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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 March 31, 2002
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
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(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
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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 April 30, 2002
----- --------------
Common Stock, $0.01 par value 260,967,278 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 ended March 31, 2002, and March 31, 2001, the Condensed
Statement of Consolidated Financial Position as of March 31, 2002, and Dec. 31,
2001, the Condensed Statement of Consolidated Cash Flows for the three months
ended March 31, 2002, and March 31, 2001, and related Notes to Consolidated
Financial Statements follow. Unless otherwise indicated, "Monsanto," "Monsanto
Company" 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
division of Pharmacia. See Note 1 - Background and 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.
In tables, all dollars are in millions, except per share amounts.
1
MONSANTO COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME
(in millions, except per share amounts)
Unaudited
Three Months Ended
March 31,
------------
2002 2001
---- ----
Net Sales $1,221 $1,306
Cost of Goods Sold 617 699
---- ----
Gross Profit 604 607
Operating Expenses:
Selling, general and administrative expenses 298 310
Research and development expenses 119 134
Amortization of goodwill - 31
Restructuring charges - 21
--- ---
Total Operating Expenses 417 496
Income From Operations 187 111
Interest Expense - net of interest income of $4 and $5, respectively (14) (19)
Other Expense - net (43) (4)
---- ---
Income Before Income Taxes 130 88
Income Tax Provision (44) (33)
---- ----
Net Income $ 86 $ 55
==== ====
Basic and Diluted Earnings per Share: $ 0.33 $ 0.21
====== =======
Weighted Average Shares Outstanding:
Basic 258.8 258.0
Diluted 263.4 263.1
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
March 31, December 31,
2002 2001
---- ----
ASSETS
Current Assets:
Cash and cash equivalents $ 217 $ 307
Trade receivables, net of allowances of $177 in 2002 and 2001 2,998 2,307
Miscellaneous receivables 398 449
Related-party loan receivable 11 30
Related-party receivable 26 44
Deferred tax assets 240 251
Inventories 1,387 1,357
Other current assets 37 52
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Total Current Assets 5,314 4,797
Property, Plant and Equipment - net 2,591 2,627
Goodwill - net 2,738 2,748
Other Intangible Assets - net 658 691
Other Assets 567 566
--------- ---------
Total Assets $11,868 $11,429
======= =======
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities:
Short-term debt $ 1,053 $ 563
Related-party short-term loan payable 592 254
Accounts payable 308 457
Related-party payable 20 87
Accrued liabilities 752 1,016
--------- ---------
Total Current Liabilities 2,725 2,377
Long-Term Debt 885 893
Postretirement and Other Liabilities 766 676
Shareowners' Equity:
Common stock (Authorized: 1,500,000,000 shares, par value $0.01)
Shares issued: 260,000,037 in 2002 and 258,112,408 in 2001 3 3
Additional contributed capital 8,018 8,056
Retained earnings 229 173
Accumulated other comprehensive loss (725) (716)
Reserve for ESOP debt retirement (33) (33)
--------- ---------
Total Shareowners' Equity 7,492 7,483
--------- ---------
Total Liabilities and Shareowners' Equity $11,868 $11,429
======= =======
See the accompanying notes to consolidated financial statements.
3
MONSANTO COMPANY AND SUBSIDIARIES
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOW
(Dollars in millions)
Unaudited
Three Months Ended
March 31,
------------------
2002 2001
---- ----
Total Cash Required by Operations $(866) $(816)
----- -----
Cash Flows Provided (Required) by Investing Activities:
Property, plant and equipment purchases (51) (116)
Acquisitions and investments (17) (17)
Loans with related-party 19 45
--- ---
Net Cash Flows Required by Investing Activities (49) (88)
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Cash Flows Provided (Required) by Financing Activities:
Net change in short-term financing 519 832
Loans from related-party 338 150
Long-term debt proceeds 19 -
Long-term debt reductions (57) (19)
Stock option exercises 37 -
Dividend payments (31) (23)
---- ----
Cash Flows Provided by Financing Activities 825 940
---- ----
Net Increase (Decrease) in Cash and Cash Equivalents (90) 36
Cash and Cash Equivalents Beginning of Year 307 131
---- ----
Cash and Cash Equivalents at End of Period $ 217 $ 167
===== =====
The effect of exchange rate changes on cash and cash equivalents was not
material. Cash payments for interest and taxes for the three months ended March
31, 2002, were $17 million and $7 million, respectively. Cash payments for
interest and taxes for the three months ended March 31, 2001, were $26 million
and $9 million, respectively.
Noncash transactions with Pharmacia during the three months ended March 31,
2002, included approximately $75 million, primarily associated with the assumed
net pension liabilities and related deferred tax assets. (See Note 11 -
Related-Party Transactions - for further details.) Noncash transactions with
Pharmacia during the three months ended March 31, 2001 included approximately
$40 million.
See the accompanying notes to consolidated financial statements.
4
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
Note 1 - Background and Basis of Presentation
Monsanto Company and its subsidiaries (here referred to as
Monsanto, Monsanto Company or the company) is a global provider of
technology-based solutions and agricultural products for growers and
downstream customers, such as grain processors and food companies. The
company's herbicides, seeds, and related genetic trait products can be
combined to provide growers with integrated solutions that help them
produce higher-yield crops, while controlling weeds, insects and
diseases more efficiently and cost effectively. 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, lawn and garden herbicide
products, and environmental technologies businesses. The Seeds and
Genomics segment consists of the global seeds and related traits
businesses, and genetic technology platforms.
In October 2000, Monsanto sold 38,033,000 shares of its common
stock at $20 per share in an initial public offering (IPO). Subsequent
to the offering, Pharmacia owned and continues to own 220 million
shares of common stock, representing 84.6 percent ownership as of
March 31, 2002. In November 2001, Pharmacia announced a plan to spin
off its entire ownership of Monsanto to Pharmacia shareowners by means
of a tax-free dividend. Pharmacia has stated that it plans to complete
the spinoff during the fourth quarter of 2002.
The accompanying consolidated financial statements 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, 2001.
Financial information for the first three months of 2002 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 (FASB)
simultaneously approved SFAS No. 141, "Business Combinations, and SFAS
No. 142, Goodwill and Other Intangible Assets". SFAS No. 141 requires
that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001, thereby eliminating the
pooling-of-interests method. SFAS No. 141 also provides broader
criteria for identifying which types of acquired intangible assets
must be recognized separately from goodwill and those which must be
included in goodwill. Monsanto adopted 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 required the company
to evaluate its existing goodwill and other intangible assets and to
make any reclassifications necessary to conform with the new
separation requirements at the date of adoption.
SFAS No. 142 changes the accounting for goodwill from an
amortization method to an impairment-only method. Under SFAS No. 142,
all goodwill amortization ceased effective Jan. 1, 2002. Goodwill will
now be tested for impairment in conjunction with a transitional
goodwill impairment test to be performed in 2002 and at least annually
thereafter. Under the new rules, Monsanto's recorded goodwill will be
tested for impairment at a level of reporting referred to as reporting
units, which are components of the Agricultural Productivity and Seeds
and Genomics reporting segments. See Note 4 - Goodwill and Other
Intangible Assets - for further discussion of the transitional
impairment test and additional details on Monsanto's goodwill and
other intangible assets.
5
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 addresses financial accounting
for and reporting of costs and obligations associated with the
retirement of tangible long-lived assets. This statement will become
effective for Monsanto on Jan. 1, 2003. Monsanto has not yet
determined the effect adoption of this standard will have on its
consolidated financial position or its results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which replaces SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of". SFAS No. 144, which was
effective for Monsanto on Jan. 1, 2002, establishes an accounting
model for long-lived assets to be disposed of by sale. It applies to
all long-lived assets and discontinued operations. The adoption of
SFAS No. 144 did not have a material effect on Monsanto's consolidated
financial position or results of operations.
Note 3 - Inventories
Components of inventories as of March 31, 2002, and Dec. 31,
2001, were as follows:
March 31, Dec. 31,
2002 2001
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Finished Goods $ 689 $ 700
Goods In Process 374 357
Raw Materials and Supplies 352 329
---- ----
Inventories at FIFO Cost 1,415 1,386
Excess of FIFO over LIFO Cost (28) (29)
---- ----
Total $1,387 $1,357
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Note 4 - Goodwill and Other Intangible Assets
As described in Note 2 - New Accounting Standards - Monsanto
adopted SFAS No. 141 and SFAS No. 142 effective Jan. 1, 2002. The
company has completed the first step of the SFAS No. 142 transitional
goodwill impairment test, which compares the fair value of a reporting
unit with its net book value, including goodwill. The fair values of
each reporting unit were determined using a discounted cash flow
methodology. In connection with the first step of the transitional
impairment test, the company identified two reporting units that may
be impaired. Any resulting impairment charge will be specific to the
corn and wheat reporting units, relating to goodwill that resulted
primarily from Monsanto's 1998 and, to a lesser extent, 1997 seed
company acquisitions. Unanticipated delays in biotechnology acceptance
and regulatory approvals, and a change in valuation method (from an
undiscounted cash flow methodology under Accounting Principles Board
(APB) Opinion No. 17, "Intangible Assets", to a discounted cash flow
methodology required by SFAS No. 142) are the primary factors leading
to the indication of impairment. The second step of the transitional
goodwill impairment test, which will determine the actual impairment
charge, if any, is expected to be completed in the second quarter of
2002. As required by SFAS No. 142, any transitional impairment charge
will be recorded as an accounting change in accordance with APB
Opinion No. 20, "Accounting Changes", effective Jan. 1, 2002. Any such
impairment charge will have no effect on our liquidity or cash flow.
Changes in the net carrying amount of goodwill for the quarter
ended March 31, 2002, by segment, are as follows:
Agricultural Seeds and
Productivity Genomics Total
------------ --------- -----
Balance as of Jan. 1, 2002 $74 $2,669 $2,743
Effect of foreign currency translation adjustments - (6) (6)
Additions 1 - 1
--- ------ ------
Balance as of March 31, 2002 $75 $2,663 $2,738
=== ====== ======
6
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
Information regarding the company's other intangible assets is as
follows:
As of March 31, 2002 As of Jan. 1, 2002
------------------------------------ -------------------------------------
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
-------- ------------ --- -------- ------------ ---
Germplasm $ 602 $(271) $331 $ 602 $(251) $351
Acquired biotechnology
intellectual property 325 (111) 214 320 (101) 219
Trademarks 115 (20) 95 115 (19) 96
Other 55 (37) 18 53 (34) 19
------- ------ ---- ------ ----- ----
Total $ 1,097 $(439) $658 $1,090 $(405) $685
======= ===== ==== ====== ====== ====
The acquired biotechnology intellectual property assets represent
acquisitions and licenses, whereby Monsanto has acquired the rights to
various research and discovery technologies encompassing enabling
processes, data libraries and patents necessary to support the
integrated genomics and biotechnology platforms. Upon adoption of SFAS
No. 141 and SFAS No. 142, the classification of all identifiable and
recognized intangible assets was reassessed, and any necessary
reclassifications were made effective Jan. 1, 2002.
