding Common Stock of such Person or (b) 5% or more of the Voting Stock of such Person. "Sale and Leaseback Transaction" of any Person is defined to mean an arrangement with any lender or investor or to which such lender or investor is a party providing for the leasing by such Person of any property or asset of such Person which has been or is being sold or transferred by such Person more than 180 days after the acquisition thereof or the completion of construction or commencement of operation thereof to such lender or investor or to any Person to whom funds have been or are to be advanced by such lender or investor on the security of such property or asset. The Stated Maturity of such arrangement will be the date of the last payment of rent or any other amount due under such arrangement prior to the first date on which such arrangement may be terminated by the lessee without payment of a penalty. Notwithstanding the foregoing, neither (a) a transaction involving a lease with a term of less than three years or (b) a transaction between the Company and a Restricted 32 34 Subsidiary of the Company or between Restricted Subsidiaries of the Company shall be deemed a Sale and Leaseback Transaction. "Securities Act" means the Securities Act of 1933, as amended. "Stated Maturity" is defined to mean, when used with respect to any security, the date specified in such security as the fixed date on which the payment of principal of such security is due and payable, including pursuant to any mandatory redemption provision (but excluding any provision providing for the repurchase of such security at the option of the holder thereof upon the happening of any contingency beyond the control of the issuer unless such contingency has occurred). "Subsidiary" is defined to mean, with respect to any Person, any corporation, association, partnership or other business entity of which more than 50% of the total voting power of the Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by (i) such Person, (ii) such Person and one or more Subsidiaries of such Person, or (iii) one or more Subsidiaries of such Person. "Voting Stock" is defined to mean Capital Stock of any class or kind ordinarily having the power to vote for the election of directors of the Company. "Wholly-Owned Restricted Subsidiary" is defined to mean, with respect to any Person, any Restricted Subsidiary of such Person if all of the Common Stock or other similar equity ownership interests (but not including Preferred Stock) in such Restricted Subsidiary (other than any directors' qualifying shares or shares issued to Persons to comply with local laws) is owned directly or indirectly by such Person. 33 35 UNDERWRITING Under the terms and conditions of the Underwriting Agreement, the Company has agreed to sell to each of the Underwriters named below, and each of such Underwriters has severally agreed to purchase from the Company, the respective principal amount of notes set forth opposite its name below:
PRINCIPAL AMOUNT UNDERWRITER OF NOTES ----------- ---------------- Lazard Freres & Co. LLC..................................... Chase Securities Inc........................................ Total............................................. -------- ========
The Underwriting Agreement provides that the several obligations of the Underwriters to pay for and accept delivery of the Notes offered hereby are subject to the approval of certain legal matters by counsel and to certain other conditions. The Underwriters are obligated to purchase all Notes if any are purchased. The Company has been advised by the Underwriters that the Underwriters propose initially to offer the Notes offered hereby directly to the public at the public offering price set forth on the cover page of this prospectus and to certain dealers at such price less a concession not in excess of % of the principal amount of the Notes. The Underwriters may allow, and such dealers may reallow, a concession not in excess of % of the amount of the Notes to other Underwriters or to certain other dealers. After this offering, the public offering price and such concessions may be changed by the Underwriters. The expenses of this offering (exclusive of Underwriters' discount) are estimated at $ and are payable by the Company. The Notes are a new issue of securities with no established trading market. The Company intends to apply for listing of the Notes on the New York Stock Exchange. In the event the Notes are not so listed, the Underwriters have indicated that they intend to make a market in the Notes, subject to applicable laws and regulations. However, the Underwriters are not obligated to do so and any such market making may be discontinued at any time, without notice, at their sole discretion. Accordingly, no assurance can be given as to the liquidity of the trading market for the Notes. The Company has agreed that, subject to certain limited exceptions, during the period beginning on the date of this prospectus and continuing to and including the date 90 days after the date of this prospectus, it will not offer, sell, contract to sell, or otherwise dispose of any securities of the Company that are substantially similar to the Notes without the prior written consent of the Underwriters. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. In connection with this offering, the Underwriters may effect transactions which stabilize or maintain the market prices of the Notes at levels above those which might otherwise prevail in the open market. Such transactions may be effected on the New York Stock Exchange or otherwise. Such stabilizing, if commenced, may be discontinued at any time. Lazard Freres & Co. LLC and Chase Securities Inc. and their affiliates have engaged and may in the future engage in various general financing and banking transactions with the Company and its affiliates. EXPERTS The consolidated financial statements and schedule of Pioneer Hi-Bred International, Inc. and subsidiaries as of August 31, 1998 and 1997, and for each of the years in the three-year period ended August 31, 1998, have been included herein and incorporated by reference herein and in the registration statement in reliance upon the 34 36 reports of KPMG Peat Marwick LLP, independent certified public accountants, included herein and incorporated by reference herein, and upon the authority of said firm as experts in accounting and auditing. LEGAL MATTERS Baker & Hostetler LLP, Cincinnati, Ohio, will pass upon the legality of the Notes offered hereby for the Company. Fried, Frank, Harris, Shriver & Jacobson (a partnership including professional corporations), New York, New York, will pass upon certain legal matters for the Underwriters. Fried, Frank, Harris, Shriver & Jacobson from time to time performs legal services for the Company. Baker & Hostetler LLP may rely as to matters of New York law upon the opinion of Fried, Frank, Harris, Shriver & Jacobson. Fried, Frank, Harris, Shriver & Jacobson may rely as to matters of Iowa law upon the opinion of Leon R. Shearer, Vice President and General Counsel for the Company. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the Commission. Reports, proxy statements and other information filed by the Company may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York, New York 10048. Copies of such materials can be obtained by mail from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Information regarding the operation of the Public Reference Section of the Commission may be obtained by calling the Commission at 1 (800) SEC-6330. The Commission maintains a World Wide Web site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants, such as the Company, that submit electronic filings to the Commission. Such material may also be inspected and copied at the offices of the New York Stock Exchange, on which the Common Stock of the Company is listed, at 20 Broad Street, New York, New York 10005. The Company has filed with the Commission a registration statement on Form S-3 (herein, together with all amendments and exhibits thereto, referred to as the "Registration Statement") under the Act, with respect to the Notes offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Company and the Notes offered by this Prospectus, reference is made to the Registration Statement. Statements made in this Prospectus as to the contents of any contract, agreement or other document referred to are not necessarily complete; and with respect to each such contract, agreement or other document filed, or incorporated by reference, as an exhibit to the Registration Statement, reference is made to the exhibit for a more complete description of the matter involved and each such statement shall be deemed qualified in its entirety by such reference. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents filed by the Company with the Commission pursuant to the Exchange Act are incorporated herein by reference: 1. The Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1998, as amended by Form 10-K/A dated December 18, 1998. All documents filed by the Company pursuant to Sections 13 (a), 13 (c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to the termination of the offering of the Notes shall be deemed to be incorporated by reference into this Prospectus and to be a part hereof from the date of filing of such documents. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of the Registration Statement or this Prospectus 35 37 to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of the Registration Statement or this Prospectus. The Company will provide without charge to each person to whom this Prospectus is delivered, upon written or oral request of such person, a copy of any or all documents which have been incorporated by reference herein, other than exhibits to such documents which are not specifically incorporated by reference therein. Requests should be directed to Pioneer Hi-Bred International, Inc., Attn: William J. DeMeulenaere, 800 Capital Square, 400 Locust Street, Des Moines, Iowa 50309 (Telephone: (515) 248-4800). 36 38 INDEX TO FINANCIAL STATEMENTS
PAGE ---- Independent Auditors' Report................................ F-2 Consolidated Balance Sheets as of August 31, 1998 and 1997...................................................... F-3 Consolidated Statements of Income for the years ended August 31, 1998, 1997 and 1996................................... F-4 Consolidated Statements of Cash Flows for the years ended August 31, 1998, 1997 and 1996............................ F-5 Consolidated Statements of Shareholders' Equity for the years ended August 31, 1998, 1997 and 1996................ F-6 Notes to Consolidated Financial Statements.................. F-8
F-1 39 INDEPENDENT AUDITORS' REPORT To the Shareholders Pioneer Hi-Bred International, Inc.: We have audited the accompanying consolidated balance sheets of Pioneer Hi-Bred International, Inc. and subsidiaries as of August 31, 1998 and 1997, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended August 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pioneer Hi-Bred International, Inc. and subsidiaries as of August 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended August 31, 1998, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Des Moines, Iowa September 18, 1998 F-2 40 CONSOLIDATED BALANCE SHEETS
AUGUST 31, ---------------- 1998 1997 ------ ------ (IN MILLIONS) ASSETS CURRENT ASSETS Cash and cash equivalents................................. $ 86 $ 97 Receivables Trade................................................... 346 256 Other................................................... 54 45 Inventories............................................... 481 440 Deferred income taxes..................................... 69 57 Other current assets...................................... 3 6 ------ ------ Total current assets............................... $1,039 $ 901 ------ ------ LONG-TERM ASSETS............................................ $ 47 $ 93 ------ ------ PROPERTY AND EQUIPMENT Land and land improvements................................ $ 66 $ 64 Buildings................................................. 387 377 Machinery and equipment................................... 580 539 Construction in progress.................................. 63 60 ------ ------ $1,096 $1,040 Less accumulated depreciation............................. 520 495 ------ ------ $ 576 $ 545 ------ ------ INTANGIBLES................................................. $ 55 $ 64 ------ ------ $1,717 $1,603 ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Short-term borrowings..................................... $ 76 $ 91 Current maturities of long-term debt...................... 14 6 Accounts payable, trade................................... 81 85 Accrued compensation...................................... 61 60 Income taxes payable...................................... 46 26 Other..................................................... 67 61 ------ ------ Total current liabilities.......................... $ 345 $ 329 ------ ------ LONG-TERM DEBT.............................................. $ 5 $ 19 ------ ------ DEFERRED ITEMS Retirement benefits....................................... $ 94 $ 80 Income taxes.............................................. 19 20 ------ ------ $ 113 $ 100 ------ ------ CONTINGENCIES MINORITY INTEREST IN SUBSIDIARIES........................... $ 7 $ 7 ------ ------ SHAREHOLDERS' EQUITY Capital stock Preferred, authorized 10,000,000 shares; issued none.... $ -- $ -- Common, $1 par value; authorized 600,000,000 shares; issued 1998 -- 229,945,014 shares; 1997 -- 278,846,889 shares................................................ 230 93 Class B common, $1 stated value; authorized 120,000,000 shares; issued 1998 -- 49,333,758 shares; 1997 -- none.......................................... 49 -- Additional paid-in capital................................ 246 43 Retained earnings......................................... 1,428 1,436 Unrealized (loss) gain on available-for-sale securities, net..................................................... (2) 19 Cumulative translation adjustment......................... (44) (26) ------ ------ $1,907 $1,565 Less Cost of common shares acquired for the treasury, 1998 -- 38,951,380 shares; 1997 -- 32,178,084 shares................................................ (631) (393) Unearned compensation................................... (29) (24) ------ ------ $1,247 $1,148 ------ ------ $1,717 $1,603 ====== ======
See Notes to Consolidated Financial Statements. F-3 41 CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED AUGUST 31, --------------------------------------- 1998 1997 1996 --------- --------- --------- (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) NET SALES................................................... $1,835 $1,784 $1,721 ------ ------ ------ Operating costs and expenses Cost of goods sold........................................ $ 789 $ 771 $ 727 Research and product development.......................... 155 146 136 Selling................................................... 395 374 382 General and administrative................................ 137 130 129 ------ ------ ------ $1,476 $1,421 $1,374 ------ ------ ------ Operating income.......................................... $ 359 $ 363 $ 347 Investment income........................................... 45 22 22 Interest expense............................................ (13) (8) (11) Net exchange and other gains (losses)....................... 16 (4) (4) ------ ------ ------ Income before items below................................. $ 407 $ 373 $ 354 Provision for income taxes.................................. (134) (127) (127) Minority interest and other................................. (3) (3) (4) ------ ------ ------ Net income................................................ $ 270 $ 243 $ 223 ====== ====== ====== Preferred stock dividend.................................... $ 9 $ -- $ -- Net income available to common shareholders................. $ 261 $ 243 $ 223 Net income per common share Basic..................................................... $ 1.13 $ .98 $ .89 Diluted................................................... $ 1.08 $ .98 $ .89 Average shares outstanding Basic..................................................... 231.5 246.9 249.5 Diluted................................................... 250.3 247.5 249.8
