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Monsanto 1985 Annual Report OSM 021632 STLCOPCB4006941 ; Set loss in 1985 includes i net restructuring cost of , S341 million (S4.43 per ! share) and an extraordi' nary income item of S30 million 'SO.40 per share) Set income m 1983 includes an extraordi\ nary income item of S33 ! million iSO.41 per share). (Dollars in millions, except per share) Net Sales Net Income (Loss) Per Common Share: Net Income (Loss) Dividends Shareowners' Equity Depreciation and Amortization Funds Provided From Operations Research and Development Expenses I Percent of Long-Term Debt to ii Total Capitalization 1985 $6,747 $ (98) $(1.27) 2.45 44.38 $ 599 $ 889 $ 470 38% 1984 $6,691 S 439 1983 S6.299 S 402 S 5.42 2.25 46.43 S 503 SI,008 S 370 S 4.89 2.075 44.83 S 523 $ 948 S 290 18% 20% I Letter To Our Shareowners 2 Introduction S Monsanto Agricultural Company 9 Monsanto Chemical Company 10 Monsanto Electronic Materials Company 14 Fisher Controls International, Inc. 18 G. D. Searle Sc Co. 10 The NutraSweet Company IS Research and Development 20 Financial Report Contents 22 Board of Directors and Officers 40 Shareowner Information 47 | Moruinto Company and Substdionts DSW 021633 STLCOPCB4006942 onsanto Company meets customer needs by Monsanto trademarks the Annual Report art providing high-quality chemical and agricultural identified by italics. jproducts, pharmaceuticals, low-calorie sweeteners, Mindustrial process controls, man-made fibers and electronic! materials. We are growing in these markets by using j technology to develop new products which deliver added j value to our customers and society. At the same time, our 56,000 employees are committed to the highest standards of conduct in the more than 100 countries where we do business. 13S^*0er*fegGra* Dollars m Millions *'ichtdet Stark hr rt* five mcmkt ptnod u-DecrmOtr. IMS WariMto Sate Dollars m Millions 1385 Sriu to Utfer ifertete Dollars m Millions DSW 021634 STLCOPCB4006943 Mehirtll. MaJumy, n*MM MV CkW Estcattra OtSev !2! Letter To Our Shareowners: No. 100 in the Fortune 500. m We acquired G. D. Searie & Co., capping a decade-long effort to enter the pharmaceutical business. The combined Searle/Monsanto pharmaceutical strengths - based oh chemistry and biotechnology - have the potential to stand among the very best pharmaceutical companies in the world.We're investing heavily in leadership- quality research and development. Because : we're plowing cash back into the business ! in our commitment to the future, current earnings are non-existent -- but the rewards look very promising indeed. BBH We added an extraordinary product to the corporation -- NutraSweet brand sweetener. Sales and earnings gains from The NutraSweet Company subsidiary are impressive, and we're working toward a secure position after U.S. patents expire in 1992. We expect this unique artificial sweetener will surprise a lot of people with its earning power and durability. NutraSweet is one of the early opportunities for the Searle/Monsanto merger to yield real synergy,with Monsanto's engineering know how now being applied to lower the cost of production. bob Monsanto's first biotechnology prod uct, targeted to improve milk productivity in cows, is on schedule for market entry in 1988. Development expenses are very large, but so is the opportunity for profit -- this could well be a worldwide market of more ineteen eighty-five was the pivotal than $1 billion. We've also made rapid Nyear in recent Company history. The decisions taken and carried out will influence the Company's fortunes for years to come. progress on moving another promising biotechnology product out of our labs. Atrial peptides, which control high blood pressure, are now into the pharmaceutical Consider this: HUH We virtually completed the trans development process at Searie. PRoVOX control room instruments formation of our chemicals, fibers and from Fisher passed one of our major plastics businesses from heavy dominance competitors in sales in this important by commodity petrochemicals just a few growth sector. PRoVOX electronic short years ago to a higher-performance, instrumentation makes it possible for less-cyclical mix. Our future will be driven manufacturers to achieve plantwide, far more by our own technology, marketing integrated process control, providing cost and manufacturing than by broad, uncon reduction and quality improvements -- trollable external conditions. This $3-plus critically important needs even in these billion unit, named Monsanto Chemical times of low capital spending for new Company, is smaller in sales and staffing capacity. than its predecessors, but more profitable, M Across the Company, we made and in 1986 it would rank just over dramatic improvements in our cost struc- 0SW 021635 STLCOPCB4006944 rure for 1986 and beyond. In doing so, we reducing production rather than supporting treated our employees in a responsible global competitiveness for one of America's manner, offering generous early retirement or job search skills to those who were displaced. mm We are very proud of the strides premier high technology industries. Else where in the agricultural world, we're doing satisfactorily, but the reduced U.S. corn and soybean acres will be missed, especially for achieved in making a safe company even Lasso herbicide. We've intensified our effort safer. A special task force spearheaded a to move Roundup herbicide into new uses companywide 50 percent reduction in the so it ct n continue its worldwide growth. storage of high-hazard materials and further We're working hard to get the agricultural strengthened the safety of plant operations and the shipment of raw materials and products. products earnings engine revved up again as we await R&D products now in the pipeline. We were able to get these things done H