INDEPENDENT AUDITORS' REPORT
To the Shareholders
Pioneer Hi-Bred International, Inc.:
We have audited the accompanying consolidated balance sheets of
Pioneer Hi-Bred International, Inc. and subsidiaries as of August 31,
1997 and 1996, and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the years in the
three-year period ended August 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position
of Pioneer Hi-Bred International, Inc. and subsidiaries as of August
31, 1997 and 1996, and the results of their operations and their cash
flows for each of the years in the three-year period ended August 31,
1997, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Des Moines, Iowa
October 3, 1997
CONSOLIDATED STATEMENTS OF INCOME
Years Ended August 31, 1997 1996 1995
- -----------------------------------------------------------------------
(In millions, except per share amounts)
Net sales ............................. $ 1,784 $ 1,721 $ 1,532
------- ------- -------
Operating costs and expenses:
Cost of goods sold ................. $ 771 $ 727 $ 642
Research and product development ... 146 136 130
Selling ............................ 374 382 354
General and administrative ......... 130 129 126
------- ------- -------
$ 1,421 $ 1,374 $ 1,252
------- ------- -------
Operating income ................... $ 363 $ 347 $ 280
Investment income ..................... 22 22 23
Interest expense ...................... (8) (11) (13)
Net exchange and other gains (losses) . (4) (4) 1
------- ------- -------
Income before items below .......... $ 373 $ 354 $ 291
Provision for income taxes ............ (127) (127) (106)
Minority interest and other ........... (3) (4) (2)
------- ------- -------
Net income ......................... $ 243 $ 223 $ 183
======= ======= =======
Net income per common share ........... $ 2.95 $ 2.68 $ 2.16
======= ======= =======
Average shares outstanding ............ 82.3 83.2 84.5
See Notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEETS
ASSETS August 31, 1997 1996
- --------------------------------------------------------------
(In millions)
CURRENT ASSETS
Cash and cash equivalents............ $ 97 $ 99
Receivables:
Trade.............................. 256 208
Other.............................. 45 35
Inventories.......................... 440 382
Deferred income taxes................ 57 58
Other current assets................. 6 2
----- -----
Total current assets............... $ 901 $ 784
----- -----
LONG-TERM ASSETS........................ $ 93 $ 81
----- -----
PROPERTY AND EQUIPMENT
Land and land improvements........... $ 64 $ 63
Buildings............................ 377 354
Machinery and equipment.............. 539 512
Construction in progress............. 60 56
----- -----
$1,040 $ 985
Less accumulated depreciation........ 495 475
----- -----
$ 545 $ 510
----- -----
INTANGIBLES............................. $ 64 $ 47
----- -----
$1,603 $1,422
====== ======
See Notes to Consolidated Financial Statements.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY August 31, 1997 1996
- ------------------------------------------------------------------------
(In millions)
CURRENT LIABILITIES
Short-term borrowings .......................... $ 91 $ 13
Current maturities of long-term debt ........... 6 12
Accounts payable, trade ........................ 85 89
Accrued compensation ........................... 60 65
Income taxes payable ........................... 26 63
Other .......................................... 61 46
------- -------
Total current liabilities .................... $ 329 $ 288
------- -------
LONG-TERM DEBT .................................... $ 19 $ 25
------- -------
DEFERRED ITEMS
Retirement benefits ............................ $ 80 $ 68
Income taxes ................................... 20 16
------- -------
$ 100 $ 84
------- -------
CONTINGENCIES
MINORITY INTEREST IN SUBSIDIARIES ................. $ 7 $ 7
------- -------
SHAREHOLDERS' EQUITY
Capital stock:
Preferred, authorized 10,000,000
shares; issued none ..... ................... $ -- $ --
Common, $1 par value; authorized
150,000,000 shares;
issued 1997 - 92,948,963 shares;
1996 - 92,693,578 shares .................... 93 93
Additional paid-in capital ..................... 43 23
Retained earnings .............................. 1,436 1,272
Unrealized gain on available-for-sale
securities, net ............................. 19 11
Cumulative translation adjustment .............. (26) (3)
------- -------
$ 1,565 $ 1,396
Less:
Cost of common shares acquired for
the treasury, 1997 - 10,726,028
shares; 1996 - 10,304,700 shares ........... (393) (364)
Unearned compensation ........................ (24) (14)
------- -------
$ 1,148 $ 1,018
------- -------
$ 1,603 $ 1,422
======= =======
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended August 31, 1997 1996 1995
- ----------------------------------------------------------------------------
(In millions)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ...................................... $ 243 $ 223 $ 183
Noncash items included in net income:
Depreciation and amortization ................ 89 77 74
Provision for doubtful accounts .............. 6 5 2
