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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-16167
MONSANTO COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 43-1878297
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
800 NORTH LINDBERGH BLVD., ST. LOUIS, MO 63167
(Address of principal executive offices)
(Zip Code)
(314) 694-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at
Class July 31, 2001
Common Stock, $0.01 par value 258,083,500 shares
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PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
The Statement of Consolidated Income of Monsanto Company and
subsidiaries for the three months and six months ended June 30, 2001,
and June 30, 2000, the Condensed Statement of Consolidated Financial
Position as of June 30, 2001, and Dec. 31, 2000, the Condensed
Statement of Consolidated Cash Flow for the six months ended June 30,
2001, and June 30, 2000, and related Notes to Consolidated Financial
Statements follow. Unless otherwise indicated, "Monsanto" and "the
company" are used interchangeably to refer to Monsanto Company or to
Monsanto Company and consolidated subsidiaries, as appropriate to the
context. With respect to the time period prior to the separation of
Monsanto's businesses from those of Pharmacia Corporation (Pharmacia)
on Sept. 1, 2000, references to "Monsanto" or "the company" also refer
to the agricultural business of Pharmacia. See Note 1 - Basis of
Presentation - of Notes to Consolidated Financial Statements for
further details. Unless otherwise indicated, "earnings per share" and
"per share" mean diluted earnings per share and "earnings per pro forma
share" and "per pro forma share" mean basic and diluted earnings per
pro forma share. In tables, all dollars are in millions, except per
share and per pro forma share amounts.
1
MONSANTO COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME
(in millions, except per share and per pro forma share amounts)
Unaudited
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
---------------------- --------------------
Net Sales $2,011 $2,007 $3,317 $3,328
Cost of Goods Sold 822 801 1,521 1,489
------ ------ ------ ------
Gross Profit 1,189 1,206 1,796 1,839
Operating Expenses:
Selling, general and administrative expenses 318 365 628 688
Research and development expenses 136 146 270 291
Amortization and adjustments of goodwill 30 120 61 149
Restructuring charges - net 31 45 52 41
------ ------ ------ -----
Total Operating Expenses 515 676 1,011 1,169
Income From Operations 674 530 785 670
Interest Expense (34) (76) (57) (143)
Interest Income 9 9 13 15
Other Expense - net (24) (19) (28) (28)
------- ------- ------ ------
Income Before Income Taxes, Extraordinary Item and Cumulative
Effect of Accounting Change 625 444 713 514
Income tax provision (234) (196) (267) (223)
------- ------- ------ ------
Income Before Extraordinary Item and Cumulative Effect of
Accounting Change 391 248 446 291
Extraordinary loss on early retirement of debt - net of tax
benefit of $2 (2) -- (2) --
Cumulative effect of a change in accounting principle -
net of tax benefit of $16 -- -- -- (26)
Net Income $ 389 $ 248 $ 444 $ 265
------- ------- ------- -------
------- ------- ------- -------
Basic Earnings per Share (per Pro Forma Share in 2000):
Income before extraordinary item and cumulative effect of
accounting change $ 1.52 $ 0.96 $ 1.73 $ 1.13
Extraordinary item (0.01) -- (0.01) --
Cumulative effect of a change in accounting principle -- -- -- (0.10)
-------- -------- -------- ---------
Net Income $ 1.51 $ 0.96 $ 1.72 $ 1.03
-------- -------- -------- ---------
-------- -------- -------- ---------
Diluted Earnings per Share (per Pro Forma Share in 2000):
Income before extraordinary item and cumulative effect of
accounting change $ 1.48 $ 0.96 $ 1.69 $ 1.13
Extraordinary item (0.01) -- (0.01) --
Cumulative effect of a change in accounting principle -- -- -- (0.10)
-------- -------- -------- ---------
Net Income $ 1.47 $ 0.96 $ 1.68 $ 1.03
-------- -------- -------- ---------
-------- -------- -------- ---------
Weighted Average Shares Outstanding (Pro Forma in 2000):
Basic 258.1 258.0 258.1 258.0
Diluted 263.5 258.0 263.5 258.0
See the accompanying notes to consolidated financial statements.
2
MONSANTO COMPANY AND SUBSIDIARIES
CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(Dollars in millions, except share amounts)
Unaudited
June 30, Dec. 31,
2001 2000
--------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 236 $ 131
Receivables, net of allowances of $165 in 2001 and $171 in 2000 3,562 2,515
Miscellaneous receivables 339 283
Related party loan receivable 11 205
Related party receivable 56 261
Deferred tax assets 210 225
Inventories 1,130 1,253
Other current assets 101 100
-------- -------
Total Current Assets 5,645 4,973
Property, Plant and Equipment - net 2,622 2,659
Goodwill - net 2,755 2,827
Other Intangible Assets - net 721 779
Other Assets 559 488
-------- --------
Total Assets $12,302 $11,726
-------- --------
-------- --------
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities:
Short-term debt $ 861 $ 158
Related party short-term loan payable 628 635
Accounts payable 366 525
Related party payable 167 162
Accrued liabilities 1,136 1,277
--------- ---------
Total Current Liabilities 3,158 2,757
Long-Term Debt 902 962
Postretirement and Other Liabilities 742 666
Shareowners' Equity:
Common stock (Authorized: 1,500,000,000 shares, par value $0.01)
Issued: 258,083,500 shares in 2001 and 258,043,000 in 2000 3 3
Additional contributed capital 7,866 7,853
Retained earnings 385 2
Accumulated other comprehensive loss (717) (479)
Reserve for ESOP debt retirement (37) --
Reserve for ESOP debt retirement - attributable to Monsanto -- (38)
-------- ---------
Total Shareowners' Equity 7,500 7,341
-------- ---------
Total Liabilities and Shareowners' Equity $12,302 $11,726
-------- ---------
See the accompanying notes to consolidated financial statements.
3
MONSANTO COMPANY AND SUBSIDIARIES
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOW
(Dollars in millions)
Unaudited
Six Months Ended
June 30,
2001 2000
--------- ---------
Total Cash Required by Operations $ (384) $ (822)
--------- ---------
Cash Flows Provided (Required) by Investing Activities:
Property, plant and equipment purchases (205) (325)
Acquisitions and investments (80) (99)
Loans with related party 38 --
------- -------
Net Cash Flows Required by Investing Activities (247) (424)
------- -------
Cash Flows Provided (Required) by Financing Activities:
Net change in short-term financing 700 1,190
Loans from related party 148 --
Long-term debt reductions (58) --
Net transactions with Pharmacia -- 71
Dividend payments (54) --
------ ------
Cash Flows Provided by Financing Activities 736 1,261
------ ------
Net Increase in Cash and Cash Equivalents 105 15
Cash and Cash Equivalents Beginning of Year 131 26
----- ------
Cash and Cash Equivalents at End of Period $ 236 $ 41
-------- --------
The effect of exchange rate changes on cash and cash equivalents was not
material. All interest expense on debt specifically attributable to Monsanto is
included in the Statement of Consolidated Income for the six months ended June
30, 2000. However, no cash payments for interest or taxes were made by Monsanto
during the six months ended June 30, 2000, because all interest and tax payments
during this period were made by Pharmacia. Cash payments for interest and taxes
for the six months ended June 30, 2001, were $54 million and $93 million,
respectively.
Effective June 30, 2001, in connection with an agency agreement among certain
subsidiaries of Monsanto and a Pharmacia subsidiary, $155 million was
reclassified from both related party loan receivable and related party
short-term loan payable to Monsanto intercompany loans, which have been
eliminated in consolidation.
Pharmacia's net investment in Monsanto increased approximately $130 million
during the six months ended June 30, 2000, resulting from non-cash transactions.
See the accompanying notes to consolidated financial statements.
4
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
Note 1 - Basis of Presentation
Monsanto is comprised of the operations, assets and liabilities
that were previously the agricultural business of Pharmacia. This
agricultural business was transferred to Monsanto from Pharmacia on
Sept. 1, 2000, pursuant to the terms of a Separation Agreement dated
as of that date (the Separation Agreement).
The consolidated financial statements for all periods prior to
Sept. 1, 2000, including the consolidated financial statements for the
three months and six months ended June 30, 2000, that are presented
herein, have been prepared on a carve-out basis, which reflects the
historical operating results, assets, and liabilities of these
business operations. The costs of certain services provided by
Pharmacia during the three months and six months ended June 30, 2000,
included in the Statement of Consolidated Income have been allocated
to Monsanto based on methodologies that management believes to be
reasonable, but which do not necessarily reflect what the results of
operations, financial position, or cash flows would have been had
Monsanto been a separate, stand-alone public entity during periods
prior to Sept. 1, 2000.
On Oct. 23, 2000, Monsanto sold 38,033,000 shares of its common
stock at $20 per share in an initial public offering (IPO). The total
net proceeds to Monsanto were $723 million. Subsequent to the
offering, Pharmacia owned and continues to own 220,000,000 shares of
common stock, representing 85.2 percent ownership of Monsanto as of
June 30, 2001.
The accompanying Statement of Consolidated Income for the three
months and six months ended June 30, 2001, and June 30, 2000, the
Condensed Statement of Consolidated Financial Position as of June 30,
2001, and the Condensed Statement of Consolidated Cash Flow for the
six months ended June 30, 2001, and June 30, 2000, have not been
audited, but have been prepared in conformity with accounting
principles generally accepted in the United States for interim
financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. In the opinion of management, these
unaudited consolidated financial statements contain all adjustments
necessary to present fairly the financial position, results of
operations and cash flows for the interim periods reported. This
quarterly report on Form 10-Q should be read in conjunction with the
audited consolidated financial statements as presented in Monsanto's
annual report on Form 10-K for the year ended Dec. 31, 2000, and the
quarterly report on Form 10-Q for the period ended March 31, 2001.
Financial information for the first six months of 2001 should not
be annualized. Monsanto has historically generated the majority of its
sales during the first half of the year, primarily because of the
timing of the planting and growing season in the Northern Hemisphere.
Note 2 - New Accounting Standards
In June 2001, the Financial Accounting Standards Board
simultaneously approved Statement of Financial Accounting Standards
(SFAS) No. 141, Business Combinations and SFAS No. 142, Goodwill and
Other Intangible Assets. SFAS No. 141 requires the use of the purchase
method of accounting for all business combinations initiated after
June 30, 2001, thereby eliminating the use of the pooling of interests
method. The Business Combinations statement also provides broader
criteria for identifying the types of acquired intangible assets that
are required to be recognized separately from goodwill and those
acquired intangible assets that are required to be included in
goodwill. Monsanto is required to adopt the provisions of SFAS No. 141
on Jan. 1, 2002, with the exception of the immediate requirement to
use the purchase method of accounting for all business combinations
initiated after June 30, 2001. SFAS No. 141 also will require Monsanto
to evaluate its existing goodwill and other intangible assets and to
make any necessary reclassifications to conform with the new
requirements at the date of adoption.
SFAS No. 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Upon adoption of
SFAS No. 142 on Jan. 1, 2002, goodwill will no longer be amortized;
rather, it will be tested for impairment at least annually and in
conjunction with an initial goodwill impairment test to be performed
in 2002. SFAS No. 142 requires companies to record any impairment loss
resulting from the initial impairment test as an accounting change in
accordance with Accounting Principles Board Opinion (APB) No. 20,
5
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED(Continued)
Accounting Changes. Upon adoption of SFAS No. 142, Monsanto will be
required to reassess the useful lives and residual values of all
identifiable and recognized intangible assets and make any necessary
amortization period adjustments by March 31, 2002. SFAS No. 142 also
will require recognized intangible assets with definite useful lives
to be amortized over such respective estimated lives and reviewed for
impairment in accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets To Be
Disposed of. Any acquired and identifiable intangible asset determined
to have an indefinite useful life will not be amortized, but instead
tested for impairment in accordance with SFAS No. 142 until its life
is determined to no longer be indefinite. Monsanto is currently
assessing its position but has not yet determined the effect that the
adoption of these standards will have on its consolidated financial
position or results of operations.
Monsanto adopted SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, and its amendments on Jan. 1,
2001. These new accounting standards establish accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedge
accounting. In accordance with the transition provisions of SFAS No.
133, the company recorded a $2 million net-of-tax cumulative effect
charge in other comprehensive income (loss) as of Jan. 1, 2001. This
amount reflects the deferred amount of derivative instruments
designated as cash flow hedges. Substantially all of the transition
adjustment recorded within accumulated other comprehensive income will
be reclassified into earnings within 12 months of adopting the
standards. Upon adoption of SFAS No. 133, the $19 million difference
between the carrying value and fair value of hedged items classified
as fair value hedges was offset by the change in fair value of the
related derivatives. Accordingly, this transition adjustment had no
net effect on earnings or shareowners' equity. See Note 9 for further
details of Monsanto's accounting for derivative instruments and
hedging activities.