The U.S. industrial economy -- that by carefully balancing borrowed cash with pan that makes non-military goods -- is money from the sale of assets. We sold our still on hold. We expea the cheaper dollar oil and gas business just before the bottom to provide some relief from the devastation fell out of the price of crude. Searle's of imports, but this is coming slowly. Even consumer products business and our Seal if the softening dollar helps on exports, the Sands plant in the United Kingdom were no duration of the dollar's prior strength longer critical to our strategies and were encouraged a significant move from oppor worth more in the hands of others. They tunistic imports to a more permanent kind. were sold at an attractive value to our Coping with this requires the most careful shareowners. market segmentation and competitive It is a fact that today we are more assessment possible. Unfortunately, we leveraged, but our ability to generate cash is and our customers carry a lot of "made impressive and means we can both service in Washington" baggage in the competitive our debt and reduce it to targeted levels fray -- regulatory, litigation and other costs over the next few years. We're not as flush which many of our international competi with cash as we once were, but we're far tors don't face -- but it's our job to deal more flush with opportunities and we have with these realities, and we will. the total resources to capitalize on them. During the year, we quite often saw We also had some disappointments in outside reports on Monsanto's positive steps 1985: for the future charaaerized in one form or an Our long-standing promise to deliver another as "Good strategic moves -- wait profits in electronic-grade silicon wafers and see." was derailed by the worst recession in the To your management, the job is very U.S. semiconductor industry's history. We'll clear. We have invested substantial assets make no rosy forecast (as we did last year) towards the future, and we must make the except to say there is evidence that business future happen as quickly as possible. We will be better, and all the fundamentals are will, however, continue to make moves that in place. We've lowered our break-even provide a durable result. The "Quick Stock point in silicon to about 50 percent of plant Fix" scenario has a siren song appeal: liqui capacity, but that didn't matter much when date everything in sight, decimate research, we ran a good part of 1985 at 25 percent. buy in shares and listen to the applause We need no new investment to turn this from the then shareowners. But next year business around -- just some orders from this resulting dull, no-growth, uninteresting the overdue recovery of the world semicon stock would soon be dumped in favor of ductor market. the newest "asset play." mm The U.S. agricultural economy has Instead, we have a view of somewhat deteriorated due in large measure to disap different stakeholders, those with short pearance of export markets. As usual, term and longer-term interests in the Washington's remedy is heavily weighted to Company. DSW 021636 i i 3 STLCOPCB4006945 A Tribute To Dr. Louis Fernandez | Our intention to serve them is simple in concept. We intend to place Monsanto among the handful of great industrial enter prises in the world -- the best in what we j choose to do -- measured by consistent \ returns for our many stakeholders. It requires no new strategy. Those deci sions are behind us. It does require these actions: For the shareowner-stakeholders, this promise means aiming for a return on equity year after year in the 20 percent j range. We finished 1984 at 12 percent, and j 1985 was lower than that based on continu- j ing operations. Our past product mix could ! not get us there. But now we have that Retiring Chairmen | opportunity. Our restructured product mix Dr, Louis Fernandez can get us there arithmetically in the 1990s -- we have a good balance now, and we ; intend to reach for this target. | For our customer-stakeholders, we l must work every day to meet the highest i standards of value, quality and service in ! the products we sell. Their rewards will be | measured in how well we meet their needs, j ! For our employee-stakeholders, we j must provide safe, meaningful and reward ! ing work in an environment in which each ! person has an equal opportunity to succeed. I We want to ensure that Monsanto is a great j place for our people to invest in their 1 careers. ; For our neighbor-stakeholders, we | must strive for a lasting and rewarding part-, nership which respects their needs. We wantj our communities to benefit from the contri butions of a highly desirable neighbor. The job of the Board of Directors and your management is to serve each of ! these groups. We have a clear view of the ! company we intend to be, and we're com : mitted to those actions which will get us i to our goals. The rewards are there for all j our stakeholders. | Richard J. Mahoney President and Chief Executive Officer * March 5, 1986 *Effective April 1, 1986, Mr. Mahoney becomes Chairman of the Board and Chief Executive Officer Dr. Louis Fernandez retires April 1 as Chairman of the Board of Directors for Monsanto Company, completing 37 years of outstanding service and leadership to j the Company. When he joined Monsanto ! in 1949, Dr. Fernandez entered an industry i that was just coming to grips with the tech- 1 nological revolution in petrochemicals. Ffe understood the magic of that technology, and he helped bring it to the world from a wide variety of executive positions. His skills, advice and counsel were invaluable j to the growth of Monsanto and to the planning and implementing of the new 1 directions it is now taking. Equally impor- tant, he helped coach and shape outstanding j managers at every level in Monsanto. : Those ate proud accomplishments, but j there is more. During the past decade, j Dr. Fernandez became a sensitive and effec- j uve leader for the chemical industry, j particularly on environmental issues. He understands the public's concerns and knows that they must be dealt with openly and honestly. He helped make Monsanto managers advocates of cooperation rather ' than confrontation on environmental issues, j and the Company has benefited from that j attitude. : . Monsanto is a better company because of ; I Dr. Fernandez. That is a legacy of which he j j can be proud. 