Total amortization expense of other intangible assets for the
three months ended March 31, 2002 and March 31, 2001 was $33 million
and $30 million, respectively. Intangible asset amortization expense
in the first quarter of 2001 included $2 million related to intangible
asset impairments, as discussed in Note 7 - Special Items.
Upon adoption of SFAS No. 142, the useful lives and residual
values of all identifiable and recognized other intangible assets were
reassessed, and any necessary prospective amortization period
adjustments were made Jan. 1, 2002. SFAS No. 142 requires recognized
intangible assets with definite useful lives to be amortized over
their estimated lives and reviewed for impairment in accordance with
SFAS No. 144.
Estimated intangible asset amortization expense for each of the
five succeeding fiscal years is as follows:
Year ending Dec. 31, Amount
-------------------- ------
2002 $130
2003 130
2004 115
2005 95
2006 60
SFAS No. 142 did not require prior periods to be restated. The
following table sets forth on an aftertax pro forma basis what the
earnings and earnings per share would have been if the provisions of
SFAS No. 142 had been applied in the first quarter of 2001. Had the
new accounting standard been adopted effective Jan. 1, 2001, Monsanto
would not have recorded $31 million of pretax goodwill amortization
expense in the first quarter of 2001, but pretax R&D expenses would
have increased by $2 million because of the reassessment of useful
lives and classifications. In addition and related to these changes,
income tax expense would have increased by $6 million for the first
quarter of 2001. This pro forma information does not include the
results of the transitional impairment test discussed above.
7
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
Three Months Ended March 31,
----------------------------
2002 2001
---- ----
Reported Net Income $ 86 $ 55
Goodwill amortization, net of tax -- 23
Effects of useful life adjustments, net of tax -- --
-- -----
Adjusted Net Income $ 86 $ 78
==== =====
Basic and Diluted Earnings Per Share:
Reported Net Income $0.33 $0.21
Goodwill amortization, net of tax -- 0.09
Effects of useful life adjustments, net of tax -- --
----- -----
Adjusted Net Income $0.33 $0.30
===== =====
Note 5 - Comprehensive Income (Loss)
Comprehensive income (loss) 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 (loss) for the three months ended March
31, 2002, and March 31, 2001, was $77 million and $(115) million,
respectively. The 2001 loss was mainly due to net foreign currency
translation adjustments, which were minimal in 2002.
Note 6 - Earnings Per 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 million shares of common
stock, representing 84.6 percent ownership of Monsanto as of March 31,
2002. The company issued 10,000 restricted shares at the time of the
IPO and an additional 45,000 restricted shares during 2001. In
connection with the company's employee stock option plans, through
March 31, 2002, approximately 1.9 million shares have been issued
since the IPO. The majority of these shares were issued in the first
quarter of 2002.
Basic earnings per share (EPS) for the three months ended March
31, 2002, and March 31, 2001, were computed using the weighted-average
number of common shares outstanding during the period (258.8 million
and 258.0 million shares, respectively). Diluted EPS for the three
months ended March 31, 2002, March 31, 2001, were computed taking into
account the effect of dilutive potential common shares, calculated to
be 4.6 million and 5.1 million shares, respectively. These dilutive
potential common shares consist of outstanding stock options.
Note 7 - 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. Restructuring and other special items,
primarily associated with the implementation of this plan, were
recorded in 2000 and 2001. These charges totaled $474 million pretax
($334 million aftertax), with $261 million ($197 million aftertax)
recorded in 2000 and $213 million ($137 million aftertax) recorded in
2001. The first quarter of 2001 included $22 million of charges
related to this plan.
The first quarter 2001 pretax charge of $22 million was comprised
of work force reduction costs of $15 million, asset impairments of $3
million and other exit costs of $4 million associated with facility
closures. The work force reduction costs included involuntary employee
separation costs for approximately 120 employees worldwide, including
positions in administration, manufacturing, and research and
development related to noncore programs. The affected employees are
entitled to receive severance benefits pursuant to established
severance policies or by governmentally mandated labor regulations.
The asset impairments consisted of $2 million for intangible assets
and $1 million (recorded within cost of goods sold) for the write-off
of seed inventories. The other exit costs included expenses associated
with contract terminations, equipment dismantling and disposal and
other shutdown costs resulting from the exit of certain research
8
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
programs and noncore activities. The company expects the remaining
asset dispositions and other exit activities associated with this plan
to be completed by Dec. 31, 2002. The remaining restructuring actions
will be funded from operations; these actions are not expected to
significantly affect the company's liquidity.
These first quarter amounts were recorded in the Statement of
Consolidated Income in the following categories:
Three Months Ended
March 31, 2001
------------------
Cost of Goods Sold $ (1)
Restructuring charges (21)
-----
Income (Loss) Before Income Taxes (22)
Income tax benefit (provision) 9
-----
Net Income (Loss) $ (13)
=====
There were no additional expenses incurred in 2002 relating to
this plan. Activities related to restructuring and other special items
for the three months ended March 31, 2002, were as follows:
Work Force Facility
Reductions Closures Total
---------- -------- -----
Jan. 1, 2002, Reserve Balance $ 35 $ 34 $ 69
Costs Charged Against Reserves (18) (13) (31)
---- ---- ----
March 31, 2002, Reserve Balance $ 17 $ 21 $ 38
==== ==== ====
During the first quarter of 2002, $3 million was paid to former
employees whose involuntary termination benefits were recorded in
2001, but elected to defer payment until 2002. For the quarter,
approximately 250 former employees received cash severance payments
totaling $15 million. The work force reduction payments for the
remaining 270 employees associated with this plan will be completed by
the end of 2002. Exit costs of $13 million associated with contract
terminations, equipment dismantling and disposal were also paid during
the first quarter of 2002.
Note 8 - Commitments and Contingencies
Monsanto is defending and prosecuting litigation in its own name.
In addition, Monsanto is defending and prosecuting certain cases that
were brought in Pharmacia's name and for which Monsanto assumed
responsibility upon the separation of its businesses from those of
Pharmacia. 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.
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. The company 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.
Although the results of litigation cannot be predicted with certainty,
it is management's belief that the final outcome of the litigation
discussed above will not have a material adverse effect on Monsanto's
financial position, profitability or liquidity.
On Feb. 3, 2002, the new government in Argentina announced
several reforms intended to stabilize the economic environment. The
government's programs continue to evolve at a rapid pace. It is
unclear what effect existing and new regulations and conditions might
have on the company's operations in Argentina, although they could
increase the company's risk of collecting its accounts receivable and
have a material adverse effect on the company's financial position,
profitability and liquidity. While the company has prepared its 2001
and 2002 financial statements relating to its Argentine operations on
9
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
a U.S. dollar functional basis, the functional currency designation in
Argentina may change based on future government economic reforms. The
peso-to-U.S. dollar exchange rate is 3.27-to-1.00 as of May 10, 2002.
While the company cannot determine how government actions in
Argentina will affect the outcome, it will aggressively pursue
collection of the $566 million of net outstanding receivables (as of
March 31, 2002) at full U.S. dollar value as they become due,
principally from May to July 2002. The Argentine agricultural markets
continue to be primarily export-oriented, and the agricultural
industry continues to operate in U.S. dollars. In March, the
government issued a decree ruling that U.S. dollar-denominated
contracts in such agriculture markets entered into prior to Jan. 6,
2002, must be honored at the same exchange parity as the one obtained
for exports of the agricultural products that contain the agricultural
inputs. However, the government recently levied a 20 percent tax on
agricultural exports. Furthermore, the exchange rate between the U.S.
dollar and peso will continue to fluctuate during the period when the
accounts receivable become due for collection. Because of the
unpredictability of these variables, it is not possible to estimate a
range of loss exposure related to the collectibility of accounts
receivable. As expected, the company has experienced minimal
collection activity year-to-date; the company will have a much more
reasonable basis for estimating its loss exposure, if any, during the
peak collection period from May to July 2002. The amount ultimately
collected in U.S. dollars could be significantly less than recorded
amounts.
In addition, the company's ability to repatriate funds from
Argentina may be restricted. The company may also have additional
exposure beyond increased collectibility risk. For example, the
company's sales, margins, and foreign-currency transactional
gains/losses, may be adversely affected based on fluctuations in
foreign-currency exchange rates and the level of inflation
experienced.
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. This risk management program focuses on the
unpredictability of financial markets and seeks to reduce the
potentially adverse effects that the volatility of these markets could
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 impacts of these exposures.
In accordance with SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", all derivatives, whether
designated in hedging relationships or not, are recognized in the
Statement of Consolidated Financial Position at their fair value. At
the time a derivative contract is entered into, Monsanto designates
the derivative as: (1) a hedge of the fair value of a recognized asset
or liability (a fair-value hedge); (2) a hedge of a forecasted
transaction or of the variability of cash flows that are to be
received or paid in connection with a recognized asset or liability (a
cash-flow hedge); (3) a foreign-currency fair-value or cash-flow hedge
(a foreign-currency hedge); (4) a foreign-currency hedge of the net
investment in a foreign subsidiary; or (5) a derivative that does not
qualify for hedge accounting treatment. Monsanto does not use
derivative financial instruments for trading purposes, nor does it
engage in commodity or interest rate speculation.