(Gain) loss on disposal of assets ............ (5) (4) 1
Other noncash items, net ..................... 7 1 6
Change in assets and liabilities, net:
Receivables .................................. (77) (46) (20)
Inventories .................................. (72) 43 (68)
Accounts payable and accrued expenses ........ (4) 61 (39)
Income taxes payable ......................... (38) 40 (8)
Other assets and liabilities ................. 27 (11) 9
----- ----- -----
Net cash provided by operating activities .... $ 176 $ 389 $ 140
----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of assets .................... $ 29 $ 15 $ 6
Capital expenditures ............................ (127) (116) (86)
Technology investments .......................... (24) (48) --
Other, net ...................................... (7) 5 (2)
----- ----- -----
Net cash used in investing activities ........ $(129) $(144) $ (82)
----- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Net short-term borrowings (payments) ............ $ 81 $ (42) $ 45
Proceeds from long-term borrowings .............. -- 1 5
Principal payments on long-term borrowings ...... (11) (55) (2)
Purchase of common stock ........................ (25) (62) (100)
Cash dividends paid ............................. (79) (69) (60)
----- ----- -----
Net cash used in financing activities ........ $ (34) $(227) $(112)
----- ----- -----
Effect of foreign currency exchange rate
changes on cash and cash equivalents ............ $ (15) $ (3) $ 3
----- ----- -----
Net increase (decrease) in cash and
cash equivalents ............................ $ (2) $ 15 $ (51)
Cash and cash equivalents, beginning ............... 99 84 135
----- ----- -----
CASH AND CASH EQUIVALENTS, ENDING .................. $ 97 $ 99 $ 84
===== ===== =====
SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments:
Interest ..................................... $ 7 $ 14 $ 13
Income taxes ................................. $ 158 $ 93 $ 117
Noncash investing and financing activities:
Technology investments acquired
by the issuance of long-term debt
and the assumption of liabilities ........... $ 10 $ 20 $ --
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended August 31, 1997 1996 1995
- -------------------------------------------------------------------------------
(In millions)
COMMON STOCK
Balance, beginning ......................... $ 93 $ 93 $ 93
Issuance in 1997 of 255,385
common shares for restricted
stock plan ............................. -- -- --
------- ------- -------
Balance ending ............................. $ 93 $ 93 $ 93
------- ------- -------
ADDITIONAL PAID-IN CAPITAL
Balance, beginning ......................... $ 23 $ 18 $ 15
Common stock issued from
treasury for restricted stock plan ...... $ 18 3 1
Tax benefits related to
restricted stock plan ................... 2 2 2
------- ------- -------
Balance, ending ............................ $ 43 $ 23 $ 18
------- ------- -------
RETAINED EARNINGS
Balance, beginning ......................... $ 1,272 $ 1,118 $ 995
Net income ............................... 243 223 183
Cash dividends on common stock
(1997 - $.95 per share;
1996 - $.83 per share;
1995 - $.71 per share) .................. (79) (69) (60)
------- ------- -------
Balance, ending ............................ $ 1,436 $ 1,272 $ 1,118
------- ------- -------
UNREALIZED GAIN ON AVAILABLE-FOR-SALE
SECURITIES, NET
Balance, beginning ......................... $ 11 $ -- $ --
Current unrealized gain .................. 8 11 --
------- ------- -------
Balance, ending ............................ $ 19 $ 11 $ --
------- ------- -------
CUMULATIVE TRANSLATION ADJUSTMENT
Balance, beginning ......................... $ (3) $ 1 $ (3)
Current translation adjustment ........... (23) (4) 4
------- ------- -------
Balance, ending ............................ $ (26) $ (3) $ 1
------- ------- -------
TREASURY STOCK
Balance, beginning ......................... $ (364) $ (303) $ (207)
Purchase of common stock for the
treasury (1997 - 369,000 shares;
1996 -1,148,900; shares; 1995 -
2,844,209 shares) ...................... (25) (62) (100)
Common stock issued from (acquired
for) treasury:
For restricted stock plan
(1997 - 17,522 shares;
1996 - 130,359 shares;
1995 - 226,088 shares) ............. -- 4 7
From resticted stock
forfeitures and stock
used to satisfy withholding
taxes (1997 - 69,850 shares;
1996 - 79,410 shares; 1995
- 109,539 shares) .................. (4) (3) (3)
------- ------- -------
Balance, ending ............................ $ (393) $ (364) $ (303)
------- ------- -------
UNEARNED COMPENSATION
Balance, beginning ......................... $ (14) $ (14) $ (12)
Net additions of common stock
to restricted stock plan ............... (18) (6) (8)
Amortization of unearned compensation .... 8 6 6
------- ------- -------
Balance, ending ............................ $ (24) $ (14) $ (14)
------- ------- -------
TOTAL SHAREHOLDERS' EQUITY AT YEAR END ........ $ 1,148 $ 1,018 $ 913
======= ======= =======
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS:
The Company's business is the broad application of the
science of genetics. Pioneer was founded in 1926 to apply
newly discovered genetic techniques to hybridize corn.
