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Monsanto Company 2005 Annual Report
“Having more traits in
a single seed saves
me trips over the field
and fuel costs. And
I get the peace of
mind of not handling
pesticides.”

Table of contents

  • Page 1
    Monsanto Company 2005 Annual Report " Having more traits in a single seed saves me trips over the field and fuel costs. And I get the peace of mind of not handling pesticides. "

  • Page 2
    Monsanto Company 2005 Annual Report " The health benefits of Vistive soybeans were appealing to me, and the premium on every bushel will improve my income. "

  • Page 3
    Monsanto Company 2005 Annual Report " Roundup Ready Flex gives me the flexibility to time my applications based on the need for weed control. "

  • Page 4
    ... Wellsburg, Iowa continue planting the low-linolenic soybeans. Contents 2005 Financial Highlights 1 Letter to Shareowners 2 The DNA of Our Business Pullout Breeding More Options 5 New Fields of Opportunity 9 Our Product Pipeline 14 Directors and Executive Officers 16 Shareowner Information Inside...

  • Page 5
    ... our business on a seeds-and-traits strategy. We use the tools of modern biology to make seeds easier to grow, to allow farmers to do more with fewer resources, and to produce healthier foods for consumers and better feed for animals. Our biotechnology products also bring environmental benefits such...

  • Page 6
    ... of a biosafety bill by the government set in motion the first year of commercial planting of new Roundup Ready soybean seed in the world's secondlargest soybean market. In Europe, the import approval of Roundup Ready Corn 2 is expanding opportunities in key corn exporting markets such as the United...

  • Page 7
    ... share gain in our corn seed brands. Our cumulative gain was six share points during those four years. Now the power of our breeding technology is being recognized and rewarded not only in the United States, but throughout the world. Each advance we made in 2005 is important in its own right. Taken...

  • Page 8
    .... a number of key acquisitions. Seminis, Emergent's cotton seed business, and the companies in our American Seeds, Inc. subsidiary all open new opportunities for growth. Especially through Seminis, we're moving into "adjacent spaces," untapped commercial arenas where the breeding technology we have...

  • Page 9
    ... new products forward in a company that sells seeds and traits. The value we bring to farmers We're an agricultural company, and we take our cue from our customers. We recognize Monsanto's business is successful only when farmers are successful. So our focus is on applying innovation and technology...

  • Page 10
    ... to bring farmers the best new hybrids. Today, he leads the research at our Waterman, Illinois, facility, where he is helping to breed the next generation of seed for farmers. Germplasm Germplasm is the building block of Monsanto's seeds-and-traits business To many people, seed is seed. Not so for...

  • Page 11
    ... phenotypic data generated on several thousands of genes from various sources and functionalities. Her team's goal is to select and prioritize the genes for testing in our commercial crops, such as corn and soybeans. Genomics Genomics probes germplasm to unlock its value Using automated, high...

  • Page 12
    ...and selected plants with the best properties for cultivation. Traditional plant breeding methods have been effective, but they are slow. Today, the use of breakthrough new technology has reinvented plant breeding. In the same time it used to take for traditional breeding work, our plant breeders can...

  • Page 13
    ... knowledge to transfer beneficial genetic traits to enhance plants' growth or to provide nutritional or other benefits to farmers, food and feed processors, or consumers. Biotechnology is also one of Monsanto's two core technology research platforms. With biotechnology, we're able to identify...

  • Page 14
    MONSANTO COMPANY The value we bring to farmers We built our business on a seeds-and-traits strategy. Using the tools of modern biology, chieï¬,y breeding and biotechnology, we look for ways to help our farmer customers do more with less. We have pioneered in this industry a new commercial model ...

  • Page 15
    ... in fiscal year 2005, Monsanto added the world's broadest vegetable seed germplasm for its small-acre crop focus. The breeding technologies pioneered in large-acre crops such as corn and soybeans are already being applied to a variety of vegetable crops. At the Seminis seed production greenhouse in...

  • Page 16
    ... traits with stacked traits that allow farmers to do more with the same seed. Developed as the newest biotechnology product, YieldGard Plus with Roundup Ready Corn 2 is in its first year of widespread commercial planting. Farmers such as Mark Maiers from Stewart, Minnesota, use it to control...

  • Page 17
    ... Bollgard II trait for insect protection. Stacked with Bollgard II, Roundup Ready Flex cotton is poised for the largest-acre launch of a new biotechnology product ever. Roundup Ready technology has yielded savings in both time and equipment costs for Steve Bailey, who has 1,200 acres planted in...

  • Page 18
    ... to commercial product in approximately 36 months because of the breakthrough applications of our marker-based breeding technology. With 800 acres planted in low-linolenic soybeans, Koch is among the largest growers of the new product. He plans to continue planting it because of the high yield and...

  • Page 19
    ... to create new value and new markets. Breeding is bolstering our seed position. This year, Monsanto increased our U.S. DEKALB and Asgrow branded corn share by two share points, for a gain of six share points in the last four years (see "Tools of our technology yield seed market share growth," below...