Changes in the fair value of a derivative that is highly
effective as, and that is designated and qualifies as a fair-value
hedge, along with changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk, are recorded
currently in earnings. Changes in the fair value of a derivative that
is highly effective as, and that is designated and qualifies as a
cash-flow hedge, to the extent that the hedge is effective, are
recorded in accumulated other comprehensive income (loss), until
earnings are affected by the variability from cash flows of the hedged
item. Any hedge ineffectiveness is included in current-period
earnings. Changes in the fair value of a derivative that is highly
effective as, and that is designated and qualifies as a
foreign-currency hedge are recorded in either current-period earnings
or accumulated other comprehensive income (loss), depending on whether
the hedging relationship satisfies the criteria for a fair-value or
10
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
cash-flow hedge. Changes in the fair value of a derivative that is
highly effective as, and that is designated as a foreign-currency
hedge of the net investment in a foreign subsidiary are recorded in
the accumulated foreign currency translation. Changes in the fair
value of derivative instruments not designated as hedges are reported
currently in earnings.
Fair-Value Hedges
Monsanto uses futures and option contracts to manage the value of
the corn and soybean seed inventories that it buys from growers.
Generally, the company hedges from 70 percent to 100 percent of the
corn and soybean inventory value, depending upon the crop and grower
pricing.
Interest rate swap agreements are used to reduce interest rate
risks and to manage interest exposure. Monsanto uses interest rate
swaps to convert its fixed-rate debt to variable-rate debt. The
resulting cost of funds may be lower or higher 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.
For the three months ended March 31, 2002, and March 31, 2001,
Monsanto recognized a net loss in cost of goods sold of less than $1
million and $0, respectively, which represented the ineffectiveness of
all fair-value hedges. No fair-value hedges were discontinued during
the first quarters of 2001 or 2002.
Cash-Flow Hedges
The company enters into contracts with a number of its seed
growers to purchase their output at the market prices in effect when
the individual growers elect to fix their contract prices. As a hedge
against possible commodity price fluctuations, the company purchases
futures and options contracts for corn and soybeans. The futures
contracts hedge the commodity price paid for these commodity purchases
while the options contracts limit the unfavorable effect that price
changes could have on these purchases.
Monsanto recognized a net loss of less than $1 million in cost of
goods sold for each of three month periods ended March 31, 2002, and
March 31, 2001, which represented the ineffectiveness of all cash-flow
hedges. No cash-flow hedges were discontinued during the three months
ended March 31, 2001, or March 31, 2002.
As of March 31, 2002, $2 million of aftertax deferred net losses
on derivative instruments accumulated in other comprehensive income
(loss) are expected to be reclassified to earnings during the next 12
months. The actual sales of the inventory, which are expected to occur
over the next 12 months, will necessitate the reclassification of 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 sometimes purchases foreign-exchange options and
forward-exchange contracts as hedges against 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. Financial instruments are
neither held nor issued by the company for trading purposes.
The company hedges a portion of its net investment in Brazilian
subsidiaries. The change in the fair value of these hedges at March
31, 2002, was an accumulated foreign currency translation loss of $23
million included in accumulated other comprehensive income.
11
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
Note 10 - Segment Information
Monsanto manages its business in two segments: Agricultural
Productivity, and Seeds and Genomics. The Agricultural Productivity
segment consists of crop protection products, animal agriculture, lawn
and garden herbicide products, and environmental technologies
businesses. The Seeds and Genomics segment consists of the global
seeds and related traits businesses, and genetic technology platforms.
Sales between segments were not significant. Segment data, as well as
a reconciliation of total Monsanto Company EBIT (earnings (loss)
before interest and income taxes) to net income for the three months
ended March 31, 2002, and March 31, 2001, is presented in the table
that follows.
Three Months Ended
March 31,
------------------
2002 2001
---- ----
Net Sales:
Agricultural Productivity $ 636 $ 808
Seeds and Genomics 585 498
---- ----
Total Monsanto $1,221 $1,306
====== ======
EBIT:
Agricultural Productivity $ 28 $ 139
Seeds and Genomics 116 (32)
---- ------
Total Monsanto $ 144 $ 107
Interest Expense - net of interest income (14) (19)
Income Tax Provision (44) (33)
---- ----
Net Income $ 86 $ 55
==== ====
Note 11 - Related-Party Transactions
On Sept. 1, 2000, Monsanto entered into a master transition
services agreement with Pharmacia, its majority shareowner. Some terms
under this master agreement expired on Dec. 31, 2001. New terms are
being negotiated in 2002, which do not differ nor are they anticipated
to differ materially from previously agreed terms. Under these
agreements, Monsanto provides certain administrative support services
to Pharmacia, and Pharmacia primarily provides information technology
support for Monsanto. In addition, the two companies pay various
taxes, capital project costs and payroll charges that are associated
with the business activities of the other. Monsanto and Pharmacia also
rent research 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 ended March 31, 2002, Monsanto recognized expenses of $8
million and recorded a reimbursement of $13 million for costs incurred
on behalf of Pharmacia. During the three months ended March 31, 2001,
Monsanto recognized expenses of $17 million and recorded a
reimbursement of $12 million for costs incurred on behalf of
Pharmacia. As of March 31, 2002, the company had a net receivable
balance (excluding dividends payable) of $6 million with Pharmacia. At
Dec. 31, 2001, the company had a net payable balance (excluding
dividends payable) of $43 million with Pharmacia. Federal income
taxes, transition services, capital project costs, employee benefits,
and information technology costs comprised the outstanding balances.
Since the IPO closing date, Pharmacia manages the loans and
deposits of Monsanto's ex-U.S. subsidiaries. Effective June 30, 2001,
certain Monsanto subsidiaries entered into an agency agreement to have
a Pharmacia subsidiary act as their 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.
Pharmacia is the counterparty for most of Monsanto's
foreign-currency exchange contracts. As of March 31, 2002, and Dec.
31, 2001, the fair value of the company's outstanding foreign-currency
exchange contracts were losses of $21 million and $7 million,
respectively. Fees were comparable to those that Monsanto would have
incurred with a third party.
12
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED (continued)
As of March 31, 2002, and Dec. 31, 2001, Monsanto was in a net
borrowing position of $581 million and $224 million, respectively,
with Pharmacia. Interest rates were comparable to those that Monsanto
would have incurred with a third party.
Monsanto and Pharmacia are in the process of separating their
noncontributory pension plans into Monsanto-only and Pharmacia-only
sponsored plans. Effective Jan. 1, 2002, the sponsorship of a plan, in
which Monsanto and Pharmacia employees participated, was transferred
from Pharmacia to Monsanto. The assets attributable to Pharmacia
employees and former Pharmacia employees were transferred to a new
Pharmacia-sponsored plan. The approximate fair value of assets,
projected benefit obligation, accumulated benefit obligation, net
pension liabilities, and related deferred tax assets assumed by
Monsanto as of Jan. 1, 2002, were approximately $980 million, $1.2
billion, $1.1 billion, $125 million, and $45 million, respectively.
The net offset of the assumed net pension liabilities and related
deferred tax assets was reflected as a reduction of additional
contributed capital in the Statement of Consolidated Shareowners'
Equity, as of Jan. 1, 2002.
On Feb. 21, 2002, Monsanto declared a quarterly dividend of $0.12
per share and recorded a related dividend payable to Pharmacia of $26
million, which was recorded in accrued liabilities. The $26 million
fourth quarter dividend was paid to Pharmacia during the first quarter
of 2002.
Note 12 - Subsequent Event
In April 2002, Monsanto announced a product discovery and
development collaboration with Ceres, Inc. (Ceres) focused on applying
genomics technologies to provide improvements in and to accelerate the
time to commercialization of certain agricultural crops. Under the
collaboration, Monsanto has acquired rights to certain of Ceres'
existing technologies in exchange for payments totaling $40 million
over the next five years. Ceres will also receive additional payments
subject to meeting specified objectives for developing additional
related technology, as part of its continuing commitment to
genomics-based product discovery. Monsanto will also fund a jointly
implemented research program and has made a minority equity investment
in Ceres. Total payments to Ceres under the collaboration (subject to
performance by Ceres) are expected to approximate $137 million over
the next five years, plus potential royalties. To date, Monsanto has
made payments of approximately $28 million.
13
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 its subsidiaries (here referred to as
Monsanto, Monsanto Company, or the company) is a global provider of
technology-based solutions and agricultural products for growers and
downstream customers, such as grain processors and food companies. Our
herbicides, seeds, and related genetic trait products can be combined
to provide growers with integrated solutions that help them produce
higher-yield crops, while controlling weeds, insects and diseases more
efficiently and cost-effectively. We also provide lawn and garden
herbicide products for the residential market.
We manage our business in two segments: Agricultural
Productivity, and Seeds and Genomics. The Agricultural Productivity
segment consists of the crop protection products, animal agriculture,
lawn and garden herbicide products, and environmental technologies
businesses. The Seeds and Genomics segment consists of the global
seeds and related traits businesses, and genetic technology platforms.
On Oct. 23, 2000, Monsanto sold approximately 38 million shares
of its common stock at $20 per share in an initial public offering
(IPO). Subsequent to the offering, Pharmacia owned and continues to
own 220 million shares of common stock, representing 84.6 percent
ownership of Monsanto as of March 31, 2002. In November 2001,
Pharmacia announced a plan to spin off its entire ownership of
Monsanto to Pharmacia shareowners by means of a tax-free dividend.
Pharmacia has stated that it plans to complete the spinoff during the
fourth quarter of 2002.
The primary operating performance measure for our two segments is
earnings before interest and income taxes (EBIT). Total company EBIT
for the first quarter of 2002 increased 35 percent to $144 million
from $107 million for the same period in the prior year. However, in
2001 and in prior years, special items significantly affected our
results. Additionally, our seed company acquisitions in 1998 and 1997
affected results by substantially increasing amortization expense
associated with intangible assets recorded at the time of acquisition.
Because of these acquisitions, EBIT in 2001 included amortization
expense related to goodwill and other intangible assets. However,
since the adoption on Jan. 1, 2002 of Statement of Financial
Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible
Assets", we no longer amortize our goodwill. (See Note 2 - New
Accounting Standards - of Notes to Consolidated Financial Statements -
for further details.) Thus, EBIT in 2002 only reflects amortization
related to other intangible assets. Accordingly, management believes
that earnings before interest, income 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) 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. In addition, this measure also eliminates the effects of
the special items described under "Events Affecting Comparability" and
in Note 7 - 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. EBITDA (excluding special
items) is not intended to replace net income, cash flows, financial
position, or comprehensive income (loss), as determined in accordance
with accounting principles generally accepted in the United States.
