February 24, 2005
VIA FACSIMILE AND FEDEX
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United States Securities and Exchange Commission
Division of Corporation Finance
450 Fifth Street, N.W.
Washington, D.C. 20549-0405
(202) 942-9528 (Fax)
Attention: H. Roger Schwall
Gary Newberry
Shannon Buskirk
Re: MONSANTO COMPANY
Form 10-K, Filed November 3, 2004
Form 10-Q, Filed January 10,
2005 File No. 1-16167
Dear Messrs. Schwall and Newberry and Ms. Buskirk:
Reference is made to the Staff's letter, dated February 9,
2005, setting forth comments to the Report on Form 10-K for the year ended
August 31, 2004 (the "Form 10-K") and the Report on Form 10-Q for the quarter
ended November 30, 2004 (the "Form 10-Q") by Monsanto Company ("Monsanto" or the
"Company"). Set forth below are the Staff's comments, indicated in bold, and the
Company's responses. As discussed with the Staff on February 23, 2005, the
Company will incorporate changes to its filings prompted by the Staff's comments
on a going forward basis in all future filings, consistent with the responses
outlined below. We understand that the purpose of the Staff's review is to
assist the Company in its compliance with the applicable disclosure requirements
and to enhance the overall disclosure in its filings. As such, we understand
that the Staff may have further comments based on our responses.
In addition, we are providing in Schedules No. 1 and 2 hereto
supplemental information as requested in the Staff's comments, including our
responses to Comment number 5. We request that the Staff return all copies of
these Schedules, after its review is complete.
Securities and Exchange Commission
February 24, 2005
page 2
ACCOUNTING COMMENTS
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Form 10-K for the year ended August 31, 2004
Item 7, Management's Discussion and Analysis of Financial Condition and
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Results of Operations
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Financial Measures, Page 24
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1. WE NOTE YOUR USE OF EBIT (EARNINGS BEFORE INTEREST AND TAXES) AS A
MEASURE OF YOUR SEGMENTS' PROFIT, ITS DEFINITION AND THE RECONCILIATION
TO NET INCOME IN NOTE 23 ON PAGE 112. WE NOTE YOUR CALCULATION OF EBIT
EXCLUDES LOSSES FROM DISCONTINUED OPERATIONS, CUMULATIVE EFFECT OF
ACCOUNTING CHANGES AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLES. IN THIS REGARD, IT APPEARS THE TITLE OF YOUR NON-GAAP
MEASURE REQUIRES MODIFICATION AS IT DOES NOT CLEARLY IDENTIFY ALL
ADJUSTMENTS YOU HAVE MADE TO THE WIDELY KNOWN AND RECOGNIZED MEASURE OF
EBIT. THE REVISED TITLE OF YOUR NON-GAAP MEASURES SHOULD NOT REFER IN
ANY WAY TO "EBIT" UNLESS THE MEASURE IS CALCULATED CONSISTENTLY WITH
ITS READILY KNOWN DEFINITION. REFER TO QUESTION 14 OF THE FREQUENTLY
ASKED QUESTIONS REGARDING THE USE OF NON-GAAP FINANCIAL MEASURES ISSUED
ON JUNE 13, 2003 FOR FURTHER EXPLANATION.
RESPONSE. The first paragraph in the "Overview -- Financial
Measures" section of Item 7 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations of Monsanto's Form 10-K,
explains the usage of the term EBIT. This financial measure is used in
the "Seeds and Genomics Segment" and "Agricultural Productivity
Segment" sections of Management's Discussion and Analysis of Financial
Condition and Results of Operations (MD&A) and in Note 23 to the
consolidated financial statements.
The readily known definition defines EBIT as net income (loss)
before interest and taxes. Monsanto also excludes discontinued
operations and the cumulative effect of a change in accounting
principle in its calculation. Throughout the Form 10-K, the Company
defines EBIT as earning (loss) from continuing operations before
cumulative effect of accounting change, interest and income taxes.
Prospectively Monsanto will re-title its definition from "EBIT" to
"Adjusted EBIT". In addition, Monsanto will prospectively add the
following to the language that appears in MD&A and the segment
footnote:
"EBIT is defined as net income (loss) before interest and
taxes. We have adjusted this definition to exclude two
additional items, discontinued operations and cumulative
effect of accounting change. We define "Adjusted EBIT" as net
income (loss) before interest, income taxes, discontinued
operations and cumulative effect of accounting change."
2. WE NOTE YOUR DISCUSSION OF CHANGES IN THIS MEASURE ON A SEGMENT BASIS
IN THE MANAGEMENT'S DISCUSSION AND ANALYSIS SECTION. THESE DISCUSSIONS
SHOULD ALSO
Securities and Exchange Commission
February 24, 2005
page 3
INCLUDE A DESCRIPTION OF THE RECONCILING ITEMS THAT APPLY
TO EACH PARTICULAR SEGMENT. PLEASE REFER TO QUESTION 19 OF THE
FREQUENTLY ASKED QUESTIONS REGARDING THE USE OF NON-GAAP FINANCIAL
MEASURES ISSUED ON JUNE 13, 2003, IF YOU REQUIRE FURTHER GUIDANCE. IN
ORDER TO COMPLY WITH ITEM 10(E) OF REGULATION S-K, IT APPEARS YOUR
DISCLOSURES SHOULD BE EXPANDED.
RESPONSE. In the "Seeds and Genomics Segment" and
"Agricultural Productivity Segment" sections of MD&A, Monsanto includes
financial results for Adjusted EBIT. Monsanto will prospectively modify
the title and footnote to the charts to comply with its response to
Comment number 1. Reconciling items between consolidated net income
(loss) and "Adjusted EBIT" consist of interest, income taxes,
discontinued operations and cumulative effect of a change in accounting
principle. Prospectively Monsanto will revise footnote 2 to the Seeds
and Genomics segment chart in MD&A as follows:
"We define "Adjusted EBIT" as net income (loss) before
interest, income taxes, discontinued operations and cumulative
effect of accounting change. Interest and income taxes are
recorded on a total company basis. We do not record these
items at the segment level. Discontinued operations relate
solely to the Seeds and Genomics segment and consist of the
European breeding and seed business for wheat and barley and
the plant-made pharmaceuticals program. See the "Results of
Operations" charts in MD&A and Note X -- Discontinued
Operations for detail of the "loss from operations of
discontinued businesses" for the periods presented. In the
transition period, the cumulative effect of a change in
accounting principle recorded was not related to this segment.
In calendar year 2002, we recorded a cumulative effect of a
change in accounting principle of $1,822 million, which was
solely related to the Seeds and Genomics segment (see Note X
-- Goodwill and Other Intangible Assets)."
Prospectively Monsanto will revise footnote 2 to the
Agricultural Productivity segment chart in MD&A as follows:
"We define "Adjusted EBIT" as net income (loss) before
interest, income taxes, discontinued operations and cumulative
effect of accounting change. Interest and income taxes are
recorded on a total company basis. We do not record these
items at the segment level. There were no discontinued
operations related to this segment. In the transition period,
we recorded a cumulative effect of a change in accounting
principle of $12 million for the adoption of a new accounting
standard relating to asset retirement obligations, which was
solely related to the Agricultural Productivity segment. In
calendar year 2002, the cumulative effect of a change in
accounting principle recorded was not related to this
segment."
Securities and Exchange Commission
February 24, 2005
page 4
Item 8, Financial Statements and Supplementary Data
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Statement of Consolidated Operations, Page 63
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3. WE NOTE YOU HAVE REPORTED THE $396 MILLION SOLUTIA PCB LITIGATION
EXPENSE AS A SEPARATE OTHER EXPENSE IN THE YEAR ENDED AUGUST 31, 2003
AND $58 MILLION RELATED TO THE SOLUTIA ASSUMED LIABILITIES AS OTHER
EXPENSE - NET IN THE YEAR ENDED AUGUST 31, 2004. IT APPEARS THESE
EXPENSES ARE RELATED TO PRIOR OPERATIONS. TELL US WHY EACH OF THESE
ITEMS SHOULD BE CLASSIFIED AS A NON-OPERATING EXPENSE UNDER ARTICLE 5
OF REGULATION S-X.
RESPONSE. Since Monsanto's business does not, and never did,
include the operations of the Chemicals Business (defined below) for
which the PCB litigation and Solutia's Assumed Liabilities relate,
Monsanto believes the appropriate income statement line item to record
these expenses was non-operating expense. The Company believes the $396
million expense for the global settlement that Monsanto participated
in, which included Solutia Inc. ("Solutia") and Pharmacia Corporation
("Pharmacia"), relating to certain Solutia PCB litigation in Alabama
recorded in the eight-month transition period ended August 31, 2003,
and the $58 million related to Solutia's Assumed Liabilities recorded
in fiscal year 2004 were both properly recorded as non-operating
expenses. Monsanto has incurred costs related to both matters pursuant
to its obligation under the Separation Agreement (defined below) to
indemnify Pharmacia. Monsanto's results of operations for all periods
presented in the Form 10-K solely consist of the Ag Business (defined
below). The Chemicals Business was separated from Pharmacia (then known
as Monsanto Company) on September 1, 1997. On February 9, 2000,
Monsanto was incorporated in Delaware as a wholly owned subsidiary of
Pharmacia (then known as Monsanto Company) under the name "Monsanto Ag
Company." Background of the relationships among Monsanto, Pharmacia,
Pfizer Inc. ("Pfizer") and Solutia is provided in the following
paragraphs.
BACKGROUND INFORMATION FOR THE ABOVE RESPONSE:
In the Form 10-K, the section "Relationships Among Monsanto
Company, Pharmacia Corporation, Pfizer Inc. and Solutia Inc." in Part I
-- Item 1 -- Business provides a brief background on the relationships
among these corporations. Prior to September 1, 1997, a corporation
that was then known as Monsanto Company ("Former Monsanto") operated an
agricultural products business (the "Ag Business"), a pharmaceuticals
business (the "Pharmaceuticals Business") and a chemical products
business (the "Chemicals Business"). Former Monsanto is today known as
Pharmacia. Pharmacia is now a wholly owned subsidiary of Pfizer, which
together with its subsidiaries operates the Pharmaceuticals Business.
Monsanto's business consists of the operations, assets and liabilities
that were previously the Ag Business. Solutia comprises the operations,
assets and liabilities that were previously the Chemicals Business.
On September 1, 1997, Pharmacia (then known as Monsanto
Company) entered into a Distribution Agreement ("Distribution
Agreement") with Solutia related to the
Securities and Exchange Commission
February 24, 2005
page 5
transfer of the operations, assets and liabilities of the
Chemical Business from Pharmacia to Solutia. Pursuant to the
Distribution Agreement, Solutia assumed and agreed to indemnify
Pharmacia (then known as Monsanto Company) for certain liabilities
related to the Chemicals Business. On September 1, 2000, Monsanto
entered into a Separation Agreement (Separation Agreement) with
Pharmacia related to the transfer of the operations, assets and
liabilities of the Ag Business from Pharmacia to us. Pursuant to the
Separation Agreement, Monsanto was required to indemnify Pharmacia for
any liabilities primarily related to the Ag Business or the Chemicals
Business, and for liabilities assumed by Solutia pursuant to the
Distribution Agreement, to the extent that Solutia fails to pay,
perform or discharge those liabilities. On December 17, 2003, Solutia
and 14 of its U.S. subsidiaries filed a voluntary petition for
reorganization under Chapter 11 of the U.S. Bankruptcy Code.