See Notes to Consolidated Financial Statements. F-4 42 CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 31, ----------------------------- 1998 1997 1996 ------- ----- ----- (IN MILLIONS) CASH FLOWS FROM OPERATING ACTIVITIES Net income................................................ $ 270 $ 243 $ 223 Noncash items included in net income Depreciation and amortization.......................... 90 89 77 Provision for doubtful accounts........................ 6 6 5 Gain on disposal of assets............................. (24) (5) (4) Other noncash items, net............................... (5) 7 1 Change in assets and liabilities, net Receivables............................................ (108) (77) (46) Inventories............................................ (62) (72) 43 Accounts payable and accrued expenses.................. 4 (4) 61 Income taxes payable................................... 20 (38) 40 Other assets and liabilities........................... 49 27 (11) ------- ----- ----- Net cash provided by operating activities.............. $ 240 $ 176 $ 389 ------- ----- ----- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of assets.............................. $ 50 $ 29 $ 15 Capital expenditures...................................... (119) (127) (116) Technology investments.................................... (9) (24) (48) Other, net................................................ (12) (7) 5 ------- ----- ----- Net cash used in investing activities.................. $ (90) $(129) $(144) ------- ----- ----- CASH FLOWS FROM FINANCING ACTIVITIES Net short-term borrowings (payments)...................... $ (7) $ 81 $ (42) Proceeds from long-term borrowings........................ 1 -- 1 Principal payments on long-term borrowings................ (6) (11) (55) Purchase of common stock.................................. (1,756) (25) (62) Issuance of common and convertible preferred stock........ 1,706 -- -- Cash dividends paid....................................... (92) (79) (69) ------- ----- ----- Net cash used in financing activities.................. $ (154) $ (34) $(227) ------- ----- ----- Effect of foreign currency exchange rate changes on cash and cash equivalents.......................................... $ (7) $ (15) $ (3) ------- ----- ----- Net increase (decrease) in cash and cash equivalents... $ (11) $ (2) $ 15 Cash and cash equivalents, beginning........................ 97 99 84 ------- ----- ----- CASH AND CASH EQUIVALENTS, ENDING........................... $ 86 $ 97 $ 99 ======= ===== ===== SUPPLEMENTAL CASH FLOW INFORMATION Cash payments Interest............................................... $ 12 $ 7 $ 14 Income taxes........................................... $ 129 $ 158 $ 93 Noncash investing and financing activities Technology investments acquired by the issuance of long-term debt and the assumption of liabilities..... $ -- $ 10 $ 20
See Notes to Consolidated Financial Statements. F-5 43 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED AUGUST 31, ------------------------------ 1998 1997 1996 ------ ------ ------ (IN MILLIONS) PREFERRED STOCK Balance, beginning........................................ $ -- $ -- $ -- Issuance of 164,446 shares............................. 16 -- -- Conversion of 164,446 shares to Class B common stock... (16) -- -- ------ ------ ------ Balance, ending........................................... $ -- $ -- $ -- ------ ------ ------ COMMON STOCK Balance, beginning........................................ $ 93 $ 93 $ 93 Issuance for restricted stock plan: (1998 -- 496,266 shares; 1997 -- 766,155 shares; 1996 -- none)........ -- -- -- Issuance of 153,296,674 shares in connection with a three-for-one stock split effected in the form of a 200% stock dividend.................................. 153 -- -- Repurchase of common stock (1998 -- 49,398,135 shares; 1997 and 1996 -- none)............................... (16) -- -- ------ ------ ------ Balance ending............................................ $ 230 $ 93 $ 93 ------ ------ ------ CLASS B COMMON STOCK Balance, beginning........................................ $ -- $ -- $ -- Conversion of preferred shares......................... 16 -- -- Issuance of 32,889,172 shares in connection with a three-for-one stock split effected in the form of a 200% stock dividend.................................. 33 -- -- ------ ------ ------ Balance, ending........................................... $ 49 $ -- $ -- ------ ------ ------ ADDITIONAL PAID-IN CAPITAL Balance, beginning........................................ $ 43 $ 23 $ 18 Common stock issued from treasury for restricted stock plan................................................. -- 18 3 Common stock issued for restricted stock plan.......... 17 -- -- Issuance of common and preferred stock................. 1,690 -- -- Repurchase of common stock............................. (1,507) -- -- Tax benefits related to restricted stock plan.......... 3 2 2 ------ ------ ------ Balance, ending........................................... $ 246 $ 43 $ 23 ------ ------ ------ RETAINED EARNINGS Balance, beginning........................................ $1,436 $1,272 $1,118 Net income............................................. 270 243 223 Cash dividends on common stock (1998 -- $.37 per share; 1997 -- $.32 per share; 1996 -- $.28 per share)...... (83) (79) (69) Cash dividends on preferred stock (1998 -- $52.00 per share; 1997 and 1996 -- none)........................ (9) -- -- Three-for-one stock split in the form of a 200% stock dividend............................................. (186) -- -- ------ ------ ------ Balance, ending........................................... $1,428 $1,436 $1,272 ------ ------ ------ UNREALIZED (LOSS) GAIN ON AVAILABLE-FOR-SALE SECURITIES, NET Balance, beginning........................................ $ 19 $ 11 $ -- Change in unrealized (loss) gain....................... (21) 8 11 ------ ------ ------ Balance, ending........................................... $ (2) $ 19 $ 11 ------ ------ ------
F-6 44 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (CONTINUED)
YEARS ENDED AUGUST 31, ------------------------------ 1998 1997 1996 ------ ------ ------ (IN MILLIONS) CUMULATIVE TRANSLATION ADJUSTMENT Balance, beginning........................................ $ (26) $ (3) $ 1 Current translation adjustment......................... (18) (23) (4) ------ ------ ------ Balance, ending........................................... $ (44) $ (26) $ (3) ------ ------ ------ TREASURY STOCK Balance, beginning........................................ $ (393) $ (364) $ (303) Purchase of common stock for the treasury (1998 -- 6,627,800 shares; 1997 -- 1,107,000 shares; 1996 -- 3,446,700 shares)............................ (234) (25) (62) Common stock issued from (acquired for) the treasury: For restricted stock plan (1998 -- none; 1997 -- 52,566 shares; 1996 -- 391,077 shares).... -- -- 4 From restricted stock forfeitures and stock used to satisfy withholding taxes (1998 -- 199,843 shares; 1997 -- 209,550 shares; 1996 -- 238,230 shares)... (4) (4) (3) ------ ------ ------ Balance, ending........................................... $ (631) $ (393) $ (364) ------ ------ ------ UNEARNED COMPENSATION Balance, beginning........................................ $ (24) $ (14) $ (14) Net additions of common stock to restricted stock plan................................................. (17) (18) (6) Amortization of unearned compensation.................. 12 8 6 ------ ------ ------ Balance, ending........................................... $ (29) $ (24) $ (14) ------ ------ ------ TOTAL SHAREHOLDERS' EQUITY AT YEAR END...................... $1,247 $1,148 $1,018 ====== ====== ======
See Notes to Consolidated Financial Statements. F-7 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES Nature of business -- The Company's business is the broad application of the science of genetics. Pioneer was founded in 1926 to apply newly discovered genetic techniques to hybridize corn. Today the Company develops, produces, and markets hybrids of corn, sorghum, and sunflowers; varieties of soybeans, alfalfa, wheat, and canola; and microorganisms useful in crop and livestock production. Approximately 90 percent of the Company's total net sales are from the sale of hybrid seed corn and soybean seed primarily within the regions of North America and Europe. Consolidation policy -- The consolidated financial statements include the accounts of the Company and all of its subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation. 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 amounts reported in the financial statements. Actual results could differ from those estimates. Cash equivalents -- The Company considers all liquid investments with a maturity at purchase of three months or less to be cash equivalents. Receivables -- Receivables are stated net of an allowance for doubtful accounts of $27 million and $23 million at August 31, 1998 and 1997, respectively. Inventories -- Inventories are valued at the lower of cost (first-in, first-out method) or market. Independent growers are contracted to produce the Company's finished seed inventory. In accordance with the contract, the Company compensates growers with bushel equivalents that can be marketed to the Company for the market price of grain for a period of time following harvest. The Company uses derivative instruments such as commodity futures and options that have a high correlation to the underlying commodity to hedge the commodity risk involved in compensating growers. Commodity contracts the Company enters into meet the criteria for hedge accounting and are accounted for on this basis. The Company regularly monitors its exposures and ensures that commodity contract amounts do not exceed the amounts of the underlying exposures. The Company does not hold or issue commodity contracts for trading purposes. It is the Company's policy to hedge commodity risk prior to setting the retail price of seed. The hedge position gains or losses are accounted for as inventory costs and expensed as cost of goods sold when the associated crop inventory is sold. In the event of early settlement of hedge contracts, gains or losses through that date continue to be deferred as a component of inventory. If the contract ceases to meet the specific criteria for use of hedge accounting, any deferred gains or losses through that date continue to be deferred; gains and losses after that date are recognized in income. Cash flows arising in respect to hedging transactions are recognized within the financial statements under cash flows from operating activities. Property and equipment -- Property and equipment is recorded at cost, net of an allowance for loss on plant closings of $3 million and $4 million at August 31, 1998 and 1997, respectively. Depreciation is computed primarily by the straight-line method over estimated service lives of two to forty years. Long-term assets -- Certain long-term assets were classified as available-for-sale securities. Available-for-sale securities held at August 31, 1998, consisted of an equity security with a cost basis of $8 million and an unrealized loss of $2 million. Available-for-sale securities held at August 31, 1997, consisted of an equity security with a cost basis of $20 million and an unrealized gain of $30 million; this security was sold in 1998 for $40 million, resulting in a gain on sale of $20 million. The Company owns various other equity security investments which are not publicly traded. Therefore, the fair value of these investments is not readily available. The majority of these investments are due to collaborative agreements. As a result, it is not practicable to estimate the fair value of the Company's other equity security F-8 46 investments. These investments are carried at approximately $1 million, which is their original cost basis net of any applicable valuation allowance. Intangibles -- Intangible assets are stated at amortized cost and are amortized by the straight-line method over one- to twenty-year periods, with the weighted-average amortization period approximating eight years for the year ended August 31, 1998. Accumulated amortization of $45 million and $38 million at August 31, 1998 and 1997, respectively, has been netted against these assets. Basis of accounting -- Subsidiary and asset acquisitions are accounted for by the purchase method. Translation of foreign currencies and foreign exchange hedging -- All assets and liabilities in the balance sheets of foreign subsidiaries whose functional currency is other than the U.S. dollar are translated at year-end exchange rates. Translation gains and losses are not included in determining net income but are accumulated as a separate component of shareholders' equity. However, for subsidiaries considered to be operating in highly inflationary countries and for certain other subsidiaries, the U.S. dollar is the functional currency, and translation gains and losses are included in determining net income. Foreign currency transaction gains and losses are included in determining net income. The Company uses a combination of derivative instruments such as forward exchange contracts, purchased options, and cross currency swaps that have a high correlation to the underlying currency to hedge future firm commitments such as exports, contractual flows, and royalties. Foreign exchange contracts the Company enters into meet the criteria for hedge accounting and are accounted for on this basis. The Company regularly monitors its currency exposures and ensures that currency contract amounts do not exceed the amounts of the underlying exposures. The Company does not hold or issue foreign currency contracts for trading purposes. While derivative hedge instruments are subject to price fluctuations from exchange and interest rate movements, these price changes would generally be offset by changes in the U.S. dollar value of foreign sales and cash flows. Therefore, hedging gains and losses on existing foreign-dominated payables or receivables are included in other assets or liabilities and are recognized in net exchange gain (loss) in conjunction with the revaluation of the foreign-currency-dominated transaction. Unrealized gains and losses related to qualifying hedges of firm sales and purchase commitments are deferred and recognized in income when the future sales or purchases are recognized, or immediately if the commitment is canceled. Option premiums paid are amortized to income over the life of the contract. Income taxes -- Income taxes are computed in accordance with Statement of Financial Accounting Standards (SFAS) No. 109. Deferred income taxes have been provided on temporary differences in the financial statement and income tax bases of certain assets and liabilities. Deferred taxes have not been recorded on $124 million in undistributed earnings from foreign subsidiaries that have not been subjected to taxation in the United States. The Company intends to reinvest such undistributed earnings indefinitely or to repatriate them only to the extent that no additional income tax liability is created. It is not practicable to estimate the income tax liability that would be incurred if such earnings were distributed in a manner subjecting them to United States taxation. The Company files consolidated U.S. Federal income tax returns with its domestic subsidiaries; therefore, no deferred income taxes have been provided or are required for the undistributed earnings of those subsidiaries. Pension plans -- The Company's domestic and Canadian operations have defined benefit pension plans covering substantially all their employees. The plans provide benefits that are based on average monthly earnings of the employees. The funding policy is to contribute annually an amount to fund pension cost as actuarially determined by an independent pension consulting firm. Other postretirement benefits -- The Company sponsors a health care plan and a life insurance plan which provide benefits to eligible retirees. The Company's contribution is based on age and years of service at retirement. The health insurance plan contains the cost-sharing features of coinsurance and/or deductibles. The life insurance plan is paid for by the Company. Benefits under both plans are based on eligibility status for F-9 47 pension and length of service. Substantially all of the Company's U.S. and Canadian full-time employees may become eligible for these benefits upon reaching age 55 and having worked for the Company at least five years. Deferred executive compensation and supplemental retirement benefit plans -- The estimated liability for the deferred executive compensation and supplemental retirement benefit plans is being accrued over the expected remaining years of active employment. Restricted stock and stock option plans -- The Company has restricted stock plans and a non-qualified stock option plan. The Company amortizes as compensation expense the cost of stock acquired for the restricted stock plans by the straight-line method over three- and five-year restriction periods. No compensation expense is recorded under the non-qualified stock option plan. In 1997 the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," as required for disclosure purposes only. The Company will continue