  • Page 20
    ... the forefront of commercial success in the global corn marketplace. In our Europe-Africa region, 2005 brought a share gain of 2.2 percent. In our Asia-Pacific region, the share gain was 1.9 percent. Today, we hold a leading market share position in every key corn-growing region. New approaches are...

  • Page 21
    ... launch of a biotechnology product ever when farmers plant our second-generation Roundup Ready Flex cotton. Setting up for growth Again in 2005, the strategic merits of our seeds-and-traits strategy were borne out in the marketplace. Sales in our seeds-and-traits businesses increased by 40 percent...

  • Page 22
    ... we're committed to developing excellent varieties and producing high-quality seeds so farmers get the greatest benefit. " Breeding Positioning Monsanto in a "hot" market segment Terry Berke, Ph.D., Woodland, California Vegetables Global production of vegetables and fruits, along with the trend...

  • Page 23
    ...To maintain our leading market position, we're developing new plant products through our Early 2005 competitive integrated research platforms corn yield comparison* in genomics, biotechnology and (in bushels per acre by plant breeding. relative maturity days) Key to our breeding strategy *Results as...

  • Page 24
    ... in the seed we sell. The heavy inï¬,ux of molecular markers to our breeding research began in earnest early in the decade. The first commercial products to use significant marker applications in corn hit the market in 2005. And we're poised to build on the market share gains we've earned in the...

  • Page 25
    ...look to the commercial horizon at company to market a second-generation biotechnology trait product: Bollgard II insect-protected cotton. For 2006 planting, our R&D pipeline delivers the industry's next second-generation trait product: Roundup Ready Flex cotton. The new trait offers farmers greater...

  • Page 26
    ... high-touch, local face of regional seed companies. Through ASI, we can apply the depth of our germplasm resources and the strength of our breeding and biotechnology tools to local seed brands to create new growth opportunities in our U.S. corn business. The acquisition of Seminis opens a new market...

  • Page 27
    ... breeding will translate into new opportunities to capture seed market share around the world, that second-generation traits such as Roundup Ready Flex cotton will blossom from their market introduction, and that newly opened doors in places such as Brazil and India will yield additional growth...

  • Page 28
    ... traits to enhance plants' growth or to provide nutritional or other benefits to farmers, food and feed processors, or consumers. Farmer, processor and consumer benefits (1) Conduct high-throughput screening of genetic database to identify valuable plant traits that can be used in our breeding...

  • Page 29
    ...) MONSANTO COMPANY 15 Phase three Candidates in development(5) Farmer benefits Roundup Ready Flex cotton Second-generation YieldGard Rootworm Second-generation YieldGard Corn Borer Roundup RReady2Yield soybeans Roundup RReady2Yield canola Dicamba-tolerant soybeans Drought-tolerant corn Higher...

  • Page 30
    ... June 2000 to October 2003. He was Monsanto's interim president and chief executive officer from December 2002 to May 2003. He is a member of the Public Policy and Corporate Responsibility Committee and the Science and Technology Committee. He also serves on the boards of Antigenics Inc. and Nereus...

  • Page 31
    ...President, Investor Relations Scarlett Lee Foster Vice President and Chief of Staff Janet M. Holloway Vice President and Treasurer Robert A. Paley This list includes executive officers as defined by the U.S. Securities and Exchange Commission. It is current as of Nov. 1, 2005. Additional information...

  • Page 32
    ... part of ongoing operations. The reconciliation of EPS to ongoing EPS for each period is included in the table below: Total Monsanto Company and Subsidiaries: 12 Months Ended Aug. 31, (Dollars per share) 2005 2004 2003 Notes to product pipeline (1) Pipeline candidates include research platforms in...

  • Page 33
    ... ACT OF 1934 Commission file number 001-16167 MONSANTO COMPANY (Exact name of Registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 43-1878297 (I.R.S. Employer Identification No.) 800 North Lindbergh Blvd., St. Louis, MO (Address...

  • Page 34
    ... Relations Environmental Matters International Operations Patents, Trademarks, Licenses, Franchises and Concessions Principal Equity Affiliates Raw Materials and Energy Resources Research and Development Seasonality and Working Capital Relationships Among Monsanto Company, Pharmacia Corporation...

  • Page 35
    ... COMPANY 2005 FORM 10-K PART II Market for the Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities Selected Financial Data Management's Discussion and Analysis of Financial Condition and Results of Operations Overview Results of Operations Seeds...

  • Page 36
    ... seeds and traits businesses, and genetic technology platforms. The Agricultural Productivity segment consists of our crop protection products (Roundup and other glyphosate-based herbicides and selective chemistries), animal agriculture businesses and lawn-and-garden herbicide products. During 2005...

  • Page 37
    MONSANTO COMPANY 2005 FORM 10-K PRINCIPAL PRODUCTS Monsanto's principal products in our two segments include the following: SEEDS AND GENOMICS SEGMENT Major Products End-Use Products and Applications Roundup Ready traits in soybeans, corn, canola and cotton(1) Bollgard and Bollgard II traits in ...