In 2000, Monsanto adopted Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements (SAB 101), the Securities
and Exchange Commission's interpretation of accounting guidelines on
revenue recognition. The adoption of SAB 101 primarily affected the
company's recognition of license revenues from biotechnology traits
sold through third-party seed companies. Monsanto restated license
revenues in 2000 to be recognized when a grower purchases seed as
compared with the previous practice of recognizing the license revenue
when the third-party seed company sold the seed into the distribution
system. SAB 101 required companies to report any change in revenue
recognition related to adopting its provisions as an accounting change
in accordance with APB No. 20. Monsanto recognized the cumulative
effect of a change in accounting principle of a loss of $26 million,
net of taxes of $16 million, effective Jan. 1, 2000.
Note 3 - Inventories
Components of inventories as of June 30, 2001, and Dec. 31, 2000,
were as follows:
June 30, Dec. 31,
2001 2000
------- -------
Finished goods $ 490 $ 753
Goods in process 397 267
Raw materials and supplies 272 259
----- -----
Inventories, at FIFO cost 1,159 1,279
Excess of FIFO over LIFO cost (29) (26)
------ ------
Total $1,130 $1,253
------ ------
Note 4 - Comprehensive Income
Comprehensive income includes all non-shareowner changes in
equity and consists of net income, foreign currency translation
adjustments, unrealized gains and losses on available-for-sale
securities, additional minimum pension liability adjustments and
accumulated derivative gains or losses on cash flow hedges not yet
realized. Comprehensive income for the three months ended June 30,
6
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED(Continued)
2001, and June 30, 2000, was $320 million and $180 million,
respectively. Comprehensive income for the six months ended June 30,
2001, and June 30, 2000, was $205 million and $222 million,
respectively.
Note 5 - Earnings Per Share and Per Pro Forma Share
On Oct. 23, 2000, Monsanto sold 38,033,000 shares of its common
stock at $20 per share in an IPO. Subsequent to the offering,
Pharmacia owned and continues to own 220,000,000 shares of common
stock, representing 85.2 percent ownership of Monsanto as of June 30,
2001. The company also issued 10,000 restricted shares at the time of
the IPO. During 2001, the company issued an additional 40,500
restricted shares.
Basic earnings per common share (EPS) for the three months and
six months ended June 30, 2001, were computed using the weighted
average number of common shares outstanding during the period
(258,057,000 shares). Diluted EPS for the three months and six months
ended June 30, 2001, were computed taking into account the effect of
dilutive potential common shares, calculated to be 5,461,706 shares.
These dilutive potential common shares consist of outstanding stock
options. Basic and diluted earnings per pro forma share for the three
months and six months ended June 30, 2000, were computed using common
shares outstanding (258,043,000 shares) immediately after the IPO.
Note 6 - Extraordinary Item
In connection with the separation of Monsanto's businesses from
those of Pharmacia, and pursuant to the Employee Benefits and
Compensation Allocation Agreement between Pharmacia and Monsanto dated
as of Sept. 1, 2000, certain assets and liabilities of the Pharmacia
Corporation Savings and Investment Plan (formerly known as the
Monsanto Savings and Investment Plan) (the "Pharmacia SIP") have been
transferred to a new Monsanto Savings and Investment Plan (the
"Monsanto SIP"); and assets and liabilities of a trust (the "Pharmacia
ESOP"), established under the Pharmacia SIP were restructured and
divided between the Pharmacia ESOP and a trust established under the
Monsanto SIP (the "Monsanto ESOP"). This restructuring included the
restructuring of debt owed by the Pharmacia ESOP. Certain costs
associated with this debt restructuring were allocated to Monsanto,
resulting in a pretax extraordinary loss of $4 million ($2 million
aftertax) for the quarter ended June 30, 2001.
Note 7 - Restructuring and Other Special Items
In 2000, Monsanto's management formulated a plan as part of the
company's overall strategy to focus on certain key crops and
streamline operations. In connection with this plan, Monsanto incurred
$261 million of net charges in 2000. Restructuring and other special
items, primarily associated with the implementation of this plan, were
also recorded in 2001. These charges totaled $69 million pretax ($43
million aftertax) for the first six months of 2001, with $47 million
($30 million aftertax) recorded in the second quarter. The pretax
components of the restructuring and other special items for the three
months and six months ended June 30, 2001, were as follows:
Three Months Ended Six Months Ended
June 30, 2001 June 30, 2001
--------------- ---------------
Workforce Reductions $ 5 $20
Facility Closures / Exit Costs 14 18
Asset Impairments:
Inventories 10 11
Other current assets 4 4
Property, plant and equipment - net 8 8
Other intangible assets - net -- 2
Other Special Items 6 6
----- -----
Total Pretax Charge $47 $69
----- -----
----- -----
7
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED(Continued)
The workforce reduction costs for the three months and six months
ended June 30, 2001, included involuntary employee separation costs
for approximately 110 and 230 employees worldwide, respectively,
including positions in administration, manufacturing and research and
development related to non-core programs. The affected employees are
entitled to receive severance benefits pursuant to established
severance policies or by governmentally mandated labor regulations.
Facility closures and other exit costs included expenses associated
with contract terminations, equipment dismantling and disposal and
other shutdown costs resulting from the exit of certain research
programs and non-core activities. The asset impairments related to
property, plant and equipment, other current assets and other
intangible assets. In addition, $10 million and $11 million related to
the write-off of inventories was recorded within cost of goods sold
for the three months and six months ended June 30, 2001, respectively.
The company expects these employee reductions, asset dispositions and
other exit activities to be completed by Dec. 31, 2001. Cash payments
to complete this restructuring plan will be funded from operations and
are not expected to significantly affect the company's liquidity. The
second quarter of 2001 also included a $6 million charge, recorded
within other expense - net, for the impairment of an equity security
due to adverse business developments of the investee.
In the second quarter of 2000, Monsanto recorded a pretax charge
of $161 million to operations, consisting of asset impairments of $129
million, workforce reduction costs of $31 million and other exit costs
of $1 million. Results for the first quarter of 2000 included a pretax
benefit of $4 million related to the reversal of previously
established restructuring reserves, resulting in a net pretax charge
of $157 million for the first six months of 2000. The workforce
reduction charge reflected involuntary employee separation costs for
375 employees worldwide. The asset impairments during the same period
consisted of $32 million for laureate oil inventories, $86 million for
intangible assets (including $84 million of goodwill) and $11 million
for equipment write-offs.
These amounts were recorded in the Statement of Consolidated
Income in the following categories:
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
------------------------ ------------------------
Cost of Goods Sold $(10) $ (32) $(11) $ (32)
Restructuring charges - net (31) (45) (52) (41)
Amortization and adjustments of goodwill -- (84) -- (84)
Other Expense - net (6) -- (6) --
----- ------- ------ ------
Income (Loss) Before Income Taxes (47) (161) (69) (157)
Income tax benefit (provision) 17 35 26 34
----- ------- ------ -------
Net Income (Loss) $(30) $(126) $(43) $(123)
----- ------- ------ -------
----- ------- ------- -------
8
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED(Continued)
Activities related to restructuring and other special items for the
six months ended June 30, 2001, were as follows:
Facility
Workforce Closures/ Asset
Reductions Exit Costs Impairments Other Total
---------- ---------- ----------- ----- -----
Restructuring and Other Special Items
-------------------------------------
Jan. 1, 2001 reserve balance $30 $ 6 $-- $ 2 $ 38
Additions:
First quarter 2001 actions 15 4 3 -- 22
Second quarter 2001 actions 5 14 22 6 47
Costs charged against reserves (25) (8) -- -- (33)
Reclassification of reserves to
other balance sheet accounts:
Inventories -- -- (11) -- (11)
Other current assets -- -- (4) (6) (10)
Property, plant and equipment - net -- -- (8) -- (8)
Other intangible assets - net -- -- (2) -- (2)
-------- ------- ------- ------ -------
June 30, 2001 reserve balance $25 $16 $-- $ 2 $ 43
During the first two quarters of 2001, $9 million was paid to
former employees whose involuntary termination benefits were recorded
in 2000, but elected to defer payment until 2001. For the first two
quarters of 2001, approximately 190 former employees received cash
severance payments totaling $16 million. Exit costs of $8 million
associated with contract terminations, equipment dismantling and
disposal were also paid during the first half of 2001.
Note 8 - Commitments and Contingencies
Monsanto is a party to litigation in its own name and is also a
party to a number of lawsuits for which Monsanto assumed
responsibility upon its separation from Pharmacia, all of which
Monsanto is vigorously defending. Such matters relate to a variety of
issues. Certain of the lawsuits and claims seek damages in very large
amounts, or seek to restrict the company's business activities.
Although the results of litigation cannot be predicted with certainty,
it is management's belief that the final outcome of such litigation
will not have a material adverse effect on Monsanto's financial
position, profitability or liquidity.
In April 1999, a jury verdict was returned against DEKALB
Genetics (which is now a wholly owned subsidiary of Monsanto), in a
lawsuit filed in U.S. District Court in North Carolina. The lawsuit
was brought by Aventis CropScience S.A. (formerly Rhone Poulenc
Agrochimie S.A.) (Aventis), claiming that a 1994 license agreement was
induced by fraud stemming from DEKALB Genetic's nondisclosure of
relevant information and that DEKALB Genetics did not have the right
to license, make or sell products using Aventis' technology for
glyphosate resistance under this agreement. The jury awarded Aventis
$15 million in actual damages for unjust enrichment and $50 million in
punitive damages. DEKALB Genetics has appealed this verdict, believes
9
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED(Continued)
it has meritorious grounds to overturn the verdict and intends to
vigorously pursue all available means to have the verdict overturned.
An arbitration has been filed on behalf of Calgene LLC, a wholly-owned
subsidiary of Monsanto, claiming that as a former partner of Aventis,
Calgene is entitled to at least half of any damages, royalties or
other amounts recovered by Aventis from Monsanto or DEKALB Genetics
pursuant to these proceedings. No provision has been made in
Monsanto's consolidated financial statements with respect to the award
for punitive damages.
On March 20, 1998, a jury verdict was returned against Pharmacia
in a lawsuit filed in the California Superior Court. The lawsuit was
brought by Mycogen Corporation (Mycogen), Agrigenetics, Inc. and
Mycogen Plant Science, Inc. claiming that Pharmacia delayed providing
access to certain gene technology under a 1989 agreement with Lubrizol
Genetics Inc., a company which Mycogen subsequently purchased. The
jury awarded $174.9 million in future damages. This jury award was
overturned on appeal by the California Court of Appeals. The
California Supreme Court has granted Mycogen's petition requesting
further review. Monsanto will continue to vigorously pursue its
position on appeal. No provision has been made in Monsanto's
consolidated financial statements with respect to this verdict.
Note 9 - Accounting for Derivative Instruments and Hedging Activities
Monsanto's business and activities expose it to a variety of
market risks, including risks related to the effects of changes in
commodity prices, foreign currency exchange rates, interest rates, and
to a lesser degree security prices. These financial exposures are
monitored and managed by the company as an integral part of its market
risk management program. The company's market risk management program
focuses on the unpredictability of financial markets and seeks to
reduce the potentially adverse effects that the volatility of these
markets may have on operating results. Monsanto's overall objectives
for holding derivatives are to minimize the risks using the most
effective methods to eliminate or reduce the effects of these
exposures.
Fair Value Hedges
The company uses futures and option contracts to manage the value
of its corn and soybean inventories that the company buys from
growers. Generally, the company hedges from 70 percent to 100 percent
of the corn and soybean inventory value, depending on the crop and
grower pricing.
From time to time, interest rate swap agreements are used to
reduce interest rate risks and to manage interest exposure. Monsanto
may from time to time use interest rate swaps to convert a portion of
its fixed-rate debt into variable-rate debt. The resulting cost of
funds may be lower than it would have been if variable-rate debt had
been issued directly. Under the interest rate swap contracts, the
company agrees with other parties to exchange, at specified intervals,
the difference between fixed-rate and floating-rate interest amounts,
which is calculated based on an agreed-upon notional amount.
The difference between the carrying value and fair value of
hedged items classified as fair value hedges was offset by the change
in fair value of the related derivatives. Accordingly, hedge
ineffectiveness for fair value hedges, determined in accordance with
SFAS No. 133, had no effect on earnings for the three months or six
months ended June 30, 2001. No fair value hedges were discontinued for
the three months or six months ended June 30, 2001.
Cash Flow Hedges
The company enters into contracts with a number of its growers to
purchase their output at market prices in effect at the time when the
individual growers elect to fix their contract prices. As a hedge
against possible commodity price fluctuations, the company purchases
corn and soybean futures and options contracts. The futures contracts
hedge the commodity price paid for these commodity purchases while the
options contracts limit the unfavorable effect that potential price
increases would have on these purchases.
For the three months and six months ended June 30, 2001, Monsanto
recognized a net loss of $1 million and $2 million, respectively,
within cost of goods sold, which represented the ineffectiveness of
all cash flow hedges. These amounts represent the portion of the
derivatives' fair value that is excluded from the assessment of hedge
effectiveness. No cash flow hedges were discontinued during the three
months or six months ended June 30, 2001.