Management's Discussion and Analysis (MD&A) should be read in
conjunction with Monsanto's consolidated financial statements, 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, 2001. Financial information
for the first three months of 2002 should not be annualized. Monsanto
has historically generated the majority of its sales during the first
14
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
half of the year, primarily because of the concentration of sales due
to the timing of the planting and growing season in the Northern
Hemisphere.
Unless otherwise indicated, "Monsanto," "Monsanto Company" 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 - Background and Basis of Presentation - of
Notes to Consolidated Financial Statements. Unless otherwise
indicated, "earnings per share" and "per share" mean diluted earnings
per share. In the tables, all dollar amounts are in millions, except
for per share amounts. Trademarks owned or licensed by Monsanto or its
subsidiaries are shown in all capital letters. Unless otherwise
indicated, references to ROUNDUP herbicides mean ROUNDUP branded and
other glyphosate-based herbicides excluding lawn and garden
herbicides; references to ROUNDUP and other glyphosate-based
herbicides exclude lawn and garden herbicide products.
Results of Operations - First Quarter 2002 Compared with First Quarter 2001
---------------------------------------------------------------------------
Net income improved to $86 million, or $0.33 per share, for the
first quarter of 2002, compared with net income of $55 million, or
$0.21 per share, for the first quarter 2001. The first quarter of 2001
included an aftertax charge of $13 million related to special items.
See "Events Affecting Comparability" for further details. Excluding
the special items in 2001, net income for the first quarter of 2002
would have been $68 million, or $0.26 per share. As discussed in Note
2 and Note 4 of Notes to Consolidated Financial Statements, net income
for the first quarter of 2002 reflects a benefit of $23 million, or
$0.09 per share, from the absence of goodwill amortization resulting
from our adoption of SFAS No. 142.
Three Months Ended
March 31,
-------------------
Total Monsanto Company and Subsidiaries: 2002 2001
---------------------------------------- ---- ----
Net sales $1,221 $1,306
====== ======
Net income $ 86 $ 55
Add: interest expense - net of interest income 14 19
Income tax provision 44 33
--- ---
EBIT(1) 144 107
Add: special items - net - 22
--- ---
EBIT (excluding special items) 144 129
Add: depreciation and amortization 110 137
---- ----
EBITDA (excluding special items)(2) $ 254 $ 266
====== =====
(1) Earnings before interest and income taxes.
(2) Earnings before interest, income taxes, depreciation,
amortization and special items.
Net sales declined 7 percent to $1.2 billion for the three-month
period ended March 31, 2002 compared with $1.3 billion for the
three-month period ended March 31, 2001. Increased sales in the Seeds
and Genomics segment were more than offset by lower sales in the
Agricultural Productivity segment. The effect of foreign currency
exchange rates, primarily the euro and the Brazilian real, unfavorably
affected sales by 2 percent. Seeds and Genomics net sales benefited
from increased demand for our biotechnology traits, particularly
ROUNDUP READY and stacked traits. In addition, because of our move
from a technology fee system to a royalty system, certain trait
revenues that were previously recognized in the second quarter were
recognized in the third and fourth quarters of last year and the first
quarter of this year. In the Agricultural Productivity segment, sales
declined due to lower volumes and average selling prices of our
ROUNDUP and other glyphosate-based herbicides. First quarter 2002 net
sales of selective chemistry products also declined from 2001 net
sales levels, as did lawn and garden herbicide products.
Cost of goods sold decreased approximately 12 percent to $617
million for the three-month period ended March 31, 2002, from $699
million for the same period in 2001. This decrease was due to lower
15
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
sales in the Agricultural Productivity segment. Gross profit declined
slightly to $604 million for the first quarter of 2002, compared with
$607 million for the first quarter of 2001. Lower gross profit for our
Agricultural Productivity products, reflective of lower net sales in
the first quarter of 2002, was offset by increased gross profit from
biotechnology trait revenues. Gross profit as a percent of sales
increased from 46 percent in 2001 to 49 percent in 2002, due to the
increased sales of high-margin traits.
Selling, general and administrative (SG&A) expenses, which
remained relatively unchanged as a percentage of net sales, decreased
4 percent to $298 million for the first quarter of 2002, compared with
$310 million for the same period in 2001. Research and development
(R&D) expenses decreased 11 percent to $119 million for the first
quarter of 2002, compared with $134 million for the first quarter of
2001. We have achieved these lower spending levels through our
continued emphasis on cost management. We are also realizing savings
from our restructuring actions taken in 2000 and 2001.
Operating results in 2002 include the positive effect of
accounting changes related to the amortization of goodwill. In the
first quarter of 2001, we recorded $31 million of goodwill
amortization expense. Since adoption of SFAS No. 142 on Jan. 1, 2002,
we no longer amortize our goodwill.
Interest expense, net of interest income, decreased nearly 26
percent to $14 million for the first quarter of 2002, compared with
$19 million for the first quarter of 2001. The lower interest expense
reflects the benefit of lower average interest rates throughout the
first quarter of 2002, when compared with 2001.
We recorded other expense, net of other income, of $43 million in
the first quarter of 2002, compared with $4 million in the same period
in the prior year. In the first quarter of 2002, currency losses
included $24 million to reflect the further devaluation of our net
assets denominated in Argentine pesos. Currently, the net assets
denominated in Argentine pesos that could be affected by future
devaluation are in the $20 million to $30 million range. See "Outlook"
for further discussion of our exposure in Argentina. We also
recognized other expense in the first quarter of 2002 related to a
broad-reaching business agreement between Monsanto and certain
subsidiaries, E.I. du Pont de Nemours (DuPont) and DuPont's Pioneer
Hi-Bred International Inc. subsidiary. Under the agreement, the
parties agreed to resolve a number of important business and patent
disputes between them, and also agreed to new business arrangements,
including the granting of licenses. In 2001, other expense - net was
reduced by other income from a deferred payout provision related to a
past business divestiture.
Income tax provision increased 33 percent to $44 million for the
first quarter of 2002 compared with $33 million for the same period in
2001. This increase was largely because of the improvement in pretax
income. The effective tax rate declined to 34 percent for the three
months ended March 31, 2002, from 38 percent for the three months
ended March 31, 2001. The absence of goodwill amortization has led to
an improvement in the effective tax rate because the majority of our
historical goodwill amortization was not deductible for tax purposes.
Agricultural Productivity Segment
---------------------------------
Our Agricultural Productivity segment consists of our crop
protection products (ROUNDUP and other glyphosate-based herbicides and
selective chemistries) and our animal agriculture, lawn and garden
herbicide products, and environmental technologies businesses. We are
a leading worldwide developer, producer and marketer of crop
protection products, including ROUNDUP herbicides.
16
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Three Months Ended
March 31,
------------------
Agricultural Productivity Segment: 2002 2001
---------------------------------- ---- ----
Net sales $636 $808
==== ====
EBIT(1) 28 139
Add: special items - net - 13
-- ---
EBIT (excluding special items) 28 152
Add: depreciation and amortization 55 58
--- ---
EBITDA (excluding special items)(2) $ 83 $210
==== ====
(1) Earnings before interest and income taxes.
(2) Earnings before interest, income taxes, depreciation, amortization
and special items.
In the Agricultural Productivity segment, net sales declined 21
percent to $636 million for the first quarter of 2002, as compared
with $808 million in the first quarter of 2001. This decrease is
primarily attributable to lower net sales of our ROUNDUP and other
glyphosate-based herbicides. Sales from our other Agricultural
Productivity businesses were also lower quarter-over-quarter, with the
exception of our animal agriculture business.
Worldwide net sales for our ROUNDUP and other glyphosate-based
herbicides were $361 million for the first quarter of 2002, down 22
percent from $462 million in the first quarter last year. Volumes
declined 10 percent, driven primarily by declines in the United States
and Argentina. Worldwide prices declined approximately 13 percent,
with the largest effect in the United States. Excluding the effects of
foreign currency fluctuations, price declined 9 percent.
In the United States, a considerable decline in volumes and a
less significant decline in the average prices of products sold led to
an overall decrease in net sales. Distribution inventory levels are
higher than year-ago levels, but we believe that we are well
positioned to meet demand during the upcoming key ROUNDUP use season.
The decline in average selling prices was primarily a result of the
mix of products sold. In the first quarter of 2002 (our second year
post-patent), the mix of products sold included more lower-priced
glyphosate products when compared with those sold in the first quarter
of 2001.
Outside the United States, performance was mixed. More favorable
weather conditions early in the year led to higher sales in Canada,
and higher demand led to improved sales performance in Brazil.
However, these improvements were more than offset by declines in other
world areas. Generic price competition affected sales in Asia, and
economic conditions affected sales in Argentina.
Net sales of our other Agricultural Productivity products
decreased 21 percent, to $275 million in 2002 compared with $346
million in 2001. Sales of our selective chemistry products, in
particular our U.S. acetanilide products, decreased because of higher
product sales earlier in the 2002 selling season (which began in the
third quarter of 2001) when compared with the 2001 selling season.
Lawn and garden first quarter 2002 net sales decreased over the same
period last year. As previously announced by The Scotts Company
(Scotts), retailers are focused on minimizing their inventory levels
by more closely matching the timing of orders to anticipated sales to
their customers. As a result, 2002 lawn and garden sales are expected
to occur later in the year. Higher sales in our animal agriculture
business, led by an increase in POSILAC bovine somatotropin, slightly
offset the declines in the other Agricultural Productivity businesses.
Operating expenses for the Agricultural Productivity segment
remained relatively unchanged for the first three months of 2002
compared with the first three months of 2001, increasing less than one
percent from the first quarter of 2001. Other expense increased
significantly, primarily because of currency losses related to the
devaluation of the Argentine peso.
17
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Agricultural Productivity segment EBIT declined significantly to
$28 million for the three-month period ended March 31, 2002, as
compared with $139 million for the same period in 2001. EBIT for the
first quarter of 2001 was affected by special items; EBIT (excluding
special items) for the first quarter of 2001 was $152 million. The
EBIT decline was principally due to an overall decline in net sales of
our crop protection products. Gross profit as a percentage of sales
for the segment decreased almost 4 percent, primarily because of lower
average selling prices and lower sales volumes of ROUNDUP and other
glyphosate-based herbicides.
Seeds and Genomics Segment
--------------------------
The Seeds and Genomics segment consists of our global seeds and
related trait business, and genetic technology platforms. We produce
leading seed brands, including DEKALB and ASGROW, and we provide our
seed partners with biotechnology traits for herbicide tolerance and
insect protection.