applying the accounting treatment prescribed by the provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees." Pro forma disclosures have been provided as if SFAS No. 123 were adopted for all stock-based compensation plans. Earnings per share -- Basic earnings per share have been computed by dividing net earnings by the weighted-average outstanding common stock and Class B common stock during each of the years presented. Diluted earnings per share have been calculated by also including in the computation the effect of employee stock options granted to employees as potential common shares. NOTE 2. ALLIANCE WITH DUPONT In September 1997, the Company and E.I. du Pont de Nemours and Company (DuPont) executed an agreement that created one of the world's largest private agricultural research and development collaborations. A joint venture, Optimum Quality Grains, L.L.C., was formed that markets improved quality traits to increase the value of crops for livestock feeders, grain processors, and other end users. The joint venture does not sell seed. Pioneer is the preferred worldwide provider and marketer of quality trait seed for the joint venture. The joint venture began operations January 1, 1998, and is being accounted for on the equity method of accounting. The Company's fifty percent equity interest in the joint venture's operations for the eight months ended August 31, 1998, was a loss of $6 million. During fiscal 1998, the Company loaned the joint venture $8 million at a variable interest rate with the principal and unpaid interest due at December 31, 2001. In connection with the above agreements, DuPont also acquired an equity interest in Pioneer through the purchase of 164,446 shares of convertible preferred voting stock for $1.71 billion. Effective January 30, 1998, each preferred share was converted into 100 shares of Class B common stock with a stated value of $1 per share, or $16.4 million. As required by the agreement, Pioneer used approximately $1.52 billion of the proceeds from the DuPont investment to purchase approximately 16.4 million shares of the Company's outstanding common stock through a Dutch auction self-tender. Immediately following the completion of the Dutch auction self-tender, DuPont's equity interest in Pioneer was approximately 20 percent. The agreement includes, among other things, a standstill provision that prohibits DuPont from increasing its ownership interest in the Company for 16 years from the date of the agreement without the consent of the Company. DuPont also gained two seats on the Company's Board of Directors. F-10 48 NOTE 3. INVENTORIES The composition of inventories is as follows:
AUGUST 31, -------------- 1998 1997 ----- ----- (IN MILLIONS) Finished seed.................................. $273 $245 Unfinished seed................................ 201 186 Supplies and other............................. 7 9 ---- ---- $481 $440 ==== ====
Unfinished seed represents the cost of parent seed, detasseling and roguing labor, and certain other production costs incurred by the Company to produce its seed supply. Much of the balance of the labor, equipment, and production costs associated with planting, growing, and harvesting the seed is supplied by independent growers, who contract specific acreage for the production of seed for the Company. The compensation of the independent growers is determined based upon yield, contracted acreage, and commodity prices. The commitment for grower compensation is accrued as seed is delivered to the Company. Accrued grower compensation was $13 million at August 31, 1998 and 1997. The Company uses derivative instruments such as commodity futures and options to hedge grower compensation costs. At August 31, 1998 and 1997, the Company had futures contracts with brokers on notional quantities amounting to 31 million bushels and 32 million bushels, respectively for corn, and 8 million and 6 million bushels, respectively for soybeans. At August 31, 1998 and 1997, inventories included $13 million and $4 million of unrealized losses on all open contracts, respectively. NOTE 4. CURRENT BORROWINGS, LINES OF CREDIT, LONG-TERM DEBT, AND GUARANTEES At August 31, 1998, the Company had domestic lines of credit totaling $200 million available to be used as support for the issuance of the Company's commercial paper. There was no commercial paper outstanding at August 31, 1998. Commercial paper outstanding at August 31, 1997, was $63 million at a weighted-average interest rate of 5.6 percent. In addition, the Company's foreign subsidiaries have lines of credit and direct borrowing agreements totaling $116 million, substantially all of which are unsecured. At August 31, 1998, short-term borrowings of $76 million were outstanding under foreign subsidiary agreements at a weighted-average interest rate of 13.7 percent. At August 31, 1997, short-term borrowings of $28 million were outstanding under these agreements at a weighted-average interest rate of 13.3 percent. Long-term debt at August 31, 1998, bears interest at varying rates and requires annual principal payments through fiscal 2011. The maturities of long-term debt for the next five fiscal years, in millions, are as follows: $14.4, $0.6, $1.6, $0.4, and $0.3. The Company has guaranteed the repayment of principal and interest on certain obligations of Village Court Associates, an affiliated real estate venture. At August 31, 1998 and 1997, such guarantees totaled approximately $23 million. F-11 49 NOTE 5. INCOME TAXES The provision for income taxes is based on income before income taxes as follows:
YEARS ENDED AUGUST 31, ----------------------- 1998 1997 1996 ----- ----- ----- (IN MILLIONS) United States............................................... $331 $308 $266 Foreign..................................................... 76 65 88 ---- ---- ---- $407 $373 $354 ==== ==== ====
The provision for income taxes is composed of the following components:
YEARS ENDED AUGUST 31, ----------------------- 1998 1997 1996 ----- ----- ----- (IN MILLIONS) Current Federal................................................ $ 88 $ 80 $ 83 State.................................................. 12 9 11 Foreign................................................ 32 31 44 ---- ---- ---- $132 $120 $138 ---- ---- ---- Deferred Federal................................................ $ (2) $ 8 $ (9) State.................................................. -- 1 (1) Foreign................................................ 4 (2) (1) ---- ---- ---- $ 2 $ 7 $(11) ---- ---- ---- $134 $127 $127 ==== ==== ====
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at August 31, 1998 and 1997, are presented below:
1998 1997 ----- ----- (IN MILLIONS) Deferred tax assets Allowance for doubtful accounts........................... $ 7 $ 6 Inventories............................................... 22 29 Benefits/compensation..................................... 48 40 Deferred profit........................................... 12 9 Nondeductible reserves.................................... 7 9 Net operating loss carryforwards.......................... 8 6 Other..................................................... 11 11 ---- ---- Total gross deferred tax asset.................... $115 $110 Less valuation allowance.......................... (4) (8) ---- ---- Total deferred tax asset.......................... $111 $102 ---- ---- Deferred tax liabilities Property and equipment.................................... $(61) $(55) Unrealized gain on available-for-sale securities.......... -- (10) ---- ---- Total deferred tax liability...................... $(61) $(65) ---- ---- Net deferred tax asset............................ $ 50 $ 37 ==== ====
The net operating loss carryforwards result from various international subsidiaries. The expiration of these net operating losses range from 1999 to indefinite. Utilization of these losses is dependent upon earnings F-12 50 generated in the respective subsidiaries. A valuation allowance has been established where appropriate for the losses and certain other items. The net change in the total valuation allowance for the year ended August 31, 1998, was a decrease of $4 million. There was no change in the total valuation allowance for the year ended August 31, 1997. Following is a reconciliation of the statutory U.S. Federal income tax rate to the Company's actual worldwide effective income tax rate:
YEARS ENDED AUGUST 31, ----------------------- 1998 1997 1996 ----- ----- ----- Statutory U.S. Federal income tax rate...................... 35.0% 35.0% 35.0% State income taxes, net of Federal income tax benefit....... 1.9 1.8 1.8 Effect of taxes on foreign earnings......................... (1.9) (1.5) -- Foreign Sales Corporation................................... (1.3) (1.4) (0.5) Other....................................................... (0.7) 0.1 (0.3) ----- ----- ----- Actual effective income tax rate....................... 33.0% 34.0% 36.0% ===== ===== =====
NOTE 6. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS QUALIFIED PENSION PLANS: The components of pension expense relating to qualified defined benefit pension plans for the years ended August 31, 1998, 1997, and 1996, consisted of the following:
1998 1997 1996 ---- ---- ---- (IN MILLIONS) Service cost................................................ $ 10 $ 8 $ 7 Interest cost on projected benefit obligation............... 15 12 11 Actual return on plan assets................................ (48) (16) (14) Net amortization and deferral............................... 27 (1) (1) ---- ---- ---- Pension expense........................................ $ 4 $ 3 $ 3 ==== ==== ====
The following table sets forth the plans' funded status as of June 30, 1998 and 1997, respectively:
1998 1997 ---- ---- (IN MILLIONS) Actuarial present value of benefit obligations Vested benefit obligation................................. $151 $121 ==== ==== Accumulated benefit obligation............................ $160 $129 ==== ==== Plan assets at fair value, primarily stocks and bonds....... $254 $214 Projected benefit obligation................................ 221 187 ---- ---- Plan assets in excess of projected benefit obligation....... $ 33 $ 27 Unrecognized net gain....................................... (26) (16) Unrecognized prior service cost............................. 3 2 Unrecognized transition asset, net (recognized over 16 years).................................................... (5) (7) ---- ---- Pension asset.......................................... $ 5 $ 6 ==== ====
Plan assets include common stock of the Company totaling $32 million and $21 million at June 30, 1998 and 1997, respectively. F-13 51 The following actuarial assumptions were used to determine the present value of benefit obligations for 1998 and 1997 respectively: discount rate of 7 percent and 8 percent, expected long-term rate of return on plan assets of 9.5 percent and 9 percent, and rate of increase in compensation levels of 5.5 percent and 6.5 percent. NON-QUALIFIED PENSION PLANS: The components of pension expense relating to non-qualified pension plans for the years ended August 31, 1998, 1997, and 1996, consisted of the following:
1998 1997 1996 ---- ---- ---- (IN MILLIONS) Service cost................................................ $2 $2 $1 Interest cost on projected benefit obligation............... 4 3 3 Net amortization and deferral............................... 1 1 1 -- -- -- Pension expense........................................ $7 $6 $5 == == ==
The following table sets forth the plans' funded status as of August 31, 1998 and 1997, respectively:
1998 1997 ---- ---- (IN MILLIONS) Actuarial present value of benefit obligations Vested benefit obligation................................. $ 21 $ 17 ==== ==== Accumulated benefit obligation............................ $ 21 $ 17 ==== ==== Plans' assets at fair value................................. $ -- $ -- Projected benefit obligation................................ 61 50 ---- ---- Plans' assets less than projected benefit obligations....... $(61) $(50) Unrecognized net loss....................................... 19 13 Unrecognized prior service cost............................. 10 11 Unrecognized transition asset, net.......................... 1 1 ---- ---- Accrued pension liabilities............................ $(31) $(25) ==== ====
In determining the present value of benefit obligations, a discount rate of 7 percent and 8 percent was used in 1998 and 1997, respectively. The assumed rate of increase in compensation levels used was 8 percent in both years. OTHER POSTRETIREMENT BENEFIT PLANS: The components of postretirement benefits cost expensed for the years ended August 31, 1998, 1997, and 1996, consisted of the following:
1998 1997 1996 ---- ---- ---- (IN MILLIONS) Service cost -- benefits earned during the year............. $2 $2 $2 Interest cost on accumulated postretirement benefit obligation................................................ 4 3 3 Return on assets............................................ -- -- -- Net amortization and deferral............................... -- -- -- -- -- -- Other postretirement benefits cost..................... $6 $5 $5 == == ==
F-14 52 The following table sets forth the plans' funded status as of August 31, 1998 and 1997, respectively:
1998 1997 ---- ---- (IN MILLIONS) Accumulated postretirement benefit obligation Retirees.................................................... $(16) $(15) Other fully eligible plans' participants.................... (12) (10) Other active plans' participants............................ (34) (23) ---- ---- $(62) $(48) Plans' assets at fair value................................. -- -- ---- ---- Accumulated postretirement benefit obligation in excess of plans' assets............................................. $(62) $(48) Unrecognized prior service cost............................. (2) (2) Unrecognized net loss....................................... 16 7 ---- ---- Accrued postretirement benefits cost................... $(48) $(43) ==== ====
For 1998 and 1997, the discount rate used in determining the accumulated postretirement benefit obligation was 7 percent and 8 percent, respectively. An 8.5 percent annual rate of increase in the per capita cost of covered health care benefits was assumed for 1998. This rate was assumed to decrease gradually to 5.5 percent in year 2004 and remain at that level thereafter. A one-percentage-point increase in the assumed health care cost trend rates would increase the accumulated postretirement benefit obligation as of August 31, 1998, by approximately $12 million and the total of the service and interest cost components of net postretirement health care cost for the year then ended by approximately $1 million. NOTE 7. LEGAL MATTERS Since April, 1996, DeKalb Genetics Corporation ("DeKalb") has filed five lawsuits against Pioneer. The lawsuits allege that insect resistant corn products that use a Bt gene, and corn products resistant to a glufosinate herbicide, infringe on certain DeKalb patents. After reviewing the Company's intellectual property position, DeKalb's patent filings, DeKalb's lawsuits, and conducting extensive discovery, Pioneer continues to believe all DeKalb's claims are without merit. Pioneer has denied DeKalb's allegations and raised defenses that, if successful, would render DeKalb's patents invalid. Pioneer believes that disposition of the lawsuits will not have a materially adverse effect on the consolidated financial position and results of operations of the Company. Pioneer also does not expect delays in the introductions of advanced corn hybrids with insect and herbicide resistance because of these lawsuits. NOTE 8. FINANCIAL INSTRUMENTS FOREIGN EXCHANGE: The Company uses derivative instruments such as forward exchange contracts, purchased options, and cross currency swaps to hedge foreign-currency-denominated transactions such as exports, contractual flows, and royalty payments. In some countries, these derivative hedge instruments are not available or are cost prohibitive. The exposures in these countries are addressed through managing net asset positions, borrowing in local currency, or investing in U.S. dollars. While derivative hedge instruments are subject to risk of loss from exchange and interest rate movements, we expect these changes would generally be offset by changes in the U.S. dollar value of foreign sales and/or cash flows. The Company does not hold these instruments with the objective of earning financial gains on the exchange rate price fluctuations alone, nor does it enter into derivative hedge instruments for which there are no underlying transaction related exposures. F-15 53 The notional amounts for contracts in place at August 31, 1998 and 1997, are shown in the following table in U.S. dollars. These contracts generally mature in less than one year.