Today, the Company develops, produces, and markets hybrids
of corn, sorghum, and sunflowers; varieties of soybeans,
alfalfa, wheat, and canola; and microorganisms useful in
crop and livestock production. Approximately 90 percent of
the Company's total net sales are from the sale of hybrid
seed corn and soybean seed primarily within the regions of
North America and Europe.
CONSOLIDATION POLICY:
The consolidated financial statements include the accounts
of the Company and all of its subsidiaries. All material
intercompany balances and transactions have been eliminated
in consolidation.
USE OF ESTIMATES:
The preparation of financial statements in conformity with
generally accepted accounting principles requires
management to make estimates and assumptions that affect
the amounts reported in the financial statements. Actual
results could differ from those estimates.
CASH EQUIVALENTS:
The Company considers all liquid investments with a
maturity at purchase of three months or less to be cash
equivalents.
RECEIVABLES:
Receivables are stated net of an allowance for doubtful
accounts of $23 million at August 31, 1997 and 1996.
INVENTORIES:
Inventories are valued at the lower of cost (first-in,
first-out method) or market. Independent growers are
contracted to produce the Company's finished seed
inventory. In accordance with the contract, the Company
compensates growers with bushel equivalents that can be
marketed to the Company for the market price of grain for a
period of time following harvest. The Company uses
derivative instruments such as commodity futures and
options to hedge the commodity risk involved in
compensating growers. It is the Company's policy to hedge
commodity risk prior to setting the retail price of seed.
The hedge position gains or losses are accounted for as
inventory costs and expensed as cost of goods sold when the
associated crop inventory is sold.
PROPERTY AND EQUIPMENT:
Property and equipment is recorded at cost, net of an
allowance for loss on plant closings of $4 million and $9
million at August 31, 1997 and 1996, respectively.
Depreciation is computed primarily by the straight-line
method over estimated service lives of two to forty years.
LONG-TERM ASSETS:
Certain long-term assets were classified as
available-for-sale securities. Available for-sale
securities held at August 31, 1997, consisted of an equity
security with a cost basis of $20 million and an unrealized
gain of $30 million. Available-for-sale securities held at
August 31, 1996, consisted of an equity security with a
cost basis of $30 million and an unrealized gain of $17
million. During 1997, the Company sold part of the equity
security for $17 million, resulting in a gain on sale of $7
million.
It was not practicable to estimate the fair value of the
Company's other equity security investments. As a result,
these investments are carried at their original cost basis
of approximately $8 million.
INTANGIBLES:
Intangible assets are stated at amortized cost and are
amortized by the straight-line method over one- to
twenty-year periods, with the weighted-average amortization
period approximating eight years for the year ended August
31, 1997. Accumulated amortization of $38 million and $28
million at August 31, 1997 and 1996, respectively, have
been netted against these assets.
BASIS OF ACCOUNTING:
Subsidiary and asset acquisitions are accounted for by the
purchase method.
TRANSLATION OF FOREIGN CURRENCIES AND FOREIGN EXCHANGE
HEDGING:
All assets and liabilities in the balance sheets of foreign
subsidiaries whose functional currency is other than the
U.S. dollar are translated at year-end exchange rates.
Translation gains and losses are not included in
determining net income but are accumulated as a separate
component of shareholders' equity. However, for
subsidiaries considered to be operating in highly
inflationary countries and for certain other subsidiaries,
the U.S. dollar is the functional currency, and translation
gains and losses are included in determining net income.
Foreign currency transaction gains and losses are included
in determining net income.
The Company uses a combination of derivative instruments
such as forward exchange contracts, purchased options, and
cross currency swaps to hedge future firm commitments such
as exports, contractual flows, and royalties. While
derivative hedge instruments are subject to price
fluctuations from exchange and interest rate movements,
these price changes would generally be offset by changes in
the U.S. dollar value of foreign sales and cash flows.
Therefore, hedging gains and losses on existing
foreign-denominated payables or receivables are included in
other assets or liabilities and are recognized in net
exchange gain (loss) in conjunction with the revaluation of
the foreign-currency-denominated transaction. Unrealized
gains and losses related to qualifying hedges of firm sales
and purchase commitments are deferred and recognized in
income when the future sales or purchases are recognized,
or immediately if the commitment is canceled. Option
premiums paid are amortized to income over the life of the
contract.
INCOME TAXES:
Income taxes are computed in accordance with SFAS No. 109.
Deferred income taxes have been provided on temporary
differences in the financial statement and income tax bases
of certain assets and liabilities.
Deferred income taxes have not been provided on the
undistributed earnings or the cumulative translation
adjustment of the foreign subsidiaries to the extent the
Company intends to reinvest such undistributed earnings
indefinitely or to repatriate them only to the extent that
no additional income tax liability is created. The
cumulative amount of the undistributed net income and
translation adjustment of such subsidiaries is
approximately $161 million at August 31, 1997. The Company
files consolidated U.S. federal income tax returns with its
domestic subsidiaries; therefore, no deferred income taxes
have been provided on the undistributed earnings of those
subsidiaries.