10
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED(Continued)
As of June 30, 2001, $3 million of aftertax deferred net losses
on derivative instruments accumulated in other comprehensive income
are expected to be reclassified into earnings during the next 12
months. The actual sales of the inventory, which are expected to occur
over the next 12 months, will necessitate reclassifying the derivative
losses into earnings. The maximum term over which the company is
hedging exposures to the variability of cash flow (for all forecasted
transactions, excluding interest payments on variable-rate debt) is 18
months.
Foreign Currency Hedges
Monsanto is exposed to currency exchange rate fluctuations
related to certain intercompany and third-party transactions. The
company may purchase foreign exchange options and forward exchange
contracts as hedges of anticipated sales and/or purchases denominated
in foreign currencies. The company enters into these contracts to
protect itself against the risk that the eventual dollar-net-cash
flows will be adversely affected by changes in exchange rates. The
company purchases foreign currency exchange contracts to hedge the
adverse effects that fluctuations in exchange rates may have on
foreign currency-denominated third-party and intercompany receivables
and payables.
Note 10 - Segment Information
Monsanto manages its business in two segments: Agricultural
Productivity, and Seeds and Genomics. The Agricultural Productivity
segment consists of the crop protection products, animal agriculture,
residential lawn and garden, and environmental technologies business
lines. The Seeds and Genomics segment is comprised of the global seeds
and related traits businesses and genetic technology platforms. Sales
between segments were not significant. Business segment data, as well
as reconciliation of total Monsanto Company EBIT (earnings (loss)
before extraordinary item, cumulative effect of accounting change,
interest and taxes) to income before extraordinary item and cumulative
effect of accounting change for the three months and six months ended
June 30, 2001, and June 30, 2000, is presented in the table that
follows.
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
------------------- -------------------
Net Sales:
Agricultural Productivity $1,574 $1,461 $2,382 $2,294
Seeds and Genomics 437 546 935 1,034
------ ------ ------ -------
Total Monsanto $2,011 $2,007 $3,317 $3,328
------ ------ ------ -------
------ ------ ------ -------
EBIT:
Agricultural Productivity $ 635 $ 605 $ 774 $ 803
Seeds and Genomics 15 (94) (17) (161)
------- -------- -------- --------
Total Monsanto 650 511 757 642
Interest expense - net of interest income (25) (67) (44) (128)
Income tax provision (234) (196) (267) (223)
------- -------- -------- --------
Income Before Extraordinary Item and
Cumulative Effect of Accounting Change $ 391 $ 248 $ 446 $ 291
------- -------- ------- --------
------- -------- ------- --------
11
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED(Continued)
Note 11 - Related Party Transactions
On Sept. 1, 2000, the company entered into a Transition Services
Agreement with Pharmacia, the company's majority shareowner. Under the
agreement, Monsanto provides certain administrative support services
for Pharmacia, while Pharmacia primarily provides information
technology support for Monsanto. In addition, the two companies pay
various payroll charges, taxes and travel costs that are associated
with the business activities of the other. Monsanto and Pharmacia also
rent research laboratory and office space from each other. Since Sept.
1, 2000, each party has charged the other entity rent based on a
percentage of occupancy times the cost to operate the facilities.
During the three months and six months ended June 30, 2001, Monsanto
recognized expenses of $16 million and $33 million, respectively, and
recorded a reimbursement of $11 million and $23 million, respectively,
for costs incurred on behalf of Pharmacia. As of June 30, 2001, and
Dec. 31, 2000, the company had a net payable balance (excluding
dividends payable) of $111 million and a net receivable balance
(excluding dividends payable) of $99 million, respectively, with
Pharmacia. These balances were largely associated with transactions
related to the Separation Agreement.
Since the IPO closing date of Oct. 23, 2000, Pharmacia manages
the loans and deposits of Monsanto's ex-U.S. subsidiaries and is the
counter-party for all foreign currency exchange contracts. Interest
rates and fees are comparable to those that Monsanto would have
incurred with a third party. As of June 30, 2001, and Dec. 31, 2000,
Monsanto was in a net borrowing position of $617 million and $430
million, respectively, with Pharmacia. As of June 30, 2001, and Dec.
31, 2000, the fair value of the company's outstanding foreign currency
exchange contracts was $4 million and $3 million, respectively.
On June 20, 2001, Monsanto declared a quarterly dividend of $0.12
per share and recorded a related dividend payable to Pharmacia of $26
million. The $26 million first quarter dividend was paid to Pharmacia
during the second quarter of 2001.
Effective June 30, 2001, certain subsidiaries of Monsanto entered
into an agency agreement with a Pharmacia subsidiary, whereby the
Pharmacia subsidiary now acts as the Monsanto subsidiaries' agent for
certain ex-U.S. treasury transactions. Under the agreement, certain
transactions, which were previously reflected as related party loans
receivable and payable, are now reflected as Monsanto intercompany
transactions. As a result, on June 30, 2001, $155 million was
reclassified from both related party loan receivable and related party
short-term loan payable to Monsanto intercompany loans, which have
been eliminated in consolidation.
12
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Monsanto Company and subsidiaries is comprised of the operations,
assets and liabilities that were previously the agricultural business
of Pharmacia Corporation (Pharmacia). This agricultural business was
transferred to Monsanto from Pharmacia on Sept. 1, 2000, pursuant to
the terms of a Separation Agreement dated as of that date.
The consolidated financial statements for all periods prior to
Sept. 1, 2000, including the consolidated financial statements for the
three months and six months ended June 30, 2000, that are presented
herein, have been prepared on a carve-out basis, which reflects the
historical operating results, assets, and liabilities of these
business operations. The costs of certain services provided by
Pharmacia during the three months and six months ended June 30, 2000,
included in the Statement of Consolidated Income have been allocated
to Monsanto based on methodologies that management believes to be
reasonable, but which do not necessarily reflect what the results of
operations, financial position, or cash flows would have been had
Monsanto been a separate, stand-alone public entity during all periods
prior to Sept. 1, 2000.
On Oct. 23, 2000, Monsanto sold 38,033,000 shares of its common
stock at $20 per share in an initial public offering (IPO). The total
net proceeds to Monsanto were $723 million. Subsequent to the
offering, Pharmacia owned and continues to own 220,000,000 shares of
common stock, representing 85.2 percent ownership of Monsanto as of
June 30, 2001.
Monsanto is a global provider of technology-based solutions and
agricultural products for growers and downstream customers, such as
grain processors, food companies and consumers, in agricultural
markets. The combination of our herbicides, seeds and related genetic
trait products provides growers with integrated solutions to more
efficiently and cost effectively produce crops at higher yields, while
controlling weeds, insects and diseases.
We manage our business in two segments: Agricultural
Productivity, and Seeds and Genomics. The Agricultural Productivity
segment consists of our crop protection products, animal agriculture,
residential lawn and garden products and environmental technologies
businesses. The Seeds and Genomics segment is comprised of our global
seed and related traits business and our genetic technology platforms.
Management's Discussion and Analysis should be read in conjunction
with Monsanto's Consolidated Financial Statements and the accompanying
notes and the Quantitative and Qualitative Disclosures About Market
Risk following this section. This quarterly report on Form 10-Q should
be read in conjunction with Monsanto's annual report on Form 10-K for
the year ended Dec. 31, 2000, and quarterly report on Form 10-Q for
the period ended March 31, 2001.
Financial information for the first six months of 2001 should not
be annualized. Monsanto has historically generated the majority of its
sales during the first half of the year, primarily because of the
timing of the planting and growing season in the Northern Hemisphere.
The primary operating performance measure for our two segments is
income (loss) before extraordinary item, cumulative effect of
accounting change, interest expense and taxes (EBIT). Total company
EBIT increased 27 percent to $650 million for the second quarter of
2001 from $511 million for the same period in the prior year. For the
first six months of 2001, total company EBIT increased 18 percent to
$757 million from $642 million for the same period in the prior year.
However, in 2001 and 2000 special items affected our results.
Additionally, our seed company acquisitions (primarily those that
occurred in 1998) have resulted in substantial amortization expense
charges associated with goodwill and other intangible assets.
Accordingly, management believes that earnings before extraordinary
item, cumulative effect of accounting change, interest, taxes,
depreciation, amortization and special items (EBITDA (excluding
special items)) is an appropriate measure for evaluating the operating
performance of our business. EBITDA (excluding special items)
13
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
eliminates, among other things, the effects of depreciation of
tangible assets and amortization of intangible assets, most of which
resulted from the seed company acquisitions accounted for under the
purchase method of accounting. It also eliminates the effects of the
special items described under "Events Affecting Comparability" and in
Note 7 - Restructuring and Other Special Items - of Notes to
Consolidated Financial Statements. The presentation of EBITDA
(excluding special items) is intended to supplement investors'
understanding of our operating performance. EBITDA (excluding special
items) may not be comparable to other companies' EBITDA performance
measures. It is not intended to replace net income, cash flows,
financial position or comprehensive income, as determined in
accordance with accounting principles generally accepted in the United
States. In June 2001, the Financial Accounting Standards Board
approved Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets. Upon adoption of SFAS No. 142 on
Jan. 1, 2002, Monsanto will no longer amortize goodwill. Monsanto has
not yet determined the effect adoption of this new accounting standard
will have on EBITDA (excluding special items).
Unless otherwise indicated, "Monsanto" and "the company", and
references to "we", "our" and "us", are used interchangeably to refer
to Monsanto Company or to Monsanto Company and consolidated
subsidiaries, as appropriate to the context. With respect to the time
period prior to the separation of Monsanto's businesses from those of
Pharmacia on Sept. 1, 2000, references to "Monsanto" or "the company"
also refer to the agricultural business of Pharmacia. See Note 1 -
Basis of Presentation - of Notes to Consolidated Financial Statements.
In tables, all dollars are in millions. Trademarks owned or licensed
by Monsanto or its subsidiaries are shown in all capital letters.
Results of Operations - Second Quarter 2001 Compared with Second Quarter 2000
Three Months Ended
June 30,
2001 2000
------------------
Total Monsanto Company and Subsidiaries:
Net sales $2,011 $2,007
------ ------
------ ------
Income before extraordinary item and cumulative
effect of accounting change $ 391 $ 248
Add: Interest expense - net of interest income 25 67
Income tax provision 234 196
------- --------
EBIT(1) 650 511
Add: restructuring & other special items 47 161
------- --------
EBIT (excluding special items) 697 672
Add: depreciation and amortization 132 132
------- --------
EBITDA (excluding special items) (2) $ 829 $ 804
------- --------
------- --------
(1) Earnings before extraordinary item, cumulative effect of accounting
change, interest and taxes
(2) Earnings before extraordinary item, cumulative effect of accounting
change, interest, taxes, depreciation, amortization and
restructuring and other special items.
14
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Net income improved to $389 million, or $1.47 per share, for the
second quarter of 2001, compared with net income of $248 million, or
$0.96 per pro forma share, for the second quarter 2000. However, there
were restructuring and other special items in both periods. The
results for the second quarters of 2001 and 2000 included aftertax
charges of $30 million and $126 million, respectively. See "Events
Affecting Comparability" for further details. Additionally, a $2
million aftertax loss was recognized in the second quarter of 2001
related to the early retirement of Employee Stock Ownership Plan
(ESOP) debt. See Note 6 - Extraordinary Item - of Notes to
Consolidated Financial Statements for further details. Excluding these
special items in both periods and the extraordinary item in 2001, net
income for the second quarter of 2001 would have been $421 million, or
$1.60 per share, compared with $374 million, or $1.45 per pro forma
share, for the second quarter of 2000.
Net sales were essentially flat at $2.0 billion for the
three-month periods ended June 30, 2001, and June 30, 2000. The
strengthening of the U.S. dollar relative to most foreign currencies,
particularly the euro and the Japanese yen, negatively affected sales
by 2 percent, or $33 million. Increased sales from our Agricultural
Productivity segment were offset by an overall decline in sales from
our Seeds and Genomics segment. The increased Agricultural
Productivity net sales can be attributed to ROUNDUP branded herbicides
for agricultural and commercial uses, and to a lesser extent, our
ROUNDUP lawn and garden products for residential use. Lower sales of
conventional corn seed, resulting from significant returns in Latin
America and fewer planted acres of corn in the United States during
the 2001 season, contributed to the Seeds and Genomics net sales
decrease.
For the three-month period ended June 30, 2001, cost of goods
sold grew 3 percent to $822 million from cost of goods sold of $801
million for the same period in 2000. Gross profit declined 1 percent,
to $1.19 billion for the second quarter of 2001 from $1.21 billion for
the second quarter of 2000. Gross profit as a percent of sales
declined one percentage point, from 60 percent in the second quarter
of 2000 to 59 percent during the same period this year. Increased
gross profit from improved performance of our Agricultural
Productivity segment was offset by a decline in the gross profit of
our Seeds and Genomics segment. Returns of conventional corn seed in
Latin America were the leading factor in the Seeds and Genomics
decline.