4. WE NOTE YOUR LINE ITEM TITLED "AMORTIZATION AND ADJUSTMENTS OF
GOODWILL" ON THE STATEMENT OF OPERATIONS AND THE $69 MILLION IMPAIRMENT
OF GOODWILL RECORDED DURING THE YEAR ENDED AUGUST 31, 2004. AS THIS
AMOUNT RELATES TO THE IMPAIRMENT OF PREVIOUSLY RECORDED GOODWILL, WE
BELIEVE IT IS NOT APPROPRIATE TO CHARACTERIZE THIS AMOUNT AS AN
"ADJUSTMENT" TO GOODWILL. IN ADDITION, THE DEPICTION OF THIS AMOUNT AS
AN ADJUSTMENT DOES NOT TRULY DESCRIBE THE NATURE OF THIS AMOUNT AS
"ADJUSTMENT TO GOODWILL" COULD HAVE SEVERAL MEANINGS. WE NOTE YOU HAVE
DESCRIBED THIS AMOUNT IN NOTE 9 ON PAGE 84 AS AN IMPAIRMENT AND BELIEVE
THE REMAINING DISCLOSURES THROUGHOUT YOUR FILING REQUIRE MODIFICATION
TO CONSISTENTLY LABEL THE $69 MILLION AS AN IMPAIRMENT.
RESPONSE. Although Monsanto has historically used the title
"Amortization and adjustments of goodwill" on the Statement of
Consolidated Operations to include goodwill impairment losses, Monsanto
will change this title to "Impairment of goodwill" in future filings.
Since the Statement of Consolidated Operations for the year ended
December 31, 2001 (the last year for which Monsanto amortized
goodwill), will not be included in future filings, the reference to
amortization is no longer necessary. Related disclosures in future
filings will also be modified to consistently label the $69 million and
future impairments, if any, as goodwill impairment losses.
Statement of Consolidated Financial Position, page 64
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5. WE NOTE THE REPORTED AMOUNT OF OTHER ASSETS AND MISCELLANEOUS
SHORT-TERM ACCRUALS ARE GREATER THAT 5% OF REPORTED TOTAL ASSETS AND
TOTAL CURRENT LIABILITIES, RESPECTIVELY. ON A SUPPLEMENTAL BASIS, TELL
US THE COMPONENTS OF THESE ITEMS. DISCLOSURE OF CERTAIN ITEMS MAY BE
REQUIRED UNDER ITEM 5.02 OF REGULATION S-X.
RESPONSE. Monsanto supplementally advises the Staff as
follows:
OTHER ASSETS
See attached supplemental Schedule No. 1 to this response for
a listing of items included in the Other Assets balance. The noncurrent
deferred tax assets balance as of
Securities and Exchange Commission
February 24, 2005
page 6
August 31, 2004, and August 31, 2003, exceeded the 5 percent threshold
noted in Item 5.02 of Regulation S-X. While the disclosure in the Form
10-K Note 11 -- Income Taxes includes a discussion of deferred tax
assets and provides a schedule of the deferred tax asset components,
it does not include a separate presentation of current and noncurrent
deferred tax assets. On a prospective basis, Monsanto will disclose
noncurrent deferred tax assets either as a separate line on the
Statement of Consolidated Financial Position or in the Income Taxes
note as either method of disclosure is acceptable under Item 5.02 of
Regulation S-X. Other than the noncurrent deferred tax assets balance,
there were no individual balances that exceeded the 5 percent
threshold noted in Item 5.02 of Regulation S-X.
MISCELLANEOUS SHORT-TERM ACCRUALS
See attached supplemental Schedule No. 2 to this response for
a listing of items included in the Miscellaneous Short-Term Accruals
balance. The income taxes payable balance as of August 31, 2004, August
31, 2003, and December 31, 2002, exceeded the 5 percent threshold noted
in Item 5.02 of Regulation S-X. On a prospective basis, Monsanto will
report income taxes payable as a separate line on the Statement of
Consolidated Financial Position for all periods presented. Other than
income taxes payable, there were no individual balances that exceeded
the 5 percent threshold.
Statement of Consolidated Cash Flow, page 65
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6. PLEASE EXPAND THE "NET CHANGE IN SHORT-TERM FINANCING" LINE ITEM TO
PRESENT THE ADDITIONS AND REPAYMENTS AS SEPARATE LINE ITEMS. NETTING IS
NOT APPROPRIATE UNLESS YOU MET THE REQUIREMENTS OF PARAGRAPH 13, AS
AMENDED, OF SFAS 95.
RESPONSE. The line item titled "Net change in short-term
financing" was primarily comprised of bank overdrafts, commercial
paper, and notes payable to banks. Monsanto has analyzed the "Net
change in short-term financing" line item for the periods presented on
the Statement of Consolidated Cash Flows in the Form 10-K. There were
no material items (gross short-term debt proceeds and short-term debt
reductions that exceeded $30 million) included in this line item in the
year ended August 31, 2004, and the eight months ended August 31, 2003,
that had maturities greater than three months, and therefore should be
presented separately as short-term debt proceeds and short-term debt
reductions. In calendar year 2002 and calendar year 2001, the Company
had less than 1 percent and 15 percent, respectively, of total
commercial paper issued with terms greater than three months, but less
than one year. The commercial paper with terms greater than three
months was included in the "Net change in short-term financing" line
item. The Company has not had commercial paper outstanding since
September 2003. The Company will follow the requirements of paragraph
13, as amended, of SFAS 95 for all future filings.
Securities and Exchange Commission
February 24, 2005
page 7
Notes to Consolidated Financial Statements
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Note 2. Significant Accounting Policies, page 69
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General
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7. PLEASE TELL US WHETHER YOU INCLUDE PURCHASING AND RECEIVING COSTS,
INSPECTION COSTS, WAREHOUSING COSTS, INTERNAL TRANSFER COSTS, AND THE
OTHER COSTS OF YOUR DISTRIBUTION NETWORK IN THE COST OF PRODUCTS SOLD
LINE ITEM. WITH THE EXCEPTION OF WAREHOUSING COSTS, IF YOU DO NOT
INCLUDE SOME OF THESE COSTS IN COST OF PRODUCTS SOLD, PLEASE TELL US
WHY NOT AND DISCLOSE:
O IN A FOOTNOTE AND IN MANAGEMENT'S DISCUSSION & ANALYSIS THE LINE
ITEMS THAT THESE COSTS ARE INCLUDED IN AND THE AMOUNTS INCLUDED
IN EACH LINE ITEM FOR EACH PERIOD PRESENTED, AND
O IN MANAGEMENT'S DISCUSSION & ANALYSIS THAT YOUR GROSS MARGINS MAY
NOT BE COMPARABLE TO THOSE OF OTHER ENTITIES, SINCE SOME ENTITIES
INCLUDE THE COSTS RELATED TO THEIR DISTRIBUTION NETWORK IN COST
OF GOODS SOLD AND OTHERS LIKE YOU EXCLUDE THEM FROM GROSS MARGIN,
INCLUDING THEM INSTEAD IN A LINE ITEM SUCH AS SELLING, GENERAL
AND ADMINISTRATIVE EXPENSES.
RESPONSE. The purchasing and receiving costs, inspection
costs, warehousing costs, internal transfer costs, and other costs of
Monsanto's distribution network were recorded in cost of goods sold for
all periods presented in the Form 10-K. See the response to Comment
number 8, which discusses the shipping and handling expenses charged to
customers. Prospectively Monsanto will include the following disclosure
in Note X -- Significant Accounting Policies:
"Monsanto records purchasing and receiving costs, inspection
costs, warehousing costs, internal transfer costs, and other
costs of the company's distribution network in cost of goods
sold as incurred."
8. PLEASE DISCLOSE YOUR ACCOUNTING POLICY FOR SHIPPING AND HANDLING COSTS.
IN DOING SO, DISCLOSE BOTH THE LINE ITEM IN WHICH YOU INCLUDE AMOUNTS
PAID BY CUSTOMERS TO YOU FOR SHIPPING AND HANDLING AND THE LINE ITEM IN
WHICH YOU INCLUDE YOUR ACTUAL COSTS FOR SHIPPING AND HANDLING. IF YOU
DO NOT INCLUDE YOUR COSTS FOR SHIPPING AND HANDLING IN COST OF SALES,
ALSO DISCLOSE THE AMOUNTS OF YOUR COSTS FOR SHIPPING AND HANDLING FOR
EACH PERIOD PRESENTED AS REQUIRED BY PARAGRAPH 6 OF EITF 00-10.
RESPONSE. Monsanto typically does not charge customers
specifically for freight costs; however, these costs are considered in
the determination of the selling price of Monsanto products.
Historically, Monsanto has paid the freight costs for shipments of
products to customers and recorded these costs in net sales. The
Company recognizes that netting the freight costs against revenues is
inconsistent with paragraph 7 of EITF 00-10. However, paragraph 8 of
EITF 00-10 states that the significance of shipping and
Securities and Exchange Commission
February 24, 2005
page 8
handling costs for the purpose of applying the guidance of the EITF
should be based on the significance of the shipping and handling costs
to each line item on the income statement that includes them and to
gross profit. For all periods presented in the Form 10-K, the freight
costs included in net sales were approximately 2% of net sales.
Additionally, had Monsanto applied paragraph 7 of EITF 00-10,
reclassifying the costs from net sales to cost of goods sold would have
no impact on gross profit. Thus, the Company determined that these
costs were not significant for purposes of applying EITF 00-10.
However, on a prospective basis, the company will reclassify the costs
from net sales to cost of goods sold for all periods presented and
provide the appropriate footnote disclosure.
All other shipping and handling costs, including warehousing
costs, internal transfer costs, and other costs of the Company's
distribution network, are included in cost of goods sold (see response
to Comment number 7).
9. EXPAND YOUR DISCLOSURES TO INCLUDE YOUR POLICY ON RESEARCH AND
DEVELOPMENT EXPENSES, AS REQUIRED BY APB 22.
RESPONSE. On a prospective basis, Monsanto will modify Note X
-- Significant Accounting Policies to include a description of its
accounting policy for Research and Development Costs as shown below.
The policy related to acquired in-process research and development with
no alternative future use was not relevant to the periods presented in
the Form 10-K. However, Monsanto will include this policy in the
Research and Development Costs section of Note X -- Significant
Accounting Policies as this will be relevant to Monsanto in the future
based on planned acquisitions. If material, the amounts of acquired
in-process research and development costs with no alternative future
use that are expensed will be disclosed in the footnotes.
"RESEARCH AND DEVELOPMENT COSTS
The company accounts for research and development costs in
accordance with SFAS No. 2, ACCOUNTING FOR RESEARCH AND
DEVELOPMENT COSTS (SFAS 2). Under SFAS 2, all research and
development costs must be charged to expense as incurred.
Accordingly, internal research and development costs are
expensed as incurred. Third-party research and development
costs are expensed when the contracted work has been performed
or as milestone results have been achieved. Acquired
in-process research and development costs with no alternative
future uses are expensed in the period acquired. The costs of
purchased in-process research and development that have
alternative future uses are capitalized and amortized over the
estimated useful life of the asset. The costs associated with
equipment or facilities acquired or constructed for research
and development activities that have alternative future uses
are capitalized and depreciated on a straight-line basis over
the estimated useful life of the asset. The amortization and
depreciation for such capitalized assets are charged to
research and development expenses."