PENSION PLANS:
The Company's domestic and Canadian operations have defined
benefit pension plans covering substantially all their
employees. The plans provide benefits that are based on
average monthly earnings of the employees. The funding
policy is to contribute annually an amount to fund pension
cost as actuarially determined by an independent pension
consulting firm.
OTHER POSTRETIREMENT BENEFITS:
The Company sponsors a health care plan and a life
insurance plan which provide benefits to eligible retirees.
The Company's contribution is based on age and years of
service at retirement. The health insurance plan contains
the cost-sharing features of coinsurance and/or
deductibles. The life insurance plan is paid for by the
Company. Benefits under both plans are based on eligibility
status for pension and length of service. Substantially all
of the Company's U.S. and Canadian full-time employees may
become eligible for these benefits upon reaching age 55 and
having worked for the Company at least five years.
DEFERRED EXECUTIVE COMPENSATION AND SUPPLEMENTAL RETIREMENT
BENEFIT PLANS:
The estimated liability for the deferred executive
compensation and supplemental retirement benefit plans is
being accrued over the expected remaining years of active
employment.
RESTRICTED STOCK AND STOCK OPTION PLANS:
The Company has restricted stock plans and a non-qualified
stock option plan. The Company amortizes as compensation
expense the cost of stock acquired for the restricted stock
plans by the straight-line method over three- and five-year
restriction periods. No compensation expense is recorded
under the non-qualified stock option plan.
In 1997 the Company adopted SFAS 123, "Accounting for
Stock-Based Compensation," as required for disclosure
purposes only. The Company will continue applying the
accounting treatment prescribed by the provisions of APB
Opinion No. 25, "Accounting for Stock Issued to Employees."
Pro forma disclosures as if SFAS No. 123 were adopted for
all stock-based compensation plans have been provided.
OTHER:
During fiscal 1997, the Financial Accounting Standards Board
issued SFAS No. 128, "Earnings Per Share." The adoption of
SFAS No. 128 is not expected to have a significant impact on
the Company's financial statements.
NOTE 2. INVENTORIES
The composition of inventories is as follows:
August 31, 1997 1996
----------------------------------------------------
(In millions)
Finished seed................... $ 245 $ 209
Unfinished seed................. 186 163
Supplies and other.............. 9 10
---- -----
$ 440 $ 382
==== =====
Unfinished seed represents the cost of parent seed,
detasseling and roguing labor, and certain other production
costs incurred by the Company to produce its seed supply. Much
of the balance of the labor, equipment, and production costs
associated with planting, growing, and harvesting the seed is
supplied by independent growers, who contract specific acreage
for the production of seed for the Company. The compensation
of the independent growers is determined based upon yield,
contracted acreage, and commodity prices. The commitment for
grower compensation is accrued as seed is delivered to the
Company. Accrued grower compensation was $13 million and $11
million at August 31, 1997 and 1996, respectively.
The Company uses derivative instruments such as commodity
futures and options to hedge grower compensation costs. At
August 31, 1997 and 1996, the Company had futures contracts
with brokers on notional quantities amounting to 32 million
bushels and 17 million bushels, respectively for corn, and 6
million bushels each year for soybeans. At August 31, 1997,
unrealized losses on all open contracts were $4 million.
NOTE 3. CURRENT BORROWINGS, LINES OF CREDIT, LONG-TERM DEBT, AND
GUARANTEES
At August 31, 1997, the Company had domestic lines of credit
totaling $200 million available to be used as support for the
issuance of the Company's commercial paper. Commercial paper
outstanding at August 31, 1997, was $63 million at a weighted
average interest rate of 5.6 percent. There was no commercial
paper outstanding at August 31, 1996.
In addition, the Company's foreign subsidiaries have lines of
credit and direct borrowing agreements totaling $37 million,
substantially all of which are unsecured. At August 31, 1997,
short-term borrowings of $28 million were outstanding under
foreign subsidiary agreements at a weighted average interest
rate of 13.3 percent. At August 31, 1996, short-term
borrowings of $13 million were outstanding under these
agreements at a weighted average interest rate of 8.9 percent
The long-term debt at August 31, 1997, bears interest at
varying rates and requires annual principal payments through
fiscal 2011. The maturities of long-term debt for the next
five fiscal years, in millions, are as follows: $6, $15, $0.4,
$1, and $0.2.
The Company has guaranteed the repayment of principal and
interest on certain obligations of Village Court Associates,
an affiliated real estate venture. At August 31, 1997, such
guarantees totaled approximately $23 million.