  • Page 38
    ... products directly to swine producers, who pay for the use of the genetics in upfront fees and/or royalties. We market our lawn-and-garden herbicide products through The Scotts Miracle-Gro Company. For additional information, see Item 7, under the heading ''MD&A - Agricultural Productivity Segment...

  • Page 39
    ... Monsanto has a broad portfolio of patents in the United States and many foreign countries that provide intellectual property protection for its products and processes. We routinely obtain patents and/or plant variety protection for our breeding technology, germplasm, commercial varietal seed...

  • Page 40
    ... to pursue the approved business plan; (3) receive rights to use intellectual property developed by Renessen in other specified areas; and (4) have the opportunity to provide specified services to Renessen on a cost-paid or cost-plus-margin basis. Renessen's products under development include...

  • Page 41
    ... Solutia and us. AVAILABLE INFORMATION Our Internet Web site address is www.monsanto.com. We make copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports, available free of charge through our Web site, as soon as...

  • Page 42
    ... upon request by contacting the Office of the General Counsel, Monsanto Company, 800 North Lindbergh Blvd., St. Louis, MO 63167. Information on our Web site does not constitute part of this report. PROPERTIES The Agricultural Productivity segment has principal chemicals manufacturing facilities at...

  • Page 43
    ... Ready soybeans, Syngenta Seeds is limited to commercializing its Roundup Ready soybeans under one product brand. This case is currently set for trial on Dec. 20, 2005. On May 12, 2004, following an announcement by Syngenta that it acquired certain rights to a glyphosate-tolerant corn product known...

  • Page 44
    ... Chemical Company, et al., was filed in the U.S. District Court for the Eastern District of New York by the Vietnam Association of Victims of Agent Orange (VAVAO) alleging that the manufacturers of Agent Orange conspired with the U.S. government to commit war crimes and crimes against humanity in...

  • Page 45
    ...working with the EPA to reach a resolution of this matter. Proceedings Related to Pension Plan On June 23, 2004, two former employees of Monsanto and Pharmacia filed a purported class action lawsuit in the U.S. District Court for the Southern District of Illinois against us and the Monsanto Company...

  • Page 46
    ... York Stock Exchange, under the symbol MON. The number of shareowners of record as of Nov. 1, 2005, was 51,855. The original quarterly dividend rate adopted by the board of directors following the initial public offering (IPO) in October 2000 was $0.12. The board of directors increased the company...

  • Page 47
    ...) Financial Position at end of Period: Total assets(7) Working capital(7,8) Current ratio(7,8) Long-term debt Debt-to-capital(9) Other Data (applicable for periods subsequent to IPO)(10): Dividends per share(11,12) Stock price per share: High Low End of period Basic shares outstanding Diluted shares...

  • Page 48
    ... share on the company's common stock declared in the fourth quarter of calendar year 2000 is prorated. It was based on a quarterly dividend rate of $0.12 per share, which reï¬,ected a policy adopted by the board of directors following Monsanto's IPO in October 2000. The board of directors increased...

  • Page 49
    ... technology platforms. The Agricultural Productivity segment consists of our crop protection products (Roundup and other glyphosate-based herbicides and selective chemistries), animal agriculture businesses and lawn-and-garden herbicide products. More than 47 percent of our total company sales...

  • Page 50
    ... or required by investing activities. We believe that free cash ï¬,ow is useful to investors and management as a measure of the ability of our business to generate cash. This cash can be used to meet business needs and obligations, to reinvest in the company for future growth, or to return to our...

  • Page 51
    ... foods for consumers and better feed for animals. Our current research-and-development strategy and commercial priorities are focused on bringing our farmer customers second-generation traits, on delivering multiple solutions in one seed (''stacking''), and on developing new pipeline products. We...

  • Page 52
    MONSANTO COMPANY 2005 FORM 10-K RESULTS OF OPERATIONS 12 Months Ended Aug. 31, % Change (Dollars in millions, except per share amounts) 2005 2004 2003(1) 2005 vs. 2004 2004 vs. 2003 Net Sales Gross Profit Operating Expenses: Selling, general and administrative expenses Bad-debt expense Research ...

  • Page 53
    ... businesses. Also, we recorded higher incentive compensation expense, which was commensurate with our improved operational results this year. The European cost savings related to prior-year restructuring actions were more than offset by the effect of exchange rates on European SG&A expenses in 2005...

  • Page 54
    ... by $3 million in 2005. In first quarter 2005, we established a $15 million reserve for litigation, which was paid out in 2005. Minority interest expense increased by $9 million in the 12-month comparison because certain of our subsidiaries in India had increased sales of cotton traits. Net foreign...

  • Page 55
    ... higher average net selling price for branded corn seed, particularly in the United States, and lower U.S. cost of goods sold due to improved corn yields for seed production. Additionally, gross profit improved from stacking more than one biotech trait in corn and increased corn trait penetration...

  • Page 56
    MONSANTO COMPANY 2005 FORM 10-K R&D expenses increased 6 percent, or $27 million, in fiscal year 2004 from the comparable prior-year period. Higher employee-related costs and expenses associated with a thirdparty software license were the largest drivers of the fiscal 2004 increase. As a percent...