Three Months Ended
March 31,
------------------
Seeds and Genomics Segment: 2002 2001
--------------------------- ---- ----
Net sales $585 $498
==== ====
EBIT(1) 116 (32)
Add: special items - net - 9
-- --
EBIT (excluding special items) 116 (23)
Add: depreciation and amortization 55 79
--- ---
EBITDA (excluding special items)(2) $171 $ 56
==== ====
(1) Earnings (loss) before interest and income taxes.
(2) Earnings (loss) before interest, income taxes, depreciation,
amortization and special items.
Net sales for the Seeds and Genomics segment increased 17 percent
to $585 million for the first quarter of 2002 from $498 million in the
same period in 2001. This growth was led by Monsanto's soybean and
corn technology traits, which delivered strong quarterly results. The
growth reflects continued increasing demand for our biotechnology
traits, and to an equal extent, a shift in the timing of sales from
the second quarter to the first quarter.
An increasingly higher percentage of our seed sales contain a
biotechnology trait, demonstrating growing demand for our
biotechnology products. Growth has been particularly strong for our
ROUNDUP READY traits. Our new approach to the market has also
contributed to the higher trait revenues. Starting with the 2002
selling season, we have eliminated the technology fee paid by growers
who plant crops containing certain of our technologies and replaced it
with a royalty paid by the seed companies licensed to market those
products. This change resulted in trait revenues being recognized
earlier - certain trait revenues that would have previously been
recognized in the second quarter were recognized in the third and
fourth quarters of 2001 and the first quarter of 2002. Higher corn
sales also contributed to the net sales growth, reflecting an expected
increase in planted acreage of corn this year. Quarter-over-quarter,
corn sales also rose because of the higher-than-anticipated corn seed
returns that we experienced last year in Latin America. These
increases were partially offset by overall lower soybean seed sales.
According to the "Prospective Plantings" report published by the U.S.
Department of Agriculture (U.S.D.A.) National Agricultural Statistics
Service, planted acreage of soybeans in the United States is expected
to be lower this year.
Seeds and Genomics gross profit increased 45 percent in the first
quarter of 2002 compared with the first quarter of 2001. Gross profit
as a percentage of net sales improved nearly 11 percentage points
during the same period. This improvement is primarily a result of
increased biotechnology trait revenues, which are high margin
contributors. Lower seed production costs also contributed to the
gross profit improvement. Last year, gross profit was negatively
affected by higher-than-anticipated corn seed returns in Latin
America.
SG&A and R&D expenses decreased 13 percent and 11 percent,
respectively, for the first quarter of 2002 compared with the first
18
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
quarter of 2001. We have successfully continued to control our costs
and focus our research efforts on our key crops. Other expense - net
in 2002 includes the effect of the devaluation of our net assets
denominated in Argentine pesos, while other expense - net in 2001
benefited from a deferred payout provision related to a past business
divestiture.
EBIT for the Seeds and Genomics segment improved to $116 million
in the first quarter of 2002 versus a loss of $32 million in the first
quarter 2001. This increase was fueled by an increase in high-margin
trait revenues and, to a lesser extent, lower operating expenses.
Special items impacted the first quarter of 2001; EBIT (excluding
special items) for the Seeds and Genomics segment was a loss of $23
million in the first quarter of 2001.
Our Agreement with The Scotts Company
-------------------------------------
In 1998, Monsanto entered into an agency and marketing agreement
with Scotts with respect to our lawn and garden herbicide 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 lawn and garden business. Scotts' payment of
a portion of this fee owed in each of the first three years of the
agreement was deferred and is required to be paid at later dates, 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 SG&A. We are also accruing interest on the amounts owed
by Scotts and are including such amounts in interest income. The total
amounts owed by Scotts, including accrued interest, were $49 million
as of March 31, 2002, and $48 million as of Dec. 31, 2001,
respectively. Scotts is required to begin paying these deferred
amounts at $5 million per year in monthly installments beginning Oct.
1, 2002.
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. Restructuring and other special items,
primarily associated with the implementation of this plan, were
recorded in 2000 and 2001. These charges totaled $474 million pretax
($334 million aftertax), with $261 million ($197 million aftertax)
recorded in 2000 and $213 million ($137 million aftertax) recorded in
2001. Pretax charges of $22 million were recorded in the first quarter
of 2001. The first quarter 2001 charge was primarily associated with
employee termination severance costs and facility closures related to
certain R&D programs and noncore activities.
These amounts were recorded in the Statement of Consolidated
Income in the following categories:
Three Months Ended
March 31, 2001
------------------
Cost of Goods Sold $ (1)
Restructuring charges - net (21)
-----
Income (Loss) Before Income Taxes (22)
Income tax benefit 9
-----
Net Income (Loss) $ (13)
=====
There were no additional expenses incurred in 2002 related to
this plan. Cash payments to complete our restructuring plan will be
funded from operations and are not expected to significantly affect
our liquidity. We expect to complete these actions by the end of 2002.
We anticipate that they will yield annual cash savings of more than
$100 million. See Note 7 - Special Items - of Notes to Consolidated
Financial Statements for further details.
In April 2002, we announced a new restructuring plan to further
streamline our organizational structure. Charges to this plan will not
exceed $124 million, and will be related primarily to facility
rationalizations and work force reductions. Charges related to this
plan will be recorded during 2002, beginning in the second quarter.
Approximately half of the restructuring expenses associated with this
plan are expected to require cash outlay; the cash payments to
complete this plan will be funded from operations and are not expected
to significantly affect our liquidity. The remaining charges will be
non-cash.
19
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Changes in Financial Condition - March 31, 2002 Compared with Dec. 31, 2001
---------------------------------------------------------------------------
March 31, 2002 Dec. 31, 2001
-------------- -------------
Working capital $2,589 $2,420
Current ratio 1.95:1 2.02:1
Debt-to-total capitalization 25% 19%
Our working capital at March 31, 2002, increased approximately
$170 million from Dec. 31, 2001, working capital to $2.6 billion.
Current assets and current liabilities increased from Dec. 31, 2001,
to March 31, 2002, driven by higher receivables and short-term
borrowings, offset somewhat by lower accrued liabilities.
Trade receivables increased due to the seasonality of our
business, amplified by the shift in trait revenues. First quarter 2002
worldwide collections were lower than first quarter 2001 collections,
primarily because of a successful customer prepayment program at the
end of 2001.
In 2002, we will continue to focus on improving collections and
will also pursue new financing options for our customers. For example,
in April 2002 we announced the establishment of a financing program
developed in cooperation with Bank One. This financing program will
provide up to $500 million in financing to our key U.S. distributors
for the purchase of Monsanto products. Under the program, a lending
company administered by Bank One will make loans to the distributors,
the proceeds of which will be used to pay for their product purchases
from Monsanto. The distributors' loan obligations are guaranteed by
Monsanto up to a maximum amount of $100 million.
Accrued liabilities declined from Dec. 31, 2001, because of
payments to growers for corn and soybean inventories and, to a lesser
extent, employee incentive payments. Total debt as of March 31, 2002,
and consequently debt-to-total capitalization, increased when compared
with Dec. 31, 2001 debt and debt-to-total capitalization levels. This
increase is consistent with the seasonality of our business. At March
31, 2002, our borrowings included a related party loan payable of $592
million, a $338 million increase from year-end, reflecting short-term
loans from Pharmacia.
Under our present debt structure, we use short-term commercial
paper and loans from Pharmacia to fund our operating cash
requirements. Pharmacia has announced its intention to spin off its
remaining interest in Monsanto, and after such spinoff, we do not
expect to have access to borrowings from Pharmacia. This could affect
our liquidity, as our capital structure will likely be affected by a
shift from short-term to longer-term borrowings and a resulting
increase in interest costs. As of March 31, 2002, we have unused
committed external borrowing facilities amounting to $1.5 billion.
Free cash flow (representing cash flows from operations less cash
required for investing activities) for the first quarter of 2002 was
relatively unchanged from free cash flow for the same period last
year, at a use of $915 million. Our operations required $866 million
in the first quarter of 2002, compared with $816 million in the first
quarter of 2001. Our first quarter 2002 receivable collections were
lower than first quarter 2001 collections, primarily because of
customer prepayments received late last year. Lower employee incentive
payments slightly mitigated the effect of lower collections. Capital
expenditures in the first quarter of 2002 declined from the first
quarter of 2001, as we continue to manage our capital expenditures.
Critical Accounting Policies
----------------------------
Monsanto regularly reviews its selection and application of
significant accounting policies and related financial disclosures. The
20
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
discussion of past performance in MD&A is based upon Monsanto's
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United
States. Our significant accounting policies are described in Note 2 -
Significant Accounting Policies - of Notes to Consolidated Financial
Statements contained in our annual report on Form 10-K for the year
ended Dec. 31, 2001. The application of these accounting policies
requires that management make estimates and judgments. On an ongoing
basis, Monsanto evaluates its estimates, which are based on historical
experience, market and other conditions, and on assumptions that we
believe to be reasonable. Actual results may differ from these
estimates due to actual market and other conditions, and assumptions
being significantly different than was anticipated at the time of the
preparation of these estimates. Such differences may affect financial
results. The estimates that affect the application of our most
critical accounting policies and require our most significant
judgments are outlined in Management's Discussion and Analysis of
Financial Condition and Results of Operations - "Critical Accounting
Policies"- contained in our annual report on Form 10-K for the year
ended Dec. 31, 2001.
New Accounting Standards
------------------------
SFAS No. 141, "Business Combinations", requires that the purchase
method of accounting be used for all business combinations initiated
after June 30, 2001, thereby eliminating the pooling-of-interests
method. It also provides broader criteria for identifying which types
of acquired intangible assets must be recognized separately from
goodwill and which must be included in goodwill. We adopted 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
required Monsanto to reassess the useful lives, residual values, and
classification of all identifiable and recognized intangible assets.
Any necessary prospective amortization period adjustments were made
Jan. 1, 2002.
On Jan. 1, 2002, Monsanto adopted SFAS No. 142, which changes the
accounting for goodwill from an amortization method to an
impairment-only method. Under SFAS No. 142, all goodwill amortization
ceased effective Jan. 1, 2002. Goodwill will now be tested for
impairment in conjunction with a transitional goodwill impairment test
in 2002 and at least annually thereafter. The first step of the
transitional impairment test indicated potential impairments in the
corn and wheat reporting units. Any resulting impairment charge will
be specific to the corn and wheat reporting units, relating to
goodwill that resulted primarily from our 1998 and, to a lesser
extent, 1997 seed company acquisitions. The second step of the
impairment test is currently underway, and any resulting charge has
not yet been finalized. The resulting impairment charges, if any, will
be recorded as a cumulative effect of accounting change in the second
quarter of 2002.