NOTE 4. INCOME TAXES
The provision for income taxes is based on income before
income taxes as follows:
Years Ended August 31, 1997 1996 1995
--------------------------------------------------------------
(In millions)
United States.................. $ 308 $ 266 $ 198
Foreign........................ 65 88 93
----- ---- -----
$ 373 $ 354 $ 291
==== ==== ====
The provision for income taxes is composed of the following
components:
Years Ended August 31, 1997 1996 1995
--------------------------------------------------------------
(In millions)
Current:
Federal..................... $ 80 $ 83 $ 59
State....................... 9 11 10
Foreign..................... 31 44 36
----- ---- -----
$ 120 $ 138 $ 105
---- ---- ----
Deferred:
Federal..................... $ 8 $ (9) $ 4
State....................... 1 (1) -
Foreign..................... (2) (1) (3)
----- ---- -----
$ 7 $ (11) $ 1
---- ---- ----
$ 127 $ 127 $ 106
==== ==== ====
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred
tax liabilities at August 31, 1997 and 1996, are presented
below:
August 31, 1997 1996
-------------------------------------------------------------
(In millions)
Deferred tax assets:
Allowance for doubtful accounts ........ $ 6 $ 6
Inventories ............................ 29 33
Benefits/compensation .................. 40 35
Deferred profit ........................ 9 8
Nondeductible reserves ................. 9 8
Net operating loss carryforwards ....... 6 5
Other .................................. 11 7
----- -----
Total gross deferred tax asset ....... $ 110 $ 102
Less valuation allowance ............. (8) (8)
----- -----
Total deferred tax asset ............. $ 102 $ 94
----- -----
Deferred tax liabilities:
Property and equipment ................. $ (55) $ (46)
Unrealized gain on available-
for-sale securities ................... (10) (6)
----- -----
Total deferred tax liability ......... $ (65) $ (52)
----- -----
Net deferred tax asset ............... $ 37 $ 42
===== =====
The net operating loss carryforwards result from various
international subsidiaries. The expiration of these net
operating losses range from 1998 to indefinite. Utilization of
these losses is dependent upon earnings generated in the
respective subsidiaries. A valuation allowance for the losses
and certain other items has been set up where appropriate.
There was no change in the total valuation allowance for the
year ended August 31, 1997. The net change in the total
valuation allowance for the year ended August 31, 1996, was a
decrease of $3 million.
Following is a reconciliation of the statutory U.S. Federal
income tax rate to the Company's actual worldwide effective
income tax rate:
Years Ended August 31, 1997 1996 1995
---------------------------------------------------------------
Statutory U.S. Federal income
tax rate .......................... 35.0% 35.0% 35.0%
State income taxes, net of
Federal income tax benefit ........ 1.8 1.8 2.4
Effect of taxes on foreign earnings (1.5) -- (0.9)
Foreign Sales Corporation .......... (1.4) (0.5) (0.7)
Other .............................. 0.1 (0.3) 0.7
---- ---- ----
Actual effective income tax rate 34.0% 36.0% 36.5%
==== ==== ====
NOTE 5. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
QUALIFIED PENSION PLANS:
The components of pension expense relating to qualified
defined benefit pension plans for the years ended August 31,
1997, 1996, and 1995, consisted of the following:
1997 1996 1995
----------------------------------------------------------
(In millions)
Service cost ............. $ 8 $ 7 $ 7
Interest cost on projected benefit
obligation .............. 12 11 11
Actual return on plan assets (16) (14) (12)
Net amortization and deferral (1) (1) (1)
---- ---- ----
Pension expense ....... $ 3 $ 3 $ 5
==== ==== ====
The following table sets forth the plans' funded status as of
June 30, 1997 and 1996, respectively:
1997 1996
---------------------------------------------------------------
(In millions)
Actuarial present value of
benefit obligations:
Vested benefit obligation ................ $ 121 $ 101
====== ======
Accumulated benefit obligation ........... $ 129 $ 108
====== ======
Plan assets at fair value, primarily
stocks and bonds ........................... 214 $ 179
Projected benefit obligation ................ 187 153
------ ------
Plan assets in excess of projected
benefit obligation ......................... $ 27 $ 26
Unrecognized net gain ....................... (16) (11)
Unrecognized prior service cost ............. 2 2
Unrecognized transition asset, net
(recognized over 16 years) ................. (7) (8)
------ ------
Pension asset ............................... $ 6 $ 9
====== ======
Plan assets include common stock of the Company totaling $21
million and $14 million at June 30, 1997 and 1996,
respectively.
In determining the present value of benefit obligations, a
discount rate of 8 percent was used in 1997 and 1996. The
expected long-term rate of return on plan assets was 9 percent
and the assumed rate of increase in compensation levels was
6.5 percent in both years.