  • Page 57
    ... from sales of certain assets for use in certain exU.S. markets in 2002, which contributed approximately $20 million aftertax of other income m m m m On an ongoing business basis, our results in the transition period were affected by lower volumes and lower average net selling prices of Roundup...

  • Page 58
    ... and trait sales for all crops increasing during the eight-month period. Sales in the Agricultural Productivity segment declined because of the continued shift toward lower-priced Roundup and other glyphosate-based herbicides and lower U.S. Roundup volumes in the postpatent glyphosate market. Sales...

  • Page 59
    ... to lower-priced glyphosate products also lowered U.S. sales of Roundup herbicides by decreasing the average net selling price. The Seeds and Genomics segment experienced higher seed sales in the United States. Higher corn seed sales were partly offset by lower soybean sales. Trait revenues in the...

  • Page 60
    MONSANTO COMPANY 2005 FORM 10-K herbicide production volumes, which led to unfavorable cost of goods sold manufacturing variances. These costs were offset by cost management efforts and lower raw material and energy prices. Lower seed inventory costs in the United States were offset by higher seed...

  • Page 61
    ... market share gain in our branded corn seed business. Soybean seed and trait net sales increased 27 percent, or $190 million, in 2005 compared with 2004. The primary drivers of the sales increase were the U.S. 2005 price increase for Roundup Ready soybean traits, which resulted in both higher trait...

  • Page 62
    ...for branded corn seed, particularly in the United States, and lower U.S. cost of goods sold due to improved corn yields for seed production. Gross profit also improved from stacking more than one biotech trait in corn, increased corn trait penetration, and the 2004 Roundup Ready soybean trait price...

  • Page 63
    ... in Europe also contributed to corn seed growth. Our operations in France led the strong performance in that region, delivering a market share gain during the transition period. Continued growth of our stacked corn and cotton traits drove U.S. sales higher. Canola trait revenues also increased in...

  • Page 64
    ... in high-margin traits more than offset the Latin American gross profit declines. Lower operating expenses had a positive effect on EBIT. SG&A spending was lower as a result of our continued focus on cost management and lower employee-related costs. R&D expenses also declined, reï¬,ecting savings...

  • Page 65
    ...of the introduction of Roundup Extended Control and overall market growth. Lawn-and-garden herbicide sales also improved in Europe because of the favorable effect of foreign exchange rates. We are party to an agency and marketing agreement with the Scotts Miracle-Gro Company (Scotts) with respect to...

  • Page 66
    ... the business in fiscal year 2004. We signed a definitive agreement to sell certain triallate intellectual property assets in the third quarter of 2004. Lawn-and-garden herbicide net sales increased because of strong market performance in the United States and favorable exchange rates in Europe...

  • Page 67
    ... production volumes of Roundup herbicides led to unfavorable cost of goods sold manufacturing volume variances, but these effects were offset by cost-management efforts and lower prices for raw materials and energy. Segment EBIT was negatively affected by the increase in bad-debt expense relating...

  • Page 68
    ...respect to the lawn-and-garden herbicide business, which was transferred to us in connection with our separation from Pharmacia. Scotts acts as our principal agent to market and distribute our lawn-andgarden herbicide products. The agreement has an indefinite term except in certain countries in the...

  • Page 69
    ... as well as incremental benefit plan costs for employees of the European wheat and barley business. Facility closure charges of $5 million in continuing operations were related to the closure of an office building in Europe, and the shutdown of production lines and the disposal of discontinued...

  • Page 70
    ...the reserve balance was depleted. We anticipate that the actions related to this plan will yield annual cash savings of more than $50 million. FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES Working Capital and Financial Condition As of Aug. 31, 2005 2004 Cash and Cash Equivalents Short-Term...

  • Page 71
    ... and we would revert to our past practice of providing these customers with direct credit purchase terms. Cash Flow Our servicing fee revenues collected and earned from the program were not significant during fiscal years 2005 and 2004, the transition period and calendar year 2002. As of Aug. 31...

  • Page 72
    ...nancing activities was $582 million in 2005, compared with $243 million in 2004. Commercial paper borrowings to fund the Seminis and Emergent acquisitions and the tender offer to purchase the Seminis Senior Subordinated Notes were the primary driver of the increase. We used cash of $495 million to...

  • Page 73
    ...short-term commercial paper borrowings were used to finance these requirements. Total debt outstanding increased by $232 million between Aug. 31, 2004, and Aug. 31, 2005. In third quarter 2005, we borrowed $1.3 billion in short-term commercial paper to fund the Seminis and Emergent acquisitions and...

  • Page 74
    ...increase over 2005 are expected to be projects to expand seed production facilities for corn and cotton. In 2005, we announced plans to construct a new data center at our world headquarters, which is estimated to cost $21 million. We are scheduled to begin construction in early 2006. The data center...