1998 1997 ---- ---- (IN MILLIONS) Forwards.................................................... $286 $229 Options purchased........................................... 7 15 Swaps....................................................... -- 19 ---- ---- $293 $263 ==== ====
At August 31, 1998, the Company had deferred unrealized gains of $4 million and losses of $5 million from hedging firm purchase and sale commitments, based on broker quoted prices. CREDIT RISK: The Company's financial instruments subject to credit risk are primarily trade accounts receivable, cash and cash equivalents, and foreign currency exchange contracts. The Company is exposed to credit risk of nonperformance by counterparties. Generally, the Company does not require collateral or other security to support customer receivables or foreign currency exchange contracts. The counterparties to the Company's derivative hedge instruments are major financial institutions. The Company evaluates the creditworthiness of the counterparties to these instruments and has never experienced, nor does it anticipate, nonperformance by any of its counterparties. The Company had the following significant concentrations of trade accounts receivables, and cash and cash equivalents subject to credit risk:
AUGUST 31, -------------- 1998 1997 ---- ---- (IN MILLIONS) United States............................................... $212 $151 Italy....................................................... $ 79 $ 69 Brazil...................................................... $ 18 $ 19 Argentina................................................... $ 35 $ 27 Central Europe.............................................. $ 23 $ 16
Within the U.S., the majority of the Company's business is conducted with individual farm operators located throughout the country. Outside the U.S., the majority of the Company's business is transacted with distributors and cooperatives, some being government sponsored. FAIR VALUE: The Company estimated the fair value of its financial instruments by discounting the expected future cash flows using the current interest rates that would apply to each class of financial instruments, except for foreign currency contracts, for which quotes from brokers were used. The fair value of cash equivalents, receivables, short-term borrowings, long-term debt, and foreign currency contracts approximates carrying value at August 31, 1998. NOTE 9. CAPITAL STOCK VOTING RIGHTS: As a result of equity transactions with DuPont, the Company issued convertible preferred stock which was subsequently converted to Class B common stock. Except for the calculation of votes per share, shareholder rights and preferences are substantially the same for both common stock and Class B common stock. Each share of common stock is generally entitled to five votes if it has been beneficially owned continuously by the same holder for a period of 36 months. All other shares are entitled to one vote per share. Holders of Class B common F-16 54 stock are entitled to cast votes equal to their percentage of common stock equivalent economic ownership interest in the Company, not to exceed 20 percent. Class B common stock is convertible to common stock only upon sale of the Class B common stock by DuPont. STOCK SPLIT: On March 10, 1998, the Board of Directors approved a three-for-one stock split effected in the form of a 200 percent stock dividend. The stock dividend was paid on April 23, 1998, to shareholders of record on March 27, 1998. All share and per share data have been adjusted to reflect this stock split. SHARE REPURCHASE: At August 31, 1998, authorized shares remaining to be purchased under a Board authorized repurchase plan approximated 4.8 million. RESTRICTED STOCK PLANS: The Company has a restricted stock plan under which shares of the Company's common stock are held by officers and key employees. Such stock is subject to an agreement requiring forfeiture by the employee in the event of termination of employment within five years of the date of grant other than as a result of retirement, death, or disability. The maximum number of shares authorized for grant under this plan is 5,250,000 shares, of which 1,257,162 had been granted as of August 31, 1998. There are 1,227,825 shares outstanding under a previous restricted stock plan. The Company also has a restricted stock plan under which shares of the Company's common stock are held by non-employee directors of the Company in lieu of cash compensation. The maximum number of shares authorized for grant under this plan is 75,000, of which 42,918 have been granted as of August 31, 1998. STOCK OPTION PLAN: During 1996, the Company adopted a non-qualified stock option plan. The plan authorizes options covering nine million shares of the Company's common stock. All options outstanding as of August 31, 1998, become exercisable one-third in each of years three, four, and five from the date of grant. The options expire after ten years from the date of grant. Options are forfeited upon termination for reasons other than retirement, death, or disability. The Company applies APB Opinion No. 25 and related interpretations in accounting for the fixed stock option plan. Accordingly, no compensation cost has been recognized for the plan. Had compensation cost for the Company's fixed stock option plan been determined consistent with SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts as follows:
YEARS ENDED AUGUST 31, ------------------------------ 1998 1997 1996 ------ ------ ------ (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Net Income as reported...................................... $ 270 $ 243 $ 223 Pro forma net income........................................ $ 267 $ 240 $ 221 Earnings per share as reported.............................. $1.08 $0.98 $0.89 Pro forma earnings per share................................ $1.07 $0.97 $0.88
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1998, 1997, and 1996, respectively: risk-free interest rate of 5.7 percent, 6.7 percent, and 6.4 percent; expected life of 7.5 each year; expected volatility of 26 percent, 22 percent, and 22 percent; and dividend yield of 1.4 percent, 1.4 percent, and 1.5 percent. F-17 55 A summary of the status of the Company's fixed stock option plan as of August 31, 1998, 1997, and 1996, and changes during the years ended on those dates is presented below:
1998 1997 1996 ---------------------- ------------------------ ---------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ---------- --------- ---------- --------- ---------- --------- Outstanding at beginning of year.... 2,991,000 $15 2,919,000 $14 -- $-- Granted............................. 207,000 $35 72,000 $26 2,919,000 $14 ---------- ---------- ---------- Outstanding at end of year.......... 3,198,000 $16 2,991,000 $15 2,919,000 $14 ========== === ========== === ========== === Options exercisable at year end..... -- -- -- Weighted-average fair value of options granted during the year..... $ 12.42 $ 9.16 $ 4.96
The following table summarizes information about fixed stock options outstanding at August 31, 1998.
OPTIONS OUTSTANDING - ---------------------------------------------------- NUMBER OUTSTANDING AT WEIGHTED-AVERAGE WEIGHTED-AVERAGE AUGUST 31, REMAINING EXERCISE PRICE 1998 CONTRACTUAL LIFE - ---------------- -------------- ---------------- $14 2,919,000 7.0 years $26 72,000 8.8 years $35 207,000 9.2 years
On September 14, 1998 the Board of Directors authorized the issuance of 1,055,150 options under this plan. These options have an exercise price of $32, the market value of the stock on the date of grant. One third of the options become exercisable one year after the date of grant, a second third two years after the date of grant, and the remaining third three years after the date of grant. There are no options exercisable at August 31, 1998. NOTE 10. EARNINGS PER SHARE Both common stock and Class B common stock are included jointly in all reference to common stock. The following tables provide a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the periods presented:
YEAR ENDED AUGUST 31, ------------------------------------------------------------------------------------------------------ 1998 1997 1996 -------------------------------- -------------------------------- -------------------------------- PER- PER- PER- INCOME SHARES SHARE INCOME SHARES SHARE INCOME SHARES SHARE NUMERATOR DENOMINATOR AMOUNT NUMERATOR DENOMINATOR AMOUNT NUMERATOR DENOMINATOR AMOUNT -------------------------------- -------------------------------- -------------------------------- (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Basic earnings per share Net Income.............. $270 $243 $233 Preferred stock dividends............. (9) -- -- ---- ---- ---- Net income attributable to common shareholders $261 231.5 $1.13 $243 246.9 $ .98 $223 249.5 $ .89 ===== ====== ====== Effect of dilutive securities Convertible preferred stock................. 9 17.7 -- -- -- -- Stock options........... -- 1.1 -- 0.6 -- 0.3 ---- ----- ---- ----- ---- ------ Diluted earnings per share Net income attributable to common shareholders $270 250.3 $1.08 $243 247.5 $ .98 $223 249.8 $ .89 ==== ===== ===== ==== ===== ====== ==== ====== ======
F-18 56 NOTE 11. GEOGRAPHIC DATA Certain financial information concerning the Company's domestic and foreign operations is as follows:
YEARS ENDED AUGUST 31, ------------------------------ 1998 1997 1996 ------ ------ ------ (IN MILLIONS) Net sales (by source) United States............................................. $1,818 $1,626 $1,435 Europe.................................................... 349 391 387 Other..................................................... 250 240 222 ------ ------ ------ $2,417 $2,257 $2,044 Less intergeographical sales, primarily United States..... 582 473 323 ------ ------ ------ $1,835 $1,784 $1,721 ====== ====== ====== Operating income (by source) United States.................. $ 355 $ 365 $ 334 Europe.................................................... 53 49 56 Other..................................................... 39 26 33 ------ ------ ------ $ 447 $ 440 $ 423 Indirect general and administrative expense............... (88) (77) (76) ------ ------ ------ $ 359 $ 363 $ 347 ====== ====== ====== Identifiable assets at August 31 United States............................................. $ 867 $ 843 $ 701 Europe.................................................... 240 228 224 Other..................................................... 369 322 244 ------ ------ ------ $1,476 $1,393 $1,169 Corporate................................................. 241 210 253 ------ ------ ------ $1,717 $1,603 $1,422 ====== ====== ====== Export sales: Primarily Europe.......................................... $ 18 $ 18 $ 20 ====== ====== ======
NOTE 12. UNAUDITED QUARTERLY FINANCIAL DATA Summarized unaudited quarterly financial data for 1998 is as follows:
THREE MONTHS ENDED NOVEMBER 30 FEBRUARY 28 MAY 31 AUGUST 31 ------------------ ----------- ----------- ------ --------- (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Net sales.......................................... $ 79 $ 302 $1,317 $ 137 Gross profit....................................... $ (6) $ 117 $ 757 $ 22 Net income (loss).................................. $ (51) $ 4 $ 366 $ (49) Preferred stock dividend........................... $ 4 $ 5 $ -- $ -- Net income (loss) available to common shareholders..................................... $ (55) $ (1) $ 366 $ (49) Net income (loss) per common share (a)(b) Basic......................................... $(.24) $(.01) $ 1.50 $(.20) Diluted....................................... $(.24) $(.01) $ 1.50 $(.20) Cash Dividends per common share (b)................ $.087 $.087 $ .087 $ .10
F-19 57 Summarized unaudited quarterly financial data for 1997 is as follows:
THREE MONTHS ENDED NOVEMBER 30 FEBRUARY 28 MAY 31 AUGUST 31 ------------------ ----------- ----------- ------ --------- (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Net sales.......................................... $ 90 $ 264 $1,288 $ 142 Gross profit....................................... $ 10 $ 94 $ 735 $ 28 Net income (loss).................................. $ (45) $ (2) $ 332 $ (42) Preferred stock dividend........................... $ -- $ -- $ -- $ -- Net income (loss) available to common shareholders..................................... $ (45) $ (2) $ 332 $ (42) Net income (loss) per common share Basic......................................... $(.18) $(.01) $ 1.35 $(.17) Diluted....................................... $(.18) $(.01) $ 1.35 $(.17) Cash dividends per common share(b)................. $.077 $.077 $ .077 $.087
- --------------- (a) Due to the conversion of preferred stock to Class B common stock late in the second quarter, the total of the four quarters' basic earnings per share does not equal the basic earnings per share for the year. As the first six months of fiscal 1998 reflect a loss available to common shareholders, the effect of convertible preferred stock and stock options are not included in the calculation of diluted earnings per share because their effects are anti-dilutive. As a result, the total of the four quarters' diluted earnings per share may not equal the diluted earnings per share for the year. (b) As a result of rounding, the total of the four quarters' earnings and cash dividends per share may not equal the earnings and cash dividends per share for the year. NOTE 13. UNAUDITED SUBSEQUENT EVENT On November 10, 1998, two lawsuits filed by DeKalb (see Note 7) were dismissed with prejudice. These lawsuits alleged the Company had infringed on DeKalb patents by using glufosinate resistant products in developing corn hybrids. F-20 58 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- [logo] PIONEER HI-BRED INTERNATIONAL, INC. $200,000,000 % SENIOR NOTES DUE --------------------------- LAZARD FRERES & CO. LLC CHASE SECURITIES, INC. , 1999 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 59 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. Except for the Registration Fee, all expenses are estimated: Registration fee............................................ $55,600 Trustee's fees and expenses (including counsel fees)........ Accounting fees and expenses................................ Legal fees and expenses..................................... Blue sky fees and expenses.................................. Printing expenses........................................... Rating agency fees.......................................... Miscellaneous............................................... ------- Total expenses......................................... $ =======