Securities and Exchange Commission
February 24, 2005
page 9
Inventory Valuation, page 71
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10. WE NOTE YOU HAVE DISCLOSED THE USE OF DIFFERENT INVENTORY METHODS
IN YOUR FINANCIAL STATEMENTS. WE BELIEVE A MIXTURE OF METHODS SHOULD
ONLY BE USED FOR DIFFERENT TYPES OF INVENTORIES, PARTICULARLY WHEN
THERE ARE VALID BUSINESS REASONS FOR DOING SO. PLEASE DISCLOSE WHICH
TYPES OF INVENTORY YOU USE EACH METHOD FOR. PLEASE DISCLOSE WHETHER
YOU USE BOTH METHODS FOR ANY SIMILAR TYPES OF INVENTORY. IF SO, PLEASE
ALSO DISCLOSE YOUR BASIS FOR DOING THIS. IN SOME INSTANCES, THIS MAY
BE DUE TO THE LIFO METHOD BEING USED FOR SIMILAR TYPES OF INVENTORY IN
COUNTRIES THAT PERMIT THE LIFO METHOD AND THE FIFO METHOD MAY BE USED
IN COUNTRIES THAT DO NOT PERMIT THE USE OF THE L1FO METHOD. IF THIS IS
THE CASE FOR SOME OF YOUR INVENTORY, PLEASE IDENTIFY THE FOREIGN
COUNTRIES WITH SIMILAR INVENTORY CATEGORIES TO THOSE YOU USE THE LIFO
METHOD FOR IN THE UNITED STATES, AND TELL US SEPARATELY FOR EACH
COUNTRY WHY YOU DO NOT USE THE LIFO METHOD FOR YOUR INVENTORIES IN
THAT COUNTRY. IF YOU ARE PERMITTED TO USE THE LIFO METHOD IN THAT
COUNTRY, PLEASE TELL US WHY YOUR SELECTIVE USE OF LIFO FOR SIMILAR
TYPES OF INVENTORIES IS APPROPRIATE.
RESPONSE. The following modifications will be made to the
section subtitled "Inventory Valuation" in Note X -- Significant
Accounting Policies, on a prospective basis to address the use of the
LIFO method within the Agricultural Productivity segment:
AGRICULTURAL PRODUCTIVITY: The fourth and fifth sentences of this
paragraph will be modified to state the following:
"The cost of the Agricultural Productivity segment inventories
in the United States, excluding supplies (approximately
one-third of total inventories as of August 31, 200X, 200X and
200X) is determined by using the last-in, first-out (LIFO)
method, which generally reflects the effects of inflation or
deflation on cost of goods sold sooner than other inventory
cost methods. The cost of inventories outside of the United
States, as well as supplies inventories in the United States,
is determined by using the first-in, first-out (FIFO) method;
FIFO is utilized outside of the United States because the
requirements in the countries where Monsanto maintains
inventories generally do not allow the use of the LIFO
method."
Monsanto advises the Staff that LIFO is not utilized in the
following countries in which Monsanto has inventories because local
requirements generally do not allow the use of LIFO for book or tax
purposes:
EUROPE-AFRICA: Switzerland, South Africa, Belgium, Hungary, Italy,
France, Turkey, Czech Republic, Malawi, Ukraine, Russia,
Slovakia, Kenya, Poland, United Kingdom, Germany,
Croatia, Spain, Denmark.
ASIA-PACIFIC: India, Malaysia, Indonesia, Thailand, Philippines,
Australia, Pakistan, China.
Securities and Exchange Commission
February 24, 2005
page 10
LATIN AMERICA: Brazil, Argentina, Colombia, Chile, Ecuador, Venezuela,
Costa Rica, Peru, Guatemala, Puerto Rico, Honduras.
NORTH AMERICA: Canada.
In Mexico, the use of LIFO is permitted; however, since it is
not permitted in other countries in Latin America, Mexico continues to
utilize the FIFO method to maintain consistency across the Latin
America region. Additionally, the amounts of inventory in Mexico are
not significant (less than $50 million for all periods presented in the
Form 10-K).
Goodwill, page 71
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11. EXPAND YOUR DISCLOSURE TO DISCUSS THE ACCOUNTING POLICY USED TO
DETERMINE THE CARRYING AMOUNTS OF GOODWILL AND INTANGIBLE ASSETS
DISCLOSED IN NOTE 9. FOR AMORTIZABLE INTANGIBLE ASSETS, DISCLOSE YOUR
POLICY WITH REGARD TO THE AMORTIZATION METHOD USED AND THE RANGE OF AND
BASIS FOR USEFUL LIVES ASSIGNED AS REQUIRED BY APB 22. IN ADDITION, FOR
CLARIFICATION PURPOSES, PLEASE PROVIDE A DISCUSSION OF WHAT THE NATURE
OF THE GERMPLASM INTANGIBLE ASSET IS.
RESPONSE. On a prospective basis, Monsanto will expand its
current disclosures of policies for Goodwill and Other Intangible
Assets included in Note X - Significant Accounting Policies to discuss
the basis for determining the carrying amounts of goodwill and
intangible assets, useful lives and method of amortization.
GOODWILL
Monsanto will insert the underlined language on a prospective
basis to expand its current disclosure as discussed above. (Changes
reflected by underlined text.)
"MONSANTO FOLLOWS THE GUIDANCE OF SFAS NO. 141, BUSINESS
COMBINATIONS, IN RECORDING THE GOODWILL ARISING FROM A
BUSINESS COMBINATION AS THE EXCESS OF PURCHASE PRICE AND
RELATED COSTS OVER THE FAIR VALUE OF IDENTIFIABLE ASSETS
ACQUIRED AND LIABILITIES ASSUMED.
Under SFAS No. 142, Goodwill and Other Intangible Assets, all
goodwill amortization ceased effective Jan. 1, 2002. Goodwill
is now subject only to impairment reviews. A fair-value-based
test is applied at the reporting unit level, which is
generally one level below the segment level. THE TEST COMPARES
THE FAIR VALUE OF THE COMPANY'S REPORTING UNITS TO THE
CARRYING VALUE OF THOSE REPORTING UNITS. This test requires
various judgments and estimates. THE FAIR VALUE OF GOODWILL IS
DETERMINED USING AN ESTIMATE OF FUTURE CASH FLOWS OF THE
REPORTING UNIT AND A RISK ADJUSTED DISCOUNT RATE TO COMPUTE A
NET PRESENT VALUE OF FUTURE CASH FLOWS. An adjustment to
goodwill will be recorded for any goodwill that is determined
to be impaired. Impairment of goodwill is measured as the
excess of the carrying amount of goodwill over the fair values
of recognized and
Securities and Exchange Commission
February 24, 2005
page 11
unrecognized assets and liabilities of the reporting unit.
Goodwill is tested for impairment annually, OR MORE FREQUENTLY
IF EVENTS OR CIRCUMSTANCES INDICATE IT MIGHT BE IMPAIRED.
Goodwill was last tested for impairment as of March 1, 2004.
SEE NOTE X -- GOODWILL AND OTHER INTANGIBLE ASSETS -- FOR
FURTHER DISCUSSION OF THE ANNUAL IMPAIRMENT TEST."
OTHER INTANGIBLE ASSETS
Monsanto will insert the underlined language on a prospective
basis to expand its disclosure as discussed above. In addition,
Monsanto will provide further clarification on the determination of
useful lives for core and completed technology germplasm. Monsanto's
core technology germplasm consists of a library of germplasm which is
the genetic foundation on which new and improved hybrids and varieties
of high-yield crop seeds are developed. The germplasm library was
created using years of breeding research. Completed technology
germplasm consists of seed hybrids and varieties that are commercially
available. The useful lives for completed technology germplasm are
based on historical product life cycles, among other factors. The
useful lives for core technology germplasm are determined in part,
based on the length of time that the germplasm will continue to be used
for future product development. As such, they can be much longer than
the useful lives of completed technology germplasm. In addition, upon
the acquisition of various seed companies, Monsanto obtained
independent valuations of the germplasm (both core and completed),
which included estimating the value and determining the useful lives.
"Other intangible assets consist primarily of ACQUIRED seed
germplasm, biotechnology intellectual property, LICENSES and
trademarks. SEED GERMPLASM IS THE GENETIC MATERIAL USED IN NEW
SEED VARIETIES. GERMPLASM IS AMORTIZED ON A STRAIGHT-LINE
BASIS OVER USEFUL LIVES RANGING FROM SEVEN YEARS FOR COMPLETED
TECHNOLOGY GERMPLASM TO A MAXIMUM OF 30 YEARS FOR CERTAIN CORE
TECHNOLOGY GERMPLASM. COMPLETED TECHNOLOGY GERMPLASM CONSISTS
OF SEED HYBRIDS AND VARIETIES THAT ARE COMMERCIALLY AVAILABLE.
CORE TECHNOLOGY GERMPLASM IS THE COLLECTIVE GERMPLASM OF
INBRED AND HYBRID SEEDS AND HAS A LONGER USEFUL LIFE AS IT IS
UTILIZED TO DEVELOP NEW SEED HYBRIDS AND VARIETIES.
Biotechnology intellectual property includes intangible assets
related to acquisitions and licenses through which Monsanto
has acquired the rights to various research and discovery
technologies. These encompass intangible assets such as
enabling processes and data libraries necessary to support the
integrated genomics and biotechnology platforms. These
intangible assets have alternative future uses AND ARE
AMORTIZED OVER USEFUL LIVES RANGING FROM THREE TO 17 YEARS.
THE USEFUL LIVES OF GERMPLASM AND ACQUIRED BIOTECHNOLOGY
INTELLECTUAL PROPERTY ARE DETERMINED BASED ON CONSIDERATION OF
SEVERAL FACTORS INCLUDING THE NATURE OF THE ASSET, ITS
EXPECTED USE, LENGTH OF LICENSING AGREEMENT OR PATENT AND THE
PERIOD OVER WHICH BENEFITS ARE EXPECTED TO BE RECEIVED FROM
THE UTILIZATION OF THE ASSET.
MONSANTO HAS A BROAD PORTFOLIO OF TRADEMARKS AND PATENTS
INCLUDING TRADEMARKS FOR ROUNDUP (FOR HERBICIDE PRODUCTS),
ROUNDUP READY, BOLLGARD, AND YIELDGARD
Securities and Exchange Commission
February 24, 2005
page 12
(FOR TRAITS), DEKALB AND ASGROW (FOR AGRICULTURAL SEEDS),
POSILAC (FOR DAIRY PRODUCTIVITY PRODUCTS), AND PATENTS FOR OUR
INSECT-PROTECTION TRAITS, FORMULATIONS USED TO MAKE OUR
HERBICIDES AND VARIOUS MANUFACTURING PROCESSES. THE
AMORTIZATION PERIOD FOR TRADEMARKS AND PATENTS RANGES FROM
THREE TO 30 YEARS. TRADEMARKS ARE AMORTIZED ON A STRAIGHT-LINE
BASIS OVER THEIR USEFUL LIVES. THE USEFUL LIFE OF A TRADEMARK
IS DETERMINED BASED ON THE ESTIMATED MARKET-LIFE OF THE
ASSOCIATED COMPANY, BRAND OR PRODUCT. PATENTS ARE AMORTIZED ON
A STRAIGHT-LINE BASIS OVER THE PERIOD IN WHICH THE PATENT IS
LEGALLY PROTECTED, THE PERIOD OVER WHICH BENEFITS ARE EXPECTED
TO BE RECEIVED, OR THE ESTIMATED MARKET-LIFE OF THE PRODUCT
WITH WHICH THE PATENT IS ASSOCIATED, WHICHEVER IS LESS. Also
included in other intangible assets is a nonamortizing
intangible asset associated with the recognition of minimum
pension liabilities. In accordance with SFAS 144, all
amortizable intangible assets are assessed for impairment
whenever events indicate a possible loss. Such an assessment
involves estimating undiscounted cash flows over the remaining
useful life of the intangible. If the review indicates that
undiscounted cash flows are less than the recorded value of
the intangible asset, the carrying amount of the intangible is
reduced by the estimated cash-flow shortfall on a discounted
basis, and a corresponding loss is charged to the Statement of
Consolidated Operations. See Note X -- GOODWILL AND OTHER
INTANGIBLE ASSETS -- FOR FURTHER DISCUSSION OF MONSANTO'S
INTANGIBLE ASSETS."