  • Page 75
    ... on our leading corn and soybean strategy. This cotton platform is expected to provide us with opportunities to deliver breeding advances and biotechnology traits in the cotton seed market. The transaction was completed on April 5, 2005, from which time the operating results of this acquisition were...

  • Page 76
    ... Productivity segment sales. Seasonality varies by the world areas where our Agricultural Productivity businesses operate. For example, the United States, Europe and Brazil were the largest contributors to Agricultural Productivity sales in 2005. The United States experienced higher sales...

  • Page 77
    ... an industry leadership position in a highly competitive environment. We have evolved to a company led by its strengths in seeds and biotechnology traits as a means of delivering solutions to our customers. We also remain the leading manufacturer of the best-selling herbicide brand, Roundup, and...

  • Page 78
    ... growth in Monsanto's branded and licensed seed market shares, through acquisitions, successful breeding of high-performance germplasm and continuous improvement in the quality of our seeds; Continued growth in licensing of seed germplasm and biotechnology traits to other seed companies through...

  • Page 79
    ... Rewards offers added protection and reduced risk program elements for farmers who use certain Monsanto technologies and agricultural herbicides. Further penetration of Roundup Ready crops also enhances the market position of Roundup herbicides as a brand-name product that farmers trust to avoid the...

  • Page 80
    ...had a negative effect on sales of Monsanto's selective corn herbicides, gross profit from the Roundup Ready trait and from the Roundup herbicides used on these acres are significantly higher than the gross profit on the lost selective herbicide sales. Our lawn-and-garden herbicide products remain...

  • Page 81
    ... date. In 2005, we recorded goodwill of $517 million related to our acquisitions (see Note 5 - Business Combinations), and we added a new reporting unit for vegetable and fruit seed. Future changes in the fair value of our reporting units could affect our goodwill and operating expenses and reduce...

  • Page 82
    ... increase. Allowances for Returns and Inventory Obsolescence: Where the right of return exists in our seed business, sales revenues are reduced at the time of sale to reflect expected returns. In order to estimate the expected returns, management analyzes historical returns, economic trends, market...

  • Page 83
    ... levels of new awards to be granted, changes in stock price, forfeitures of awards, employee exercise behaviors and the portion of costs to be capitalized in inventory, the actual impact on earnings per share may differ from this estimate. In addition, SFAS 123R amends SFAS No. 95, Statement of Cash...

  • Page 84
    ...we anticipate. RISK FACTORS Competition in seeds and traits and agricultural chemicals has significantly affected and will continue to affect our sales. Many companies engage in plant biotechnology and breeding research, and speed in getting a new product to market can be a significant competitive...

  • Page 85
    ... used by agricultural biotechnology companies, and may launch future attacks against our field testing sites, and research, production, or other facilities. The successful development and commercialization of our pipeline products will be necessary for our growth. Commercializing new biotechnology...

  • Page 86
    ... prices can increase our costs and decrease our sales. We purchase our seed inventories from production growers at market prices and retain the seed in inventory until it is sold. These purchases constitute a significant portion of the manufacturing costs for our seeds. We use hedging strategies...

  • Page 87
    ... to protect itself against commodity price increases and uses options contracts to limit the unfavorable effect that price changes could have on these purchases. The company's futures and options contracts are accounted for as cash ï¬,ow hedges and are mainly in the Seeds and Genomics segment. The...

  • Page 88
    ... a Business Conduct program designed to encourage and assist employees in living up to high standards of integrity, as well as a Code of Ethics for Chief Executive and Senior Financial Officers. Management seeks to maintain the effectiveness of internal control over financial reporting by careful...

  • Page 89
    ... 2005 FORM 10-K Management's Annual Report on Internal Control over Financial Reporting Management of Monsanto Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined in defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act...

  • Page 90
    ... of the related consolidated financial statement amounts as of and for the year ended Aug. 31, 2005. Accordingly, our audit did not include the internal control over financial reporting at Seminis and Emergent. The Company's management is responsible for maintaining effective internal control over...

  • Page 91
    .... 8, 2005, expressed an unqualified opinion on management's assessment of the effectiveness of the Company's internal control over financial reporting and an unqualified opinion on the effectiveness of the Company's internal control over financial reporting. St. Louis, Missouri Nov. 8, 2005 59

  • Page 92
    MONSANTO COMPANY 2005 FORM 10-K Statement of Consolidated Operations Year Ended Aug. 31, (Dollars in millions, except per share amounts) 2005 2004 Eight Months Ended Aug. 31, 2003 Year Ended Dec. 31, 2002 Net Sales Cost of goods sold Gross Profit Operating Expenses: Selling, general and ...

  • Page 93
    MONSANTO COMPANY 2005 FORM 10-K Statement of Consolidated Financial Position As of Aug. 31, (Dollars in millions, except share amounts) 2005 2004 Assets Current Assets: Cash and cash equivalents Short-term investments Trade receivables - net (see Note 7) Miscellaneous receivables Deferred tax ...

  • Page 94
    ...) by Operations Cash Flows Provided (Required) by Investing Activities: Purchases of short-term investments Maturities of short-term investments Acquisitions of businesses, net of cash acquired Technology and other investments Capital expenditures Other investments and property disposal proceeds...