NON-QUALIFIED PENSION PLANS:
The components of pension expense relating to non-qualified
pension plans for the years ended August 31, 1997, 1996, and
1995, consisted of the following:
1997 1996 1995
---------------------------------------------------------------
(In millions)
Service cost...................... $ 2 $ 1 $ 2
Interest cost on projected
benefit obligation 3 3 3
Net amortization and deferral..... 1 1 1
---- ---- ----
Pension expense................ $ 6 $ 5 $ 6
==== ==== ====
The following table sets forth the plans' funded status as of
August 31, 1997 and 1996, respectively:
1997 1996
---------------------------------------------------------------
(In millions)
Actuarial present value of benefit
obligations:
Vested benefit obligation ................ $ 17 $ 16
====== ======
Accumulated benefit obligation ........... $ 17 $ 16
====== ======
Plans' assets at fair value ................. $ -- $ --
Projected benefit obligation ................ 50 37
------ ------
Plans' assets less than projected
benefit obligation ......................... $ (50) $ (37)
Unrecognized net loss ....................... 13 4
Unrecognized prior service cost ............. 11 11
Unrecognized transition asset, net .......... 1 1
------ ------
Accrued pension liabilities .............. $ (25) $ (21)
====== ======
In determining the present value of benefit obligations, a
discount rate of 8 percent was used in 1997 and 1996. The
assumed rate of increase in compensation levels used was 8
percent in both years.
OTHER POSTRETIREMENT BENEFIT PLANS:
The components of postretirement benefits cost expensed for
the years ended August 31, 1997, 1996, and 1995, consisted of
the following:
1997 1996 1995
---------------------------------------------------------------
(In millions)
Service cost -- benefits earned
during the year ..................... $2 $2 $2
Interest cost on accumulated
postretirement benefit
obligation .......................... 3 3 2
Return on assets ..................... - - --
Net amortization and deferral ........ - - --
-- -- --
Other postretirement benefits cost$ 5 $5 $4
== == ==
The following table sets forth the plans' funded status as of
August 31, 1997 and 1996, respectively:
1997 1996
---------------------------------------------------------------
(In millions)
Accumulated postretirement
benefit obligation:
Retirees .............................. $(15) $(12)
Other fully eligible plans'
participants ......................... (10) (8)
Other active plans' participants ...... (23) (20)
---- ----
$(48) $(40)
Plans' assets at fair value ........... -- --
---- ----
Accumulated postretirement
benefit obligation in excess of
plans' assets ........................ $(48) $(40)
Unrecognized prior service cost ....... (2) (1)
Unrecognized net loss ................. 7 1
---- ----
Accrued postretirement benefits cost $(43) $(40)
==== ====
For 1997 and 1996, the discount rate used in determining the
accumulated postretirement benefit obligation was 8 percent. A
9 percent annual rate of increase in the per capita cost of
covered health care benefits was assumed for 1997. This rate
was assumed to decrease gradually to 5.5 percent in year 2004
and remain at that level thereafter. A one-percentage-point
increase in the assumed health care cost trend rates would
increase the accumulated postretirement benefit obligation as
of August 31, 1997, by approximately $8 million and the total
of the service and interest cost components of net
postretirement health care cost for the year then ended by
approximately $1 million.
NOTE 6. LEGAL MATTERS
DeKalb Genetics Corporation ("DeKalb") has filed five lawsuits
against Pioneer alleging that insect-resistant corn products
that use a Bt gene, and corn products resistant to a
glufosinate herbicide, infringe on certain DeKalb patents.
After reviewing the Company's intellectual property position,
all of DeKalb's patent filings, and DeKalb's lawsuits, Pioneer
believes DeKalb's claims are without merit. Pioneer has denied
DeKalb's allegations and raised defenses that, if successful,
would render DeKalb's patents invalid. Pioneer believes that
disposition of the lawsuits will not have a materially adverse
effect on the consolidated financial position and results of
operations of the Company. Pioneer also does not expect delays
in the introductions of advanced corn hybrids with insect and
herbicide resistance because of these lawsuits.
NOTE 7. FINANCIAL INSTRUMENTS
FOREIGN EXCHANGE:
The Company uses derivative instruments such as forward
exchange contracts, purchased options, and cross currency
swaps to hedge foreign-currency-denominated transactions such
as exports, contractual flows, and royalty payments. In some
countries these derivative hedge instruments are not available
or are cost prohibitive. The exposures in these countries are
addressed through managing net asset positions, borrowing in
local currency, or investing in U.S. dollars.
While derivative hedge instruments are subject to risk of loss
from exchange and interest rate movements, we expect these
changes would generally be offset by changes in the U.S.
dollar value of foreign sales and/or cash flows. The Company
does not trade these instruments with the objective of earning
financial gains on the exchange rate price fluctuations alone,
nor does it trade in currencies for which there are no
underlying transaction related exposures.
The notional amounts for contracts in place at August 31, 1997
and 1996, are shown in the following table in U.S. dollars.
These contracts generally mature in less than one year.
August 31, 1997 1996
------------------------------------------------------------
(In millions)
Forwards........................ $ 229 $ 79
Options purchased............... 15 14
Swaps........................... 19 26
---- -----
$ 263 $ 119
==== =====
At August 31, 1997, deferred unrealized gains and losses from
hedging firm purchase and sale commitments, based on broker
quoted prices, were $9 million and $5 million, respectively.