Selling, general and administrative (SG&A) expenses decreased 13
percent to $318 million for the second quarter of 2001, compared with
$365 million for the same period in 2000. SG&A expenses as a percent
of sales declined from 18 percent to 16 percent. These decreases are
reflective of continued cost management efforts and the absence of
amortization expense related to certain seed assets that became fully
amortized in the third quarter of 2000.
Research and development (R&D) expenses decreased 7 percent to
$136 million for the second quarter of 2001, compared with $146
million for the second quarter of 2000. Our reduced R&D spending
reflects the actions we have taken to focus on core programs related
to our key crops.
Amortization and adjustments of goodwill decreased $90 million to
$30 million in the second quarter of 2001, compared with $120 million
in the second quarter of 2000 primarily as a result of an $84 million
write-down of goodwill in 2000 associated with our decision to
terminate certain nutrition programs.
Interest expense, net of interest income, decreased nearly 63
percent to $25 million for the second quarter of 2001, compared with
$67 million for the second quarter of 2000. This decrease reflects the
$2.9 billion reduction in debt resulting from our separation from
Pharmacia and our initial public offering in 2000. Our June 30, 2001,
debt levels are higher than those of Dec. 31, 2000, due to seasonal
working capital requirements. Other expense, net of other income,
increased $5 million in the second quarter of 2001 when compared to
the same period in the prior year, primarily as a result of an
impairment of an equity investment. Excluding this impairment charge,
other expense would have declined slightly.
Income tax provision increased 19 percent to $234 million for the
second quarter of 2001 compared with $196 million for the same period
in 2000. This increase was largely due to the 41 percent improvement
in pretax income (before extraordinary item and the cumulative effect
of accounting change) in the second quarter of 2001 compared with the
second quarter of 2000. The effective tax rate decreased to 37 percent
for the six months ended June 30, 2001, from 44 percent for the six
months ended June 30, 2000. The higher effective tax rate in 2000 was
a result of the $84 million write-down of goodwill, which was not tax
deductible, in the second quarter of 2000.
15
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Agricultural Productivity Segment
Our Agricultural Productivity segment consists of our crop
protection products (ROUNDUP and other glyphosate products and
selective chemistries), animal agriculture, ROUNDUP lawn and garden,
and environmental technologies businesses.
Three Months Ended
June 30,
2001 2000
------------------
Net sales $1,574 $1,461
------ ------
EBIT(1) $ 635 $ 605
Add: restructuring & other special items 27 12
----- ------
EBIT (excluding special items) 662 617
Add: depreciation and amortization 50 44
----- ------
EBITDA (excluding special items) (2) $ 712 $ 661
------ ------
------ ------
(1) Earnings before extraordinary item, cumulative effect of accounting
change, interest and taxes
(2) Earnings before extraordinary item, cumulative effect of
accounting change, interest, taxes, depreciation, amortization and
restructuring and other special items.
In the Agricultural Productivity segment, net sales increased 8
percent to $1.6 billion for the second quarter of 2001, compared with
$1.5 billion in the second quarter of 2000. The quarter-over-quarter
increase was led by increased sales of our ROUNDUP family of
herbicides in the United States and Argentinean markets. The ROUNDUP
lawn and garden business also delivered a strong sales performance,
along with a slight improvement in our animal agriculture business.
Worldwide net sales for our ROUNDUP herbicides and other
glyphosate products (excluding ROUNDUP lawn and garden) increased 4
percent to $1.1 billion for the second quarter of 2001 from $1.0
billion for the same period last year. Worldwide volumes of these
products increased 19 percent; however, the effects of lower prices in
certain countries, currency fluctuations and the mix of branded
product sales partially offset the volume growth.
In the United States, the effect of 8 percent volume growth of
our ROUNDUP family of branded products was partially offset by a 3
percent decline in price, primarily due to marketing programs with
distributors, retailers and farmers. As a result, sales of ROUNDUP
(excluding ROUNDUP lawn and garden products) in the United States
increased 5 percent. The growth was led by increased demand in
over-the-top applications with ROUNDUP READY crops. Due to the
seasonality of the business, the majority of full-year 2001 sales in
this market segment have taken place by the end of the second quarter.
The other principal market segment for ROUNDUP, the burndown market,
was comparable with prior year. The burndown market, which occurs
prior to planting and includes use in conservation tillage
applications, was affected by adverse weather conditions in the
central and southern Corn Belt.
Increased sales of branded ROUNDUP herbicide in Latin America
also contributed to the net sales growth quarter-over-quarter, a
result of increased adoption of conservation tillage in Argentina. The
net sales increases in the United States and Latin America were
partially offset by a decline in sales in Asia, primarily attributable
to lower prices, including the effects of currency.
The overall increase in worldwide branded ROUNDUP volumes is
consistent with our post-patent pricing strategy and our strategy to
provide unique formulations of ROUNDUP (such as ROUNDUP ULTRAMAX) and
a range of products within the ROUNDUP family of branded products to
encourage new uses. We are also able to offer integrated solutions
that combine seeds, traits and herbicides.
The Agricultural Productivity segment also benefited from an
increase in sales by other businesses. Net sales of our other
Agricultural Productivity products increased 16 percent, to $516
million in 2001 compared with net sales of $444 million in 2000.
Second-quarter 2001 net sales for ROUNDUP lawn and garden products
increased over the same period last year because of strong volume
16
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
growth and price increases on certain products. An improved dairy
economy led to stronger animal agriculture sales of POSILAC bovine
somatotropin. Higher sales of our other herbicides and other
commercial activities also contributed to the sales growth.
Quarterly operating expenses for the Agricultural Productivity
segment decreased 8 percent despite the increase in net sales for the
segment. SG&A expenses and R&D spending as a percent of sales dropped
3 percentage points, reflective of continued cost management.
EBIT for the Agricultural Productivity segment increased 5
percent, to $635 million for the three-month period ended June 30,
2001, as compared with EBIT of $605 million for the same period in
2000. Increased sales of branded ROUNDUP herbicide and ROUNDUP lawn
and garden products, improved sales and operational performance of our
animal agriculture business, and lower SG&A expenses drove the EBIT
improvement during the second quarter of 2001. Gross profit as a
percent of sales for the segment declined by 3 percentage points. This
decline was largely attributable to lower prices, including the
effects of branded product mix and the effects of currency
fluctuations, of ROUNDUP products in certain areas outside of the
United States. Special items affected EBIT for the second quarters of
2001 and 2000; EBIT (excluding special items) for the segment
increased 7 percent, to $662 million for the three-month period ended
June 30, 2001, as compared with EBIT (excluding special items) of $617
million for the same period in 2000.
Seeds and Genomics Segment
Our Seeds and Genomics segment consists of the global seeds and
related traits business and genetic technology platforms.
Three Months Ended
June 30,
2001 2000
-------------------
Net sales $437 $546
----- -----
----- -----
EBIT(1) $ 15 $ (94)
Add: restructuring & other special items 20 149
---- -----
EBIT (excluding special items) 35 55
Add: depreciation and amortization 82 88
---- -----
EBITDA (excluding special items)(2) $117 $143
---- -----
---- -----
(1) Earnings (loss) before extraordinary item, cumulative effect of
accounting change, interest and taxes
(2) Earnings before extraordinary item, cumulative effect of accounting
change, interest, taxes, depreciation, amortization and
restructuring and other special items.
Net sales for the Seeds and Genomics segment decreased 20 percent
to $437 million for the second quarter of 2001 from net sales of $546
million in the same period in 2000, mainly due to an overall decline
in worldwide conventional corn seed sales. Higher-than-anticipated
returns of relatively high-priced corn seed in Latin America
negatively affected second quarter sales by approximately $80 million.
These seed returns resulted from a strategic move made last year to
sell higher performance seed. However, farmers chose not to plant that
seed, resulting in substantial returns of relatively high-priced corn
seed this year. Corn seed sales in the United States also decreased,
in part a result of lower planted acreage of corn this year and higher
corn seed sales earlier in the 2000-2001 season. Trait revenue was
essentially flat for the quarter when compared with revenues last
year. Monsanto's soybean technology traits delivered strong quarterly
results that were offset by a decline in quarterly cotton trait
revenues. However, on a year-to-date comparison, soybean and cotton
trait revenues both increased, reflective of higher demand for our
biotechnology traits.
17
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Seeds and Genomics gross profit decreased 10 percent in the
second quarter of 2001 compared with gross profit in the second
quarter of 2000. The gross profit from biotechnology trait revenues
partially offset the effect of the overall decline in conventional
corn seed sales. Gross profit as a percent of net sales improved seven
percentage points during the same period. However, gross profit for
the second quarter of 2000 was negatively affected by $32 million of
charges associated with inventory write-offs. See "Events Affecting
Comparability" for further details.
SG&A and R&D expenses decreased 18 percent and 10 percent,
respectively, for the second quarter of 2001 compared with those
expenses in the second quarter of 2000. Savings realized as a result
of our focus on cost management contributed to the decline in SG&A
expenses, as did the absence of amortization expense related to
certain assets associated with the Holden's Foundation Seeds, Inc.
(Holden's) acquisition that became fully amortized in the third
quarter of 2000. Our reduced R&D spending reflects the actions we have
taken to focus on core R&D programs. Other expense increased $8
million for the second quarter of 2001, compared with other expense in
the second quarter of 2000, largely associated with an equity
investment impairment and increased losses from equity affiliates.
EBIT for the Seeds and Genomics segment improved to earnings of
$15 million in the second quarter of 2001 versus a loss of $94 million
in the second quarter 2000. However, special items significantly
affected the second quarter of 2000, and to a much lesser extent, the
second quarter of 2001. EBIT (excluding special items) for the Seeds
and Genomics segment declined to $35 million in the second quarter of
2001 versus $55 million in the second quarter of 2000, as lower
operating expenses did not completely mitigate lower net sales and
gross profit.
Results of Operations - First Six Months of 2001 Compared with First Six Months
of 2000
Six Months Ended
June 30,
2001 2000
--------------------
Total Monsanto Company and Subsidiaries:
Net sales $3,317 $3,328
Income before extraordinary item and cumulative
effect of accounting change $ 446 $ 291
Add: Interest expense - net of interest income 44 128
Income tax provision 267 223
EBIT(1) 757 642
Add: restructuring & other special items 69 157
EBIT (excluding special items) 826 799
Add: depreciation and amortization 269 275
EBITDA (excluding special items) (2) $1,095 $1,074
(1) Earnings before extraordinary item, cumulative effect of accounting
change, interest and taxes
(2) Earnings before extraordinary item, cumulative effect of
accounting change, interest, taxes, depreciation, amortization and
restructuring and other special items.
18
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Net income totaled $444 million, or $1.72 per share, for the
first six months of 2001 compared with net income of $265 million, or
$1.03 per pro forma share, for the first six months of 2000. Both
periods included restructuring and other special items. The first six
months of 2001 and 2000 included aftertax charges of $43 million and
$123 million, respectively. See "Events Affecting Comparability" for
further details. Net income in 2001 also was affected by a $2 million
aftertax extraordinary loss, or $0.01 per share, related to the early
retirement of ESOP debt, while 2000 results included a cumulative
effect of accounting change of $26 million aftertax, or $0.10 per pro
forma share. Excluding the restructuring and other special items in
both periods, the extraordinary item in 2001, and the cumulative
effect of an accounting change in 2000, net income for the six-month
period ended June 30, 2001, would have been $489 million, or $1.86 per
share, compared with $414 million, or $1.60 per pro forma share, for
the six-month period ended June 30, 2000.
Net sales of $3.3 billion for the first half of 2001 remained
relatively unchanged from the first half of 2000. Growth was
negatively affected by the strong U.S. dollar, which reduced net sales
by nearly 2 percent or $60 million. Conventional corn seed returns in
Latin America significantly reduced sales within the Seeds and
Genomics segment. Increased revenues from biotechnology traits - in
particular, soybean and stacked cotton traits - and increased revenues
from all businesses within the Agricultural Productivity segment
mitigated the effects of the corn seed returns and currency
fluctuations.
Cost of goods sold increased 2 percent to $1.52 billion for the
first six months of 2001 from $1.49 billion for the same period in
2000. Gross profit decreased 2 percent to $1.80 billion for six months
ended June 30, 2001, compared with gross profit of $1.84 billion for
the six months ended June 30, 2000. Gross profit as a percent of sales
declined from 55 percent in the first half of 2000 to 54 percent in
the same period this year. Increased gross profit from biotechnology
trait revenues was offset by the negative effects of corn seed returns
in Latin America and lower gross profit in our Agricultural
Productivity segment during the first six months of 2001 when compared
with the same period in 2000.