Note 7. Customer Financing Program, page 83
--------------------------------------------
12. YOU DISCLOSE THAT YOUR TRANSFERS OF CUSTOMER LOANS ARE TREATED AS A
SALE. PLEASE TELL US IN DETAIL HOW THESE LOAN TRANSACTIONS MEET THE
CRITERIA IN PARAGRAPHS 9.A., B., AND C. OF SFAS 140 FOR SALES
TREATMENT. PLEASE TELL US SPECIFICALLY HOW YOUR TRANSFERRED LOANS HAVE
BEEN ISOLATED FROM YOU WHEN THEY ARE STILL GUARANTEED BY YOU.
RESPONSE. Monsanto advises the Staff that the Company extends
credit to trade customers in the normal course of business which are
due in terms not exceeding approximately one year. For customers
desiring to obtain longer term financing, Monsanto refers certain of
its customers to a third-party specialty lender, Great Plains Funding
Corporation (Great Plains), that makes loans directly to Monsanto's
customers (i.e., the customer financing program). This allows customers
to pay off amounts due to Monsanto while receiving extended financing
terms through loans with Great Plains. Great Plains is a special
purpose entity ("SPE") that was established with limited independent
capital and whose activities are substantially all related to Monsanto.
In order to fund the loans to the Monsanto customers, Great Plains
sells the loans to GP Funding I Corp., a qualifying SPE ("GP Funding I"
or "QSPE"). Monsanto services the loans and provides a first-loss
guarantee of up to $100 million on the loans sold to GP Funding I. GP
Funding I funds its purchase of the loans by issuing beneficial
interests in them to commercial paper conduits.
Although Monsanto does not have any ownership interest in
Great Plains, Great Plains is consolidated by Monsanto pursuant to FIN
46R (and preceding guidance under EITF 90-15). Because substantially
all of its activities are for/with Monsanto and
Securities and Exchange Commission
February 24, 2005
page 13
Monsanto guarantees the loans sold to GP Funding I up to $100 million,
Monsanto is considered to be the "primary beneficiary" (as defined by
FIN 46R) of Great Plains. GP Funding I meets the following conditions
for being a QSPE (SFAS 140, paragraph 35):
a) It is demonstrably distinct from Great Plains because it
cannot be unilaterally dissolved by Monsanto or by Great
Plains, and more than 10% of its beneficial interests in the
loans is held by commercial paper conduits; b) Its permitted
activities are limited to holding loans transferred from Great
Plains, issuing beneficial interests in such loans to the
commercial paper conduits, and engaging in other incidental
activities related thereto; c) It holds only transferred loans
(passive financial assets), the Monsanto guarantee of those
loans and cash collections on the loans briefly until paid to
the commercial paper conduits; and d) It cannot sell or
otherwise dispose of the loans. The transaction documents do
not permit the sale of the loans to Monsanto under any
circumstances.
The transfers of customer loans meet the criteria in paragraphs 9.a.,
b., and c. of SFAS 140 for sales treatment as follows:
a. Monsanto has determined that the loans originated by Great Plains and
transferred to GP Funding I would be beyond the reach of Monsanto and
Great Plains, and their respective creditors, even in the event of
bankruptcy of either party. Monsanto originates the loans as the agent
of Great Plains (consolidated SPE) and provides a first-loss guarantee
of up to $100 million on the loans; however, Monsanto is not the lender
and does not have any ownership interest in the loans. Monsanto has
received outside legal opinions with respect to the following matters
to support its conclusions (excerpts from such opinions are set forth
in quotations below):
i. In the event Great Plains became a debtor in a case under Title
11 of the United States Code (the Bankruptcy Code), the transfer
of loans from Great Plains to GP Funding I "would not be, after
full consideration of all relevant factors, properly
characterized as a pledge of the Loans to secure a borrowing by
[Great Plains] from [QSPE] by a court exercising bankruptcy
jurisdiction and reasonable judgment, and (a) such Loans and the
proceeds thereof would not be part of the estate of Great Plains
under section 541(a)(1) of the Bankruptcy Code in such event, and
(b) section 362(a) of the Bankruptcy Code would not apply to stay
payment to [QSPE] (or its assigns) of amounts collected on the
Loans transferred under the Sale Agreement and proceeds of sale
thereof."
ii. In the event Monsanto became a debtor in a case under the
Bankruptcy Code, "it would not be a proper exercise by the court
of its equitable discretion to disregard in a properly presented,
briefed and argued case the separate legal existence and
corporate form of [QSPE] so as to order substantive consolidation
under the Bankruptcy Code of the assets and liabilities of [QSPE]
with the bankruptcy estate of [Monsanto]."
iii. In the event Great Plains became a debtor in a case under the
Bankruptcy Code, "a court in a proper exercise of its equitable
discretion would not disregard in a
Securities and Exchange Commission
February 24, 2005
page 14
properly presented, briefed and argued case the separate legal
existence and corporate form of [QSPE] so as to order substantive
consolidation under the Bankruptcy Code of the assets and
liabilities of [QSPE] with the bankruptcy estate of Great
Plains."
b. As noted above, GP Funding I is a QSPE and the commercial paper
conduits that hold the beneficial interests in the loans
transferred to GP Funding I have the right to freely pledge or
exchange such beneficial interests.
c. Monsanto has no ownership interest in the loans, and the Loan Sale
Agreement between Great Plains and GP Funding I provides that
Great Plains relinquishes all title and control over the loans
upon transfer of the loans to GP Funding I. Therefore, Great
Plains does not maintain effective control over the loans after
transfer from Great Plains to GP Funding I. The Loan Sale
Agreement does not permit or require the repurchase of any loans
by Great Plains. Additionally, the transaction documents do not
permit the sale of the loans to Monsanto under any circumstances.
Accordingly, Monsanto accounts for the transfer of the loans by
Great Plains (a member of the Monsanto consolidated financial reporting
group) to GP Funding I as a sale under SFAS 140.
13. PLEASE DISCLOSE HOW YOU HAVE CLASSIFIED THESE CUSTOMER LOAN TRANSFERS
IN YOUR STATEMENT OF CONSOLIDATED CASH FLOWS. PLEASE DISCLOSE THE
NECESSARY CASH FLOW INFORMATION AS REQUIRED BY PARAGRAPH 17.F.(4) OF
SFAS 140.
RESPONSE. In accordance with paragraph 17.f.(4) of SFAS 140,
Monsanto currently discloses the amount of loans sold through the
financing program. Prospectively, Monsanto will adjust the customer
financing note disclosure as shown below.
(Changes reflected by underlined text.)
"PROCEEDS FROM customer loans sold through the financing
program totaled $X million for fiscal year 200X, $X million for
the fiscal year 200X and $X million for fiscal year 200X. THESE
PROCEEDS ARE INCLUDED IN NET CASH PROVIDED BY OPERATIONS IN THE
STATEMENT OF CONSOLIDATED CASH FLOWS."
As discussed in the response to Comment 12, Monsanto has concluded
that the proceeds from the customer loan transfers arise from the sale of
receivables by the consolidated Monsanto entity in accordance with SFAS 140
and should therefore be included in operating activities in accordance with
SFAS 95, paragraph 22.a. Accordingly, the proceeds have been included in
net cash provided (required) by operations in the Statement of Consolidated
Cash Flows for all periods presented in the Form 10-K.
Securities and Exchange Commission
February 24, 2005
page 15
Note 9. Goodwill and Other Intangible Assets, page 84
------------------------------------------------------
14. WE NOTE THE INCREASES IN YOUR ACQUIRED BIOTECHNOLOGY INTELLECTUAL
PROPERTY ARE DUE, IN PART, TO DELIVERABLES RECEIVED UNDER THE 2002
PRODUCT DISCOVERY AND DEVELOPMENT COLLABORATION WITH CERES, INC. EXPAND
YOUR DISCLOSURES TO EXPLAIN HOW THE INTANGIBLE ASSETS RECEIVED FROM
CERES WERE VALUED AND WHAT CONSIDERATION WAS GIVEN IN EXCHANGE FOR
THEM. SPECIFICALLY ADDRESS THE ACQUISITION OF RIGHTS IN EXCHANGE FOR
VENDOR FINANCING AND SUPPLEMENTALLY DESCRIBE HOW THIS EXCHANGE WAS
ACCOUNTED FOR. ALSO, EXPLAIN WHAT CONSIDERATION WILL BE RECEIVED IN
EXCHANGE FOR $137 MILLION OF FUTURE PAYMENTS UNDER THE COLLABORATION
AGREEMENT, IF ANY.
RESPONSE. The 2002 product discovery and development
collaboration with Ceres, Inc. is a five-year multi-element arrangement
that includes the following components: 1) acquisition of rights to
existing technologies, 2) acquisition of rights to similar technology
developed over the five-year agreement, 3) a 9% minority equity
investment in Ceres, and 4) funding of a joint research program. The
agreement specifies payments to Ceres of $137 million over the
five-year term, summarized as follows:
1) Acquisition of rights to existing technologies $40 million
2) Acquisition of rights to similar technology to be developed $45 million
3) Equity investment $22 million
4) Funding of joint research program $30 million
The acquisition of rights to existing technologies (item 1
above) was in exchange for a $40 million loan payable over five years
("vendor financing") and was recorded at inception as an intangible
asset. Interest on the financing is charged to earnings as interest
expense.
The first two components, acquisition of rights to existing
technologies and acquisition of rights to similar technology to be
developed, are comprised of a database of intellectual property
primarily made up of gene sequencing and gene leads, processes,
libraries and other biological materials. These technologies, similar
to a library of data sets, were valued using an internally-developed
discounted cash flow valuation methodology. The estimated values of the
acquired technologies are primarily based on increased probabilities of
success and accelerated launch dates for specific products under
development. Based on this methodology, the acquired existing
technologies had an estimated value of $42 million (as compared to the
contracted payment of $40 million), and the amount of the related
intangible asset recorded was based on the consideration paid. The
subsequently developed similar technology deliverables acquired to-date
were valued using the same method, and such values have been higher
than the contractually-determined cash consideration paid for the
deliverables acquired to-date. Accordingly, each of those acquired
intangible assets was valued based on the cash consideration amount. As
additional technologies are received over the term of the arrangement,
the deliverables are evaluated to ensure that established quantity and
quality specifications have been met prior to completing the
acquisition and recording the related the intangible assets. If the
deliverables do not meet such specifications, Monsanto is not
Securities and Exchange Commission
February 24, 2005
page 16
contractually required to purchase them. The carrying values of the
intangible assets related to the acquired technologies are reviewed for
impairment quarterly. The assets are amortized on a straight-line basis
over useful lives of 10 years.
The cash paid for the minority equity investment in preferred
stock of Ceres approximated fair value for the shares acquired. The
fair value per share was estimated using multiple methods including an
evaluation of the most recent investor financing transaction, review of
stock prices of comparable companies and IPO valuations of like
companies. These methods resulted in a range of stock prices of $5.74
to $6.56 per share. Monsanto purchased its equity investment in Ceres
at $6.50 per share, which was determined to represent a purchase at
fair value based on the range of fair value estimates. The investment
represented approximately 9% of Ceres' equity. There is no Monsanto
representation on Ceres' board of directors and no other control
features involved in Monsanto's equity investment. The investment was
recorded at the fair value paid and is accounted for using the cost
method. The carrying value of the investment is reviewed for impairment
quarterly. Monsanto does not have an option to put this equity
investment back to Ceres or any other party.