CREDIT RISK:
The Company's financial instruments subject to credit risk are
primarily trade accounts receivable, cash and cash
equivalents, and foreign currency exchange contracts. The
Company is exposed to credit risk of nonperformance by
counterparties. Generally, the Company does not require
collateral or other security to support customer receivables
or foreign currency exchange contracts. The counterparties to
the Company's derivative hedge instruments are major financial
institutions. The Company evaluates the creditworthiness of
the counterparties to these instruments and has never
experienced, nor does it anticipate, nonperformance by any of
its counterparties.
The Company had the following significant concentrations of
trade accounts receivables, and cash and cash equivalents
subject to credit risk:
August 31, 1997 1996
---------------------------------------------------------------
(In millions)
United States................... $ 151 $ 141
Italy........................... $ 69 $ 57
Brazil.......................... $ 19 $ 19
Argentina....................... $ 27 $ 11
Central Europe.................. $ 16 $ 9
Within the U.S., the majority of the Company's business is
conducted with individual farm operators located throughout
the country. Outside the U.S., the majority of the Company's
business is transacted with distributors and cooperatives,
some being government sponsored.
FAIR VALUE:
The Company estimated the fair value of its financial
instruments by discounting the expected future cash flows
using the current interest rates which would apply to each
class of financial instruments, except for foreign currency
contracts for which quotes from brokers were used.
The fair value of cash equivalents, receivables, short-term
borrowings, long-term debt, and foreign currency contracts
approximates carrying value at August 31, 1997.
NOTE 8. CAPITAL STOCK
VOTING RIGHTS:
Generally, each share of common stock is entitled to five
votes per share if the share has been beneficially owned
continuously by the same person for a period of 36 consecutive
months preceding the record date for the relevant
shareholders' meeting. All other shares are entitled to one
vote per share.
SHARE REPURCHASE:
At August 31, 1997, authorized shares remaining to be
purchased under a Board authorized repurchase plan
approximated 2.1 million.
RESTRICTED STOCK PLANS:
The Company has a restricted stock plan under which shares of
the Company's common stock are held by the Company for
officers and key employees. Such stock is subject to an
agreement requiring forfeiture by the employee in the event of
termination of employment within five years of the date of
grant other than as a result of retirement, death, or
disability. The maximum number of shares authorized for grant
under this plan is 1,750,000 shares, of which 258,472 had been
granted as of August 31, 1997.
The Company also has a restricted stock plan under which
shares of the Company's common stock are held for non-employee
directors of the Company in lieu of cash compensation. The
maximum number of shares authorized for grant under this plan
is 25,000, of which 14,306 have been granted as of August 31,
1997.
STOCK OPTION PLAN:
During 1996, the Company adopted a non-qualified stock option
plan. The plan authorizes options covering three million
shares of the Company's common stock. Options under the plan
are exercisable one-third in each of years three, four, and
five from the date of grant. The options expire after ten
years from the date of grant. Options are forfeited upon
termination for reasons other than retirement, death, or
disability.
The Company applies APB Opinion No. 25 and related
interpretations in accounting for the fixed stock option plan.
Accordingly, no compensation cost has been recognized for the
plan. Had compensation cost for the Company's fixed stock
option plan been determined consistent with SFAS Statement No.
123, the Company's net income and earnings per share would
have been reduced to the pro forma amounts as follows:
Years Ended August 31, 1997 1996
---------------------------------------------------------------
(In millions, except per share amounts)
Net Income as reported $ 243 $ 223
Pro forma net income $ 240 $ 221
Primary earnings per share
as reported $2.95 $2.68
Pro forma earnings per share $2.92 $2.65
The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 1997
and 1996, respectively: risk-free interest rate of 6.7 percent
and 6.4 percent; expected life of 7.5 years each year;
expected volatility of 22 percent each year; and dividend
yield of 1.4 percent and 1.5 percent.
A summary of the status of the Company's fixed stock option
plan as of August 31, 1997 and 1996, and changes during the
years ended on those dates is presented below:
1997 1996
---------------------------------------------- --------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
------ -------- ------ ---------
Outstanding at beginning
of year.......... 973,000 $ 43 - $ -
Granted........... 24,000 $ 78 973,000 $ 43
------ ---- ------- ----
Outstanding at end
of year 997,000 $ 44 973,000 $ 43
======= ==== ======= ====
Options exercisable
at year end........... - -
Weighted-average fair
value of options
granted during the year $ 27.47 $ 14.89
The following table summarizes information about fixed stock
options outstanding at August 31, 1997.
Options Outstanding
---------------------------------------------------------------
Number Weighted-Average
Weighted-Average Outstanding Remaining
Exercise Price at 8/31/97 Contractual Life
-------------- ---------- ----------------
$ 43 973,000 8.0 years
$ 78 24,000 9.8 years
There are no options exercisable at August 31, 1997.