4~] DSW 021637 STLCOPCB4006946 onsanto Company has restructured to achieve its strategic goals and better serve its many stakeholders. Recent acquisitions and discoveries have added exciting new opportunities to its traditional strengths and markets. Nevertheless, challenges will face the Company in the years ahead and Monsanto is fully committed to meeting them head on. Results will be delivered by Monsanto's strong management team through the six operating companies and research efforts described in the following pages. The Executive Management Committee which will guide Monsanto in the years ahead Includes: left to right, Robert L. Berra, | Harold ). Corbett, Francis J. Fitzgerald (standing), Richard I. Mahoney, Earle H. Harbison, Jr. (standing), Dr. S. Alien Hetnlitger, Robert 6. Potter (standing), Nicholas L Reding (standing), Dr. Howard A. SchneMerman, Francis A. Stroble. DSW 021638 STLCOPCB4006947 Monsanto Agricultural Company onsanto Agricultural Company brings together Mhigh technology chemicals and products in plant and animal sciences to serve agricultural and related industries everywhere in the world. It was a tough year in 1985 for agricultural businesses. ; Sales and operating income were lower than in 1984. Lasso herbicide is primarily a U. S. business, and the recession in the nation's farm economy hurt sales in major corn and soybean markets. That was the largest single factor in the disappointing results.. OSW 021639 STLCOPCB4006948 Roundup herbicide, by comparison, is more of an international business, with hundreds of uses in more than 100 coun tries. Sales in the United States were Monsanto Agricultural Company Presideat Nicholas L Reding (center! plans business strategies with colleagues. affected by the farm economy, but business in other world areas, particularly northern Latin America, Canada and Western Europe, was relatively strong. The use of Roundup for industrial, forestry and home and garden markets continued to grow. Overall, however, sales of Roundup were marginally lower, though usage was higher, as inventories were reduced. Avadex BW herbicide, used primarily products. For Lasso, that means retaining its to control weeds in wheat and small position as the premier corn and soybean grains, had a good year, with sales gains herbicide. There are compelling economic from outside the United States. During 1985, Monsanto Agricultural reasons for farmers to use Lasso in its ! various forms. On-the-farm tests show Company (MAC) introduced Limit turf that using Lasso helps improve revenues regulator in the northeast United States for commercial markets such as golf courses, highway rights-of-way and cemeteries. It through better weed control and less crop stress, which increase yields. In reduced tillage, farmers leave crop residues in the reduces the growth of cool season grasses, allowing fewer mowings and more effi cient property management. In other areas, sales of Alimet liquid feed supplement for poultry benefited from the company's low-cost manufactur ing position and a price increase was put tasso Micro-Tech herbicide television commercials help farmers visaaftze this new mfcrocapsales which pene trate through stubble hi field after harvest. It conserves moisture, helps control erosion and reduces the number of tillage trips across a field, thus saving time and fuel. With the develop ment of effective herbicides like Lasso Micro-Tech, reduced tillage is becoming cost-effective and popular with farmers in place late in the year. In addition, proprietary varieties of soybean and hybrid wheat seeds continued to be well received by U.S. farmers. "It was a difficult year," said Nicholas L. Reding, Monsanto Executive Vice President and President of MAC. "Forming a single agricultural company from three around the world. During 1985, the U.S. Environmental Protection Agency (EPA) initiated a Special Review of Lasso herbicide. Tests submitted to EPA by Monsanto for the agency's standard re-registration process showed that laboratory rats fed high levels of alachlor, the active ingredient in Lasso, former units isn't a dramatic change. We daily for most of their lives developed are still in the same businesses -- agricul tumors. There is no evidence that alachlor tural chemicals, animal products and seeds. But bringing them together helps us plan for challenging economic and causes tumors in humans, but as a result, EPA began a Special Review to examine all health, safety and benefits data on Lasso. competitive conditions. Our strategy That review should continue through is set for each major business." 