The final component, funding of a joint research program, was
valued based on the amount of effort (number of researchers
contractually required) to complete the research plans, at a
fair-market-value rate per researcher. The rate per researcher was
determined to be consistent with Monsanto's internal costs plus a
reasonable profit margin of approximately 25%. This research is
unrelated to the research activities required to develop the defined
technology deliverables (item 2 above). The research costs funded by
Monsanto are expensed as incurred.
The disclosures related to the collaboration agreement with
Ceres, Inc. within Note X - Goodwill and Other Intangible Assets will
be replaced on a prospective basis as follows:
Current disclosure:
"This product discovery and development collaboration focuses
on applying genomics technologies to improve and to accelerate
the time to commercialization of certain agricultural crops.
Under the 2002 collaboration, Monsanto acquired rights to
certain of Ceres' existing technologies in exchange for vendor
financing totaling $40 million, to be paid over five years.
This existing technology has a weighted-average useful life of
10 years. Ceres will receive additional payments if it meets
specified objectives for developing additional related
technology, as part of its continuing commitment to
genomics-based product discovery. In 2002, Monsanto made a
minority equity investment in Ceres. Monsanto also will fund a
jointly implemented research program. Including the $40
million for vendor financing, total payments to Ceres under
the 2002 collaboration (subject to performance by Ceres) are
expected to approximate $137 million over five years, plus
potential royalties."
Securities and Exchange Commission
February 24, 2005
page 17
Prospective disclosure:
"The 2002 product discovery and development collaboration is a
five-year arrangement that focuses on applying genomics technologies to
improve and to accelerate the time to commercialization of certain
agricultural crops. The arrangement included the acquisition of rights
to existing technologies, acquisition of rights to similar technology
to be developed over the term of the arrangement, a minority equity
investment in Ceres and funding of a joint research program. The
technologies received under the collaboration agreement were valued
using a discounted cash flow methodology under which the value to
Monsanto was driven by increased probabilities of success and
accelerated launch dates for specific products. The acquired
technologies are recorded as intangible assets, with weighted-average
useful lives of 10 years, only when the specified deliverables meet
established quantity and quality criteria, and the asset amounts
recorded do not exceed the amounts paid for 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 as incurred. Including
the rights to existing technologies, the rights to technology to be
developed, the equity investment and the joint research program, total
payments to Ceres under the 2002 collaboration are expected to
approximate $137 million over five years, plus potential royalties."
NOTE 11. INCOME TAXES, PAGE 87
15. TELL US WHAT FACTORS WERE CONSIDERED IN ESTABLISHING THE VALUATION
ALLOWANCE FOR YOUR TAX LOSS CARRYFORWARDS RELATED TO THE DEFERRED TAX
ASSETS IN BRAZIL AND WHAT EVENTS OCCURRED, CAUSING CHANGES IN THESE
FACTORS DURING FISCAL YEAR 2004 THAT LED TO THE CONCLUSION TO REVERSE
THE VALUATION ALLOWANCE. ALSO, TELL US HOW YOU DETERMINED THAT A
VALUATION ALLOWANCE WAS NOT NEEDED FOR THE FUTURE RECOGNITION OF TAX
LOSS CARRYFORWARDS ASSOCIATED WITH THE DEFERRED TAX ASSETS IN ARGENTINA
AS OF AUGUST 31, 2003 AND WHAT EVENTS OCCURRED DURING FISCAL YEAR 2004
THAT LED TO THE CONCLUSION THAT A VALUATION ALLOWANCE WAS NEEDED. WE
MAY HAVE FURTHER COMMENT.
RESPONSE. In connection with the deferred tax assets in Brazil
and Argentina, Monsanto advises the Staff as follows:
BRAZIL
The valuation allowance related to the deferred tax asset
produced by tax loss carryforwards in Brazil was first established
during the first quarter of 1999. Prior to 1999, Brazil had been a
profitable entity, consistently generating taxable income. The
valuation allowance was recorded due to a weakening of the Brazilian
economy and substantial changes in Monsanto's Brazilian business, which
created a significant tax loss and the potential for future tax losses.
The changes included:
Securities and Exchange Commission
February 24, 2005
page 18
- Acquisitions of Brazilian seed businesses financed with $575
million of high interest rate dollar denominated debt with
European lenders (financing entered into in late 1998), and
- A tax deductible currency loss of approximately $150 million
associated with the European debt (the Brazilian reais/U.S.
dollar exchange rate went from 1.21 to 1 at the end of
December 1998 to 1.72 to 1 at the end of March 1999).
The valuation allowance was subsequently reviewed and assessed
quarterly as required under SFAS 109. It should be noted that, due to
the Southern Hemisphere planting season (September through December),
the market information available to management in August 2003, at the
conclusion of the eight month period ended August 31, 2003 (the
"transition period"), in developing projections of taxable income to
assess whether the Brazil deferred tax assets would be realized was not
materially different than the market information available in December
2002. Accordingly, information on the 2003 planting season was first
available to management in the second quarter of fiscal year 2004. The
reversal of this valuation allowance at the conclusion of the second
quarter of Monsanto's 2004 fiscal year in February 2004 was supported
by factors which particularly impacted Monsanto, as well as a greatly
improved business climate within Brazil. The factors which particularly
impacted Monsanto included:
- The development of a royalty system to capture value from the
use of the technology in Monsanto's ROUNDUP READY soybean
seeds (each of the four largest Brazilian grain processors had
signed agreements during January 2004), (please see the
"Outlook" section in MD&A of the Form 10-K);
- The presence of glyphosate "anti-dumping" legislation,
effective February 2003, which produced a fair pricing
environment and broader market for Monsanto's glyphosate
products;
- Two consecutive years of significant growth in the glyphosate
market (2002 vs. 2001 and 2003 vs. 2002) at a 10-15% rate,
which is a major product offering for Monsanto in Brazil;
- The approaching maturity of the European debt, along with
management's commitment to capitalize this debt, reduced the
amount of interest expense and mitigated the possibility of
generating currency driven tax losses; and
- Adoption of a new business model in Brazil in response to
continued economic and market uncertainties including actions
we have taken with our customers and operational decisions we
have made have reduced working capital levels and distribution
inventory levels thus reducing carrying costs and providing
product pricing leverage (see the "Outlook" section in MD&A of
Monsanto's Report on Form 10-K for the fiscal year ended
December 31, 2002).
The factors related to the general Brazilian business climate
included:
- Continued growth in the Brazilian agricultural sector of the
economy at an annual rate of 5.5%;
Securities and Exchange Commission
February 24, 2005
page 19
- Growth in Brazilian gross domestic product of 3.4% (2003 vs.
2002) compared to 1.5% (2002 vs. 2001);
- Stabilization of the Brazilian currency (2.9 reais per dollar
at the end of 2003 compared to 3.5 reais per dollar at the end
of 2002);
- Declines in the rate of inflation (8.7% at the end of 2003 vs.
25.3% at the end of 2002) and interest rates (16.5% at the
end of 2003 vs. 25% at the end of 2002); and
- An enhanced level of comfort with the stability of Brazil's
central government with the election of President Lula and his
appointed Finance Minister.
Based on the foregoing, management prepared updated
projections of taxable income based on the company's updated long-range
financial projections. With positive evidence consisting of two
planting seasons of operating profits, the strides made in the royalty
system, the revised forecast of taxable income, and consideration of
the indefinite carryforward period available for tax net operating
losses, management concluded it was more likely than not the deferred
tax assets related to the cumulative net operating losses were fully
realizable. This conclusion has been confirmed by the continued
vitality of Monsanto's Brazilian businesses subsequent to the second
quarter of fiscal 2004 when the reversal of the valuation allowance was
recorded.
ARGENTINA
The determination that a valuation allowance was not required
for the Argentina deferred tax asset as of August 31, 2003 was based
upon projections of future taxable income reflecting that net operating
losses generated in calendar years 2001, 2002 and 2003 would be
realized in the 2006 calendar year. Monsanto's Argentine business
operations were profitable prior to 2001. The tax losses during
calendar years 2001, 2002 and 2003 were driven by the following
discrete events:
- 2001: large scale flooding across Argentina's farming regions;
- 2002: economic crisis, as reflected in the dollar/peso
exchange rate moving from on 1/1 January 1, 2002, to 1/3.36 on
December 31, 2002, and unforeseen volumes of seed inventory
returns due to 2001 floods; and
- 2003: operational changes made by management, primarily in
response to the past economic crisis and business environment
in Argentina (such as contracting the volume of products in
the distribution channel and product line rationalization).
The benefit associated with these tax loss carryforwards was
projected to be realized within the applicable five-year tax loss
carryforward period in Argentina at the close of Monsanto's eight month
period ended August 31, 2003.
Management's projections of taxable income prepared at the
conclusion of the second quarter of fiscal 2004 based on the updated
long-range financial projections presented a distinctly different
conclusion than the projections at the end of the transition
Securities and Exchange Commission
February 24, 2005
page 20
period. It should be noted that, due to the Southern Hemisphere
planting season (September through December), the market information
available to management at the conclusion of the transition period was
not materially different than the market information available in
December 2002. At the conclusion of the second quarter of fiscal 2004,
management now had the benefit of knowing the actual result of the
Argentine agricultural product selling season which began in September
2003. The updated projections reflected an anticipated tax loss of 204
million pesos for the 2003 calendar year (or $69.4 million based upon
the year end exchange rate of 2.94 Argentine pesos to the dollar) and
244.5 million pesos for the 2004 calendar year (or $84 million based
upon the February 28, 2004, exchange rate of 2.92 Argentine pesos to
the dollar). These updated projections were primarily driven by the
unfavorable experience of the 2003 selling season and significant bad
debt expenses. Management revised their assumptions in developing its
projections of taxable income during the five-year carryforward period
in light of the experience of two successive planting seasons which had
generated tax losses since inception of the economic crisis. Based on
these projections, management concluded it was more likely than not the
deferred tax asset associated with the net operating loss would not be
realized. Accordingly, a valuation allowance was required for the full
amount of the deferred tax asset associated with tax loss
carryforwards.
Note 22. Commitments and Contingencies, page 105
-------------------------------------------------
16. WE NOTE YOUR DISCUSSION UNDER ITEM 3 ON PAGES 13 THROUGH 16 OF NUMEROUS
LEGAL PROCEEDINGS, WHICH HAVE NOT BEEN FULLY DISCLOSED WITHIN THE
FOOTNOTES TO THE FINANCIAL STATEMENTS. IN PARTICULAR, NOTE 22 REFERS TO
LITIGATION SOLUTIA WAS DEFENDING IN PENNSYLVANIA, THE DETAILS OF WHICH
ARE PROVIDED UNDER ITEM 3. HOWEVER, THE FOOTNOTE DISCUSSION DOES NOT
ADDRESS THE NATURE OF THIS PROCEEDING. ITEM 3 ALSO DISCUSSES
PROCEEDINGS RELATED TO THE DELTA AND PINE LAND COMPANY, AGENT ORANGE,
SYNGENTA AND OTHERS, WHICH HAVE NOT BEEN DISCLOSED IN NOTE 22. UNDER
THE REQUIREMENTS OF SFAS 5 AND FIN 14, IT APPEARS NOTE 22 REQUIRES
EXPANSION TO DISCUSS THE NATURE AND STATUS OF SUCH PROCEEDINGS. YOUR
EXPANDED DISCLOSURE SHOULD ALSO INCLUDE A DISCUSSION OF THE RELATED
ACCRUED LIABILITIES AND AN ESTIMATE OF THE RANGE OF REASONABLY POSSIBLE
ADDITIONAL LOSS OR FOR THOSE PROCEEDINGS IN WHICH NO ACCRUAL HAS BEEN
MADE, AN ESTIMATE OF THE RANGE OF REASONABLY POSSIBLE LOSS FOR EACH
PROCEEDING THAT MEETS THE DISCLOSURE REQUIREMENTS OF SFAS 5. WE MAY
HAVE FURTHER COMMENTS UPON REVIEW OF YOUR RESPONSE.