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Iowa Business Corporation Act (the "IBCA") provides for or permits indemnification of directors and officers for acts in their capacities as such in certain situations summarized below. Unless limited by articles of incorporation, a corporation must indemnify a director or an officer who is wholly successful, on the merits or otherwise, in the defense of any proceeding to which he or she was a party against reasonable expenses incurred by him or her in connection with such proceeding. In addition, unless the articles of incorporation provide otherwise, a court may order a company to indemnify a director or officer if it determines that such director or officer is fairly and reasonably entitled to indemnification in view of all the relevant circumstances, whether or not he or she has met the applicable standard of conduct or was adjudged liable in a derivative action or for receiving an improper personal benefit. In such case, if the director or officer was adjudged liable, the court must limit indemnification to reasonable expenses incurred. The IBCA permits indemnification if a director or officer acted in good faith and in a manner reasonably believed to be in the Company's best interests, and, in a criminal action, if such person had no reasonable cause to believe that his or her conduct was unlawful. No indemnification is permitted in connection with a proceeding by or in the right of a corporation in which the person was adjudged liable to the corporation or in connection with any proceeding in which the director or officer was adjudged liable for receiving an improper personal benefit. The IBCA permits advancement of expenses to a director or officer upon (i) receipt of an undertaking to repay all amounts advanced if it shall be determined ultimately that he or she is not entitled to be indemnified by the corporation; (ii) the person furnishes the corporation a written affirmation of the person's good faith belief that he or she has met the applicable standard of conduct; or (iii) determination is made that the facts then known to those making the determination would not preclude indemnification. The IBCA provides that, subject to certain limitations, its indemnification provisions shall not be deemed exclusive of any other right to indemnification to which a director or officer may be entitled under the articles of incorporation or bylaws, or any agreement, vote of shareholders or disinterested directors, or otherwise. Notwithstanding the foregoing, indemnification cannot be provided in the case of (i) a breach of the director's duty of loyalty to the corporation or its shareholders; (ii) an act or omission not in good faith; (iii) intentional misconduct; (iv) a knowing violation of law; (v) a transaction from which the person seeking indemnification derives an improper personal benefit; (vi) liability for certain unlawful distributions; and (vii) liability in a proceeding by or in the right of the corporation. The bylaws of the Company provide for indemnification of directors and officers of the Company to the fullest extent permitted by Iowa law. II-1 60 The Company has entered into contracts with each of its directors and executive officers providing for indemnification and reimbursement of expenses to the fullest extent permitted by Iowa law in connection with actions against them in their capacities as such. Reference is made to the Underwriting Agreement, filed as Exhibit 1 to this Registration Statement, for information concerning indemnification arrangements among the Company and the underwriters. ITEM 16. EXHIBITS. 1 Form of Underwriting Agreement* 4.1 Form of Indenture* 4.2 Forms of Notes (included in Exhibit 4.1)* 5 Opinion of Baker & Hostetler LLP 12 Computation of Ratio of Earnings to Fixed Charges 23.1 Consent of KPMG Peat Marwick LLP 23.2 Consent of Baker & Hostetler LLP (contained in Exhibit 5) 24 Power of Attorney Statement of Eligibility and Qualification on Form T-1 of 25 The Chase Manhattan Bank, as Trustee under the Indenture
- --------------- * (To be filed by amendment) ITEM 17. UNDERTAKINGS. The Company hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the Company's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of any employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the Registration Statement shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, and controlling persons of the Company pursuant to the provisions described under Item 15 above or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. The Company hereby undertakes that: (1) For the purpose of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of a registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b) (l) or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be part of the registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-2 61 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, Pioneer Hi-Bred International, Inc. certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Des Moines, State of Iowa, on December 17, 1998. PIONEER HI-BRED INTERNATIONAL, INC. * -------------------------------------- Charles S. Johnson, Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons on behalf of Pioneer Hi-Bred International, Inc. in the capacities indicated, on December 17, 1998. * Chairman, President and Chief - ------------------------------------------------ Executive Officer Charles S. Johnson * Executive Vice President, Chief - ------------------------------------------------ Operating Officer and Director Jerry L. Chicoine * Corporate Controller - ------------------------------------------------ Duane A. Suess * Vice President and Chief Financial - ------------------------------------------------ Officer Brian G. Hart * Director - ------------------------------------------------ Nancy Y. Bekavac * Director - ------------------------------------------------ C. Robert Brenton * Director - ------------------------------------------------ Fred S. Hubbell * Director - ------------------------------------------------ Luiz Kaufmann * Director - ------------------------------------------------ Dr. F. Warren McFarlan * Director - ------------------------------------------------ Dr. Owen J. Newlin * Director - ------------------------------------------------ Thomas N. Urban * Director - ------------------------------------------------ Dr. Virginia Walbot
II-3 62 * Director - ------------------------------------------------ H. Scott Wallace * Director - ------------------------------------------------ Fred W. Weitz * Director - ------------------------------------------------ Herman H.F. Wijffels * Director - ------------------------------------------------ Charles O. Holliday, Jr. * Director - ------------------------------------------------ William F. Kirk
*William J. DeMeulenaere, by signing his name hereto, does sign this Registration Statement on behalf of the persons indicated above pursuant to a power of attorney duly executed by such persons and filed as an exhibit to this Registration Statement. By: /s/ WILLIAM J. DEMEULENAERE ------------------- William J. DeMeulenaere, Attorney-In-Fact II-4 EX-5 2 EXHIBIT 5 1 EXHIBIT 5 [LETTERHEAD OF BAKER & HOSTETLER LLP] December 18, 1998 Pioneer Hi-Bred International, Inc. 800 Capital Square 400 Locust Street Des Moines, Iowa 50309 Re: Registration Statement on Form S-3 with respect to $200,000,000 aggregate principal amount of Senior Notes of Pioneer Hi-Bred International, Inc. Dear Sirs: We have acted as special counsel to Pioneer Hi-Bred International, Inc., an Iowa corporation (the "Company"), in connection with its Registration Statement on Form S-3 (the "Registration Statement"), filed under the Securities Act of 1933 (the "Act"), relating to the proposed public offering of up to $200,000,000 aggregate principal amount of the Company's Senior Notes (the "Notes") to be issued under an indenture between the Company and the Trustee named on the Form T-1 included as an exhibit to the Registration Statement (the "Indenture"). We have examined originals, or copies certified or otherwise identified to our satisfaction, of such documents as we have deemed necessary for the purposes of this opinion. Based on the foregoing, we are of the opinion that: When (a) the Indenture shall have been duly executed and delivered in substantially the form filed with the Registration Statement, (b) the Notes shall have been duly executed and authenticated in accordance with the terms of the Indenture, (c) the Registration Statement shall have become effective under the Act, (d) the Indenture shall have been qualified under the Trust Indenture Act of 1939 and (e) the Notes shall have been issued and sold as described in the Registration Statement and in the prospectus which is a part thereof, the Notes will be duly authorized and valid and binding obligations of the Company, except as may be limited by bankruptcy, insolvency, reorganization or other laws relating to the enforcement of creditors' rights generally or by general principles of equity. The Indenture provides that it and the Notes are to be governed by and construed in accordance with the laws of the State of New York. We do not purport to be qualified to express legal conclusions based on the laws of any state or jurisdiction other than the laws of the State of Ohio, the United States of America and, solely with respect to the due execution, delivery and 2 Pioneer Hi-Bred International, Inc. December 18, 1998 Page 2 authorization of the Indenture and the Notes, the laws of the State of Iowa. The opinion herein has been rendered as if the Indenture and the Notes were governed in all respects by the laws of the State of Ohio, without giving effect to principles of conflict of laws, and in rendering this opinion we have assumed that New York law is the same as Ohio law in all relevant respects. Accordingly, we express no opinion as to the laws of any state or jurisdiction other than the laws of the State of Ohio, the laws of the United States of America, and, as indicated above, the laws of the State of Iowa. We hereby consent to the use of this opinion as an exhibit to the Registration Statement and to the reference to our firm under "Legal Matters" in the prospectus comprising a part of the Registration Statement. Very truly yours, Baker & Hostetler LLP BH/jh EX-12 3 EXHIBIT 12 1 Exhibit 12 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (In millions, except ratio of earnings to fixed charges)
Years Ended August 31, -------------------------------------------- 1998 1997 1996 1995 1994 EARNINGS AS DEFINED: Earnings before income taxes after eliminating undistributed earnings of 50% or less owned affiliates .................................. $403.9 $369.9 $350.0 $288.7 $346.8 Fixed charges as below ......................... 17.5 13.1 15.9 17.1 14.3 ------ ------ ------ ------ ------ Earnings as defined ............................ $421.4 $383.0 $365.9 $305.8 $361.1 ====== ====== ====== ====== ====== FIXED CHARGES AS DEFINED: Interest expense, including amortization of debt issue costs .......................... $ 13.0 $ 8.0 $ 11.0 $ 13.0 $ 11.0 Interest capitalized ........................... -- -- -- -- -- Portion of rental expense representative of the interest factor (estimated at 33% of rent expense) ......................... 4.5 5.1 4.9 4.1 3.3 Preferred stock dividends of majority- owned subsidiary company ..................... -- -- -- -- -- Share of interest expense related to guaranteed debt of 50% owned affiliated company ...................................... -- -- -- -- -- ------ ------ ------ ------ ------ Fixed charges as defined ....................... $ 17.5 $ 13.1 $ 15.9 $ 17.1 $ 14.3 ====== ====== ====== ====== ====== RATIO OF EARNINGS TO FIXED CHARGES ...................................... 24.1 29.2 23.0 17.9 25.3
EX-23.1 4 EXHIBIT 23.1 1 Exhibit 23.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors and Shareholders Pioneer Hi-Bred International, Inc. and Subsidiaries: We consent to the use of our reports included herein and incorporated by reference herein and to the reference to our firm under the heading "Experts" in the prospectus. KPMG Peat Marwick LLP Des Moines, Iowa December 18, 1998 EX-24 5 EXHIBIT 24 1 Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, THAT: Each of the undersigned officers and directors of Pioneer Hi-Bred International, Inc., an Iowa corporation (the "Company"), has made, constituted and appointed, and by this instrument does make, constitute and appoint, Jerry L. Chicoine, Dwight G. Dollison, Brian G. Hart, Leon R. Shearer, and William J. DeMeulenaere, any of whom may act, with full power of substitution and re-substitution, to affix for such person and in such person's name, place and stead, in any and all capacities as attorney-in-fact, such person's signature to a Registration Statement on Form S-3 or other form registering under the Securities Act of 1933 the Company's debt securities containing such terms and provisions as the Board of Directors of the Company may specify or authorize officers of the Company to specify, and to any and all amendments, supplements and exhibits to such Registration Statement, and to any and all applications and other documents pertaining thereto, giving and granting to each such attorney-in-fact full power and authority to do and perform every act and thing whatsoever requisite and necessary to be done in and about the premises, as fully as such person might or could do if personally present, and hereby ratifying and confirming all that each of such attorneys-in-fact or any such substitute shall lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, this Power of Attorney has been signed in the capacities indicated below on December 15, 1998. /s/ Charles S. Johnson /s/ Dr. Owen Newlin - ----------------------------------------------- ---------------------------------- Charles S. Johnson, Chairman, President and Dr. Owen Newlin, Director Chief Executive Officer /s/ Jerry L. Chicoine /s/ Thomas N. Urban - ----------------------------------------------- ---------------------------------- Jerry L. Chicoine, Executive Vice President, Thomas N. Urban, Director Chief Operating Officer and Director /s/ Duane A. Suess /s/ Dr. Virginia Walbot - ----------------------------------------------- ---------------------------------- Duane A. Suess, Corporate Controller Dr. Virginia Walbot, Director /s/ Brian G. Hart /s/ H. Scott Wallace - ----------------------------------------------- ---------------------------------- Brian G. Hart, Vice President and H. Scott Wallace, Director Chief Financial Officer /s/ Nancy Y. Bekavac /s/ Fred W. Weitz - ----------------------------------------------- ---------------------------------- Nancy Y. Bekavac, Director Fred W. Weitz, Director /s/ C. Robert Brenton /s/ Herman H.F. Wijffels - ----------------------------------------------- ---------------------------------- C. Robert Brenton, Director Herman H.F. Wijffels, Director /s/ Fred S. Hubbell /s/ Charles O. Holliday, Jr. - ----------------------------------------------- ---------------------------------- Fred S. Hubbell, Director Charles O. Holliday, Jr., Director /s/ Luiz Kaufmann /s/ William F. Kirk - ----------------------------------------------- ---------------------------------- Luiz Kaufmann, Director William F. Kirk, Director /s/ Dr. F. Warren McFarlan - ----------------------------------------------- Dr. F. Warren McFarlan, Director