1986. MAC remains convinced that Lasso can be used safely, and the scientific data oh Crop Chenricab support the product's continued MAC's large crop chemical businesses registration. remain the foundation of the new Also during the year, French authori company. Faced with a depressed farm ties reviewed the same issues and reaf economy in the U.S. and growing compe firmed their decision that Lasso should tition worldwide, the job of MAC is to continue to be registered. In Canada, a sustain the flow of earnings from Lasso decision by the Minister of Agriculture and Roundup, while developing new to cancel Lasso registration has been |7 DSW 021640 STLCOPCB4006949 I appealed by Monsanto, and a special | review panel has been established as 1 provided for by Canadian law. No signifi! cant effect on operating results is expected ! from these reviews. | Continuing the growth of Roundup ; herbicide is a second element in the agri' cultural chemical strategy. Since its j introduction in 1974, Roundup has been one of the most successful herbicides ever developed. It has been accepted by farmers for controlling difficult weeds, by forestry professionals as a management tool and by j industrial and highway maintenance | departments as a cost-saving herbicide. I Monsanto will build on that success. | "We're doing that by entering new markets | and by fine-tuning the formulation for new ; uses," Mr. Reding said. "bandmaster | herbicide, a mixture using the active ingre; dient in Roundup, was introduced in 1985 to U.S. wheat growers." Landmaster is especially beneficial in reduced tillage applications for dryland wheat and small grains. Landmaster joins many other MAC specialized mixtures developed to meet local needs, such as for wheat in Australia, vineyards in France and plantations in Malaysia. "We've also reduced prices for Roundup in the United States," Mr. Reding : said. "We expect this to open new markets Baifc ruurch teto th fundamental nature of plants Is aimed at creating exeting new products for farmers. Improving agricultural productivity through better seeds is an important part of our future -- Including research going oa at Jacob Hartz Seed Co., Inc., part of HybrfTech Seed Internatioeal, Inc. chemicals also has become more intense. "We're casting a wider net for new products," Mr. Reding said. "MAC has the ! i ! finest worldwide marketing, sales and ! product development organization in the industry, and we intend to keep it busy." , The company is investigating licens- I ing and acquisition opportunities around , the world. MAC laboratories are looking I aggressively for new herbicides and disease j control products. A new class of chemicals I looks promising. And, MAC is developing I ways to speed up the screening and testing process for new products, and has built in tougher research checkpoints to identify potential products more quickly. ! mm Animal Sciences j While crop chemicals remain the largest j product segment in MAC, new products in j 1 animal sciences have potential for growth ! and profitability. The most immediate task j here is to commercialize bovine somato- j tropin, a protein produced through generic engineering that increases the efficiency of milk production in dairy cattle. Field trials j are under way now on this research prod- I uct, and MAC has established a team of research, development and marketing people to commercialize it as soon as possible after regulatory approval. "We're also pursuing a broad pro gram based on biotechnology to develop other products to improve animal produc- , tivity," Mr. Reding said. "They are aimed j at reducing costs for the producer -- which in turn means stabilizing or cutting | the costs of meat, milk and eggs for consumers." while it helps farmers by reducing costs." An important part of the strategy is continuing growth in international markets for existing products. For exam ple, trial programs testing the effectiveness of Roundup, Lasso and other agricultural chemicals on farms in the Soviet Union and the People's Republic of China increased in 1985. The search for new agricultural 8I n Plant Sciences Two efforts are under way in plant sciences. One is an ongoing business, HybriTech Seed International, Inc., which markets hybrid wheat seeds and proprie tary soybean seeds in the United States ; and is developing hybrid wheat seeds in | France. In wheat, research is under way to j enhance hybrid seed production through j chemical techniques. In soybeans, the Jacob Hartz Seed Co., Inc. continues to develop high-performing seed and food grade varieties. They introduced several DSW 021641 STLCOPCB4006950 new lines in 1985. The second area involves funda mental work in Monsanto's corporate research laboratories using biotechnology to develop more productive crop plants. Short-term, the goal is to continue devel oping improved proprietary seeds for existing markets. Longer-term, the goal is to use new technology in the seed industry. This might include plants that produce more protein, supply their own fertilizer, grow in dry or cold conditions or protect themselves against pests. Work also contin ues on developing microbes that produce natural pesticides for protecting plants. Monsanto products an dsntopad (or sffscthMMS under retion*l condttioas, as at Monsanto's Knuchi Research Station in Japan. an Economic Outlook The economic outlook for agricultural markets is mixed. Much of the farm econ omy in the United States is depressed and probably will stay that way for some time. For 1986, we expect only modest growth due to uncertainty surrounding the U.S. government's farm programs, reduced plantings, continued depressed commodity prices and continuing fluctuations in credit/currency conditions worldwide. Other world areas, including the Eastern bloc nations and the People's Republic of China, have growth potential. "Everywhere, the emphasis is on efficient production," said Mr. Reding. "Our products are aimed at helping im prove that efficiency, particularly during difficult times. And in line with this commitment, we will continue to speak out for agriculture -- supporting educa tion and improved government policies and programs which help farmers. Our fortunes are tied to theirs, and we intend to help them be successful. "A strong company like MAC can manage its way through the times ahead and continue to bring new and needed technology to the market. That gives us a decided edge now and for the future." _9_ Ji DSW 021642 STLCOPCB4006951 Monsanto Chemical Company n January 