SFAS No. 142 did not require that prior periods be restated. Had
Monsanto adopted the new accounting standard as of Jan. 1, 2001,
Monsanto would not have recorded $31 million of goodwill amortization
expense in the first quarter of 2001, but R&D expenses would have
increased by $2 million because of the reassessment of useful lives
and classifications. In addition and related to these changes, income
tax expense would have increased by $6 million for the first quarter
of 2001. The net effect of these items would have increased first
quarter 2001 and full-year 2001 earnings per share by $0.09 per share
and $0.40 per share, respectively. Because of the seasonality of the
agricultural business, quarterly financial information should not be
annualized. For further details see Note 4 - Goodwill and Other
Intangible Assets - of Notes to Consolidated Financial Statements.
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 addresses financial accounting
for and reporting of costs and obligations associated with the
retirement of tangible long-lived assets. This statement will become
effective for Monsanto on Jan. 1, 2003. Monsanto has not yet
determined the effect adoption of this standard will have on its
consolidated financial position or its results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which replaces SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of". SFAS No. 144, which was
effective for Monsanto on Jan. 1, 2002, establishes an accounting
model for long-lived assets to be disposed of by sale. It applies to
all long-lived assets, including discontinued operations. The adoption
of SFAS No. 144 did not have a material effect on our consolidated
financial position or results of operations.
21
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Outlook - Update
----------------
Focused Strategy
----------------
We believe that our focused approach to the business and the
value we bring to our customers will allow us to maintain an industry
leadership position. We continue to face a difficult agricultural and
economic environment, especially in Latin America. While growth from
our traditional products will be challenged in these conditions, we
believe that our portfolio of integrated products and services
continues to offer farmers cost-effective and value-added solutions.
Our current business and continued cost management are important in
the near-term, while gaining biotechnology acceptance and continued
development of our research pipeline are important to our future
growth.
We remain committed to managing our operating costs and improving
our cash position through working capital and capital expenditure
management. Our investments in improved technologies are part of the
plan to increase overall glyphosate capacity and to operate in a more
cost-effective manner. As part of our emphasis on working capital, we
have focused on receivables collections and also have instituted more
stringent credit policies. We will continue to seek new external
financing alternatives for our customers to supplement our recently
announced financing program. Our working capital challenges in 2002
will be receivables management in Latin America, particularly in
Argentina and Brazil.
Latin America
-------------
Our primary receivables focus has been centered on, and remains
centered on, the key agricultural markets of Argentina and Brazil. We
have a strong presence in these countries, and we will continue to
operate there because of their importance to our business.
We have been affected by significant changes in Argentine
monetary legislation and a decline in the value of the Argentine peso.
The economic situation in Argentina continues to evolve. It is unclear
what effect existing and new regulations and conditions might have on
our business in Argentina, although they could increase our risk of
collecting our accounts receivable and have a material adverse effect
on our financial position, profitability and liquidity. While we have
prepared our 2001 and 2002 financial statements relating to our
Argentine operations on a U.S. dollar functional basis, the functional
currency designation in Argentina may change based on future
government economic reforms. Prior to the devaluation, the Argentine
peso was pegged to the U.S. dollar, but was trading at 3.27 pesos to
the U.S. dollar as of May 10, 2002.
While we cannot determine how government actions in Argentina
will affect the outcome, we will aggressively pursue collection of the
$566 million of net outstanding receivables (as of March 31, 2002) at
full U.S. dollar value as they become due, principally from May to
July 2002. The Argentine agricultural markets continue to be primarily
export-oriented, and the agricultural industry continues to operate in
U.S. dollars. In March, the government issued a decree ruling that
U.S. dollar-denominated contracts in such agriculture markets entered
into prior to Jan. 6, 2002, must be honored at the same exchange
parity as the one obtained for exports of the agricultural products
that contain the agricultural inputs. However, the government recently
levied a 20 percent tax on agricultural exports. Furthermore, the
exchange rate between the U.S. dollar and peso will continue to
fluctuate during the period when the accounts receivable become due
for collection. Because of the unpredictability of these variables, it
is not possible to estimate a range of loss exposure related to the
collectibility of accounts receivable. As expected, we have
experienced minimal collection activity year-to-date; we will have a
much more reasonable basis for estimating our loss exposure, if any,
during our peak collection period from May to July 2002. The amount we
ultimately collect in U.S. dollars could be significantly less than
the recorded amounts.
22
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
In addition, our ability to repatriate funds from Argentina may
be restricted. We may also have additional exposure beyond increased
collectibility risk. For example, our sales, margins and
foreign-currency transactional gains/losses may be adversely affected
based on fluctuations in foreign-currency exchange rates and the level
of inflation experienced.
We continually evaluate our approach to the business, especially
in light of current economic conditions. Until there is more clarity
in the economic policies, the majority of future sales in Argentina
will be made for either cash or grain. Due to the changing economic
conditions, we are changing the method by which we account for our
Latin American grain sales program to no longer record revenues and
cost of goods sold of essentially the same amount on the conversion of
grain to cash. Under the nature of the current program, we no longer
take ownership of the grain, thereby eliminating the associated
inventory risk. Results for 2001 included net sales of approximately
$65 million related to this program, with minimal contribution to
gross margin and EBIT.
ROUNDUP Herbicide
-----------------
ROUNDUP herbicide is key to our integrated strategy. Primary
drivers for ROUNDUP growth in the future will be ROUNDUP use in
conjunction with conservation tillage systems and growth in ROUNDUP
READY crops. Conservation tillage helps 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 conservation tillage and applications of ROUNDUP over the top
of ROUNDUP READY crops.
We expect to continue to selectively reduce average prices
through new formulations, discounts, rebates or other promotional
strategies to encourage new uses and to increase our sales volumes.
This strategy likely will result in a reduction in our gross margin,
consistent with the reduction in recent years, as we have implemented
a price-elasticity strategy. Without patent protection worldwide,
ROUNDUP herbicide continues to face competition from generic producers
and marketers, whose pricing policies in some instances cause downward
pressure on our prices. Since the expiration of our glyphosate patent
in 2000, we also face these pressures in the United States. ROUNDUP
prices are expected to decline in the United States, as they have
outside the United States. Our brands, new formulations, support by
distributors, logistics and manufacturing capabilities are key factors
in this competitive environment. Although we continually monitor
grower use of our products and related distribution inventory levels,
distribution channel inventories are higher in the United States than
they were prior to expiration of our patent for ROUNDUP. Higher
product levels at our distributors could adversely affect our future
sales. Further, an unanticipated rate of reduction in prices of
competitive glyphosate products could have a material adverse affect
on ROUNDUP pricing and the company's financial results. However, we
have faced similar issues in a post patent environment in other world
areas, and expect to be able to address these issues in the U.S.
market.
In Brazil, distributors have increased their levels of
inventories. Although we continually monitor grower use of our
products and related distribution inventory levels, high levels of
product at our distributors could adversely affect our future sales.
Seed Biotechnology
------------------
Biotechnology traits offer growers several benefits: lower costs,
greater convenience, higher yields, and the ability to adopt
environmentally sound practices like conservation tillage. According
to the "Prospective Plantings" report published by the U.S.D.A.
National Agricultural Statistics Service, U.S. biotechnology acreage
is expected to increase for the sixth consecutive year. Worldwide, the
number of acres planted with biotechnology traits developed by
Monsanto increased approximately 14 percent to 118 million acres in
2001, from 103 million acres in 2000.
Gaining global acceptance of biotechnology is another key part of
our strategy. In March 2002, our seed partner in India, Maharashtra
Hybrid Seed Company Limited, received commercial approval for BOLLGARD
insect-protected cotton. This is the first biotechnology crop approved
by India, one of the world's largest cotton producing countries.
Proceedings are pending before the Indian courts seeking to overturn
the government's authorization for the commercial release of insect-
protected cotton. To date, the courts have denied applications for
injunctive relief and planting is occurring. We believe that the
challenges are without merit and that commercialization of our
technology will be allowed to continue. We are focused on completing
the steps necessary for approval in Brazil
23
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
(planting ROUNDUP READY soybeans), Europe (importing corn that may
contain a ROUNDUP READY trait), and the United States (planting
BOLLGARD II and YIELDGARD corn rootworm-protected products).
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 these issues, and to
achieving greater acceptance, efficient regulation, and timely
commercialization of biotechnology products.
We also continue to address concerns about the unintended or
adventitious presence of biotechnology materials in seed, crops or
food. We expect these types of issues to continue. We are addressing
the issue of adventitious presence through our own seed quality
programs, by working with others in seed, feed and food industry
associations, by developing information to improve both understanding
and management of seed quality, and by continuing to press for
regulations which recognize and accept the adventitious presence of
biotechnology traits.
A new pricing structure and approach to the market in place
starting with the 2002 selling season has resulted in a shift in the
recognition of certain trait revenues from the second quarter of 2002
to the last half of 2001 and the first quarter of 2002. We decided to
change from a technology fee system to a royalty system to simplify
the purchase of seed with our traits and to allow seed companies to
have more flexibility in pricing their products.
Monsanto and DuPont recently announced a broad-reaching business
agreement that included the resolution of all pending lawsuits and the
granting of technology licenses, including royalty-bearing licenses to
Monsanto's ROUNDUP READY corn and soybean technologies. Though the net
effect of this agreement was immaterial to our net income for the
first quarter of 2002, this agreement will contribute to our net
income going forward.
Other Information
-----------------
In April 2002, Monsanto announced a product discovery and
development collaboration with Ceres, Inc. (Ceres) focused on applying
genomics technologies to provide improvements in and to accelerate the
time to commercialization of certain agricultural crops. Under the
collaboration, Monsanto has acquired rights to certain of Ceres'
technologies in exchange for payments totaling $40 million over the
next five years. Ceres will also receive additional payments subject
to meeting specified objectives for developing additional related
technology, as part of its continuing commitment to genomics-based
product discovery. Monsanto will also fund a jointly implemented
research program and has made a minority equity investment in Ceres.