  • Page 95
    MONSANTO COMPANY 2005 FORM 10-K Statement of Consolidated Shareowners' Equity (Dollars in millions, except per share amounts) Common Stock Treasury Stock Additional Contributed Capital Retained Earnings (Deficit) Accumulated Other Comprehensive Income (Loss)(1) Reserve for ESOP Debt Total ...

  • Page 96
    MONSANTO COMPANY 2005 FORM 10-K Statement of Consolidated Comprehensive Income (Loss) Year Ended Aug. 31, (Dollars in millions) 2005 2004 Eight Months Ended Aug. 31, 2003 Year Ended Dec. 31, 2002 Net Income (Loss) Other Comprehensive Income (Loss): Foreign currency translation adjustments ...

  • Page 97
    ... protection products (Roundup and other glyphosate-based herbicides and selective chemistries), animal agriculture businesses and lawn-and-garden herbicide products. In second quarter 2005, the company committed to a plan to sell the environmental technologies businesses, and in fourth quarter 2005...

  • Page 98
    ...and commercialization, in which the company had a 9 percent equity investment as of Aug. 31, 2005. Monsanto currently has an agreement in place under which Monsanto makes payments for research services and receives rights to intellectual property developed within funded research. The entity reported...

  • Page 99
    ..., promptness of payment, and market share increases. The associated cost of marketing programs is recognized as a reduction of gross sales in the Statement of Consolidated Operations. Research and Development Costs The company accounts for research and development costs in accordance with SFAS No...

  • Page 100
    ... and hybrid seeds and has a longer useful life as it is utilized to develop new seed hybrids and varieties. Acquired biotechnology intellectual property includes intangible assets related to acquisitions and licenses through which Monsanto has acquired the rights to various research and discovery...

  • Page 101
    .... Monsanto accrues these costs in the period when responsibility is established and when such costs are probable and reasonably estimable based on current law and existing technology. Postclosure and remediation costs for hazardous waste sites and other waste facilities at operating locations are...

  • Page 102
    ... significant effect on Monsanto's cash ï¬,ow, liquidity, or capital resources. Derivatives and Other Financial Instruments Monsanto uses financial derivative instruments to limit its exposure to changes in foreign currency exchange rates, commodity prices, and interest rates. Monsanto participated...

  • Page 103
    ... in which Monsanto employees participate, as all stock options granted under those plans had an exercise price equal to the fair market value of the underlying common stock on the date of grant. The following table shows what the effect on net income (loss) and earnings (loss) per share would have...

  • Page 104
    MONSANTO COMPANY 2005 FORM 10-K Notes to Consolidated Financial Statements (continued) share-based payment transactions in their financial statements. The cost of share-based payment transactions to employees will be based on the fair value of the award on the grant date and recognized as expense...

  • Page 105
    ... biotechnology traits in the cotton seed market. The transaction was completed on April 5, 2005, from which time the operating results of this acquisition were included in the company's consolidated financial statements. The cash portion of the acquisition was funded with $284 million of commercial...

  • Page 106
    ... employee terminations and relocations, exiting certain product lines and facility closures. In first quarter 2006, the company expects to record additional liabilities of approximately $20 million related to Seminis and the Emergent India business, which will be considered part of the purchase...

  • Page 107
    ... related to the global wheat reporting unit), and $8 million pretax in costs associated with facility closures. Restructuring charges were recorded in the Statement of Consolidated Operations as follows: Year Ended Aug. 31, (Dollars in millions) 2005 2004 Eight Months Ended Aug. 31, 2003 Year Ended...

  • Page 108
    ...as well as incremental benefit plan costs for employees of the European wheat and barley business. Facility closure charges of $5 million in continuing operations related to the closure of an office building in Europe, and the shutdown of production lines and disposal of discontinued agricultural...

  • Page 109
    ... of work force reduction and exit costs to be reimbursed to Monsanto. The asset impairments were related to property, plant and equipment. Restructuring reversals of $1 million were recorded within cost of goods sold in fiscal year 2004 because asset write-offs were lower than originally estimated...

  • Page 110
    MONSANTO COMPANY 2005 FORM 10-K Notes to Consolidated Financial Statements (continued) $4 million were recorded in calendar year 2002 for facility closures because costs were lower than originally estimated and because assets brought higher proceeds than originally estimated. As of Aug. 31, 2004, ...

  • Page 111
    ...) $1,154 Monsanto uses commodity futures and options contracts to hedge the price volatility of certain commodities, primarily soybeans and corn. This hedging activity is intended to manage the price paid to production growers for corn and soybean seeds. The increase in finished goods inventory as...

  • Page 112
    ... impairment of goodwill and other intangible assets related to the company's global wheat business. A potential impairment was determined in the wheat reporting unit during the quarter ended Nov. 30, 2003. Fair value calculations using a discounted cash ï¬,ow methodology indicated a potential...