1,1986, Monsanto reaffirmed the Oimportance of its chemical heritage. Monsanto Chemical Company (MCC) joined the Company's strongest chemicals, plastics and fibers businesses into a $3-plus billion international organization. It was put j | together carefully with a wide range of successful : products and with the resources to build on technology and market strengths for new products in the future. j MCC's goal is to bring to its many markets superior ! products that offer higher value to its customers. j 10 ; DSW 021643 STLCOPCB4006952 Adding value to chemical products in innovative ways is the key to MCC's success. ! "To do this, the company must define j its markets, differentiate the performance ! of its products from competition and become the most reliable supplier at the lowest cost in the marketplace," said Francis J. Fitzgerald, Monsanto Chemical Company President.* During the rest of the decade, MCC is expected to contribute a large percentage of total corporate profits. The company is built around a less cyclical, less commodity-dominated product mix and a Saflex plastic interlayer, j found in laminated glass, j affords this financial j institution improved safety steady flow of new marketing opportuni for its customers. ties from products and services that are expected to drive growth through the 1990s and beyond. The future of the combined Monsanto Chemical Company businesses is brighter now than at any time in the last 20 years. jssesi Major Product Families Monsanto Chemical Company has ongo ing businesses which are expected to turn in sales of $3-plus billion in 1986, world wide. Approximately $2 billion of that will come from healthy product families including carpet staple, detergent mate rials, Lustran plastics, rubber chemicals and Saflex interlayer. These product fami lies are supplemented by a healthy Robert 6. Potter, ; President, Monsanto j Chemical Company j Ieffective April II specialty chemicals business as well as a group of other smaller businesses, making it clear that MCC has a solid product foundation for the future. Monsanto is the largest U.S. producer of nylon staple fibers for carpet. Carpets made from Monsanto fibers are eligible for inclusion in the program for Wear- Dated textile products. This means that if the products don't perform in accord ance with Monsanto's warranty, Monsanto replaces them. MCC carpet fiber sales are supported with some of the most innova tive marketing programs in the textile industry. The acquisition of the Witfield Divi- *Effective April 1, 1986, Mr. Fitzgerald becomes President and Chief Operating Officer of Monsanto. Mr. Robert G. Potter becomes President of MCC on that date. sion from Witco Corporation in 1985 reinforced Monsanto's position in the detergent industry. The Witfield unit, which extended Monsanto's product line ; and broadened its overall product mix, produces surfactant intermediates for detergent and specialty applications. Lustran is Monsanto's leading entry in high-performance plastics. There is a great deal of growth potential in this prod uct as manufacturers find more uses for Lustran in appliances, auto parts and consumer products. Other major plastics products include Vydyne nylon, Cadon engineering thermoplastic and a new line j of polymer alloy engineering thcrmoplas1 tics. MCC is continuing to invest in the ! future of its plastics businesses. A new plastics customer applications laboratory soon will be under construction in the northeastern United States, and plant capacity expansions are under way in ; Belgium and Japan. In addition, modern| ization programs have been completed at j plants in Mexico and Canada. Monsanto's rubber chemicals busi ness continued to lead the industry in worldwide sales in 1985. In addition, the rubber chemicals division completed j an expansion at its Akron, Ohio marketi ing and research center. Current research ; programs are being aimed at developing I the lowest cost chemical processes and j new proprietary chemicals and instruj ments for the rubber industry. ; Saflex plastic interlayer for autoj motive and architectural glass continues j to be an industry leader in worldwide j markets. New markets arc opening as architects make more use of laminated j glass in homes and offices. Saflex offers ; , . j j j j U; DSW 021644 STLCOPCB4006953 improved safety, security, acoustical and energy saving properties. Sales for indus trial and residential construction offer growth potential greater than the automo tive market. Another group of businesses provides about one-third of MCC's sales. Key among these are specialty chemicals which continued to perform well in established positions. These include the ACL family of dry chlorine products which is a leader among disinfectants for swimming pools. Other specialty products are analgesics and fire resistant and heat transfer func tional fluids. Profitable specialty resins include high-performance, pressure-sensitive j adhesives and other MCC resins used in industrial coatings such as paints, high-gloss printing varnishes and reflec tive traffic sign coatings. MCC's Acrilan acrylic fiber gained significant market share in 1985, and is increasingly concentrated on high value | 12 ! Momitto t totting nn high ttomtonfi for quality control and specification at its recently expanded rubber chemicals research coster in Akron, Ohio. An Info-Share seminar hi Los Aagafes, one of tea ihren in 1985, brings detergent materials customer* together with Moaunto technology, customer servlet and OubBc policy experts. specialty products. Acrilan and other trademarked products include new fibers | for socks, sweatsuits, upholstery, craft yarn j and sweaters. A growing number of leading mills and retailers offer WearDated products, demonstrating high j \ ! consumer recognition of the brand. Nylon j filament, with a