SG&A expenses improved nearly 2 percent as a percent of net
sales. These expenses declined 9 percent to $628 million for the
six-month period ended June 30, 2001, compared with SG&A expenses of
$688 million for the same period in 2000. This decrease was primarily
due to continued cost management efforts and to a lesser extent, the
absence of amortization expense related to certain assets that became
fully amortized in the third quarter of 2000. Partially offsetting the
reductions to SG&A expenses were increased agency fees payable to The
Scotts Company (Scotts) as a result of increased sales from our
ROUNDUP lawn and garden business in the first half of 2001. See "Our
Agreement with The Scotts Company" for further details.
R&D expenses decreased 7 percent to $270 million for the
six-month period ended June 30, 2001, compared with $291 million for
the six-month period ended June 30, 2000. Our reduced R&D spending
reflects the actions we have taken to focus on certain key crops and
eliminate certain research projects.
In the six months ended June 30, 2000, we wrote down $84 million
of goodwill associated with the decision to terminate certain
nutrition programs. Excluding this write-down, amortization of
goodwill was relatively flat in the six months ended June 30, 2001,
compared with the same period in 2000.
Interest expense, net of interest income, decreased nearly 66
percent to $44 million for the first six months of 2001, compared with
$128 million for the first six months of 2000. This decrease reflects
the $2.9 billion reduction in debt resulting from our separation from
Pharmacia and our initial public offering in 2000. Our June 30, 2001,
debt levels are higher than those of Dec. 31, 2000, due to seasonal
working capital requirements. Other expense, net of other income, of
$28 million for the first half of 2001 was unchanged from the same
period last year. Other expense in the current year related to an
impairment of an equity investment was largely offset by other income
from a deferred payout provision related to a past business
divestiture.
19
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Income tax provision increased 20 percent to $267 million for the
six-month period ended June 30, 2001, compared with $223 million for
the same period in 2000. This increase was largely due to the 39
percent improvement in pretax income (before extraordinary item and
cumulative effect of accounting change) in the six-month period ended
June 30, 2001, compared with the six-month period ended June 30, 2000.
During the same period, the effective tax rate decreased from 43
percent for the six months ended June 30, 2000, to 37 percent for the
six months ended June 30, 2001. This decrease was primarily a result
of the non-deductibility of the $84 million goodwill write-down in
2000 and, to a lesser extent, the difference in the mix of earnings
projected for 2001 versus 2000.
Agricultural Productivity Segment
Our Agricultural Productivity segment consists of our crop
protection products (ROUNDUP and other glyphosate products and
selective chemistries), animal agriculture, ROUNDUP lawn and garden,
and environmental technologies businesses.
Six Months Ended
June 30,
2001 2000
-----------------
Net sales $2,382 $2,294
------ ------
------ ------
EBIT(1) $ 774 $ 803
Add: restructuring & other special items 40 9
----- -----
EBIT (excluding special items) 814 812
Add: depreciation and amortization 108 99
----- -----
EBITDA (excluding special items) (2) $ 922 $ 911
----- -----
----- -----
(1) Earnings before extraordinary item, cumulative effect of
accounting change, interest and taxes
(2) Earnings before extraordinary item, cumulative effect of
accounting change, interest, taxes, depreciation, amortization and
restructuring and other special items.
In the Agricultural Productivity segment, net sales increased 4
percent to $2.4 billion for the first six months of 2001 as compared
with $2.3 billion in the first six months of 2000. Increased sales of
ROUNDUP branded herbicide in the United States and Argentinean markets
and higher sales from our other agricultural productivity businesses
contributed to the increase.
Worldwide net sales for our ROUNDUP herbicide and other
glyphosate products (excluding ROUNDUP lawn and garden) of $1.5
billion during the first six months of 2001 were roughly equal with
those during the same period last year. Volumes of these products
increased 12 percent during the period, but were offset by the 11
percent effect of mix and price of products sold. Excluding the
effects of currency fluctuations, worldwide year-to-date price has
declined more than 8 percent.
In the United States, volume growth of 9 percent was slightly
offset by a modest decline in the prices of our ROUNDUP family of
branded products, driven primarily by marketing programs and branded
product mix, resulting in an overall increase in U.S. net sales. This
growth was due to increased demand in the over-the-top market segment.
Increased adoption of ROUNDUP READY crops led to growth in the market
for over-the-top applications of ROUNDUP. Due to the seasonality of
the business, a majority of the full-year 2001 sales in this market
segment has taken place by the end of the second quarter. The other
principal ROUNDUP market segment, the burndown market, was comparable
with prior year. The burndown market, which occurs prior to planting
and includes use in conservation tillage applications, was affected by
adverse weather conditions in the central and southern Corn Belt.
20
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Sales of ROUNDUP herbicide in Argentina were also higher than
last year on the strength of increased demand for our branded
products. However, Canada, Australia and Japan experienced declines in
net sales, primarily attributable to price competition, unfavorable
weather conditions in Canada and Australia, and the effect of currency
fluctuations in Japan.
The overall increase in global volumes is consistent with our
post-patent pricing strategy and our strategy to provide unique
formulations of ROUNDUP (such as ROUNDUP ULTRAMAX) and a range of
products within the ROUNDUP family of branded products to encourage
new uses. We are also able to offer integrated solutions that combine
seeds, traits and herbicides.
Net sales of our other Agricultural Productivity products
increased 11 percent, to $862 million for the six months ended June
30, 2001, compared with net sales of $777 million in 2000, on the
strength of net sales growth in our ROUNDUP lawn and garden business
and other commercial activities. ROUNDUP lawn and garden first-half
2001 net sales increased over the same period last year, due primarily
to strong volume growth and price increases on certain products. The
results for the first half of 2001 also included sales from a
previously unconsolidated investment, which was consolidated beginning
in the second quarter of 2000 when we acquired a controlling interest.
Global sales of acetanilide herbicides - primarily used to control
weeds in corn crops - were lower in the first half of 2001 because the
company took advantage of a one-time U.S. market opportunity in the
first quarter of 2000.
Operating expenses for the Agricultural Productivity segment
declined 4 percent for the first six months of 2001. Continued cost
management mitigated the effect of slightly higher SG&A costs related
to our ROUNDUP lawn and garden business. Other expense for the segment
decreased, primarily due to decreased losses from equity affiliates in
2001.
EBIT for the Agricultural Productivity segment declined 4
percent, to $774 million for the six-month period ended June 30, 2001,
as compared with $803 million for the same period in 2000. EBIT for
the first six months of 2001 and 2000 was affected by special items;
Agricultural Productivity EBIT (excluding special items) for the first
six months of 2001 of $814 improved slightly from $812 for the same
period a year ago. Overall gross profit for the segment declined 2
percent, with gross profit as a percent of sales dropping 3 percentage
points. These gross profit declines resulted primarily from lower
ROUNDUP prices, including the effects of currency and mix of branded
products sold. Strong performance by the ROUNDUP lawn and garden
business combined with improved cost management mitigated these margin
shortfalls leading to the overall increase in EBIT (excluding special
items) for the six months ended June 30, 2001.
Seeds and Genomics Segment
Our Seeds and Genomics segment consists of the global seeds and
related traits business and genetic technology platforms.
Six Months Ended
June 30,
2001 2000
------------------
Net sales $935 $1,034
----- ------
----- ------
EBIT(1) $ (17) $ (161)
Add: restructuring & other special items 29 148
----- ------
EBIT (excluding special items) 12 (13)
Add: depreciation and amortization 161 176
----- ------
EBITDA (excluding special items) (2) $173 $ 163
----- ------
----- ------
(1) Earnings (loss) before extraordinary item, cumulative effect of
accounting change, interest and taxes
(2) Earnings before extraordinary item, cumulative effect of accounting
change, interest, taxes, depreciation, amortization and
restructuring and other special items.
21
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Net sales for the Seeds and Genomics segment decreased 10 percent
to $935 million for the first six months of 2001 from $1.0 billion in
the same period in 2000. This decline was largely a result of lower
conventional corn seed sales in Latin America, where
higher-than-anticipated returns of relatively high-priced corn seed
affected sales by approximately $100 million. These seed returns
resulted from a strategic move made last year to sell higher
performance corn seed. However, farmers chose not to plant that seed,
resulting in substantial returns of relatively high-priced corn seed
this year. In the United States, increased revenues from biotechnology
traits and higher soybean seed sales offset lower conventional corn
seed sales. Lower corn planted acreage and higher corn seed sales
earlier in the 2000-2001 season led to the decrease in U.S. corn sales
in the first half of 2001. The increase in trait revenue was led by
particularly strong results for Monsanto's ROUNDUP READY soybean
technology traits. Increased cotton trait revenue reflected higher
demand for biotechnology traits, particularly our stacked BOLLGARD and
ROUNDUP READY traits. We estimate that our insect-resistant and
ROUNDUP READY technologies were used on approximately 80 million acres
in the United States during the 2001-growing season, an increase of 11
percent over the previous year.
Year-to-date Seeds and Genomics gross profit declined 3 percent
versus the comparable period last year. However, gross profit as a
percent of net sales improved 4 percentage points during the same
period. This is primarily a result of proportionally higher margin
trait revenues, which offset the effects of the corn seed returns.
SG&A expenses and R&D expenses decreased 15 percent and 10
percent, respectively, for the first half of 2001 compared with the
first half of 2000 primarily due to cost reductions as we have
narrowed our focus to certain key crops. The absence of amortization
expense related to certain assets associated with the Holden's
acquisition that became fully amortized in the third quarter of 2000
also contributed to the decline in SG&A expenses. Other expense
increased $3 million in the current year. An impairment of an equity
investment and increased losses from equity affiliates were largely
offset by a deferred payout provision related to a past business
divestiture.
Seeds & Genomics EBIT for six months ended June 30, 2001,
improved to a loss of $17 million versus an EBIT loss of $161 million
for the six months ended June 30, 2000. Restructuring and other
special items affected EBIT during 2001 and, to a greater extent,
2000. EBIT (excluding special items) for the Seeds and Genomics
segment improved to earnings of $12 million in the first half of 2001
versus a loss of $13 million in the first half of 2000. Increased
revenues from biotechnology traits and continued cost management drove
the EBIT improvement and offset the effects of lower corn seed sales.
Our Agreement with The Scotts Company
In 1998, Monsanto entered into an agency and marketing agreement
with Scotts with respect to our ROUNDUP lawn and garden business.
Under the agreement, beginning in the fourth quarter of 1998, Scotts
was obligated to pay us a $20 million fixed fee each year to defray
costs associated with the ROUNDUP lawn and garden business. Scotts'
payment of a portion of this fee owed in each of the first three years
of the agreement is deferred and required to be paid at later dates,
together with interest. Monsanto is accruing the $20 million fixed fee
per year owed by Scotts ratably over the periods during which it is
being earned as a reduction of selling, general and administrative
expenses. We are also accruing interest on the amounts owed by Scotts
and including such amounts in interest income. The total amount owed
by Scotts, including accrued interest, was $45 million as of June 30,
2001, and $42 million as of Dec. 31, 2000. Scotts is required to begin
paying these deferred amounts at $5 million per year in monthly
installments beginning Oct. 1, 2002.
22
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Events Affecting Comparability
In 2000, Monsanto's management formulated a plan as part of the
company's overall strategy to focus on certain key crops and
streamline operations. Total pretax charges from this plan are
expected to be approximately $425 million to $475 million, including
$261 million of net charges incurred in 2000 and $69 million in the
first half of 2001. The first and second quarter 2001 charges were
primarily associated with employee termination severance costs and
facility closures related to certain R&D programs and non-core
activities. The second quarter of 2001 also included a $6 million
charge for the recognition of an impairment of an equity investment
due to adverse business developments of the investee.
In the second quarter of 2000, we recorded a pretax charge of
$161 million to operations, consisting of asset impairments of $129
million, workforce reduction costs of $31 million and other exit costs
of $1 million. Results for the first quarter of 2000 included a pretax
benefit of $4 million related to the reversal of previously
established restructuring reserves, resulting in a net pretax charge
of $157 million for the first six months of 2000. The workforce
reduction charge reflected involuntary employee separation costs for
375 employees worldwide. The asset impairments during the same period
consisted of $32 million for laureate oil inventories, $86 million for
intangible assets (including $84 million of goodwill) and $11 million
for equipment write-offs.
These amounts were recorded in the Statement of Consolidated
Income in the following categories:
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
----------------------- -----------------------
Cost of Goods Sold $(10) $ (32) $(11) $ (32)
Restructuring charges - net (31) (45) (52) (41)
Amortization and adjustments of goodwill -- (84) -- (84)
Other Expense - net (6) -- (6) --
----- ------- ----- -------
Income (Loss) Before Income Taxes (47) (161) (69) (157)
Income tax benefit (provision) 17 35 26 34
----- ------- ----- -------
Net Income (Loss) $(30) $(126) $(43) $(123)
----- ------- ----- ------
----- ------- ----- ------
Additional charges in the range of approximately $95 million to
$145 million are expected to be incurred as we plan to continue to
stringently focus our R&D programs and streamline our manufacturing
operations. The remaining restructuring charges we expect to incur
relate primarily to facility closures and employee severance and will
be recorded during the second half of 2001 as plans are finalized,
approved, and the appropriate communications to employees occur. We
expect to implement these actions by the end of 2001. Cash payments to
complete our restructuring plan will be funded from operations and are
not expected to significantly affect our liquidity. We anticipate that
our restructuring plan will yield annual cash savings of approximately
$100 million. See Note 7 - Restructuring and Other Special Items - of
Notes to Consolidated Financial Statements for further details.