  • Page 113
    MONSANTO COMPANY 2005 FORM 10-K Notes to Consolidated Financial Statements (continued) such technologies. The minority equity investment in Ceres was recorded at fair value and is accounted for using the cost method. Under the joint research program, research costs funded by Monsanto are expensed ...

  • Page 114
    ...of the American Jobs Creation Act of 2004 (AJCA) on Oct. 22, 2004. As a result, Monsanto recorded a deferred tax benefit of $106 million in first quarter 2005. Of this tax benefit, $20 million was recorded in continuing operations related to the impairment of goodwill in the global wheat business...

  • Page 115
    ...31, 2005. Effective March 11, 2005, Monsanto finalized a 364-day $1.0 billion revolving credit facility. This 364-day facility was initiated to be used for general corporate purposes, which may include working capital, acquisitions, capital expenditures, refinancing and to support commercial paper...

  • Page 116
    ... 2006 working capital needs at a term of 18 months. Interest rate swap agreements are used to reduce interest rate risk and to manage the interest rate sensitivity of the company's debt. For a more complete discussion of interest rate management, see Note 14 - Financial Instruments. The information...

  • Page 117
    ...adverse effects that market volatility could have on operating results. As part of its market risk management strategy, Monsanto uses derivative instruments to protect fair values and cash ï¬,ows from ï¬,uctuations caused by volatility in currency exchange rates, interest rates, and commodity prices...

  • Page 118
    ... 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 ï¬,uctuations, Monsanto purchases futures and options contracts for corn and soybeans. The futures...

  • Page 119
    ... basis, were effective during the periods indicated for the principal plans in which Monsanto employees participated: Year Ended Aug. 31, 2005 2004 Eight Months Ended Aug. 31, 2003 Year Ended Dec. 31, 2002 Discount Rate Assumed Long-Term Rate of Return on Assets Annual Rates of Salary Increase...

  • Page 120
    ... of period Service cost Interest cost Plan participants' contributions Actuarial loss Acquisitions Benefits paid Curtailments Settlements Benefit Obligation at End of Period Change in Plan Assets: Fair value of plan assets at beginning of period Actual return on plan assets Employer contribution...

  • Page 121
    ... the company's share of the benefit cost and the participants' share of the cost, which is funded by participant contributions to the plans. NOTE 16. POSTRETIREMENT BENEFITS - HEALTH CARE AND OTHER POST EMPLOYMENT BENEFITS Monsanto-Sponsored Plans Substantially all regular full-time U.S. employees...

  • Page 122
    ... on a weighted-average basis, were effective for the principal plans during the periods indicated: Year Ended Aug. 31, 2005 2004 Eight Months Ended Aug. 31, 2003 Year Ended Dec. 31, 2002 Discount Rate Initial Trend Rate for Health Care Costs Ultimate Trend Rate for Health Care Costs 5.00% 7.00...

  • Page 123
    ... the plan with shares released from the leveraged employee stock ownership plan (Monsanto ESOP). The Monsanto ESOP is leveraged by debt due to Monsanto. The debt, which was $18 million as of Aug. 31, 2005, is repaid primarily through company contributions and dividends paid on Monsanto common stock...

  • Page 124
    ... formerly known as the Monsanto 2000 Management Incentive Plan, the company may grant awards to key officers, directors, and employees of Monsanto, including stock options, of up to 39.3 million shares of Monsanto common stock. Other employees may be granted options under the Monsanto Company Broad...

  • Page 125
    ...to Consolidated Financial Statements (continued) basis, with an exercise price equal to the fair market value of Monsanto common stock on the grant date. On Feb. 27, 2004, Monsanto issued a grant of stock options to eligible management employees under the LTIP and the Broad-Based Plan. Approximately...

  • Page 126
    ...the market price of Monsanto's common stock and recognized over the 24-month vesting period. NOTE 19. CAPITAL STOCK Monsanto is authorized to issue 1.5 billion shares of common stock, $0.01 par value, and 20 million shares of undesignated preferred stock, $0.01 par value. The board of directors has...

  • Page 127
    ...further details. Also, in connection with the acquisition of biotechnology intellectual property assets from Ceres, Monsanto recorded intangible assets and the related obligations, in excess of amounts paid, of $35 million in noncash transactions in the second quarter of 2002. See Note 10 - Goodwill...

  • Page 128
    ... or expenses. For example, like many other companies, Monsanto has agreed to indemnify its officers and directors for liabilities incurred by reason of their position with Monsanto. Contracts for the sale or purchase of a business or line of business may require indemnification for various events...

  • Page 129
    ... company took action to mitigate these credit risks in 2005, including increasing the allowance for doubtful trade receivables by $12 million, and will continue to carefully monitor Brazilian trade receivables in 2006. Remediation Obligations: Monsanto's Statement of Consolidated Financial Position...

  • Page 130
    MONSANTO COMPANY 2005 FORM 10-K Notes to Consolidated Financial Statements (continued) judgment against Bayer CropScience AG, a subsidiary of Bayer AG, and its affiliates that four patents, which had been assigned to Bayer CropScience by Plant Genetics Systems, N.V. and which involve claims to ...