variety of industrial and j carpet end uses, continues to be an integral ! part of the fibers division. In addition, MCC maintained its ' j world leadership position in acetic acid j and maleic anhydride technologies. MCC's j other businesses include fabricated products, engineered products and Enviro- ; I Chem Systems, Inc. j j mm New Products MCC is commercializing innovative new products. Santoprene thermoplastic rubber, for example, offers plastic's lower manufacturing costs and rubber's higher performance in hose, under-the-hood automotive products, wire and cable, sheeting ! | : ' i DSW 021645 STLCOPCB4006954 and glazing gaskets. Certain grades of Santoprene have been accepted by Under writers Laboratories, Inc. and the Mine Safety and Health Administration, while others can be used in accordance with IJ.S. Food and Drug Administration reg ulations. A variation of Santoprene introduced this year, Geolast thermopiasj tic elastomer, combines the oil resistance I of rubber with the economics and process ; ing ease of thermoplastics. As part of a tour of tbe Peasacola Technical Center, commercial Interior designers examine nylon carpet staple fibers. \ j I Technology Technologies offering substantial opportu nity for commerical success are being funded in 1986 at $125 million. j MCC has a three-fold strategy for | j technology. First, scientists and engineers j 1 are working to shorten product develop- j | nient time -- the goal is five to seven years from discovery to commercialization. | Second, MCC is increasing emphasis on I the acquisition of technology from outside j | the company. Finally, it is expanding | collaborative research with Monsanto customers in each of the major product families. "We will be able to accelerate the development of new products by building on existing technologies and finding new ways to apply them," said Mr. Fitzgerald. "We're putting less emphasis on building new processes and more emphasis on extending existing technology to provide a broader product mix. Acquiring new technologies, rather than developing them ourselves, will be an option we'll pursue." I MCC technology programs will be j less capital intensive. The focus will be on the development of products like Santoj prene thermoplastic rubber -- products ; which arc patented, meet market needs | and whose value is in their function and i performance. : For example, Monsanto has devel! oped sophisticated new technologies to | combine polymers that ordinarily are | incompatible, such as ABS plastic and i ' i ; | j ! j j \ j j ; ; 1 j | ! ; 1 j j 13 | OSH 021646 STLCOPCB4006955 nylon. Like metal alloys, these combina tions perform better than their compo nents would alone. The ABS-nylon alloy is among the toughest thermoplastics known, and also performs well at high temperatures. As a housing for power tools or lawn and garden equipment, it can stand up to motor heat, vibration and rough handling. Monsanto already has a solid record in amino resin cross-linkers, which help increase the durability and gloss of paints and other coatings for automobiles, appli ances, metal cans and other items. A newly developed family of cross-linkers reduces solvent emissions and allows the coating to cure at lower temperatures. Reduced emissions are a major goal of the coating industry and lower temperature curing conserves energy and allows plastic to be substituted for metal, also reducing weight. an Positive Public Image "As a chemical producer, Monsanto has been leaving the low-margin commodities to focus on higher-value products," Mr. Fitzgerald said. "Beyond the business advantages, this change means we will no longer be dealing with some high-hazard products and will be transporting less hazardous raw mate rials. In addition, we will continue to take the lead in environmental safety and open communications with the public," he said. "MCC inherited a good safety record and a tradition of high level performance. The new company's challenge is to maintain and improve on it," he said. "MCC's goal is leadership in both financial results and corporate citizenship. MCC's performance will be measured by Monsanto's investors, our customers, our employees and our neighbors." Jams E. Spriioate, PrssMsrt, Mounts Doctreoie Materials Coopaay 14 Monsanto Electronic Materials Company onsanto Electronic MMaterials Company makes high-quality silicon wafers, the substrate for semiconductors used in computers and other electronic products. The company is among the world's largest suppliers of this material. Markets for silicon were severely depressed in 1985, particularly in the United States. Customers were working off huge invento ries of semiconductors built up in prior years. In addition, semiconductor imports into the United States depressed markets for U.S. producers. As a result, silicon sales were extremely weak and the com pany lost money for the year. Looking ahead, there are signs that the semiconduc tor market should improve in 1986, and Monsanto expects sales to benefit. Monsanto's overall strategy of becoming an international producer of high-quality silicon has not changed. There is also increased emphasis on cost control. The break-even point in manufac turing has been dramatically lowered to about 50 percent of capacity, allowing quicker financial improvement when markets improve. New facilities in Japan, Korea and the United Kingdom are on schedule for completion in 1986, bringing production closer to worldwide markets. DSW 02164? STLCOPCB4006956 Fisher Controls International, Inc. isher Controls International, Inc. is a leading Fworldwide manufacturer and supplier of process control equipment and systems for the process and energy industries. Fisher sells more than equipment. It sells innovative solutions to customers' process control needs. Fisher's sophisticated valves, regulators, measurement