Changes in Financial Condition - June 30, 2001 Compared with Dec. 31, 2000
June 30, 2001 Dec. 31, 2000
------------- -------------
Working capital $2,487 $2,216
Current ratio 1.79:1 1.80:1
Debt-to-total capitalization 24% 19%
23
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Our working capital at June 30, 2001, increased 12 percent, or
$271 million, from Dec. 31, 2000, working capital of $2.2 billion.
Accounts receivable increased due to the seasonality of our business,
partially offset by fluctuations in currency, primarily related to the
Brazilian real. As part of our focus on receivables management,
worldwide collections increased 12 percent from both the second
quarter and the first half of 2000. Net receivables as a percent of
the last 12 months' sales remained flat with last year at 65 percent.
Brazil and Argentina collections, in terms of U.S. dollars, have
increased 13 percent year-over-year despite the economic conditions in
those countries. Cash and cash equivalents increased to $236 million,
largely as a result of collections that were received at the end of
the second quarter of 2001. Other current liabilities decreased from
year-end due primarily to employee compensation plans and incentive
payments, as well as customer prepayments applied in the second
quarter that were received prior to Dec. 31, 2000.
Our June 30, 2001, debt levels are significantly higher than
those of Dec. 31, 2000, due to seasonal working capital requirements.
Under our debt structure, we use short-term commercial paper to fund
our operating cash requirements. Accounts payable decreased from
year-end primarily due to the payment of significant payables related
to the ongoing construction of a new glyphosate manufacturing facility
in Brazil, which is expected to begin operations by the end of 2001.
The combination of these factors, the majority of which are consistent
with the seasonality of our business, are the main contributors to our
operating cash requirement. Total cash required by operations
decreased $438 million for the first six months of 2001 compared with
the first six months of 2000. This improvement in cash flow was driven
by increased customer collections and the increase in income before
income taxes, extraordinary item and cumulative effect of accounting
change, which was partially due to lower interest expense in 2001.
Capital expenditures in the first six months of 2001 declined $120
million to $205 million in the first six months of 2000, as we have
completed several glyphosate expansion projects and seed production
facilities that were underway in the prior year.
As of June 30, 2001, the company's borrowings included a related
party loan payable of $628 million, a slight decrease from year-end.
However, Monsanto's net borrowing position with Pharmacia increased to
$617 million at June 30, 2001, from $430 million as of Dec. 31, 2000.
We have committed external borrowing facilities amounting to $1.5
billion that were unused as of June 30, 2001.
Related party transactions, excluding treasury cash management,
during the first six months of 2001 and the last four months of 2000
(subsequent to the IPO) resulted in a net payable (excluding dividends
payable) of $111 million as of June 30, 2001, and a net receivable
(excluding dividends payable) from Pharmacia of $99 million as of Dec.
31, 2000. Transition services, payroll, pension and information
technology costs associated with the separation accounted for the
outstanding balances.
New Accounting Standards
In June 2001, the Financial Accounting Standards Board
simultaneously approved Statement of Financial Accounting Standards
(SFAS) No. 141, Business Combinations and SFAS No. 142, Goodwill and
Other Intangible Assets. SFAS No. 141 requires the use of the purchase
method of accounting for all business combinations initiated after
June 30, 2001, thereby eliminating the use of the pooling of interests
method. The Business Combinations statement also provides broader
criteria for identifying the types of acquired intangible assets that
are required to be recognized separately from goodwill and those
acquired intangible assets that are required to be included in
goodwill. We are required to adopt the provisions of SFAS No. 141 on
Jan. 1, 2002, with the exception of the immediate requirement to use
the purchase method of accounting for all business combinations
initiated after June 30, 2001. SFAS No. 141 also will require us to
evaluate our existing goodwill and other intangible assets and to make
any necessary reclassifications to conform with the new separation
requirements at the date of adoption.
24
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
SFAS No. 142 changes the accounting for goodwill from an
amortization method to an impairment-only approach. Upon adoption of
SFAS No. 142 on Jan. 1, 2002, goodwill will no longer be amortized;
rather, it will be tested for impairment at least annually and in
conjunction with an initial goodwill impairment test to be performed
in 2002. SFAS No. 142 requires companies to record any impairment loss
resulting from the initial impairment test as an accounting change in
accordance with Accounting Principles Board Opinion (APB) No. 20,
Accounting Changes. Upon adoption of SFAS No. 142, we will be required
to reassess the useful lives and residual values of all identifiable
and recognized intangible assets and make any necessary amortization
period adjustments by March 31, 2002. SFAS No. 142 also will require
recognized intangible assets with definite useful lives to be
amortized over such respective estimated lives and reviewed for
impairment in accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets To Be
Disposed of. Any acquired and identifiable intangible asset determined
to have an indefinite useful life will not be amortized, but instead
tested for impairment in accordance with SFAS No. 142 until its life
is determined to no longer be indefinite. We are currently assessing
our position but have not yet determined the effect that the adoption
of these standards will have on our consolidated financial position or
results of operations.
Monsanto adopted SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, and its amendments on Jan. 1,
2001. These new accounting standards establish accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and hedge
accounting. In accordance with the transition provisions of SFAS No.
133, we recorded a $2 million, net-of-tax, cumulative effect charge in
other comprehensive income (loss) as of Jan. 1, 2001. This amount
reflects the deferred amount of derivative instruments designated as
cash flow hedges. Substantially all of the transition adjustment
recorded within accumulated other comprehensive income will be
reclassified into earnings within 12 months of adopting the standards.
Upon adoption of SFAS No. 133, the $19 million difference between the
carrying value and fair value of hedged items classified as fair value
hedges was offset by the change in fair value of the related
derivatives. Accordingly, this transition adjustment had no net effect
on earnings or shareowners' equity.
Outlook - Update
Focused Strategy
We continue to face a difficult agricultural environment, with
commodity prices continually below historical levels and the effects
of currency fluctuations affecting the industry. This environment has
affected grower income and liquidity, and thus, purchasing decisions.
Despite the conditions in the industry, Monsanto's integrated solution
of products and services provides a portfolio that continues to offer
cost-effectiveness and added value to farmers. We will continue to
focus on managing costs, in particular SG&A expenses, and to
aggressively manage working capital. As part of our emphasis on
working capital, we have focused on managing receivable collections
and also have instituted more stringent credit policies. The strong
U.S. dollar relative to other currencies may continue to affect our
sales growth. We anticipate that our controlled, focused approach to
the business will allow us to maintain an industry leadership
position.
25
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
The first half of the fiscal year is largely focused on the peak
agricultural season in the Northern Hemisphere. As we enter the second
half of the year, the Southern hemisphere becomes increasingly
important. As a result, our second-half 2001 growth is somewhat
dependent on the economic conditions in the key Latin American
agricultural markets of Argentina and Brazil. Given the recent
economic trends in those markets, we will continue to closely track
the conditions there. We have taken several steps to help us manage
these businesses for profitability, namely moving sales closer to the
product use season, which occurs September through December.
Importantly, the agricultural markets in Argentina and the soybean
market in Brazil are export-oriented with grain trading denominated
largely in U.S. dollars. However, if the economic conditions,
including currency exchange rates, and conditions in the agricultural
markets deteriorate substantially, it could have a material adverse
effect on our financial position, profitability or liquidity, or
increase our credit risk in those countries.
ROUNDUP Post-Patent
ROUNDUP continues to face competition from generic producers. In
certain markets outside the United States, patents protecting ROUNDUP
expired many years ago, and compound per se patent protection for the
active ingredient in ROUNDUP herbicide expired in the United States on
Sept. 20, 2000. A key driver for ROUNDUP growth in 2001 will be its
use in conjunction with conservation tillage systems, which help
farmers reduce soil erosion by replacing plowing with the judicious
use of herbicides to control weeds. We believe that there is
significant value yet to be gained through growth in conservation
tillage and in ROUNDUP READY crops.
We expect to continue to selectively reduce prices through
discounts, rebates or other promotional strategies to encourage new
uses and to increase our sales volumes. This strategy likely will
result in a modest reduction in our gross margin, consistent with the
gross margin reduction in the last three years, as we have proactively
and consistently implemented a price-elasticity strategy. In addition,
as other agricultural chemical suppliers have access to glyphosate in
the United States, their pricing policies may cause downward pressure
on our prices. While there can be no assurance that any increases in
volumes will offset price reductions, this generally has been our
experience in world areas outside of the United States. In Brazil, the
overall market for glyphosate is growing but the industry is reducing
its inventory levels. We will monitor this situation to minimize the
effect on our business.
Seed Biotechnology
We continue to address concerns raised by consumers and public
interest groups and questions raised by government regulators
regarding agricultural and food products developed through
biotechnology. We are committed to addressing concerns regarding food
products developed through biotechnology, and to achieving more
greater acceptance, efficient regulation and timely commercialization
of biotechnology products. During the first six months of 2001,
progress was made on the biotechnology regulatory fronts in Japan,
Europe and Argentina. Monsanto's new ROUNDUP READY corn product
received Japanese import approval. This product had previously
received both U.S. food and feed approvals and was introduced in
limited quantities this year in the United States. The European Union
gave approval to a directive that governs the approval process for all
biotechnology products. While the rules on traceability and labeling
of biotechnology products are still not final, resolutions were
proposed in late July, which will be discussed more fully in ensuing
months. In April 2001, Argentina approved the planting of ROUNDUP
READY cotton. Argentina, second only to the United States in the use
of genetically modified seeds, had not approved the use of a new
genetically modified agricultural product since 1998 prior to this
ROUNDUP READY cotton approval. A small commercial launch of the
product is expected this fall. In Brazil, we are focused on completing
the steps necessary for approval of ROUNDUP READY soybeans. Although
it is not possible to predict the approval timetables of regulatory
and legal bodies, we remain cautiously optimistic for a limited
commercial launch this year.
26
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
We also continue to address concerns regarding, and issues
arising from, the unintended (adventitious) presence of biotechnology
materials in seed, crops or food. For example, we, together with
representatives of the United States government, representatives of
the potato industry and certain food companies, are currently in
discussions with the Japanese government concerning the detection of
our NEWLEAF Y and NEWLEAF PLUS traits in potato snack products. We are
addressing the issue of adventitious presence through our own seed
quality programs, by working with others in the seed industry, and by
continuing to press for the establishment of explicit thresholds for
the adventitious presence of biotechnology traits.
Starting with the 2002 selling season, we will eliminate the
technology fee paid to us by growers who plant YIELDGARD
insect-protected corn, ROUNDUP READY corn and ROUNDUP READY soybeans
and replace it with a royalty paid by seed companies licensed to
market those products. The new royalty pricing structure, which will
make the purchase of seed with Monsanto's traits simpler, may result
in a shift in certain trait revenues from the first two quarters of
2002 to the fourth quarter of 2001.
Other Information
As discussed in Note 8 - Commitments and Contingencies - of Notes
to Consolidated Financial Statements, Monsanto is involved in a number
of lawsuits and claims relating to a variety of issues. Many of these
lawsuits relate to intellectual property disputes. We expect that such
disputes will continue to occur as the agricultural biotechnology
industry continues to evolve.
This Outlook section should be read in conjunction with outlook
information in our annual report for the fiscal year ended Dec. 31,
2000, which is incorporated by reference into our annual report on
Form 10-K. For additional information regarding the outlook for
Monsanto, see "Cautionary Statements Regarding Forward Looking
Information," below.
Euro Conversion
On Jan. 1, 1999, 11 of the 15 member countries of the European
Union established fixed conversion rates between their national
currencies and the euro. Greece joined the original 11 in early 2001.
During the transition period, from Jan. 1, 1999, until Jan. 1, 2002,
both the national currencies and the euro will be legal currencies.
Beginning Jan. 1, 2002, the euro will be the sole legal tender for
commercial transactions in these countries.
As of Jan. 1, 1999, we began to engage in euro-denominated
transactions and were legally compliant. We expect to have all
affected information systems fully converted by December 2001. We do
not expect the euro conversion to have a material effect on our
competitive position, business operations, financial position or
results of operations.
Cautionary Statements Regarding Forward Looking Information
Under the Private Securities Litigation Reform Act of 1995,
companies are provided with a "safe harbor" for making forward-looking
statements about the potential risks and rewards of their strategies.
We believe it is in the best interest of our shareowners to use these
provisions in discussing future events. However, we are not required
to, and you should not rely on us to, revise or update these
statements or any factors that may affect actual results, whether as a
result of new information, future events or otherwise. Forward-looking
statements include our business plans; the potential for the
development, regulatory approval, and public acceptance of new
products; other factors that could affect our future operations or
financial position, and other statements that are not matters of
historical fact. Such statements often include the words "believes,"
"expects," "anticipates," "intends," "plans," "estimates," or similar
expressions.