RESPONSE. This is an area to which Monsanto, including its
accounting and legal staff, has devoted considerable attention, and
where the Company has sought to improve the quality of its disclosure
and its usefulness to investors. Monsanto takes a systematic approach
to including in its consolidated financial statements appropriate
disclosures and reserves for contingencies arising from litigation and
other proceedings.
In accordance with SFAS 5, Monsanto accrues an "estimated loss
from a loss contingency . . . by a charge to income if BOTH of the
following conditions are met: (a) Information available prior to
issuance of the financial statements indicates that it is
Securities and Exchange Commission
February 24, 2005
page 21
probable that . . . a liability had been incurred at the date of the
financial statements. . . . (b) The amount of the loss can be
reasonably estimated." (SFAS 5, paragraph 8.) Monsanto confirms that
all of the legal proceedings described in the referenced disclosure, as
well as all other litigation against Monsanto, has been carefully
evaluated against this standard. Necessarily, as a part of making the
determination contemplated by SFAS 5 as to whether a reserve is
appropriate, and the amount of any such reserve, management evaluates
the potential outcome of the various legal proceedings, working in
close consultation with legal counsel and otherwise as contemplated by
paragraph 36 of SFAS 5. And, in each case where no reserve is
established, that decision is based on the inability to satisfy one or
the other of the requirements of SFAS 5 paragraph 8.
In accordance with SFAS 5, SOP 94-6 and FIN 14, even in
circumstances in which it would be inappropriate to establish a reserve
relating to a litigation-related loss contingency, a company may be
required to disclose a litigation-related loss contingency.
Specifically, Monsanto understands that paragraph 10 of SFAS 5 provides
that disclosure of a loss contingency must be made if "there is at
least a reasonable possibility that a loss or an additional loss may
have occurred." Monsanto further recognizes and understand that
paragraph 10 contemplates that "The disclosure shall indicate the
nature of the contingency and shall give an estimate of the possible
loss or range of loss or state that such an estimate cannot be made."
As of the date of the Form 10-K, Monsanto determined that the
likelihood of incurring a liability was reasonably possible with
respect to only one of its potentially material contingencies--its
obligation to indemnify Pharmacia following Solutia's failure to do so.
Accordingly, Monsanto described in the notes to financial statements
the nature and status of the proceedings related to Solutia's
bankruptcy, including the amounts expended or guaranteed by Monsanto to
perform its obligation to Pharmacia. The description included in the
notes covered the material events prior to and in connection with
Solutia's bankruptcy, because those were the events that could lead,
and had led, to liability for Monsanto. The notes did not include a
description of any particular proceeding being managed by Monsanto
(such as the Pennsylvania litigation), because Monsanto could not be
held liable for any of the proceedings unless Monsanto consented to be
held liable or Pharmacia enforced its indemnification right against
Monsanto. Further, none of the proceedings appeared to be individually
material to Monsanto. Monsanto disclosed that it was reasonably
possible that the effects of the indemnification obligation relating to
Solutia would result in a material adverse effect on its financial
position, profitability or liquidity. However, because of the many
uncertainties relating to any resolution of Solutia's bankruptcy
proceeding, including those described in the response to Comment 22,
Monsanto was not able to reasonably estimate the amount or range of
reasonably possible additional loss. This was consistent with the Proof
of Claim that Monsanto subsequently filed with the bankruptcy court in
Solutia's bankruptcy proceedings on November 29, 2004, which claim was
both highly complex and subject to further amendment.
In Monsanto's determination at the time of filing the Form
10-K, the likelihood of incurring a liability with respect to its other
legal proceedings, such as the Agent Orange,
Securities and Exchange Commission
February 24, 2005
page 22
Delta and Pine Land and Syngenta proceedings, was believed to be
remote. Accordingly, financial statement disclosure of such
contingencies was not required by SFAS 5, and Monsanto did not record
an accrual, nor did Monsanto estimate the range of reasonably possible
loss for such proceedings. However, the nature and status of these
legal proceedings were described elsewhere in its Form 10-K in
compliance with Item 103 of Regulation S-K, pursuant to which all
material legal proceedings, as well as environmental proceedings that
could result in a penalty of $100,000 or more, must be disclosed,
regardless of the likelihood that the company would incur a liability.
Although Monsanto does not believe disclosure was required under Item
103 because the Company was not a proper party to such proceedings, it
voluntarily disclosed the nature and status of some of the more
significant Solutia-related proceedings in its Form 10-K in order to
give investors an understanding of the more significant among the
hundreds of proceedings that the Company was managing on behalf of
Pharmacia.
Monsanto fully recognizes that it would be helpful to
investors to better forecast and quantify the potential impacts of
litigation contingencies, whether by way of accruing reserves or
disclosure, as appropriate. As the posture of each of the referenced
matters develops, Monsanto will evaluate the feasibility of doing so,
and expects to include relevant and meaningful disclosure in its
periodic filings as available.
17. ON A SIMILAR MATTER, PROVIDE US WITH A SCHEDULE LISTING ALL LOSS
CONTINGENCIES, CLEARLY IDENTIFYING THE ITEMS MENTIONED UNDER THIS
HEADING AND UNDER ITEM 3, FROM THOSE WHICH ARE NOT, AND SHOWING ALL
ACCRUAL ACTIVITY FOR EACH PERIOD PRESENTED IN YOUR ANNUAL REPORT AND
SUBSEQUENT INTERIM REPORTS. IDENTIFY INCREASES ATTRIBUTABLE TO INITIAL
ESTIMATES, REVISIONS IN ESTIMATES AND ACQUISITIONS, AND DECREASES
ATTRIBUTABLE TO EXPENDITURES, REVISIONS IN ESTIMATES AND DISPOSITIONS
SEPARATELY. CLEARLY IDENTIFY THE IMPACT OF EACH ENTRY ON YOUR RESULTS
OF OPERATIONS FOR EACH PERIOD PRESENTED. TELL US YOUR ESTIMATE OF THE
RANGE OF REASONABLY POSSIBLE ADDITIONAL LOSS FOR EACH ITEM APPEARING IN
YOUR SCHEDULE.
RESPONSE. Following is a listing of the loss contingencies for
which Monsanto has recorded an accrual.
(1) PHARMACIA-SOLUTIA (most recent disclosure in Part II, Item 1 and
Note 15 of the Form 10-Q)
During the fiscal year ended August 31, 2004, Monsanto established an
accrual (via a charge to income) of approximately $11 million for
remediation work to be performed at Anniston, Alabama and Sauget,
Illinois under an agreement with the Environmental Protection Agency
(EPA). Monsanto's agreement with the EPA was for a period of six
months, which expired on September 15, 2004, subject to automatic
renewal until terminated upon 60 days' notice. As of August 31, 2004,
following dispersals for remediation costs, the remainder of the
accrual was $6.3 million, which was spent in the first quarter of
fiscal 2005 Monsanto continued to accrue during the quarter for an
additional 60 days' costs, on the expectation that Monsanto would
exercise its termination rights. An accrual of $6 million was
outstanding as of November 30, 2004,
Securities and Exchange Commission
February 24, 2005
page 23
which was part of the $263 million accrual described below. It was not
reasonably possible to estimate a range of reasonably possible
additional loss given this termination right and the uncertainties of
Monsanto's intentions beyond the next 60 days.
For the quarter ended November 30, 2004, Monsanto took a charge to
income of $284 million for certain litigation and environmental
remediation costs associated with Solutia's bankruptcy. The outstanding
balance as of November 30, 2004 was $263 million. The accrual was based
on the best estimates of Monsanto's management and input from its legal
and other outside advisors. Accrual was required under SFAS 5, because
Monsanto had determined that it crossed the threshold of probability
during the course of discussions held in December 2004 with the other
parties-in-interest in Solutia's bankruptcy. Additionally, through its
due diligence process Monsanto was able in December 2004 to reasonably
estimate the amount of certain elements of that potential liability.
However, the degree to which Monsanto might ultimately be responsible
for the particular matters reflected in the charge or any additional
matters remained uncertain. Discussions between and among the various
parties involved in the Solutia bankruptcy were expected to continue
(and have continued) for some time and a formal reorganization plan
must ultimately be affirmed by several constituencies and the
bankruptcy court. Accordingly, the possible additional loss or range of
loss was not estimable, and, therefore, no further disclosure was made.
See the Company's responses to Comments 16 and 22 for a further
discussion of the uncertainties and its inability to reasonably
estimate the amount or range of reasonably possible additional loss.
(2) AGREVO (most recent disclosure in Note 15 of the Form 10-Q)
As of November 30, 2004 Monsanto recorded an accrual for $15 million. A
charge to income was taken because information available prior to the
issuance of financial statements, including partial denial of
meritorious motions for summary judgment, indicated that it was
reasonably probable that a liability had been incurred and the amount
of the loss was reasonably estimable, given the status of discussion
between the parties, which commenced in early November 2004. The $15
million accrual was recorded as a charge to income and represented the
projected or reasonably expected settlement amount. The matter was
settled for $15 million in January 2005.
(3) INDONESIA (most recent disclosure in Part II, Item 1 of the Form
10-Q)
As of August 31, 2004 no amounts were accrued in the Company's
financials for the review by the SEC or DOJ of items associated with
its former business activities in Indonesia. However, Monsanto accrued
$500,000, as a charge to income, because of substantial progress toward
resolution with the SEC as of November 30, 2004. Ultimately, Monsanto
paid a combined total of $1.5 million to the SEC and DOJ under the
terms of final agreements that were negotiated in January 2005. While
Monsanto recognized that these amounts were immaterial for financial
statement disclosure purposes, the treatment accorded was considered
appropriate disclosure in light of the fact that the matter involved
potential criminal sanctions and in light of Monsanto's prior filings
regarding its ongoing cooperation with the SEC and DOJ to address the
matter.
(4) HEIZER CREEK LANDFILL (most recent disclosure in Part II, Item 1 of
the Form 10-Q)
Securities and Exchange Commission
February 24, 2005
page 24
In October 2000, Monsanto recorded a reserve of $1.5 million as a
charge to income following the conclusion of its Engineering
Evaluation/Cost Analysis Report, which contained, among other things, a
recommended remedy for remediation of the Heizer Creek landfill in West
Virginia. The amount of the reserve was based upon the cost to
implement the recommended remedy. No adjustments have been made to the
reserve, as Monsanto is awaiting direction from the EPA prior to
commencing remediation work. Monsanto believes the range of reasonably
possible additional loss is between $0 and $500,000, due to the length
of time between when Monsanto prepared its estimate of costs and when
Monsanto might commence remediation work. This accrual has not been
disclosed in the notes to Monsanto's financial statements due to its
immaterial nature.
(5) AVENTIS CROPSCIENCE S.A. (most recent disclosure in Note 18 to the
Form 10-K)
In November of 2001 a reserve of $50M was recorded in other expense as
a charge to income following a federal appeals courts decision to
uphold a 1999 judgment against DEKALB Genetics Corporation (which
subsequently became a wholly owned subsidiary of Monsanto), pursuant to
which the Aventis was awarded $15 million of actual damages and $50
million of punitive damages. This reserve was in addition to the $15
million recorded for actual damages prior to 2001. Monsanto has fully
paid the $65 million in judgment.