instrumentation and control systems are designed, manufactured and sold through an expanding international network of research, manufacturing, sales and customer service facilities. ' | ! j I Robert E. Flynn, Chairman and Chief Executive Officer, Fisher Controls international, inc. In its first application in the food industry, PRdVOX instrumentation provides the Unlever margarine plant bi Rotterdam, Roland eftfe higher level coordination, reporting and tracking. Fisher overcame sluggish demand in some markets to outpace its competitors in 1985. PRoVOX distributed control instrumenta tion led the way in that success, growing at twice the market rate since it was intro duced five years ago. PRoVOX is the cornerstone of Fisher's strategic position ing as a supplier of solutions for integrated process control. Product introductions continued in 1985 with new valves and measurement instrumentation, such as a portable level detector that can measure levels of liquids and solids from outside containers. PRoVOX technology also moved forward rapidly with the development of software and interface packages targeted to meet customers' needs in small systems markets. These additions expand the already extensive PRoVOX line. They are attractive to customers because they increase the capability of existing systems, give more price and capacity choices and make plantwide system integration easier. The market for integrated systems is expected to double by the 1990s. Fisher intends to be part of this growth. Fisher broadened its worldwide manufacturing and product support in 1985 with a new instrumentation facility in England and other facilities nearing completion. In addition, the company expanded its service and sales network, opening new markets in Europe and Asia-Pacific. In January 1986, the Monsanto Sepa rations Business Group was incorporated as Permea, Inc., and became a Fisher sub sidiary. Permea, Inc. supplies membrane and adsorption systems for gas processing, along with a variety of gas processing products. Permea, Inc. includes the newly acquired Kemp and Maritime Protection businesses. Fisher operates in competitive, international businesses. To continue its success, the company is committed to "Process Performance" -- combining qual ity, service applications, engineering and research to meet the needs of its many worldwide customers. |15 OSW 021648 STLCOPCB4006957 cquiring G. D. Searle & Co. in 1985 gave Monsanto j Aa long-awaited entry into the international pharma- j ceutical industry. Searle intends to strengthen its j position through developing new chemical and biological products for its worldwide marketing and sales organiza- | tion. Discoveries emerging from Searle's research, plus those already under development at Monsanto, give Searle the breadth of research and diversity of discovery j necessary to meet human needs for new, effective pharmaceuticals. Cytatec, a new anti-ulcer product approved is Europe, Latin America and Asia, is produced seder "dean rootn" cootfttiuHs at this facflfty la England. 16 DSW 021649 STLCOPCB4006958 G. D. Searle &C Co. was acquired by j Monsanto to provide established devel- j opment and marketing skills as well as ; pharmaceutical research capabilities. Monsanto's Health Care Division has been merged into Searle to create a strong, free standing subsidiary. "We now have an international pharmaceutical organization that is one of the top 30 in the world, and we intend t:o make it even stronger," said Earle H. Harbison, Jr., an Executive Vice President of Monsanto3' and Chairman of the Board of Searle. Research will be the basis of that strength. During the several years prior to the acquisition by Monsanto, Searle had increased its discovery efforts, and new drug candidates are beginning to emerge from that process. Combined with the health care research formerly conducted by Monsanto, total research and development j capabilities at Searle have increased by Searta's pad provide* onca-a-day nitrate therapy for tho prevantten and treatment of angina (cheat pain). Using a `illrough the skin" drag delivery system developed by Searle research, Atffro- disc dispenses medication continoutly and uniformly over a 24-hour period. almost 50 percent. Contributing to that work are the molecular biotechnology and chemical synthesis strengths of Monsanto and its joint research arrangements with leading universities. "Combining biotechnology with traditional chemical research forms a balanced program with the breadth we need to be a force in the marketplace," j Or. Shetdoe 0. Gfigsre, President and Chief Executive Officer, G. D. Searle & Co. Mr. Harbison said. "We will fund that work at between S160 million and $170 million in 1986, and we intend to keep investing at appropriate levels in the future." j One of the important products now ! emerging from the Searle research efforts is Cytotec for the treatment of ulcers. Cytotec has been successfully launched in Mexico and introduced in Switzerland, Malaysia and Singapore. Cytotec registrations have been submitted in 36 countries, including the United States. To date, it has been approved in eight countries, with addi tional approvals anticipated in 1986. Beyond Cytotec, there are 21 new ! chemical or biological entities in various stages of the development process neces-* *Effective April 1, 1986, Mr. Harbison becomes Vice Chairman of Monsanto Company. sary to establish their safety and efficacy. Among them is Atrial Peptide III, for cardiovascular therapy. : Atrial peptide research is a good j example of how the Searle/Monsanto : efforts support each other. This exciting j protein was first identified at Washington j University for further testing. Through j collaboration with Monsanto, test quan- j titles were produced using biotechnology j and chemical synthesis. Based