Total payments to Ceres under the collaboration (subject to
performance by Ceres) are expected to approximate $137 million over
the next five years, plus potential royalties. To date, Monsanto has
made payments of approximately $28 million.
As discussed in Note 8 - Commitments and Contingencies - of Notes
to the 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 evolves.
This Outlook section should be read in conjunction with outlook
information in our annual report for the year ended Dec. 31, 2001,
which is incorporated by reference into our annual report on Form
10-K. For additional information about the outlook for Monsanto, see
"Cautionary Statements Regarding Forward Looking Information," below.
24
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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.
The transition period for conversion to the euro was from Jan. 1,
1999, to Jan. 1, 2002, at which time the euro became legal tender for
the 12 participating member countries. On Jan. 1, 1999, we began to
engage in euro-denominated transactions and were legally compliant.
All affected information systems were fully converted by December
2001. We have not experienced, nor do we expect to experience, a
material effect on our competitive position, business operations,
financial position, or results of operations as a result of the euro
conversion.
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: statements about our business plans; statements
about the potential for the development, regulatory approval, and
public acceptance of new products; estimates of future financial
performance; predictions of national or international economic,
political or market conditions; statements regarding 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.
Competition for ROUNDUP Herbicide: ROUNDUP herbicide 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 2000.
ROUNDUP herbicide is likely to face increasing competition in the
future, including in the United States. In order to compete
successfully in this environment, we rely on a combination of (1)
marketing strategy, (2) pricing strategy, and (3) decreased production
costs.
Marketing Strategy: We expect to increase ROUNDUP sales volumes
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 of ROUNDUP READY seed acreage, and on our ability to develop
services and marketing programs that are attractive to our customers.
Pricing Strategy: Historically, we have selectively reduced the
net sales price of ROUNDUP herbicide worldwide in order to increase
volumes and penetrate new markets. 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. However, there can be no guarantee that
price reductions will stimulate enough volume growth to offset the
price reductions and increase revenues.
25
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
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 glyphosate.
Realization and Introduction of New Products: Our ability to
develop and introduce new products to market, particularly new
agricultural biotechnology products, will depend on, among other
things, the availability of sufficient financial resources to fund
research and development needs; the success of our research efforts;
our ability to gain acceptance through the chain of commerce (e.g., by
processors, food companies, and consumers); our ability to obtain
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 trade and
marketability of these products may deter farmers from planting them,
even in countries where planting and consumption have been fully
approved.
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 can be no guarantee of the timing or granting of approvals.
Regulatory authorities can block the sale or import of our products,
order recalls, and prohibit planting of seeds containing our
technology. As agricultural biotechnology continues to evolve, 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 traits in precommercial seed,
commercial seed varieties, or the crops and products produced can
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. Concerns
about seed quality related to biotechnology could also lead to
additional requirements such as seed labeling and traceability.
Concerns about unintended biotechnology traits in grain or food could
lead to additional government regulations and to consumer concerns
26
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
about the integrity of the food supply chain from the farm to the
finished product. Together with other seed companies and industry
associations, we are actively seeking sound, science-based rules and
regulatory interpretations that would clarify the legal status of
trace adventitious amounts of biotechnology traits in seed, crops and
food. This may involve the establishment of threshold levels for the
adventitious presence of biotechnology traits, and standardized
sampling and testing methods. Although we believe that thresholds are
already implicit in some existing laws, the establishment of
appropriate regulations would provide the basis for recognition and
acceptance of the adventitious presence of biotechnology traits.
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 may be kept
secret, or if published like those outside the United States,
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 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.
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 also
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 subject to
weather conditions and natural disasters that affect commodity prices,
seed yields, and grower decisions about purchases of seeds, traits and
herbicides. In addition, 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, seed and biotechnology
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, our ability
to collect customer receivables, and our ability to repatriate funds
from ex-U.S. operations. 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 refinance our short-term debt as it becomes due, would
increase our interest costs and adversely affect our sales and our
profitability.
Litigation and Contingencies: We are involved in numerous major
lawsuits regarding contract disputes, intellectual property issues,
biotechnology issues, antitrust allegations and other matters. Adverse
outcomes could subject us to substantial damages or limit our ability
to sell our products. In addition, in connection with the separation
of our businesses from those of Pharmacia Corporation on Sept. 1,
2000, and pursuant to a Separation Agreement entered into on that date
(the "Separation Agreement"), we assumed, and agreed to indemnify
Pharmacia for, any liabilities primarily related to Pharmacia's former
agricultural or chemical businesses. Under the Separation Agreement,
we agreed to indemnify Pharmacia for any liabilities that Solutia Inc.
had assumed from Pharmacia in connection with the spinoff of Solutia
on Sept. 1, 1997, to the extent that Solutia fails to pay, perform or
discharge those liabilities. This indemnification obligation applies
to litigation, environmental and all other liabilities that were
assumed by Solutia.
27
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Distribution of Products: In order to successfully market our
products, we must estimate growers' needs, and successfully match the
level of product at our distributors to those needs. If distributors
do not have enough inventory of our products at the right time, our
current sales will suffer. On the other hand, high product inventory
levels at our distributors may cause revenues to suffer in future
periods as these distributor inventories are worked down, particularly
in the event of unanticipated price reductions.
Cost Management: Our ability to meet our short- and long-term
objectives requires that we manage our costs successfully, without
adversely affecting our performance. Changing business conditions or
practices may require us to reduce costs to remain competitive. If we
are unable to identify cost savings opportunities and successfully
reduce costs and maintain cost reductions, our profitability will be
affected.
Accounting Policies and Estimates: In accordance with generally
accepted accounting principles, we adopt certain accounting policies,
such as policies related to the timing of revenue recognition and
other policies described in our financial statements. Changes to these
policies may affect future results. There may also be changes to
generally accepted accounting principles, which may require
adjustments to financial statements for prior periods and changes to
the company's accounting policies and financial results prospectively.
In addition, we must use certain estimates, judgments and assumptions
in order to prepare our financial statements. For example, we must
estimate matters such as levels of returns, collectibility of
receivables, and the probability and amount of future liabilities. If
actual experience differs from our estimates, adjustments will need to
be made to financial statements for future periods, which may affect
revenues and profitability. Finally, changes in our business practices
may result in changes to the way we account for transactions, and may
affect comparability between periods.
Operations 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. In
addition, we engage in manufacturing, seed production, sales, and/or
research and development in many parts of the world. Although we have
operations in virtually every region, our ex-U.S. sales are
principally in Argentina, Brazil, Canada, France, Mexico, Australia
and Japan. Accordingly, developments in those parts of the world
generally have a more significant effect on our operations than
developments in other places. Operations outside the United States are
potentially subject to a number of unique risks and limitations,
including, among others, fluctuations in currency values and
foreign-currency exchange rates; exchange control regulations; changes
in a specific country's or region's political or economic conditions;
weather conditions; import and trade restrictions; import or export
licensing requirements and trade policy; unexpected changes in
regulatory requirements; and other potentially detrimental domestic
and foreign governmental practices or policies affecting United States
companies doing business abroad. 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.
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, 2001.
28
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Pursuant to the Separation Agreement between Monsanto Company and
Pharmacia Corporation, 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 some of these cases, we manage the
litigation. 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. The discussion below includes certain proceedings to which
Pharmacia is a party and which we are defending or prosecuting, as
well as proceedings to which Monsanto is a party in its own name.
Monsanto is also involved in other legal proceedings arising in the
ordinary course of business. While the results of litigation cannot be
predicted with certainty, we do not believe that the resolution of the
proceedings that we are defending or prosecuting, either individually
or taken as a whole, will have a material adverse effect on our
financial position, profitability or liquidity. We have meritorious
legal arguments and will continue to represent our interests
vigorously in all of these proceedings.
In addition to the proceedings described below, to which
Pharmacia or we are a party and which we are defending or prosecuting,
pursuant to the Separation Agreement we have assumed, and agreed to
indemnify Pharmacia for, any liabilities primarily related to
Pharmacia's former agricultural or chemical businesses. Under the
Separation Agreement, we agreed to indemnify Pharmacia for any
liabilities that Solutia Inc. ("Solutia") had assumed from Pharmacia
in connection with the spinoff of Solutia on Sept. 1, 1997 (the
"Solutia Spinoff"), to the extent that Solutia fails to pay, perform
or discharge those liabilities. This indemnification obligation
applies to litigation, environmental and all other liabilities that
were assumed by Solutia, and which are not included in the discussion
below. For example, pursuant to the Distribution Agreement entered
into in connection with the Solutia Spinoff (the "Distribution
Agreement"), Solutia assumed responsibility for litigation currently
pending in state and federal court in Alabama brought by several
thousand plaintiffs, alleging property damage, anxiety and emotional
distress and personal injury arising from exposure to polychlorinated
biphenyls (PCB's), which were discharged from an Anniston, Alabama
plant site that was formerly owned by Pharmacia and that was
transferred to Solutia as part of the Solutia Spinoff. Pursuant to the
terms of the Distribution Agreement, Solutia is required to indemnify
Pharmacia for liabilities that Pharmacia incurs in connection with
this litigation. Pursuant to the terms of the Separation Agreement,
Monsanto would be required to indemnify Pharmacia in the event that
Solutia failed to pay or discharge such liabilities or to indemnify
Pharmacia therefor.
The following updates certain proceedings to which Pharmacia or
we are a party and for which we are responsible. In that discussion,
we use the phrase "the former Monsanto Company" to refer to Pharmacia
Corporation prior to the date of the Separation Agreement. Other
information with respect to legal proceedings appears in our annual
report on Form 10-K for the year ended Dec. 31, 2001.
29
The following proceedings, described in Monsanto's annual report
on Form 10-K for the year ended Dec. 31, 2001, have been settled
pursuant to a Master Settlement Agreement and Release entered into on
April 1, 2002, with E. I. du Pont De Nemours and Company ("DuPont")
and its subsidiary, Pioneer Hi-Bred International Inc. ("Pioneer").