NOTE 9. GEOGRAPHIC DATA
Certain financial information concerning the Company's
domestic and foreign operations is as follows:
Years Ended August 31, 1997 1996 1995
----------------------------------------------------------------
(In millions)
Net sales (by source):
United States ................ $ 1,626 $ 1,435 $ 1,271
Europe ....................... 391 387 349
Other ........................ 240 222 189
------- ------- -------
$ 2,257 $ 2,044 $ 1,809
Less intergeographical
sales, primarily
United States .............. 473 323 277
------- ------- -------
$ 1,784 $ 1,721 $ 1,532
======= ======= =======
Operating income (by source):
United States ................ $ 365 $ 334 $ 269
Europe ....................... 49 56 53
Other ........................ 26 33 31
------- ------- -------
$ 440 $ 423 $ 353
Indirect general and
administrative expense ...... (77) (76) (73)
------- ------- -------
$ 363 $ 347 $ 280
======= ======= =======
Identifiable assets at August 31:
United States ................ $ 843 $ 701 $ 736
Europe ....................... 228 224 212
Other ........................ 322 244 210
------- ------- -------
$ 1,393 $ 1,169 $ 1,158
Corporate .................... 210 253 135
------- ------- -------
$ 1,603 $ 1,422 $ 1,293
======= ======= =======
Export sales:
Primarily Europe ............. $ 18 $ 20 $ 15
======= ======= =======
NOTE 10. UNAUDITED QUARTERLY FINANCIAL DATA
Summarized unaudited quarterly financial data for 1997 is as
follows:
Three Months Ended November 30 February 28 May 31 August 31
-----------------------------------------------------------------------
(In millions, except per share amounts)
Net sales ............... $ 90 $ 264 $1,288 $ 142
Gross profit ............ $ 10 $ 94 $ 735 $ 28
Net income (loss) ....... $ (45) $ (2) $ 332 $ (42)
Net income (loss) per
common share (1) ..... $(.55) $(.02) $ 4.04 $(.51)
Cash dividends per
common share(1) ...... $ .23 $ .23 $ 23 $ .26
Summarized unaudited quarterly financial data for 1996 is as
follows:
Three Months Ended November 30 February 28 May 31 August 31
-----------------------------------------------------------------------
(In millions, except per share amounts)
Net sales.......... $ 92 $ 281 $1,168 $ 180
Gross profit....... $ 8 $ 107 $ 691 $ 52
Net income (loss).. $ (49) $ 4 $ 303 $ (35)
Net income (loss) per
common share (1) $(.59) $ .05 $ 3.64 $(.42)
Cash dividends per
common share (1) $ .20 $ .20 $ .20 $ .23
(1) As a result of rounding, the total of the four quarters'
earnings and cash dividends per share may not equal the
earnings and cash dividends per share for the year.
NOTE 11. SUBSEQUENT EVENTS
In September 1997, the Company and E.I. du Pont de Nemours and
Co. (DuPont) formally completed an agreement that creates one
of the world's largest private agricultural research and
development collaborations. The companies also formed a joint
venture that will market improved quality traits to increase
the value of crops for livestock feeders, grain processors,
and other end users. The joint venture will not sell seed.
Pioneer will be the preferred worldwide provider and marketer
of quality trait seed for the joint venture. Contribution of
tangible assets or cash to the joint venture are not expected
to materially impact the financial condition or results of
operation of the Company in the near future.
DuPont also acquired a 20 percent interest in Pioneer through
the purchase of preferred voting shares for $1.7 billion.
Pioneer used a portion of the proceeds from the DuPont
investment to purchase approximately 20 percent of outstanding
shares through a Dutch auction self-tender. The Company
purchased the shares at $92.50 per share, and when combined
with all other costs associated with the transaction, will
have approximately $180 million available for corporate
purposes.
The agreement, among other things, includes a standstill
provision that prohibits DuPont from increasing its ownership
share in Pioneer for 16 years without the consent of Pioneer.
DuPont also gained two of the 15 seats on the Pioneer board of
directors.
MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's stock is traded on the New York Stock Exchange. The
range of closing prices for these shares for the past two years are as
follows:
1997 1996
-------------------------------------------------
Quarter: HIGH LOW High Low
First....... 73 1/8 55 1/8 57 3/8 43
Second...... 72 1/8 65 3/8 58 1/4 49 3/4
Third....... 73 58 3/4 56 5/8 51 3/4
Fourth...... 90 69 5/8 57 1/4 51
On August 31, 1997, there were approximately 20,000 registered and
beneficial shareholders of the Company's 82,222,935 outstanding
shares. Quarterly dividends paid for the years ended August 31, 1997
and 1996 are as follows:
Cash Dividends Per Share 1997 1996
---------------------------------------------
Quarter:
First.................. $ .23 $ .20
Second................. $ .23 $ .20
Third.................. $ .23 $ .20
Fourth................. $ .26 $ .23
The stock of the Company became publicly traded in 1973 and quarterly
dividends have been paid continuously since that time. It is
anticipated that dividends will continue to be paid in the future. The
Company's stock is included in the Standard & Poors Composite Stock
Price Index.
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