Our ability to achieve our goals depends on many known and
unknown risks and uncertainties, including changes in general economic
and business conditions. These factors could cause our actual
performance and results to differ materially from those described or
implied in forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, those
discussed below.
27
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Competition for ROUNDUP: The family of ROUNDUP herbicides is a
major product line. Patents protecting ROUNDUP in several countries
expired in 1991, and compound per se patent protection for the active
ingredient in ROUNDUP herbicide expired in the United States in
September 2000. These herbicides are likely to face increasing
competition in the future. We believe that we can compensate for
increased competition both within and outside the United States and
continue to increase revenues and profits from ROUNDUP through a
combination of (1) marketing strategy, (2) pricing strategy, and (3)
decreased production costs.
Marketing Strategy: We expect to increase ROUNDUP sales by
encouraging new uses (especially conservation tillage), providing
unique formulations and services and offering integrated seed and
biotech solutions. The success of our ROUNDUP marketing strategy will
depend on the continued expansion of conservation tillage practices
and our ability to realize and promote cost and production benefits of
our product packages, and to introduce new ROUNDUP READY crops.
Pricing Strategy: We have significantly reduced the sales price
of ROUNDUP in the United States and around the world. This price
elasticity strategy is designed to increase demand for ROUNDUP by
making ROUNDUP more economical, encouraging both new uses of the
product and expansion of the number of acres treated. Our experience
in numerous markets worldwide has been that price reductions have
stimulated volume growth. However, such volume increases also may have
been influenced by a variety of other factors, such as weather; launch
of new products including ROUNDUP READY crops; competitive products
and practices; and an increase in agricultural acres planted.
Conditions, and therefore volume trends experienced to date, may or
may not continue.
Production Cost Decreases: We also believe that increased volumes
and technological innovations will lead to efficiencies that will
reduce the production cost of glyphosate. As part of this strategy, we
have entered into agreements to supply glyphosate to other herbicide
producers. Such cost reductions will depend on realizing such
increased volumes and innovations, and securing the resources required
to expand production of ROUNDUP.
Realization and Introduction of New Products: Our ability to
develop and introduce to market new products, particularly new
agricultural biotechnology products, will be dependent, among other
things, upon the availability of sufficient financial resources to
fund research and development needs; the success of our research
efforts; our ability to gain consumer acceptance and regulatory
approvals; the demonstrated effectiveness of our products; our ability
to produce new products on a large scale and to market them
economically; our ability to develop, purchase or license required
technology; and the existence of sufficient distribution channels.
Governmental and Consumer Acceptance: The commercial success of
agricultural and food products developed through biotechnology will
depend in part on government and public acceptance of their
cultivation, distribution and consumption. We continue to work with
consumers, customers and regulatory bodies to encourage understanding
of modern biotechnology, crop protection and agricultural
biotechnology products. Biotechnology has enjoyed and continues to
enjoy substantial support from the scientific community, regulatory
agencies and many governmental officials around the world. However,
public attitudes may be influenced by claims that genetically modified
plant products are unsafe for consumption or pose unknown risks to the
environment or to traditional social or economic practices, even if
such claims have little or no scientific basis. The development and
sales of our products have been, and may in the future be, delayed or
impaired because of adverse public perception or extreme regulatory
caution in assessing the safety of our products and the potential
effects of these products on other plants, animals, human health and
the environment.
Securing governmental approvals for, and consumer confidence in,
products developed through biotechnology poses numerous challenges,
particularly outside the United States. If crops grown from seeds that
were developed through biotechnology are not yet approved for import
into certain markets, growers in other countries may be restricted
from introducing or selling their grain. In addition, because some
markets have not approved these products, some companies in the food
industry have sought to establish supplies of non-genetically-modified
crops, or have refused to purchase crops grown from seeds developed
through biotechnology. Resulting concerns about marketability of these
products may deter farmers from planting them, even in countries where
planting and consumption have been fully approved. These concerns have
prompted agriculture officials in some states and some wheat industry
representatives to suggest a moratorium on the commercialization of
ROUNDUP READY wheat, which is one of the products in our pipeline.
28
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Regulatory Approvals: The field testing, production and marketing
of our products are subject to extensive regulations and numerous
government approvals, which vary widely among jurisdictions. Obtaining
necessary regulatory approvals can be time-consuming and costly, and
there is no guarantee of success. Regulatory authorities can block the
sale or import of our products, order recalls, and prohibit planting
of seeds containing our technology. As agricultural biotechnology
evolves, new unanticipated restrictions and burdensome regulatory
requirements may be imposed. In addition, international agreements may
also affect the treatment of biotechnology products.
Seed Quality and Adventitious Presence: The detection of
unintended (adventitious) biotechnology material in pre-commercial
seed, commercial seed varieties or the crops and products produced
could negatively affect our business or results of operations. The
detection of adventitious presence can result in the withdrawal of
seed lots from sale, or in governmental regulatory compliance actions
such as crop destruction or product recalls in some jurisdictions.
During the first six months of 2001, we announced the voluntary
withdrawal of one variety of ROUNDUP READY canola seed because of the
presence of trace levels of an alternate version of the ROUNDUP READY
trait that had not been approved in Japan, a major importing country.
We have also cooperated with government actions over seed purity in
soybean and corn seed in Italy, and corn seed in Germany. In France, a
government agency is auditing conventional seed supplies to try to
evaluate the extent of adventitious presence of transgenic material.
In addition we, together with representatives of the United States
government, representatives of the potato industry and certain food
companies, are in discussions with the Japanese government concerning
the detection of our NEWLEAF Y and NEWLEAF PLUS traits in potato snack
products. Concerns about seed quality related to biotechnology could
also lead to additional regulations on our business, such as
regulations related to testing procedures, mandatory governmental
reviews of biotechnology advances, or the integrity of the food supply
chain from the farm to the finished product. However, we and others in
the industry are seeking the establishment of appropriate threshold
levels for the adventitious presence of biotechnology traits. Although
we believe that such thresholds are implicit in existing laws, the
establishment of appropriate explicit thresholds would clearly render
adventitious presence acceptable if it is below the established
threshold amounts.
Intellectual Property: We have devoted significant resources to
obtaining and maintaining our intellectual property rights, which are
material to our business. We rely on a combination of patents,
copyrights, trademarks and trade secrets, confidentiality provisions,
Plant Variety Protection Act registrations and licensing arrangements
to establish and protect our intellectual property. We seek to
preserve our intellectual property rights and to operate without
infringing the proprietary rights of third parties. Intellectual
property positions are becoming increasingly important within the
agricultural biotechnology industry.
There is some uncertainty about the value of available patent
protection in certain countries outside the United States. Moreover,
the patent positions of biotechnology companies involve complex legal
and factual questions. Rapid technological advances and the number of
companies performing such research can create an uncertain
environment. Patent applications in the United States are kept secret,
and outside the United States, patent applications are published 18
months after filing. Accordingly, competitors may be issued patents
from time to time without any prior warning to us. That could decrease
the value of similar technologies that we are developing. Because of
this rapid pace of change, some of our products may unknowingly rely
on key technologies already patent-protected by others. If that should
occur, we must obtain licenses to such technologies in order to
continue to use them.
Certain of our seed germplasm and other genetic material,
patents, and licenses are currently the subject of litigation and
additional future litigation is anticipated. Although the outcome of
such litigation cannot be predicted with certainty, we will continue
to defend and litigate our positions vigorously. We believe that we
have meritorious defenses and claims in the pending suits.
29
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
Technological Change and Competition: A number of companies are
engaged in plant biotechnology research. Technological advances by
others could render our products less competitive. In addition, the
ability to be first to market a new product can result in a
significant competitive advantage. We believe that competition will
intensify, not only from agricultural biotechnology firms but from
major agrichemical, seed and food companies with biotechnology
laboratories. Some of our agricultural competitors have substantially
greater financial, technical and marketing resources than we do.
Planting Decisions and Weather: Our business is highly seasonal.
It is subject to weather conditions and natural disasters that affect
commodity prices, seed yields, and grower decisions about purchases of
seeds, traits and herbicides. As they have for the last three years,
crop commodity prices continue to be at historically low levels. There
can be no assurance that this trend will not continue. These lower
commodity prices affect growers' decisions about the types and amounts
of crops to plant and may negatively influence sales of our herbicide
and seed products.
Need for Short-Term Financing: Like many other agricultural
companies, we regularly extend credit to our customers to enable them
to acquire agricultural chemicals and seeds at the beginning of the
growing season. Our credit practices, combined with the seasonality of
our sales, make us dependent on our ability to obtain substantial
short-term financing to fund our cash flow requirements and on our
ability to collect customer receivables. Our need for short-term
financing typically peaks in the second quarter. Downgrades in our
credit rating or other limitations on our ability to access short-term
financing, including our ability to re-finance our short-term debt as
it becomes due, would increase our interest costs and adversely affect
our sales and our profitability.
Litigation: We are involved in numerous major lawsuits regarding
contract disputes, intellectual property issues, biotechnology,
antitrust allegations and other matters. Adverse outcomes could
subject us to substantial damages or limit our ability to sell our
products.
Markets Outside the United States: Sales outside the United
States make up a substantial portion of our revenues and we intend to
continue to actively explore international sales opportunities.
Challenges we may face in international markets include changes in
foreign currency exchange rates, changes in a specific country's or
region's political or economic conditions, weather conditions, trade
protection measures, import or export licensing requirements, and
unexpected changes in regulatory requirements. Weakened economies may
cause future sales to decrease because customers may purchase fewer
goods in general, and also because imported products could become more
expensive for customers to purchase in their local currency. Changes
in exchange rates may affect our earnings, the book value of our
assets outside the United States, and our equity. Although we have
operations in virtually every region of the world, our ex-U.S.
business is principally conducted in Brazil, Argentina, Canada,
Mexico, France, Japan and Australia. Accordingly, events and
conditions in those parts of the world generally have a more
significant impact on our operations than similar changes in other
ex-U.S. regions.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There are no material changes related to market risk from the
disclosures in Monsanto's annual report on Form 10-K for the year
ended Dec. 31, 2000.
30
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Pursuant to the Separation Agreement between us and Pharmacia
Corporation (Pharmacia), effective Sept. 1, 2000, we assumed
responsibility for legal proceedings primarily related to the
agricultural business. As a result, although Pharmacia may remain the
named defendant or plaintiff in these cases, we will manage the
litigation. In addition, in the proceedings where Pharmacia is the
defendant, we will indemnify Pharmacia for costs, expenses and any
judgments or settlements; and in the proceedings where Pharmacia is
the plaintiff, we will pay the fees and costs of, and receive any
benefits from, this litigation. While the results of litigation cannot
be predicted with certainty, we do not believe these matters or their
ultimate disposition will have a material adverse effect on our
financial position, profitability or liquidity. The following updates
certain proceedings to which Pharmacia or we are a party and for which
we are responsible. Other information with respect to legal
proceedings appears in our annual report on Form 10-K for the year
ended Dec. 31, 2000 and in our quarterly report on Form 10-Q for the
period ending March 31, 2001.
As described in Monsanto's annual report on Form 10-K for the
year ended Dec. 31, 2000, on May 19, 1995, Mycogen Plant Science Inc.
("MPS") filed suit against Monsanto in the United States District
Court in California alleging infringement of its patent involving
synthetic Bt genes, and seeking unspecified damages and injunctive
relief. Monsanto prevailed on summary judgment in dismissing all
claims. On May 30, 2001, the United States Court of Appeals for the
Federal Circuit affirmed the summary judgment finding that current
products of Monsanto do not infringe the MPS patent. The appellate
court also determined that certain factual issues prevented complete
entry of summary judgment on the issue of prior invention by Monsanto.
The matter will be remanded for further proceedings and to determine
whether an action previously won by Monsanto against MPS in United
States District Court in Delaware is dispositive of all claims by MPS.
As described in Monsanto's annual report on Form 10-K for the
year ended Dec. 31, 2000, on March 27, 1997, Pioneer Hi-Bred
International Inc. ("Pioneer") filed an action against Monsanto
regarding a 1993 license agreement for insect-resistant corn
technology ("Bt corn"). All claims by Pioneer were dismissed, and
Monsanto also prevailed at trial on counterclaims that terminated the
license for material breach and resulted in the award to Monsanto of
approximately $20 million in damages, interest and legal fees. The
court also ordered Pioneer to destroy specified biological material
discovered through the use of Monsanto's technology. The matter is now
on appeal to the United States Court of Appeals for the Eighth
Circuit. Pioneer has paid approximately $12 million of the damages
awarded by the District Court. Monsanto has also initiated an
arbitration proceeding to determine the amount of royalty payments
owed by Pioneer for sales of Bt corn following the trial which
terminated the 1993 license. We will vigorously pursue the arbitration
claim and will also oppose any effort by Pioneer to overturn the
court's judgment.