Pursuant to this agreement (the "DuPont/Pioneer Settlement"), the
parties resolved a number of important business and patent disputes,
and also agreed to new business arrangements, including the granting
of licenses:
o two lawsuits filed by Pioneer on Oct. 28, 1998, in United States
District Court for the Southern District of Iowa, against DEKALB
Genetics Corporation ("DEKALB Genetics") and Asgrow Seed Company,
LLC ("Asgrow") (both of which are now our subsidiaries), alleging
misappropriation of trade secrets;
o a lawsuit filed by the former Monsanto Company on Dec. 8, 1999,
in United States District Court for the Eastern District of
Missouri, against Pioneer, relating to a technology license for
glyphosate-tolerant soybeans and canola;
o a lawsuit filed by DEKALB Genetics on April 30, 1996, in United
States District Court for the Northern District of Illinois,
against Pioneer, regarding infringement of patents covering the
microprojectile method for producing fertile, transgenic corn
plants covering a bar or pat gene, as well as the production and
breeding of progeny of such plants;
o a lawsuit filed by Pioneer on May 30, 2001, in United States
District Court for the Northern District of Illinois, against
Monsanto and DEKALB Genetics, alleging sham litigation filed in
alleged violation of the antitrust laws;
o a lawsuit filed by DEKALB Genetics on July 2, 1999, in United
States District Court for the Northern District of Illinois,
against Pioneer in a patent interference action to declare that
DEKALB Genetics was the first inventor of the microprojectile
method of producing fertile transgenic corn;
o a lawsuit filed by Pioneer on Nov. 23, 1999, in the United States
District Court for the Eastern District of Iowa, against the
former Monsanto Company and DEKALB Genetics, for alleged
infringement of Pioneer's patent pertaining to the
microprojectile transformation of corn;
o a lawsuit filed by DuPont on March 27, 2000, in United States
District Court for the District of South Carolina, against the
former Monsanto Company, alleging violations of federal antitrust
acts and state law in connection with glyphosate-related business
matters; and
o a lawsuit filed by DuPont on March 30, 2000, in United States
District Court for Delaware, against the former Monsanto Company
and Asgrow, alleging violations of federal antitrust acts and
state law in connection with glyphosate-tolerant soybean business
matters.
30
As described in Monsanto's annual report on Form 10-K for the
year ended Dec. 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 the former
Monsanto Company and 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 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 the former Monsanto Company 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 appealed the jury
verdict and damage award, and Aventis appealed the finding that the
former Monsanto Company was a bona fide licensee. On Nov. 22, 2001 the
United States Court of Appeals for the Federal Circuit upheld the
prior judgments. On March 26, 2002, the Court of Appeals for the
Federal Circuit reversed its decision regarding the bona fide licensee
issue and declined rehearing on the petition of DEKALB Genetics
regarding the monetary awards. Subsequent to those appellate rulings,
DEKALB Genetics has paid the monetary judgments. Monsanto and DEKALB
Genetics will file certiorari petitions with the United States Supreme
Court to overturn the appellate rulings. 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. 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. 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.
As described in Monsanto's annual report on Form 10-K for the
year ended Dec. 31, 2001, on Nov. 13, 2001, Chemical Products
Technologies, Inc. ("CPT, Inc.") initiated a lawsuit in the United
States District Court for the District of South Carolina, Florence
Division, against Monsanto. In its Complaint, CPT, Inc. seeks damages
arising out of alleged violations of Section 1 of the Sherman Act
(antitrust), the Lanham Act and the South Carolina Unfair Trade
Practices Act. CPT, Inc. claims that Monsanto has violated the Sherman
Act in several respects in connection with glyphosate-related business
31
matters, and has violated the Lanham Act by unfairly disparaging CPT,
Inc.'s ClearOut(TM)herbicide product, thereby interfering with CPT,
Inc.'s customer relationships. Monsanto denies CPT, Inc.'s allegations
and filed an Answer and Affirmative Defenses on Dec. 31, 2001. On Feb.
8, 2002, the CPT, Inc. matter was consolidated with the DuPont
litigation pending in the South Carolina court. On March 1, 2002,
Zetachem USA, Inc. ("Zetachem USA") applied for leave to be added as
an additional plaintiff in the South Carolina action. Monsanto denies
that it has any liability to CPT, Inc. or Zetachem USA. In May 2002,
in light of the settlement of the DuPont litigation pursuant to the
DuPont/Pioneer Settlement, Monsanto requested a transfer of this
litigation to the United States District Court for the Eastern
District of Missouri, where, as described in its annual report on Form
10-K for the year ended Dec 31, 2001, Monsanto has sued CPT, Inc., for
patent infringement.
As described in Monsanto's annual report on Form 10-K for the
year ended Dec. 31, 2001, on March 7, 2000, the United States
Department of Justice filed suit on behalf of the EPA in United States
District Court for the District of Wyoming against the former Monsanto
Company, Solutia and P4 Production, LLC ("P4 Production") seeking
civil penalties for alleged violations of Wyoming's environmental laws
and regulations, and of an air permit issued in 1994 by the Wyoming
Department of Environmental Quality. The permit had been issued for a
coal coking facility in Rock Springs, Wyoming, that is currently owned
by P4 Production. The United States sought civil penalties of up to
$25,000 per day (or $27,500 per day for violations occurring after
Jan. 30, 1997) for the air violations, and immediate compliance with
the air permit. The companies have already paid a $200,000 fine
covering the same Clean Air Act violations pursuant to a consent
decree entered in the First Judicial District Court in Laramie County,
Wyoming, on June 25, 1999. On April 21, 2000, the companies filed a
motion for dismissal or summary judgment on the grounds of claim
preclusion, including the doctrines of res judicata and release. In an
opinion dated March 29, 2002, the court denied the companies' motion
for summary judgment. On April 19, 2002, the companies filed a motion
for certification of an appeal of the order denying the motion for
summary judgment. Any liability would be shared by Monsanto and
Solutia, based upon the purchases from P4 Production.
As described in Monsanto's annual report on Form 10-K for the
year ended Dec 31, 2001, on Sept. 28, 1999, the former Monsanto
Company entered into a consent order with the United States
Environmental Protection Agency ("EPA") whereby the former Monsanto
Company agreed to immediately investigate contamination at the Heizer
Creek landfill near Nitro, West Virginia, and to propose a remedy
based on the results. the former Monsanto Company used the Heizer
Creek landfill for approximately one year between 1958 and 1959 to
dispose of plant waste from its former Nitro, West Virginia,
manufacturing location. In 1999, the EPA identified elevated levels of
dioxin in one sample taken at the former landfill. The investigation
of the dioxin contamination at the site, the risk assessment and the
evaluation of remedial action options have been completed and
submitted to EPA in an Engineering Evaluation/Cost Analysis (EE/CA)
Report. The EE/CA Report also contains our recommended remedy as
required in the consent order. The cost to implement the recommended
remedy was estimated at $1.5 million, and funds were reserved for this
amount. In March 2002, the EPA concluded that the remedy recommended
in the EE/CA Report was protective of human health and the
environment. The EPA published a public notice of its decision and
initiated a 30-day public comment period, ending April 27, 2002.
As described in Monsanto's annual report on Form 10-K for the
year ended Dec. 31, 2001, since the 1984 termination of the class
action litigation against various manufacturers, including the former
Monsanto Company, of the herbicide Agent Orange used in the Vietnam
War, Monsanto and the former Monsanto Company have successfully
defended against various lawsuits associated with the herbicide's use.
A few matters remain pending, including three separate actions, now
consolidated, initially filed against the former Monsanto Company and
The Dow Chemical Company in Seoul, Korea, in Oct. 1999. Approximately
13,760 Korean veterans of the Vietnam War allege they were exposed to,
32
and suffered injuries from, herbicides manufactured by the defendants.
The complaints fail to assert any specific causes of action, but seek
damages of 300 million won (approximately $250,000) per plaintiff.
Monsanto is also defending ancillary actions in Korea, including a
request for provisional relief pending resolution of the main lawsuit.
The trial court has advised that a ruling in the main lawsuit will be
announced in court on May 23, 2002 at 1:30 p.m. local time. After the
ruling the non-prevailing parties are expected to file a de novo
appeal. On Dec. 2, 1999, plaintiffs filed a class action lawsuit
against the former Monsanto Company and five other herbicide
manufacturers in the United States District Court for the Eastern
District of Pennsylvania. The plaintiffs purport to represent a class
of over 9,000 Korean and 1,000 United States service persons allegedly
exposed to the herbicide Agent Orange and other herbicides sprayed
from 1967 to 1970 in or near the demilitarized zone separating North
Korea from South Korea. The complaint does not assert any specific
causes of action or demand a specified amount in damages. The Judicial
Panel on Multidistrict Litigation has granted transfer of the case to
the United States District Court for the Eastern District of New York
for coordinated pretrial proceedings as part of In re "Agent Orange"
Product Liability Litigation, which is the multidistrict litigation
proceeding established in 1977 to coordinate Agent Orange-related
litigation in the United States. Two suits filed by individual U.S.
veterans contesting their denial of claims subsequent to the class
action settlement have been consolidated in the multidistrict
litigation, and were dismissed by the District Court. In an opinion
dated Nov. 30, 2001 the United States Court of Appeals for the Second
Circuit vacated the District Court's dismissal claims and remanded the
cases to the District Court for further proceedings. On Dec. 14, 2001
defendants filed with the Court of Appeals a Petition for Rehearing
and Rehearing En Banc. On May 8, 2002, the appeals court denied the
request for rehearing.
33
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 (Item 9) on Feb. 14, 2002,
pursuant to Regulation FD, relating to a slide presentation prepared for
use by the Company's Chief Technology Officer at an
AgChemicals/AgBiotechnology conference.
The Company filed a report on Form 8-K (Item 5) on March 12, 2002 providing
specific details regarding option grants under the Company's 2000
Management Incentive Plan and its Broad-Based Stock Option Plan including,
without limitation, the number of founders' grant options scheduled to vest
on March 15, 2002, the first vesting date under both of these plans, and
the corresponding weighted average exercise price of such options.
The Company furnished a report on Form 8-K (Item 9) on April 4, 2002,
pursuant to Regulation FD, relating to slide presentations prepared for use
by the Company's executives at an investor meeting in New York.
34
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/ Richard B. Clark
---------------------------------
RICHARD B. CLARK
Vice President and Controller
(On behalf of the Registrant and
as Principal Accounting Officer)
Date: May 15, 2002
35
EXHIBIT INDEX
-------------
Exhibit
Number Description
------- -----------
2 Omitted - Inapplicable
3 Omitted - Inapplicable
4 Omitted - Inapplicable
10 Omitted - Inapplicable
11 Omitted - Inapplicable; see Note 6 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
36