EX-25 6 EXHIBIT 25 1 Exhibit 25 ------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 ------------------------- FORM T-1 STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE ------------------------------------------- CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(B)(2) ________ ---------------------------------------- CHASE MANHATTAN TRUST COMPANY, NATIONAL ASSOCIATION (Exact name of trustee as specified in its charter) 29-2933369 (State of incorporation (I.R.S. employer if not a national bank) identification No.) ONE OXFORD CENTER, SUITE 1100 301 GRANT STREET, PITTSBURGH, PA 15219 (Address of principal executive offices) (Zip Code) WILLIAM H. MCDAVID THE CHASE MANHATTAN BANK GENERAL COUNSEL 270 PARK AVENUE NEW YORK, NEW YORK 10017 TEL: (212) 270-2611 (Name, address and telephone number of agent for service) -------------------------------------------- PIONEER HI-BRED NATIONAL, INC. (Exact name of obligor as specified in its charter) IOWA 42-0470520 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification No.) 800 CAPITAL SQUARE 400 LOCUST STREET DES MOINES, IOWA 50309 (Address of principal executive offices) (Zip Code) -------------------------------------------- DEBT SECURITIES 2 (Title of the indenture securities) -------------------------------------------- GENERAL ITEM 1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION AS TO THE TRUSTEE: (a) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY TO WHICH IT IS SUBJECT. Comptroller of the Currency, Washington, D.C. (b) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS. Yes. ITEM 2. AFFILIATIONS WITH THE OBLIGOR. IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH AFFILIATION. None. NO RESPONSES ARE INCLUDED FOR ITEMS 3-15 OF THIS FORM T-1 BECAUSE THE OBLIGOR IS NOT IN DEFAULT AS PROVIDED UNDER ITEM 13. ITEM 16. LIST OF EXHIBITS List below all exhibits filed as a part of this Statement of Eligibility. 1. EXHIBIT T1A(a) A copy of the Articles of Association of the Trustee as now in effect. 2. EXHIBIT T1A(b) A copy of the Certificate of Authority of the Trustee (previously known as New Trust Company, National Association,) to commence business. Also included in Exhibit TIA (b) are letters dated November 24, 1997 from the Comptroller of the Currency authorizing the exercise of fiduciary powers by the Trustee and acknowledging the name change of the Trustee. 3. EXHIBIT T1A(c) The Authorization of the Trustee to exercise corporate trust powers is contained in Exhibit T1A(b). 4. EXHIBIT T1B A copy of the By-Laws of the Trustee as now in effect. 5. EXHIBIT T1C Not applicable 6. EXHIBIT T1D The Trustee's consent required by Section 321(b) of the Act. 7. EXHIBIT T1E A copy of the latest report of condition of the Trustee, published pursuant to law or the requirements of its supervising or examining authority. 8. EXHIBIT T1F Not applicable 9. EXHIBIT T1G Not applicable 2 3 SIGNATURE Pursuant to the requirements of the Trust Indenture Act of 1939 the Trustee, Chase Manhattan Trust Company, National Association, a national banking association organized and existing under the laws of the United States of America , has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of Cleveland and Ohio, on the 11th day of December , 1998. CHASE MANHATTAN TRUST COMPANY, NATIONAL ASSOCIATION By /s/ Timothy J. Vara --------------------------------- Timothy J. Vara Vice President 3 4 EXHIBIT T1E
CHASE MANHATTAN TRUST COMPANY, NATIONAL ASSOCIATION STATEMENT OF CONDITION SEPTEMBER 30, 1998 ($000) ------ ASSETS Cash and Due From Banks $ 15,946 Securities Available for Sale 3,072 Premises and Fixed Assets 586 Intangible Assets 88,275 -------- Total Assets $107,879 ======== LIABILITIES Sundry Liabilities and Accrued Expenses $ 3,917 -------- STOCKHOLDER'S EQUITY Common Stock $ 5,000 Surplus 95,000 Retained Earnings 3,962 -------- Total Stockholder's Equity $103,962 -------- Total Liabilities and Stockholder's Equity $107,879 ========
5 EXHIBIT T1A(a) [CHASE LOGO] CHASE MANHATTAN TRUST COMPANY, NATIONAL ASSOCIATION CHARTER NO. 23548 ARTICLES OF ASSOCIATION For the purpose of organizing an Association to perform any lawful activities of a national bank, the undersigned do enter into the following Articles of Association: FIRST. The title of this Association shall be Chase Manhattan Trust Company, National Association (the "Association"). SECOND. The main office of the Association shall be in the City of Pittsburgh, County of Allegheny, Commonwealth of Pennsylvania. The business of the Association shall be limited to the fiduciary powers and the support of activities incidental to the exercise of those powers. The Association will obtain the prior written approval of the Office of the Comptroller of the Currency before amending these Articles of Association to expand the scope of its activities and services. THIRD. The board of directors of this Association shall consist of not less than five nor more than twenty-five persons, the exact number to be fixed and determined from time to time by resolution of a majority of the full board of directors or by resolution of a majority of the shareholders at any annual or special meeting thereof. Each director, during the full term of his directorship, shall own common or preferred stock of the Association or of a holding company owning the Association, with an aggregate par, fair market or equity value of not less than $1,000. Any vacancy in the board of directors may be filled by action of the shareholders or a majority of the remaining directors. Terms of directors, including directors selected to fill vacancies, shall expire at the next regular meeting of shareholders at which directors are elected, unless the directors resign or are removed from office. Despite the expiration of a director's term, the director shall continue to serve until his or her successor is elected and qualifies or until there is a decrease in the number of directors and his or her position is eliminated. 6 FOURTH. There shall be an annual meeting of the shareholders to elect directors and transact whatever other business may be brought before the meeting. It shall be held at the main office or any other convenient place the board of directors may designate, on the day of each year specified therefore in the by-laws, or if that day falls on a legal holiday in the state in which the Association is located, on the next following banking day. If no election is held on the day fixed or in event of a legal holiday, on the following banking day, an election may be held on any subsequent day within 60 days of the day fixed, to be designated by the board of directors, or, if the directors fail to fix the day, by shareholders representing two-thirds of the shares issued and outstanding. Advance notice of the meeting may be duly waived by the sole shareholder in accordance with 12 C.F.R. 7.2001. A director may resign at any time by delivering written notice to the board of directors, its Chairperson, or to the Association, which resignation shall be effective when the notice is delivered unless the notice specifies a later effective date. A director may be removed by shareholders at a meeting called to remove him or her, when notice of the meeting stating that the purpose or one of the purposes is to remove him or her is provided, if there is a failure to fulfill one of the affirmative requirements for qualification, or for cause. FIFTH. The authorized amount of capital stock of this Association shall be five million dollars ($5,000,000), divided into fifty thousand (50,000) shares of common stock of the par value of one hundred dollars ($ 100) each; but said capital stock may be increased or decreased from time to time, according to the provisions of the laws of the United States. No holder of shares of the capital stock of any class of the Association shall have any preemptive or preferential right of subscription to any shares of any class of stock of the Association, whether now or hereafter authorized, or to any obligations convertible into stock of the Association, issued, or sold, nor any right to subscription to any thereof other than such, if any, as the board of directors, in its discretion may from time to time determine and at such price as the board of directors may from time to time fix. Unless otherwise specified in the Articles of Association or required by law, (1) all matters requiring shareholder action, including amendments to the Articles of Association, must be approved by shareholders owning a majority voting interest in the outstanding voting stock, and (2) each shareholder shall be entitled to one vote per share. The Association, at any time and from time to time, may authorize and issue debt obligations, whether or not subordinated, without the approval of the shareholders. 7 SIXTH. The board of directors may appoint one of its members President of this Association, and one of its members Chairperson of the board or two of its members as Co-Chairpersons of the board, and shall have the power to appoint one or more Vice Presidents, a Secretary who shall keep minutes of the directors' and shareholders' meetings and be responsible for authenticating the records of the Association, and such other officers and employees as may be required to transact the business of this Association. A duly appointed officer may appoint one or more officers or assistant officers if authorized by the board of directors in accordance with the by-laws. The board of directors shall have the power to: (1) Define the duties of the officers, employees, and agents of the Association. (2) Delegate the performance of its duties, but not the responsibility for its duties, to the officers, employees, and agents of the Association. (3) Fix the compensation and enter into employment contracts with its officers and employees upon reasonable terms and conditions consistent with applicable law. (4) Dismiss officers and employees. (5) Require bonds from officers and employees and fix the penalty thereof. (6) Ratify written policies authorized by the Association's management or committees of the board. (7) Regulate the manner in which any increase or decrease of the capital of the Association shall be made, provided that nothing herein shall restrict the power of shareholders to increase or decrease the capital of the Association in accordance with law. (8) Manage and administer the business and affairs of the Association. (9) Adopt initial by-laws, not inconsistent with law or the Articles of Association, for managing the business and regulating the affairs of the Association. (10) Amend or repeal by-laws, except to the extent that the Articles of Association reserve this power in whole or in part to shareholders. (11) Make contracts. (12) Generally perform all acts that are legal for a board of directors to perform. SEVENTH. The board of directors shall have the power to change the location of the main office to any other location permitted under applicable law, without the approval of the shareholders, and shall have the power to establish or change the location of any branch or branches of the Association to any other location permitted under applicable law, without the approval of the shareholders subject to approval by the Office of the Comptroller of the Currency. EIGHTH. The corporate existence of this Association shall continue until termination according to the laws of the United States. NINTH. These Articles of Association may be amended at any regular or special meeting of the shareholders by the affirmative vote of the holders of a majority of the stock of this Association, unless the vote of the holders of a greater amount of stock is required by law, and in that case by the vote of the holders of such greater amount. The Association's board of directors may propose one or more amendments to the Articles of Association for submission to the shareholders. 8 EXHIBIT T1A (b) COMPTROLLER OF THE CURRENCY TREASURY DEPARTMENT [GRAPHIC] OF THE UNITED STATES WASHINGTON, D.C. Whereas, satisfactory evidence has been presented to the Comptroller of the Currency that New Trust Company National Association located in Pittsburgh State of Pennsylvania has complied with all provisions of the statues of the United States required to be complied with before being authorized to commence the business of banking as a National Banking Association; Now, therefore, I hereby certify that the above named association is authorized to commence the business of banking as a National Banking Association. IN TESTIMONY WHEREOF, WITNESS MY SIGNATURE AND SEAL OF [GRAPHIC] CHARTER NO. OFFICE THIS 24TH DAYS OF NOVEMBER 1997 23548 DEPUTY COMPTROLLER OF THE CURRENCY 9 - -------------------------------------------------------------------------------- Comptroller of the Currency EXHIBIT T1A (b) Administrator of National Banks - -------------------------------------------------------------------------------- November District 11 14 Avenue of the America's Suite 3900 New York, New York 10036 November 24, 1997 Joseph R. Bielawa Vice President and Assistant General Counsel The Chase Manhattan Bank 270 Park Avenue, 39th Floor New York, New York 10017 Re: Change in Corporate Title New Trust Company, National Association (Bank) Pittsburgh, Pennsylvania Dear Mr. Bielawa: The Office of the Comptroller of the Currency (OCC) has received your submission, concerning the change and amendment to Article First of the above-referenced Bank's Articles of Association. The OCC has amended its records to reflect that effective November 24, 1997, the corporate title of New Trust Company, National Association, Charter Number 23548, was changed to "Chase Manhattan Trust Company, National Association." You are reminded that the OCC does not approve national bank name changes nor dies it maintain official titles or the retention of alternate titles. The use of other titles or the retention of the rights o any previously title is the responsibility of the Bank's board of directors. Legal counsel should be consulted to determine whether or not the new title, or any previously used title, could be challenged by competing institutions under the provisions of federal state law. A copy of the amended Article as accepted for filing is enclosed for the Bank's records. Very truly yours /s/ Linda Leickel Linda Leickel Senior Licensing Analyst Charter No.:23548 Control No.: 97 NE 04 010 w/97 NE 01 022 10 - -------------------------------------------------------------------------------- Comptroller of the Currency EXHIBIT T1A (b) Administrator of National Banks - -------------------------------------------------------------------------------- November District Licensing 1114 Avenue of the America's Suite 3900 Telephone (212) 790-4055 New York, New York 10036 Fax: (212) 790-4098 November 24, 1997 Mr. Daryl J. Zupan President and CEO New Trust Company, National Association c/o Mellon Bank, N.A., Corporate Trust Two Mellon Bank Center, Suite 325 Pittsburgh, Pennsylvania 15259 Re: Charter for a National Trust Bank, New Trust Company, National Association. Pittsburgh, Pennsylvania ACN 97 NE 01 0022 Dear Mr. Zupan: The Comptroller of the Currency (OCC) has found that you have met all conditions imposed by the OCC and completed all steps necessary to commence the business of banking. Your charter certificate is enclosed. You are authorized to commence business on November 24, 1997. This letter also constitutes OCC authorization to exercise fiduciary powers. You are reminded that several of the standard conditions contained in the preliminary approval letter dated October 23, 1997 will continue to apply once the bank opens and by opening, you agree to subject your association to these conditions of operations. Some of the conditions bear reiteration here: 1. Regardless of the association's FDIC insurance status, the association is subject to the Change in Bank Control act (12 U.S.C. 1817(j)) by virtue of its national bank charter. Please refer to item 4 in the list of standard conditions sent with the preliminary approval letter. 