(6) CENTRAL GARDEN AND PET (most recent disclosure in Note 5 to the
Form 10-K)
In January 2002, Monsanto and Central Garden announced a settlement of
all litigation related to Central Garden's distribution of lawn and
garden products for the former Monsanto during the 1990s. Monsanto
dismissed a lawsuit relating to the payment of receivables due from
Central Garden, and Central Garden dismissed two other lawsuits. As a
result of the settlement of the receivables lawsuit, Monsanto recorded
a charge and wrote off the related accounts receivable of $32 million
in other expense-net.
18. SUBMIT A SEPARATE LISTING OF ITEMS MENTIONED UNDER THIS HEADING FOR
WHICH NO ACCRUAL HAS BEEN MADE, AND THOSE ITEMS FOR WHICH YOU ARE
UNABLE TO ESTIMATE A RANGE OF REASONABLY POSSIBLE LOSS. TELL US THE
AMOUNT OF DAMAGES SPECIFIED BY PLAINTIFFS, AND ANY ESTIMATES OF
REMEDIATION PREPARED BY EXTERNAL PARTIES, OF WHICH YOU ARE AWARE.
RESPONSE. Monsanto has recorded an accrual for all of the loss
contingencies specifically mentioned in Note 22 to the consolidated
financial statements in its Form 10-K. Following is a listing of the
legal proceedings not specifically mentioned in Note 22 but otherwise
described in its Form 10-K, and subsequent interim reports, for which
no accrual has been made. Monsanto deems the likelihood of incurring a
liability in each such proceeding to be remote or at such a stage that
it was not possible to assess the likelihood of incurring a liability.
Accordingly, consistent with SFAS 5, paragraph 10, or SOP 94-6,
paragraphs 12-19, Monsanto has not estimated the range of reasonably
possible loss for any of these proceedings.
Securities and Exchange Commission
February 24, 2005
page 25
Estimate of Remediation
Amount of Damages Specified by Prepared by External Parties,
Proceeding Plaintiffs of which Monsanto is Aware
---------- ------------------------------ -----------------------------
Mycogen Interference Proceedings Unspecified damages and injunctive n/a
relief
Monsanto v. Bayer Unspecified damages and injunctive n/a
CropScience AG relief
Syngenta Seeds v. Monsanto et al. Unspecified damages and injunctive n/a
(re: infringement) relief
Syngenta v. Monsanto (re: Unspecified damages and injunctive n/a
antitrust matters) relief
Regents of the Univ. of Calif. v. Unspecified damages and injunctive n/a
Monsanto relief
Two grower lawsuits in federal Unspecified damages and other relief n/a
court
Multiple grower lawsuits in state Unspecified damages and other relief n/a
courts
Grower lawsuits regarding Unspecified damages and other relief n/a
glyphosate
Delta and Pine Land v. Pharmacia Unspecified damages and other relief n/a
Agent Orange-Veterans cases Unspecified damages n/a
Agent Orange-Vietnam citizens Unspecified damages n/a
cases
Agent Orange-South Korea cases Unspecified damages n/a
P4 Production, LLC environmental n/a None
remediation
Walker v. Monsanto (re: pension Unspecified damages and other relief n/a
plan)
Virdie Allen et al. v. Monsanto, Unspecified damages n/a
et al.
Securities and Exchange Commission
February 24, 2005
page 26
Note 25. Equity Affiliates, page 114
-------------------------------------
19. WE NOTE THE DISCLOSURE THAT YOU PERFORMED SERVICES FOR RENESSEN LLC
THAT WERE FAIR VALUED AT $45 MILLION AND WERE RECOVERED AT COST. TELL
US ON A SUPPLEMENTAL BASIS HOW FAIR VALUE WAS DETERMINED AND HOW THE
RELATED TRANSACTIONS WERE RECORDED ON YOUR FINANCIAL STATEMENTS.
RESPONSE. Monsanto supplementally advises the Staff that
certain Monsanto employees conduct research and development services
for Renessen LLC ("Renessen"), a 50-50 owned and funded joint venture
between Monsanto and Cargill. Monsanto pays the employees from its own
funds and tracks the cost of conducting the research and development
services for Renessen. The cost of the services is recorded as research
and development expenses. These costs are primarily labor, supplies and
overhead and are incurred by Monsanto on a regular basis throughout the
year. Monsanto invoices Renessen for the actual cost of these services
on a monthly basis. When Renessen is billed for the services, Monsanto
records a receivable due from Renessen in miscellaneous receivables and
credits research and development expenses (fully offsetting the
previously recorded expense). The fair value of the services
approximates cost. Prospectively, Monsanto will modify its disclosure
to clarify that fair value approximates cost.
Note 26. Advertising Costs, page 114
-------------------------------------
20. WE NOTE THE DISCLOSURE ON PAGE 39 REGARDING YOUR AGREEMENT WITH SCOTTS.
PLEASE EXPAND YOUR FOOTNOTES TO DESCRIBE YOUR ACCOUNTING FOR THIS
AGENCY AND MARKETING AGREEMENT.
RESPONSE. On a prospective basis, Monsanto will modify Note X
-- Advertising Costs to include a description of the agency and
marketing agreement with The Scotts Company ("Scotts"). This will
include changing the title of the note to "Selling, General and
Administrative Expenses" and adding the following section:
"AGENCY AND MARKETING AGREEMENT
In 1998, Pharmacia (f/k/a Monsanto Company) entered into an
agency and marketing agreement with The Scotts Company
(Scotts) with respect to the lawn-and-garden herbicide
business, which was transferred to Monsanto in connection with
its separation from Pharmacia. Under the agreement, beginning
in the fourth quarter of 1998, Scotts was obligated to pay
Monsanto a $20 million fixed fee each year to defray costs
associated with the lawn-and-garden business. Scotts deferred
a specified amount of this fee, owed in each of the first
three years of the agreement, and it is contractually required
to be paid in full, with interest. Scotts began paying these
deferred amounts ($5 million per year in monthly installments)
in October 2002. Monsanto records the payment to defray costs
as a credit to selling, general and administrative expenses.
Beginning in program year 2003 (October of 2002,) the annual
fixed fee was increased to $25 million. In
Securities and Exchange Commission
February 24, 2005
page 27
addition, if certain thresholds are achieved, starting with
program year 2001, recovery of the deferred amount is
accelerated and the contribution payment is increased.
Monsanto is accruing interest on the deferred amounts owed by
Scotts and including it in interest income. The total amount
owed by Scotts, including accrued interest, was approximately
$XX million as of A date, $XX million as of B date, and $XX
million as of C date."
The information regarding Monsanto's advertising costs as
disclosed in the Form 10-K will be presented after the Agency and
Market Agreement section in a section titled Advertising Costs. Both
the Agency and Marketing Agreement and Advertising Costs sections will
be presented within the Selling, General and Administrative Expenses
note.
Note 27. Discontinued Operations, page 114
-------------------------------------------
21. WE NOTE THAT YOUR DISCONTINUED OPERATIONS REPORTED NO SIGNIFICANT
PRE-TAX LOSSES AND THAT AS OF AUGUST 31, 2004, THE REMAINING ASSETS AND
LIABILITIES OF THESE BUSINESSES WERE LESS THAN $1 MILLION. IN
CONNECTION WITH THE EXIT OF THIS BUSINESS, YOU DISCLOSE THAT YOU
RECORDED A $68 MILLION DEFERRED TAX BENEFIT FOR A FOREIGN CAPITAL LOSS
CARRYFORWARD, FOR WHICH A FULL VALUATION ALLOWANCE HAD BEEN PROVIDED,
AS OF AUGUST 31, 2004. ADDITIONALLY, IN NOTE 30 ON PAGE 116, YOU
DISCLOSED THAT A $105 MILLION U.S. DEFERRED TAX ASSET RELATED TO THE
DISPOSAL THAT PREVIOUSLY WAS NOT RECORDED DUE TO NUMEROUS UNCERTAINTIES
ASSOCIATED WITH THE AMERICAN JOBS CREATION ACT OF 2004 WILL NOW BE
RECORDED IN THE FIRST QUARTER OF FISCAL YEAR 2005. TELL US THE NATURE
OF THE TAX DEDUCTIONS THAT CREATED THESE DEFERRED TAX BENEFITS AND THE
CIRCUMSTANCES UNDER WHICH IT WOULD REVERSE, GIVEN THAT NO SUBSTANTIAL
FINANCIAL LOSS FOR DISCONTINUED OPERATIONS WAS REPORTED IN PRIOR
PERIODS AND NO SUBSTANTIAL ASSETS OR LIABILITIES REMAIN.
RESPONSE. Monsanto advises the Staff that it incurred a
substantial tax loss on the disposition of its European wheat and
barley business during the fourth quarter of Monsanto's fiscal 2004.
The loss in question related to Monsanto's acquisition of the stock of
Plant Breeding International Cambridge Limited ("PBIC"), a U.K. company
acquired for approximately $503 million in 1998, and the subsequent
disposition of the assets held by PBIC in June 2004. An election was
made at acquisition by Monsanto under Section 338(h)(10) of the
Internal Revenue Code which effectively increased the tax basis of
PBIC's assets, from a U.S. perspective, to the $503 million purchase
price. In October 2003, Monsanto made a "check-the-box" election
available under U.S. tax law which effectively liquidated Monsanto U.K.
Ltd. (the Monsanto subsidiary which then held the historic operating
assets of PBIC - PBIC owned certain non-operating assets). This
election made Monsanto (U.S.) the owner of the operating assets for
U.S. income tax purposes. The election had no impact on Monsanto's U.K.
tax position.
Monsanto had made a decision to engage in an effort to dispose
of its European wheat and barley business (including the historic
operating and non-operating assets of PBIC) by the time of the October
2003 election. The operating and non-operating assets were to be
offered for sale by Monsanto U.K. Ltd. and PBIC, respectively, to
discrete
Securities and Exchange Commission
February 24, 2005
page 28
groups of potential buyers. The Internal Revenue Service had adopted a
litigating position that the sequence of steps in a liquidation/sale
could be reversed to deny taxpayers any benefit from a loss generated
by those events. Please see the attached copy of Notice 2003-46. This
position was also being litigated in the United States Tax Court in
DOVER V. COMMISSIONER. In addition, pending legislation would have
limited Monsanto's U.S. tax basis in the PBIC assets to their fair
market value at the time of the liquidation (approximately $15 million,
rather than the estimated remaining $320 million of tax basis under
existing tax law after depreciation/amortization of the original $503
million investment). Please see the attached copy of Section 431 of the
pending S.1637 "Jumpstart Our Business Strength (JOBS) Act" or "Jobs
Act". Another section of that Bill (Section 435, also attached) also
posed a threat to realizing any tax benefit in the U.S. from the
disposition by disallowing tax benefits in circumstances where the
"principal purpose" of the acquisition of an asset or assets was to
avoid federal income tax.
The actual disposition of the wheat and barley business during
the fourth quarter of the fiscal 2004 generated both a capital loss in
the U.K. and a potential (due to the uncertainties described above)
ordinary tax loss in the U.S. Monsanto was precluded from claiming a
tax loss in both the U.S. and U.K. under the "dual consolidated loss"
provisions contained in Section 1503 of the Internal Revenue Code.
Monsanto could only claim a U.S. tax loss if it was willing to make a
"non-use" election under Treasury Regulation 1.1503-2(g)(2).