  • Page 131
    ... quarter fiscal 2005 results. As of Aug. 31, 2005, $239 million was recorded in the Condensed Statement of Consolidated Financial Position ($55 million in current liabilities and $184 million in other liabilities). A portion of the $284 million charge was discounted, using a risk-free discount rate...

  • Page 132
    ... be paid over three years, in quarterly installments which began in March 2005. Also in connection with that settlement, Solutia agreed to issue warrants to Monsanto for the purchase of up to 10 million shares of Solutia common stock, at an exercise price of $1.104 per share. Solutia did not execute...

  • Page 133
    ... GEOGRAPHIC DATA Operating segments are organized primarily by similarity of products and aggregated into two reportable segments: Seeds and Genomics, and Agricultural Productivity. The Seeds and Genomics segment consists of the global seeds and related traits businesses and biotechnology platforms...

  • Page 134
    ... most of Monsanto's major markets, it continues to affect operating results. To mitigate the effect of inï¬,ation, Monsanto implemented measures to control costs, to improve productivity, to manage capital expenditures and working capital, and to raise selling prices when government regulations and...

  • Page 135
    ... risk management infrastructure to develop and commercialize enhanced grain products in the processing and animal feed markets, and to increase returns on those products by greater participation in the value chain. Monsanto and Cargill each have a 50 percent interest in Renessen. A governance board...

  • Page 136
    ... with its separation from Pharmacia. Scotts acts as Monsanto's principal agent to market and distribute its lawn-and-garden herbicide products. The agreement has an indefinite term except in certain countries in the European Union. The agreement related to those countries terminates on Sept. 30...

  • Page 137
    ... for the resolution of a purchase price adjustment that Monsanto expects to pay to the buyer in first quarter 2006 and an accrual of $5 million for the resolution of a warranty obligation that was related to the operations of the environmental technologies businesses prior to its disposal. European...

  • Page 138
    ... of Monsanto by Pharmacia effective Aug. 13, 2002. Monsanto has used these funds to pay for the separation of the Monsanto and Pharmacia research and development NOTE 30. QUARTERLY DATA (UNAUDITED) organizations, legal activities required to separate the ownership of certain intellectual property de...

  • Page 139
    ... were effective to provide reasonable assurance of the achievement of the objectives described above. ITEM 9B. OTHER INFORMATION None. The report called for by Item 308(a) of Regulation S-K is incorporated herein by reference to Management's Annual Report on Internal Control over Financial Reporting...

  • Page 140
    ...; Vice President and Chief Information Officer, Responsible for Human Resources - Monsanto Company, 7/03-4/04; Vice President and Chief Information Officer - Monsanto Company, 4/04-4/05; present position, 4/05 Director of Manufacturing, Global Seed Supply - Pharmacia Corporation and Monsanto Company...

  • Page 141
    ... Internal Revenue Code (Proxy Item No. 3);'' ''Executive Compensation;'' and ''Change of Control Agreements.'' ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information appearing in the Proxy Statement, under the headings ''Stock Ownership...

  • Page 142
    MONSANTO COMPANY 2005 FORM 10-K PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) Documents filed as part of this Report: (1) The following financial statements appearing in Item 8: ''Statement of Consolidated Operations;'' ''Statement of Consolidated Financial Position;'' ''Statement...

  • Page 143
    ..., thereunto duly authorized. MONSANTO COMPANY (Registrant) By: /s/ RICHARD B. CLARK Richard B. Clark Vice President and Controller (Principal Accounting Officer) Date: Nov. 8, 2005 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the...

  • Page 144
    ...-Q for the period ended Feb. 28, 2005, File No. 1-16167).* 5. Stock Purchase Agreement dated as of Feb. 15, 2005, by and among the company, Emergent Genetics India Ltd. and International Seed Holdings, L.P. (incorporated by reference to Exhibit 2.2 of Form 8-K, filed Feb. 22, 2005, File No. 1-16167...

  • Page 145
    ... 8-K, filed Aug. 5, 2005, File No. 1-16167).†New Form of Change-of-Control Employment Security Agreement, amended effective Dec. 18, 2002 (incorporated by reference to Exhibit 10.20 of Form 10-K for the period ended Dec. 31, 2002, File No 1-16167).†Monsanto Company Executive Health Management...

  • Page 146
    ...Public Accounting Firm (Monsanto Company). Independent Auditors' Consent (Renessen LLC). Rule 13a-14(a)/15d-14(a) Certification (pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, executed by Chief Executive...Oxley Act of 2002, executed by the Chief Executive Officer and the Chief Financial ...

  • Page 147
    ...Purchase Plan The Investor Services Program allows shareowners to reinvest dividends in Monsanto Company common stock automatically. Shareowners can also purchase common shares through an optional cash investment feature. For more information on the program, contact Mellon Investor Services (address...

  • Page 148
    ... and, ultimately, our business. Since the introduction of Monsanto's first biotechnology products in 1996, farmers throughout the world have adopted the technology on an increasing number of acres on an annual basis. During this time, we have seen this technology deliver real benefits to our farmer...