As described in Monsanto's annual report on Form 10-K for the
year ended Dec. 31, 2000 and in its quarterly report on Form 10-Q for
the quarter ended March 31, 2001, on Nov. 20, 1997, Aventis
CropScience S.A. (formerly Rhone Poulenc Agrochimie S.A.) ("Aventis")
filed suit in the United States District Court in North Carolina
against Monsanto and DEKALB Genetics Corporation ("DEKALB Genetics")
alleging that because DEKALB Genetics failed to disclose a research
report involving the testing of plants to determine glyphosate
tolerance, Aventis was induced by fraud to enter into a 1994 license
agreement relating to technology incorporated into a specific type of
herbicide-tolerant corn. Aventis also alleged that DEKALB Genetics did
not have a right to license, make or sell products using Aventis
technology for glyphosate resistance under the terms of the 1994
agreement. On April 5, 1999, the trial court rejected Aventis's claim
31
that the contract language did not convey a license. Jury trial of the
fraud claims ended April 22, 1999, with a verdict for Aventis and
against DEKALB Genetics. The jury awarded Aventis $15 million in
actual damages and $50 million in punitive damages. The trial was
bifurcated to allow claims for patent infringement and
misappropriation of trade secrets to be tried before a different jury.
Jury trial on these claims ended June 3, 1999, with a verdict for
Aventis and against DEKALB Genetics. The district court had dismissed
Monsanto from both phases of the trial prior to verdict on the legal
basis that it was a bona fide licensee of the corn technology. On or
about Feb. 8, 2000, the district court affirmed both jury verdicts
against DEKALB Genetics, and enjoined DEKALB Genetics from future
sales of the specific type of herbicide-tolerant corn involved in the
agreement (other than materials held in DEKALB Genetics' inventory on
June 2, 1999). Judgment was entered March 10, 2000. DEKALB Genetics
has filed an appeal of the jury verdict and damage award with the
United States Court of Appeals for the Federal Circuit, and Aventis
has filed an appeal to contest the finding that Monsanto was a bona
fide licensee. Oral argument on all issues was held on Aug. 6, 2001.
We, our licensees and DEKALB Genetics (to the extent permitted under
the district court's order and an agreement with Aventis) continue to
sell the specific type of herbicide-tolerant corn pursuant to a
royalty-bearing agreement with Aventis, entered prior to the June 3,
1999, jury verdict. In addition, we and DEKALB Genetics are replacing
this specific type of herbicide-tolerant corn with new technology not
associated with Aventis's claims in this litigation, beginning in the
spring 2001 planting season. The district court held an advisory jury
trial which ended with a verdict in favor of Aventis on Sept. 1, 2000,
regarding claims that certain employees of Aventis should be named as
"co-inventor" on two patents issued to DEKALB Genetics. No monetary
relief was sought. DEKALB Genetics continues to deny that Aventis
employees should be named as "co-inventor" on the two patents since
those individuals made no inventive contribution. The parties have
submitted proposed findings of fact and conclusions of law on the
verdict. DEKALB Genetics will appeal any adverse final decision or
judgment. An arbitration was filed on May 27, 1999, in the name of
Calgene LLC, our wholly-owned subsidiary, claiming that as a former
partner of Aventis, Calgene LLC is entitled to at least half of any
damages, royalties or other amounts recovered by Aventis from us or
DEKALB Genetics pursuant to these proceedings. Calgene LLC's claim was
submitted to the arbitration panel on August 8, 2001.
As described in Monsanto's annual report on Form 10-K for the
year ended Dec. 31, 2000, on Oct. 28, 1998, Pioneer filed two related
lawsuits seeking injunctive relief and unspecified damages against
DEKALB Genetics and Asgrow Seed Company, LLC ("Asgrow"), another of
our subsidiaries, in the United States District Court in Iowa alleging
misappropriation of Pioneer trade secrets related to corn breeding. On
Oct. 8, 1999, Pioneer added us and the prior owners of DEKALB Genetics
and Asgrow (Pfizer Inc. and The Upjohn Company, respectively) as
defendants in the litigation. In addition to state law trade secret
misappropriation claims, Pioneer alleges Lanham Act and patent law
violations. Pioneer also asserts that the defendants have violated an
unspecified contractual obligation not to conduct breeding using
Pioneer germplasm. On July 17, 1999, the court denied without
prejudice the defendants' motions to dismiss the initial trade secret
claims. On Jan. 4, 2000, the district court allowed Pioneer to amend
its claims to assert that the defendants infringed its patents. On
July 18, 2001, pursuant to a settlement agreement, a Stipulated Order
of Partial Dismissal was entered by the court. The liability and
damages portions of the case have been bifurcated, and trial is set
for November 2002 regarding the remaining liability issues.
As described in Monsanto's annual report on Form 10-K for the
year ended Dec. 31, 2000 and in its quarterly report on Form 10-Q for
the quarter ended March 31, 2001, on March 30, 2000, E.I. duPont De
Nemours and Company ("DuPont") filed a suit against Monsanto and
Asgrow in the United States District Court for Delaware, seeking
damages and equitable relief including the divestiture of Asgrow by
Monsanto for alleged violations of federal antitrust acts and state
law in connection with glyphosate-tolerant soybean business matters.
32
The complaint asserts that Asgrow breached certain contract
obligations and that Monsanto tortiously interfered with those
obligations, and as a consequence DuPont is asserting previously
resolved claims that Asgrow misappropriated intellectual property of
DuPont. The complaint also alleges that Asgrow's actions improperly
accelerated Monsanto's development of glyphosate-tolerant soybeans.
DuPont has sought leave to amend its complaint to add a cause of
action based upon an alleged violation of the Lanham Act relating to
some of our advertising campaigns. Monsanto has filed to dismiss the
lawsuit based on statute of limitations and estoppel. On June 15,
2001, Asgrow obtained leave to file a counterclaim asserting that it
is a co-owner of certain intellectual property rights asserted by
DuPont in this lawsuit. On June 15, 2001, DuPont obtained leave to
file a further amended complaint, alleging that it was defrauded by
Monsanto and/or Asgrow into entering into certain business
arrangements, and asserting certain other state law claims. Trial in
this case is set for September 2002. Monsanto and Asgrow deny any
liability in this case.
As described in Monsanto's annual report on Form 10-K for the
year ended Dec. 31, 2000, DEKALB Genetics, which Monsanto acquired in
December 1998, has filed legal actions to enforce its patents. On
April 30, 1996, DEKALB Genetics filed patent infringement actions in
the United States District Court for the Northern District of Illinois
against Pioneer, Mycogen Corporation ("Mycogen") and two of Mycogen's
subsidiaries, and on Aug. 27, 1996, against several Hoechst Schering
AgrEvo GmbH entities (these actions are referred to as the "Rockford
Litigation"). The suits relate to DEKALB Genetics' patents involving
herbicide-resistant and/or insect-resistant fertile, transgenic corn.
In particular, the DEKALB Genetics patents cover:
o fertile, transgenic corn plants expressing genes encoding Bt
insecticidal proteins;
o the microprojectile method for producing fertile, transgenic
corn plants covering a bar or pat gene, as well as the
production and breeding of progeny of such plants;
o methods of producing either herbicide-resistant or
insect-resistant transgenic corn; and
o transgenic corn plants containing a bar or pat gene (all
lawsuits related to this patent have been stayed pending
resolution of an interference proceeding at the United States
Patent and Trademark Office).
In each case, DEKALB Genetics has asked the court to determine
that infringement has occurred, to enjoin further infringement and/or
to award unspecified compensatory and exemplary damages. By order
dated June 30, 1999, a special master construed the patent claims in a
manner largely in accord with the position of DEKALB Genetics. The
judge has adopted the findings of the special master and appointed a
settlement mediator to conduct discussions among the parties. A trial
against Pioneer ended in a mistrial on Feb. 23, 2001, and will be
re-tried October 1, 2001. A trial against Mycogen involving a
different patent, set for April 2001, was settled by the parties
subject to final documentation. In May 2001, Pioneer sought to file a
new counterclaim in the litigation alleging that the DEKALB Genetics
patent suit was sham litigation filed in violation of the antitrust
laws. A separate lawsuit was also initiated against Monsanto and
DEKALB Genetics on May 30, 2001, by Pioneer in the Rockford Litigation
alleging the same purported antitrust-based claim. DEKALB Genetics and
Monsanto are vigorously defending the baseless litigation and have
requested that the suit be dismissed or stayed pending the outcome of
the patent actions filed by DEKALB Genetics against Pioneer.
On July 2, 1999, DEKALB Genetics sued Pioneer in the United
States District Court for the Northern District of Illinois in a
patent interference action to declare that DEKALB Genetics was the
first inventor of the microprojectile method of producing fertile
transgenic corn. The court has denied Pioneer's motion to dismiss. On
July 30, 1999, DEKALB Genetics moved to consolidate this suit with the
remainder of the Rockford Litigation for purposes of trial, but the
request has been provisionally denied.
33
On Nov. 23, 1999, Pioneer sued Monsanto, DEKALB Genetics and
Novartis Seeds, Inc. in the United States District Court for the
Eastern District of Iowa for alleged infringement of Pioneer's patent
pertaining to the microprojectile transformation of corn. This suit
has been transferred at Monsanto's request to the United States
District Court for the Northern District of Illinois for consolidated
treatment with the Rockford Litigation. On the same date, DEKALB
Genetics filed an interference action in the United States District
Court for the Northern District of Illinois seeking a declaration that
DEKALB Genetics was the first inventor of the microprojectile method
of producing fertile transgenic corn, and the related suits have been
assigned to that court for disposition. On July 13, 2001, Pioneer was
granted a related patent arising out of the same research for
transformation of corn, and suit was initiated in the Rockford
Litigation against DEKALB Genetics and Monsanto for alleged
infringement of the new patent. Defendants are vigorously defending
the litigation.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
At the company's Annual Meeting of Stockholders on April 18, 2001, four matters
were submitted to a vote of stockholders.
1. The following directors were elected, each to hold office until
the Annual Meeting to be held in 2002 or until a successor is
elected and has qualified or until his or her earlier death,
resignation or removal. Votes were cast as follows:
Votes Votes
Name "For" "Withhold Authority"
Frank V. Atlee, III 248,461,194 4,085,702
Hakan Astrom 248,749,264 3,797,632
Christopher J. Coughlin 252,463,499 83,397
Michael Kantor 252,460,730 86,166
Gwendolyn S. King 252,531,629 15,267
C. Steven McMillan 252,533,399 13,497
William U. Parfet 252,533,499 13,397
John S. Reed 252,533,049 13,847
Hendrik A. Verfaillie 248,750,364 3,796,532
2. The approval of the Phantom Share Agreements (including
performance goals) for purposes of exempting payments under these
agreements from the deduction limitation of Section 162(m) of the
Internal Revenue Code was submitted to a vote of stockholders. The
Board recommended a vote for the proposal. A total of 252,202,816
votes were cast in favor of this proposal, a total of 330,884
votes were cast against it, 13,236 votes were counted as
abstentions.
3. The approval of the Annual Incentive Program Performance Goal was
submitted to a vote of stockholders. The Board recommended a vote
for the proposal. A total of 250,740,566 votes were cast in favor,
a total of 1,797,258 votes were cast against it and 9,072 were
counted as abstentions.
4. The appointment by the Board of Directors of Deloitte & Touche LLP
as principal independent auditors for the year 2001 was ratified
by the stockholders. A total of 251,399,721 votes were cast in
favor of ratification, 1,139,479 votes were cast against it, and
7,696 votes were counted as abstentions.
Brokers were permitted to vote on the following items in the absence of
instructions from street-name holders and, therefore, broker non-votes did not
occur in those matters: the election of directors; the approval of the Phantom
Share Agreements; the approval of the Annual Incentive Plan; and the
ratification of auditors.
34
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits: None
(B) Reports on Form 8-K: The Company furnished a report on Form 8-K on
May 31, 2001, pursuant to Regulation FD, relating to a slide
presentation. The report on Form 8-K included information
furnished under Item 9, announcing that Monsanto's Chief Operating
Officer and Chief Financial Officer would speak at meetings with a
variety of members of the financial and investment community in
Milwaukee, Wisconsin and Minneapolis, Minnesota.
35
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MONSANTO COMPANY
(Registrant)
/s/ C. L. Tomlin
-----------------
CURTIS L. TOMLIN
Vice President and Controller
(On behalf of the Registrant and
as Principal Accounting Officer)
Date: August 13, 2001
36
EXHIBIT INDEX
Exhibit
Number Description
2 Omitted - Inapplicable
3 Omitted - Inapplicable
4 Omitted - Inapplicable
10 Omitted - Inapplicable
11 Omitted - Inapplicable; see Note 5 of Notes to
Consolidated Financial Statements
15 Omitted - Inapplicable
18 Omitted - Inapplicable
19 Omitted - Inapplicable
22 Omitted - Inapplicable
23 Omitted - Inapplicable
24 Omitted - Inapplicable
99 Omitted - Inapplicable
37