2. The board of directors is responsible for regular review and update of policies and procedures and for assuring ongoing compliance with them. This includes maintaining an internal control system that ensures compliance with the currency reporting and record keeping requirements of the Bank Secrecy Act (BSA). The board is expected to train its personnel in BSA procedures and designate one person or a group to monitor day-to-day compliance. 11 Mr. Daryl J. Zupan Page two 3. The bank will not engage in full commercial powers authorized to national banks without the OCC's prior approval Following the commencement of operations, bank management is urged to become familiar with the requirements of the Securities Exchange Act of 1934 and Part 11 of the Comptroller's regulations relative to the registration of the bank's equity securities and related periodic reports. These requirements will be applicable to your bank when the number of shareholders of record is maintained at 500 or more. Such registration may be subsequently terminated pursuant to the Act, only when the number of shareholders of record is reduced to fewer than 300. Should you have any questions regarding the supervision of your bank, please contact the portfolio manager who will be responsible for OCC's ongoing supervisory effort at your institution. You will be notified of the name and number of the appropriate individual in the near future. Sincerely, /s/ Micheal G. Tiscia Micheal G. Tiscia Licensing Manager Enclosure cc: Official File Field File 12 EXHIBIT T1B [CHASE LOGO] CHASE MANHATTAN TRUST COMPANY, NATIONAL ASSOCIATION BY-LAWS ARTICLE I. MEETINGS OF SHAREHOLDERS SECTION 1.1. ANNUAL MEETING. The regular annual meeting of the shareholders to elect directors and transact whatever other business may properly come before the meeting, shall be held at the main office of the Association, or such other place as the board may designate, and at such time in each year as may be designated by the board of directors. Unless otherwise provided by law, notice of the meeting may be waived by the Association's sole shareholder in accordance with 12 C.F.R. Sec. 7.2001. If, for any cause, an election of directors is not made on that date, or in the event of a legal holiday, on the next following banking day, an election may be held on any subsequent day within 60 days of the date fixed, to be designated by the board, or, if the directors fail to fix the date, by shareholders representing two thirds of the shares issued and outstanding. SECTION 1.2. SPECIAL MEETINGS. Except as otherwise specifically provided by statute, special meetings of the shareholders may be called for any purpose at any time by a majority of the board of directors or by any one or more shareholders owning, in the aggregate, not less than twenty-five percent of the stock of the Association or by the Chairperson of the board of directors or the President. Unless otherwise provided by law, advance notice of a special meeting may be waived by the Association's Sole Shareholder in accordance with 12 C.F.R. Sec. 7.2001. SECTION 1.3. NOMINATIONS OF DIRECTORS. Nominations for election to the board of directors may be made by the board of directors or by any stockholder of any outstanding class of capital stock of the Association entitled to vote for the election of directors. Nominations, other than those made by or on behalf of the existing management of the Association, shall be made in writing and shall be delivered or mailed to the President of the Association and to the Comptroller of the Currency, Washington, D.C., not less than 14 days nor more than 50 days prior to any meeting of shareholders called for the election of directors, provided, however, that if less than 21 days' notice of the meeting is given to shareholders, such nomination shall be mailed or delivered to the President of the Association and to the Comptroller of the Currency not later than the close of business on the seventh (7th) day following the day on which the notice of meeting was mailed. Such notification shall contain the following information to the extent known to the notifying shareholder. (1) The name and address of each proposed nominee. (2) The principal occupation of each proposed nominee. 13 (3) The total number of shares of capital stock of the Association that will be voted for each proposed nominee. (4) The name and residence address of the notifying shareholder. (5) The number of shares of capital stock of the Association owned by the notifying shareholder. Nominations not made in accordance herewith may, in his/her discretion, be disregarded by the Chairperson of the meeting, and upon his/her instructions, the vote tellers may disregard all votes cast for each such nominee. SECTION 1.4. PROXIES. Shareholders may vote at any meeting of the shareholders by proxies duly authorized in writing, but no officer or employee of this Association shall act as proxy. Proxies shall be valid only for one meeting to be specified therein, and any adjournments of such meeting. Proxies shall be dated and filed with the records of the meeting. Proxies with rubber stamped facsimile signatures may be used and unexecuted proxies may be counted upon receipt of a confirming telegram from the shareholder. Proxies meeting above requirements submitted at any time during a meeting shall be accepted. SECTION 1.5 QUORUM. A majority of the outstanding capital stock, represented in person or by proxy, shall constitute a quorum at any meeting of shareholders, unless otherwise provided by law, or by the shareholders or directors pursuant to Section 10.2, but less than a quorum may adjourn any meeting, from time to time, and the meeting may be held, as adjourned, without further notice. A majority of the votes cast shall decide every question or matter submitted to the shareholders at any meeting, unless otherwise provided by law or by the Articles of Association, or by the shareholders or directors pursuant to Section 10.2. Any action required or permitted to be taken by the shareholders may be taken without a meeting by unanimous written consent of the shareholders to a resolution authorizing the action. The resolution and the written consent shall be filed with the minutes of the proceedings of the shareholders. ARTICLE II. DIRECTORS SECTION 2.1. BOARD OF DIRECTORS. The board of directors ("board") shall have the power to manage and administer the business and affairs of the Association. Except as expressly limited by law, all corporate powers of the Association shall be vested in and may be exercised by the board. SECTION 2.2. NUMBER. The board shall consist of not less than five nor more than twenty-five persons, the exact number within such minimum and maximum limits to be fixed and determined from time to time by resolution of a majority of the full board or by resolution of a majority of the shareholders at any meeting thereof; PROVIDED, HOWEVER, that a majority of the full board may not increase the number of directors to a number which: (1) exceeds by more than two the number of directors last elected by shareholders where such number was 15 or less; and (2) exceeds by more than four the number of directors last elected by shareholders where such number was 16 or more, but in no event shall the number of directors exceed 25. 14 SECTION 2.3. ORGANIZATION MEETING. The Secretary shall notify the directors-elect of their election and of the time at which they are required to meet at the main office of the Association to organize the new board and elect and appoint officers of the Association for the succeeding year. Such meeting shall be held on the day of the election or as soon thereafter as practicable, and, in any event, within 30 days thereof. If, at the time fixed for such meeting, there shall not be a quorum, the directors present may adjourn the meeting, from time to time, until a quorum is obtained. SECTION 2.4. REGULAR MEETINGS. The time and location of regular meetings of the board shall be set by the board. Such meetings may be held without notice. Any business may be transacted at any regular meeting. The board may adopt any procedures for the notice and conduct of any meetings as are not prohibited by law. SECTION 2.5. SPECIAL MEETINGS. Special meetings of the board may be called at the request of the Chairperson or Co-Chairperson of the board, the President, or three or more directors. Each member of the board shall be given notice stating the time and place, by telegram, telephone, letter or in person, of each such special meeting at least one day prior to such meeting. Any business may be transacted at any special meeting. SECTION 2.6. ACTION BY THE BOARD. Except as otherwise provided by law, corporate action to be taken by the board shall mean such action at a meeting of the board. Any action required or permitted to be taken by the board or any committee of the board may be taken without a meeting if all members of the board or the committee consent in writing to a resolution authorizing the action. The resolution and the written consents thereto shall be filed with the minutes of the proceedings of the board or committee. Any one or more members of the board or any committee may participate in a meeting of the board or committee by means of a conference telephone or similar communications equipment allowing all persons participating in the meeting to hear each other at the same time. Participation by such means shall constitute presence in person at such meeting. SECTION 2.7. WAIVER OF NOTICE. Notice of a special meeting need not be given to any director who submits a signed waiver of notice, whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to him or her. SECTION 2.8. QUORUM AND MANNER OF ACTING. Except as otherwise required by law, the Articles of Association or these by-laws, a majority of the directors shall constitute a quorum for the transaction of any business at any meeting of the board and the act of a majority of the directors present and voting at a meeting at which a quorum is present shall be the act of the board. In the absence of a quorum, a majority of the directors present may adjourn any meeting, from time to time, until a quorum is present and no notice of any adjourned meeting need be given. At any such adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally called. 15 SECTION 2.9. VACANCIES. In the event a majority of the full board increases the number of directors to a number which exceeds the number of directors last elected by shareholders, as permitted by Section 2.2, directors may be appointed to fill the resulting vacancies by vote of such majority of the full board. In the event of a vacancy in the board for any other cause, a director may be appointed to fill such vacancy by vote of a majority of the remaining directors then in office. SECTION 2.10. REMOVAL OF DIRECTORS. The vacancy created by the removal of a director pursuant to this Section may be filled by the board in accordance with Section 2.9 of these by-laws or by the shareholders. ARTICLE III. COMMITTEES SECTION 3.1. EXECUTIVE COMMITTEE. There may be an executive committee consisting of the Chairperson or Co-Chairperson of the board and not less than two other directors appointed by the board annually or more often. Subject to the limitations in Section 3.4(g) of these by-laws, the executive committee shall have the maximum authority permitted by law. SECTION 3.2. AUDIT COMMITTEE. There may be an audit committee composed of not less than two directors, exclusive of any active officers, appointed by the board annually or more often, whose duty it shall be to make an examination at least once during each calendar year and within fifteen months of the last examination into the affairs of the Association, or cause continuous suitable examinations to be made, by auditors responsible only to the board, and to report the results of any such examinations in writing to the board from time to time. Such examinations shall include audits of the fiduciary business of the Association as may be required by law or regulation. SECTION 3.3. OTHER COMMITTEES. The board may appoint, from time to time, other committees of one or more persons, for such purposes and with such powers as the board may determine. SECTION 3.4. GENERAL. (a) Each committee shall elect a Chairperson from among the members thereof and shall also designate a Secretary of the committee, who shall keep a record of its proceedings. (b) Vacancies occurring from time to time in the membership of any committee shall be filled by the board for the unexpired term of the member whose departure causes such vacancy. The board may designate one or more alternate members of any committee, who may replace any absent member or members at any meeting of such committee. (c) Each committee shall adopt its own rules of procedure and shall meet at such stated times as it may, by resolution, appoint. It shall also meet whenever called together by its Chairperson or the Chairperson of the board. (d) No notice of regular meetings of any committee need be given. Notice of every special meeting shall be given either by mailing such notice to each member of such committee at his or her address, as the same appears in the records of the Association, at least two days before the day of such 16 meeting, or by notifying each member on or before the day of such meeting by telephone or by personal notice, or by leaving a written notice at his or her residence or place of business on or before the day of such meeting. Waiver of notice in writing of any meeting, whether prior or subsequent to such meeting, or attendance at such meeting, shall be equivalent to notice of such meeting. Unless otherwise indicated in the notice thereof, any and all business may be transacted at any special meeting. (e) All committees shall, with respect to all matters, be subject to the authority and direction of the board and shall report to it when required. (f) Unless otherwise required by law, the Articles of Association or these by-laws, a quorum at any meeting of any committee shall be one-third of the full membership and present shall be the act of the committee. (g) No committee shall have authority to take any action which is expressly required by law or regulation to be taken at a meeting of the board or by a specified proportion of directors. ARTICLE IV. OFFICERS AND EMPLOYEES SECTION 4.1. CHAIRPERSON OF THE BOARD. The board shall appoint one of its members to be the Chairperson of the board, or two persons to serve as Co-Chairperson of the board to serve at its pleasure. Such person shall preside at all meetings of the board. The Chairperson or Co-Chairpersons of the board shall supervise the carrying out of the policies adopted or approved by the board; shall have general executive powers, as well as the specific powers conferred by these by-laws; and shall also have and may exercise such further powers and duties as from time to time may be conferred upon, or assigned by the board. SECTION 4.2. PRESIDENT. The board may appoint one of its members to be the President of the Association. In the absence of the Chairperson or Co-Chairpersons, the President shall