Consequently, Monsanto would ultimately be required to determine
whether it was prudent to (i) make the "non-use" election and thereby
forego an opportunity in the U.K. to offset the capital loss incurred
on the disposition of the wheat and barley business assets against a
potential capital gain generated by the sale of non-operating assets
held by PBIC or (ii) retain the ability to claim a tax benefit in the
U.K. Monsanto was not required to decide whether to make this "non-use"
election until May 15, 2005, the date on which its U.S. tax return for
fiscal 2004 would be due. A deferred tax asset was not recorded for any
potential U.S. tax benefit because such an asset would only exist if
Monsanto was committed to make the "non-use" election. As of the June
2004 sale date of the PBIC operating assets and as of August 31, 2004,
Monsanto could not come to that conclusion given the
legislative/litigation risks that made it unclear whether any U.S. tax
benefit would be realized if the "non-use" election were made.
Consequently, upon the sale of the PBIC operating assets in
June 2004, a deferred tax asset of $68 million was recorded for the
U.K. tax loss. A restructuring of the U.K. wheat and barley business
had created U.K. tax basis in the historic PBIC assets. A full
valuation allowance was associated with this deferred tax asset because
the capital loss could only be used in the U.K to offset U.K. capital
gains and it was unclear whether the disposition of certain
non-operating assets held by PBIC would generate capital gains to allow
recovery of the deferred tax asset (the sale price of such
non-operating assets included a fixed amount approximately equal to
PBIC's U.K. tax basis plus contingent payments based upon future events
beyond the control of PBIC or the buyer). This possibility of realizing
a U.K. tax benefit, coupled with the risks associated with realizing
Securities and Exchange Commission
February 24, 2005
page 29
a U.S. tax benefit, precluded Monsanto from committing to make the
"non-use" election.
The "American Jobs Creation Act of 2004," or "AJCA", a
successor bill to the "Jobs Act" was enacted in October 2004, during
the first quarter of Monsanto's 2005 fiscal year. Section 836 of the
AJCA (copy attached) was virtually identical to Section 431 of the Jobs
Act. However, Section 836 was only effective as of the date of
enactment. There was no provision in the AJCA similar to Section 435 of
the Jobs Act. Accordingly the legislative risk, which was the primary
driver for Monsanto's earlier conclusion that it was not in a position
to determine that it would be prudent to make the "non-use" election,
had been eliminated. The United States Tax Court had rejected the
Internal Revenue Service's litigating position in its Dover v.
Commissioner opinion published in May 2004. The enactment of the AJCA
and the Dover opinion greatly diminished the economic incentive for the
Internal Revenue Service to further litigate this issue. Accordingly,
in the first quarter of fiscal 2005, Monsanto committed to file the
"non-use" election on its fiscal 2004 U.S. corporate income tax return.
This commitment required Monsanto to record a deferred tax asset for
the U.S. loss and reverse the U.K. based deferred tax asset/valuation
allowance, as the "non-use" election would preclude Monsanto from
claiming any U.K. tax benefit for the U.K. loss. The tax benefit was
recorded as a deferred tax asset, rather than a current tax benefit,
due to the fact Monsanto was in a net operating loss carryforward
position in the U.S. prior to the recognition of this loss (please see
Note 11 of the Form 10-K). Based upon Monsanto's ability to produce
taxable income in the U.S. which would absorb this tax loss
carryforward, no valuation allowance was considered necessary.
Monsanto reported the pre-tax loss on its investment in the
wheat and barley business before reporting the tax benefit of the loss.
A loss of $229 million was recorded in the first quarter of calendar
year 2002 as part of the cumulative effect of a change in accounting
principle related to the adoption of SFAS 142. A second loss of $56
million was recorded in the first quarter of fiscal 2004 as the result
of a goodwill impairment analysis. This impairment was recorded in
continuing operations in accordance with paragraph 39 of SFAS 142. No
tax benefit was recorded on the impairments in the earlier periods due
to the reasons outlined above. The U.S. tax benefit could only be
obtained by Monsanto's commitment to the "non-use" election in the
first quarter of fiscal year 2005. This benefit was recorded in the
first quarter of 2005 upon enactment of the AJCA.
FORM 10-Q FOR THE QUARTER ENDED NOVEMBER 30, 2004
Note 15. Commitments and Contingencies, page 14
------------------------------------------------
22. WE NOTE YOUR FORM 8-K FILED DECEMBER 20, 2004, WHICH DISCLOSED A $284
MILLION CHARGE RELATED TO SOLUTIA CONTINGENCIES WOULD BE MADE IN YOUR
CURRENT QUARTER. IN YOUR FORM 10-K FILED ON NOVEMBER 3, 2004, THESE
CONTINGENCIES WERE DEEMED REASONABLY POSSIBLE BUT NOT SUBJECT TO
ESTIMATION. IN YOUR FORM 10-Q FILED ON JANUARY 10, 2005, YOU DISCLOSE
THAT THE DEGREE TO WHICH YOU ARE RESPONSIBLE FOR THESE MATTERS IS
UNCERTAIN, AND THAT ACTUAL COSTS MAY BE MATERIALLY DIFFERENT FROM THIS
Securities and Exchange Commission
February 24, 2005
page 30
ESTIMATE. GIVEN THE REQUIREMENT TO DISCLOSE ANY ADDITIONAL REASONABLY
POSSIBLE LOSSES IN ACCORDANCE WITH PAS 5 AND FIN 14, TELL US HOW AND
WHY YOU CONCLUDED THAT ANY ADDITIONAL LOSSES FOR THIS CONTINGENCY DO
NOT NEED TO BE DISCLOSED. IF ADDITIONAL LOSSES ARE REASONABLY POSSIBLE,
DISCLOSE SUCH LOSSES IN ACCORDANCE WITH FAS 5 AND FIN 14.
ADDITIONALLY, WE UNDERSTAND THIS CHARGE WAS ESTIMATED ON A DISCOUNTED
BASIS. PLEASE NOTE THE REQUIREMENTS OF SAB TOPIC 5Y STATE DISCLOSURE OF
ADDITIONAL INFORMATION IS REQUIRED FOR THOSE LIABILITIES MEETING THE
CONDITIONS FOR DISCOUNTING, SUCH AS THE DISCOUNT RATE USED, THE
AGGREGATE UNDISCOUNTED AMOUNT, EXPECTED PAYMENTS OVER THE NEXT FIVE
YEARS, ETC. PLEASE EXPAND YOUR DISCLOSURES TO PROVIDE THIS INFORMATION
AS REQUIRED BY SAB TOPIC 5Y. WE MAY HAVE FURTHER COMMENT AFTER
REVIEWING YOUR RESPONSE.
RESPONSE. As disclosed in the Form 10-K, Monsanto could be
obligated to indemnify Pharmacia for any liabilities that Solutia
assumed from Pharmacia upon its spinoff. These liabilities include
litigation, environmental remediation and certain retiree liabilities
relating to individuals who were employed by Pharmacia prior to the
Solutia spinoff. Monsanto will be liable for such obligations only if
Solutia does not perform them or the Company otherwise assumes the
obligations. Following Solutia's December 2003 bankruptcy filing, the
extent to which Solutia will remain liable for these obligations, or be
discharged of them, can only be determined by the bankruptcy court.
Accordingly, the ultimate impact on Monsanto of Solutia liabilities
that Monsanto may be called upon to deal with as a result of the
Solutia bankruptcy proceeding will depend on the final outcome of a
number of factors, including: (i) the extent to which Solutia is
discharged from liabilities; (ii) the amount of such liabilities; (iii)
the extent to which the other parties to such liabilities receive
payment of their claims as part of the plan of reorganization; (iv) the
extent to which the Company has successful defenses to the assertion of
liabilities from which Solutia is discharged; and (v) the extent to
which the Company receives payment of its claims against Solutia as
part of Solutia's plan of reorganization (which will depend, among
other things, on the extent to which the Company has incurred costs at
that time of the estimation or other liquidation of those claims and
the amount of the payment allocated to the class to which such claims
are assigned).
Both prior to and since Solutia's bankruptcy filing, Monsanto
has managed certain litigation and environmental remediation repudiated
by Solutia. In connection with its management of such matters and with
the assistance of outside advisors the Company developed a reasonable
estimate of the amount that it is reasonably possible the Company would
incur if it continued to manage and satisfy such obligations. Further,
because Monsanto had determined in that it crossed the threshold of
probability during the course of discussions held in December 2004 with
the other parties-in-interest in Solutia's bankruptcy, accrual was
required under SFAS 5. This charge was disclosed in a Form 8-K and
subsequently in the Form 10-Q. However, because of the many
uncertainties relating to any resolution of Solutia's bankruptcy
proceeding, including
Securities and Exchange Commission
February 24, 2005
page 31
those described above, the Company was not able to reasonably estimate
the amount or range of reasonably possible additional loss. Further, as
disclosed in the Form 10-K, due to the same uncertainties, the Company
could not ascertain the likelihood that it might ultimately be
responsible for other environmental remediation or the retiree medical
benefits nor develop a reasonable estimate of such liabilities, as
Solutia was currently managing those liabilities. This was consistent
with the Proof of Claim that Monsanto filed with the bankruptcy court
in Solutia's bankruptcy proceedings on November 29, 2004, which claim
was both highly complex and subject to further amendment. Therefore,
consistent with paragraph 10 of SFAS 5, no further disclosure regarding
possible additional losses was required, because no reasonable estimate
as to such losses could have been made. The disclosure in Note 15 of
the Form 10-Q did not include a discussion of the potential other
environmental or retiree medical obligations, as there was no change to
the discussion provided in the Form 10-K.
The $284 million charge the Company recorded in the first
quarter of fiscal 2005 includes estimates of costs to defend and
resolve certain third-party tort litigation and estimates of costs for
remediation at environmental remediation sites Monsanto is managing. Of
the $284 million charge, $86 million accrued, and $21 million paid
during the first fiscal quarter, was not subjected to discounting, and
the remainder was discounted. A risk free discount rate of 3.5 percent
was selected based on discussions with outside legal counsel and
guidelines provided in SOP 96-1, paragraph 132, and SAB 92 Topic 5-Y,
because there was no available market for the liabilities. Management
believes the rate used was appropriate and conservative.
The expected aggregate undiscounted amount was approximately
$222 million. The expected payments for each of the next five years are
$29 million for 2005, $26 million for 2006, $18 million for 2007, $7
million for 2008, and $5 million for 2009. The aggregate amount
thereafter is approximately $137 million. The amount recognized in the
Statement of Consolidated Financial Position totaled $177 million. The
discount amount represents the difference between the $222 million
aggregate undiscounted amount and the $177 million recognized in the
Statement of Consolidate Financial Position.
Monsanto will expand the disclosure in its future filings to
include the discount rate and the above discussion, in accordance with
SAB Topic 5-Y.
* * * * * *
Please contact me ((314) 694-6854), or either Eric S. Robinson
((212) 403-1220) or Roy J. Katzovicz ((212) 403-1313) of Wachtell,
Lipton, Rosen & Katz, special counsel to the Company, if you have any
questions or comments relating to the matters referenced above. Thank
you for your attention to this matter.
Sincerely,
Securities and Exchange Commission
February 24, 2005
page 32
/s/Richard B. Clark
Richard B. Clark
Vice President and Controller
Monsanto Company
cc: Terrell K. Crews, Monsanto Company
Nancy E. Hamilton, Esq., Monsanto Company
Jennifer L. Woods, Esq., Monsanto Company
Eric S. Robinson, Esq., Wachtell, Lipton, Rosen & Katz
Roy J. Katzovicz, Esq., Wachtell, Lipton, Rosen & Katz