preside at any meeting of the board. The President shall have general executive powers, and shall have and may exercise any and all other powers and duties pertaining by law, regulation, or practice to the office of President, or imposed by these by-laws. The President shall also have and may exercise such further powers and duties as from time to time may be conferred, or assigned by the board. SECTION 4.3. VICE PRESIDENT. The board may appoint one or more Vice Presidents. Each Vice President shall have such powers and duties as may be assigned by the board. SECTION 4.4. SECRETARY. The board shall appoint a Secretary, Cashier, or other designated officer who shall be Secretary of the board and of the Association, and shall keep accurate minutes of all meetings. The Secretary shall attend to the giving of all notices required by these by-laws; shall be custodian of the corporate seal, records, documents and papers of the Association; shall provide for the keeping of proper records of all transactions of the Association; shall have and may exercise any and all other powers and duties pertaining by law, regulation or practice, to the office of Cashier, or imposed by these by-laws; and shall also perform such other duties as may be assigned from time to time, by the board. SECTION 4.5. OTHER OFFICERS. The board may appoint one or more Assistant Vice Presidents, one or more Trust Officers, one or more Assistant Secretaries, one or more Assistant Cashiers, one or 17 more Managers and Assistant Managers of branches and such other officers and attorneys in fact as from time to time may appear to the board to be required or desirable to transact the business of the Association. Such officers shall respectively exercise such powers and perform such duties as pertain to their several offices, or as may be conferred upon, or assigned to, them by the board, the Chairperson or Co-Chairpersons of the board, or the President. The board may authorize an officer to appoint one or more officers or assistant officers. SECTION 4.6. RESIGNATION. An officer may resign at any time by delivering notice to the Association. A resignation is effective when the notice is given unless the notice specifies a later effective date. ARTICLE V. FIDUCIARY ACTIVITIES SECTION 5.1. TRUST COMMITTEE. There shall be a Trust Committee of this Association composed of four or more members, who shall be capable and experienced officers or directors of the Association. The Committee is charged with the responsibility for the investment, retention, or disposition of assets held in accounts with respect to which the Association has investment authority; for the review of the assets of accounts for which the Association has investment authority promptly after the acceptance of such an account and at least once during every calendar year thereafter to determine the advisability of retaining or disposing of such assets; for the determination of the manner in which proxies received for accounts for which the Association has responsibility for the voting of proxies shall be voted; for the determination of all substantial questions involving discretionary authority of the Association of a non-investment nature, including, but not limited to, distribution of principal and/or income in respect of any account; for providing advice as to the investment, retention, or disposition of assets in investment advisory accounts maintained by the Association; for the making of such reports as this board shall require; and for such other responsibilities as may be assigned by this board. The Trust Committee, in discharging its aforementioned responsibilities, may authorize officers of the Association to exercise such powers and under such conditions as the Committee may from time to time prescribe. SECTION 5.2. TRUST INVESTMENTS. Funds held in a fiduciary capacity shall be invested according to the instrument establishing the fiduciary relationship and local law. Where such instrument does not specify the character and class of investments to be made and does not vest in the Association a discretion in the matter, funds held pursuant to such instrument shall be invested in investments in which corporate fiduciaries may invest under applicable law. SECTION 5.3. TRUST AUDIT COMMITTEE. The board shall appoint a committee of at least two directors, exclusive of any active officer of the association, which shall, at least once during each calendar year make suitable audits of the association's fiduciary activities or cause suitable audits to be made by auditors responsible only to the board, and at such time shall ascertain whether fiduciary powers have been administered according to law, Part 9 of the Regulations of the Comptroller of the Currency, and sound fiduciary principles. 18 SECTION 5.4. FIDUCIARY FILES. There shall be maintained by the association all fiduciary records necessary to assure that its fiduciary responsibilities have been properly undertaken and discharged. ARTICLE VI. STOCK AND STOCK CERTIFICATES SECTION 6.1. TRANSFERS. Shares of stock shall be transferable on the books of the Association, and a transfer book shall be kept in which all transfers of stock shall be recorded. Every person becoming a shareholder by such transfer shall, in proportion to his or her shares, succeed to all rights of the prior holder of such shares.The board may impose conditions upon the transfer of the stock reasonably calculated to simplify the work of the Association with respect to stock transfers, voting at shareholder meetings, and related matters and to protect it against fraudulent transfers. SECTION 6.2. STOCK CERTIFICATES. Certificates of stock shall bear the signature of the Chairperson or Co-Chairpersons of the board or President (which may be engraved, printed or impressed), and shall be signed manually or by facsimile process by the Secretary, Assistant Secretary, Cashier, Assistant Cashier, or any other officer appointed by the board for that purpose, to be known as an authorized officer, and the seal of the Association shall be engraved thereon. Each certificate shall recite on its face that the stock represented thereby is transferable only upon the books of the Association properly endorsed. In case any such officer who has signed or whose facsimile signature has been placed upon such certificate shall have ceased to be such before such certificate is issued, it may be issued by the Association with the same effect as if such officer had not ceased to be such at the time of its issue. The corporate seal may be a facsimile, engraved or printed. ARTICLE VII. CORPORATE SEAL SECTION 7.1. CORPORATE SEAL. The Chairperson, the President, the Cashier, the Secretary or any Assistant Cashier or Assistant Secretary, or other officer thereunto designated by the board, shall have authority to affix the corporate seal to any document requiring such seal, and to attest the same. Such seal shall be substantially in the following form: A circle, with the words "Chase Manhattan Trust Company, National Association" within such circle. ARTICLE VIII. MISCELLANEOUS PROVISIONS SECTION 8.1. FISCAL YEAR. The fiscal year of the Association shall be the calendar year. SECTION 8.2. EXECUTION OF INSTRUMENTS. All agreements, indentures, mortgages, deeds, conveyances, transfers, certificates, declarations, receipts, discharges, releases, satisfactions, settlements, petitions, schedules, accounts, affidavits, bonds, undertakings, proxies and other instruments or documents may be signed, executed, acknowledged, verified, delivered or 19 accepted on behalf of the Association by the Chairperson or Co-Chairpersons of the board, or the President, or any Vice Chairperson, or any Managing Director, or any Vice President, or any Assistant Vice President, or the Chief Financial Officer, or the Controller, or the Secretary, or the Cashier, or, if in connection with exercise of fiduciary powers of the Association, by any of those officers or by any Trust Officer. Any such instruments may also be executed, acknowledged, verified, delivered or accepted on behalf of the Association in such other manner and by such other officers as the board may from time to time direct. The provisions of this Section 8.2 are supplementary to any other provision of these by-laws. SECTION 8.3. RECORDS. The Articles of Association, the by-laws and the proceedings of all meetings of the shareholders, the board, and standing committees of the board, shall be recorded in appropriate minute books provided for that purpose. The minutes of each meeting shall be signed by the Secretary, Cashier or other officer appointed to act as Secretary of the meeting. SECTION 8.4. CORPORATE GOVERNANCE PROCEDURES. To the extent not inconsistent with applicable Federal banking law, bank safety and soundness or these by-laws, the corporate governance procedures found in the Delaware General Corporation Law shall be followed by the Association. ARTICLE IX. INDEMNIFICATION SECTION 9.1. RIGHT TO INDEMNIFICATION. Each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she is or was a director or an officer of the Association or is or was serving at the request of the Association as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan (hereinafter an "indemnitee"), whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Association to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Association to provide broader indemnification rights than such law permitted the Association to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement) reasonably incurred or suffered by such indemnitee in connection therewith; provided, however, that, except as provided in Section 9.3 of these by-laws with respect to proceedings to enforce rights to indemnification, the Association shall indemnify any such indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized by the board. 20 SECTION 9.2. RIGHT TO ADVANCEMENT OF EXPENSES. The right to indemnification conferred in Section 9.1 of these by-laws shall include the right to be paid by the Association the expenses (including attorney's fees) incurred in defending any such proceeding in advance of its final disposition (hereinafter an "advancement of expenses"); provided, however, that, if the Delaware General Corporation Law requires, an advancement of expenses incurred by an indemnitee in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such indemnitee, including, without limitation, service to an employee benefit plan) shall be made only upon delivery to the Association of an undertaking (hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal (hereinafter a "final adjudication") that such indemnitee is not entitled to be indemnified for such expenses under this Section 9.2 or otherwise. The rights to indemnification and to the advancement of expenses conferred in Sections 9.1 and 9.2 of these by-laws shall be contract rights and such rights shall continue as to an indemnitee who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the indemnitee's heirs, executors and administrators. SECTION 9.3. RIGHT OF INDEMNITEE TO BRING SUIT. If a claim under Section 9.1 or 9.2 of these by-laws is not paid in full by the Association within sixty (60) days after a written claim has been received by the Association except in the case of a claim for an advancement of expenses, in which case the applicable period shall be twenty (20) days, the indemnitee may at any time thereafter bring suit against the Association to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Association to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. In (1) any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and (2) any suit brought by the Association to recover an advancement of expenses pursuant to the terms of an undertaking, the Association shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met any applicable standard for indemnification set forth in the Delaware General Corporation Law. Neither the failure of the Association (including the board, the Association's independent legal counsel, or its shareholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Association (including the board, the Association's independent legal counsel, or its shareholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or brought by the Association to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this Article IX or otherwise shall be on the Association. 21 SECTION 9.4. NON-EXCLUSIVITY OF RIGHTS. The rights to indemnification and to the advancement of expenses conferred in this Article IX shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, the Association's Articles of Association, by-laws, agreement, vote of shareholders or disinterested directors or otherwise. SECTION 9.5. INSURANCE. The Association may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Association or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Association would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. SECTION 9.6. INDEMNIFICATION OF EMPLOYEES AND AGENTS OF THE ASSOCIATION. The Association may, to the extent authorized from time to time by the board, grant rights to indemnification and to the advancement of expenses to any employee or agent of the Association to the fullest extent of the provisions of this Article IX with respect to the indemnification and advancement of expenses of directors and officers of the Association. ARTICLE X. BY-LAWS SECTION 10.1. INSPECTION. A copy of the by-laws, with all amendments, shall at all times be kept in a convenient place at the main office of the Association, and shall be open for inspection to all shareholders during banking hours. SECTION 10.2. AMENDMENTS. The by-laws may be amended, altered or repealed, at any regular meeting of the board by a vote of a majority of the total number of the directors except as provided below. The Association's shareholders may amend or repeal the by-laws even though the by-laws may be amended or repealed by its board. 22 EXHIBIT T1D Consent for Records of Governmental Agencies to be Made Available to the Commision ------------------------------------- The undersigned, Chase Manhattan Trust Company, National Association, Pittsburgh, Pennsylvania pursuant to Section 321(b) of The Trust Indenture Act of 1939, hereby authorizes the Board of Governors of the Federal Reserve System, the Federal Reserve Banks, the Treasury Department, the Comptroller of the Currency and the Federal Deposit Insurance Corporation, under such conditions as they may prescribe, to make available to the Commision such reports, records or other information as they may have available with respect to the undersigned as a prospective trustee under an indenture to be qualified under the aforesaid Trustee Indenture Act of 1939 and to make through their examiners or other employees for the use of the Commision, examinations of the undersigned prospective Trustee. The undersigned also, pursuant to Section 321(b) of said Trust Indenture Act of 1939, consents that reports of examination by the Federal, State, Territorial or District authorities may be furnished by such authorities to the Commission upon request therefor. Dated this 11th day of December , 1998. Chase Manhattan Trust Company, National Association By: /s/ Timothy J. Vara ------------------------------- Timothy J. Vara Vice President -----END PRIVACY-ENHANCED MESSAGE-----