on promis- ing results, atrial peptides are now moving into the development process at Searle. In addition to Searle's own new | chemical compounds, new products are j coming from Lorex, the Searle/Synthelabo j joint venture. Lorex filed an application in the United States in 1985 to market Kerlotte, a patented beta blocker for the treatment of angina and hypertension. Kerlone already is marketed outside the j United States. j lo strengthen the company's position j in key markets, Searle has completed new pharmaceutical manufacturing facilities in Japan and Korea. In addition, a major facility to support Cytotec was brought on stream in England. Searlc's tasks for the future are to j continue its aggressive research, divide its j efforts appropriately among discovery, j pre-clinical and clinical work, continue its j toxicological and formulation testing, and j further strengthen its marketing and sales j organization around the world, j "We intend to build one of the top j competitors in pharmaceuticals, world wide," said Mr. Harbison. "Time will tell, j but we are confident we have the elements ! in place to be a winner." j ! j j j . ! 17 i DSW 021650 STLCOPCB4006959 The NutraSweet Company he NutraSweet Company was made a free-standing j Tsubsidiary on January 1,1986, allowing the company to focus on continuing its outstanding j market success with NutraSweet brand sweetener, the leading low-calorie sweetener in the United States, Since j its approval by the U.S. Food and Drug Administration j in 1981, NutraSweet has grown to sales of over $700 j mpeiollpiolentihnro1u9g8h5o* uItttihseewstoimrladtendotwhautsme oproedtuhcatns 1c0o0ntmaiinlliinogn | NutraSweet. And the markets continue to grow. { Worldwide, more than 100 ! milBon people now ate I products containing HutmSmmt ' Including the period j before its acquisition | by Monsanto. : i DSN 021651 STLCOPCB4006960 The effect of NutraSweet on the growth of several food categories has been dramatic. After hot cocoa mixes sweetened with NutraSweet appeared on the market, sales of these products stopped declining and grew by about 25 percent. Powdered soft drinks were once a stagnant $650 million market. Since the introduction of NutraSweet brand sweetener in these prod ucts, their sales grew to $900 million in less than three years. Equal, a low-calorie tabletop sweetener made with NutraSweet and the company's entry into the food business, is another excellent example of market growth. Since Equal was intro duced in 1982, the tabletop sweetener market has grown from about $100 million to over two and one half times that amount; and Equal has captured over half of the dollar sales in this expanded market. But most dramatic has been the impact of NutraSweet on the soft drink industry. Until the introduction of NutraSweet in carbonated beverages in late 1983, the diet soft drink market had been growing at a moderate rate. Since that time, there has been a tremendous acceleration in this segment's growth. Currently, sugar-free brands are growing at an annual rate of 11 percent as compared to a 2 percent rate for sugar soft drinks. In 1985, sugar-free soft drinks accounted for about 25 percent of grocery store soft drink sales in the United States. Today, more than 45 sugar-free soft drink brands, including all the major brands, are sweetened 100 percent with NutraSweet. NutraSweet has become the industry's sugar-free sweetener of choice, j As with any successful product, there arc those who seek to make unsub stantiated charges against the product. NutraSweet is one of the most thoroughly tested food additives ever evaluated by the U.S. Food and Drug Administration (FDA) and has undergone over 100 scientific studies over a 20-year period. Regulatory and scientific authorities throughout the world have reviewed the data on NutraSweet and have found it to be safe for the general population. These authori ties include the FDA, the World FlealtH Organization, the Council on Scientific Affairs of the American Medical Associa tion, the Scientific Committee for Food of the Commission of the European Commu nities and the regulatory bodies of more than 50 nations. When NutraSweet was nationally launched, the decision was made to market it as a brand -- which was a first for a food ingredient. Food and beverage manu facturers carried the NutraSweet brand name on packaging and in advertising. A red and white peppermint swirl was created to identify products sweetened exclusively with NutraSweet brand sweetener. Marketing and advertising campaigns in 1985 were designed to develop the consumer's understanding of the benefits of NutraSweet, to promote recognition of the NutraSweet swirl logo, and to build consumer preference for brands sweetened 100 percent with NutraSweet. Today, some 98 percent of U.S. consumers are aware of NutraSweet. Further, 72 percent of the public has tried products containing . NutraSweet, and three-quarters of these U.S. consumers are repeat users. Sweeteners are not new to Monsanto over 85 years ago the Company's first product was saccharin. Today, Monsanto is excited at reentering this market with NutraSweet, one of the most successful new food ingredients in history. TIm rwl sod wWts pepptradst nrirl Wditlfte* products mcctMcd adotMi wttii NutrsSmeL @Nl/TRA^yiET] to DSW 021652 STLCOPCB4006961 Research and Development M onsanto's ability to improve the profitability of existing products and to discover new ones is the strongest in history. With over $500 million budgeted for research and development programs in 1986, the Company is well positioned to compete effectively, not only in today's marketplace, but two, five and ten years from now. Intimidating skills in chemistry, molecular biology, process engineering, life sciences and other fields are closely coupled to imaginative business strategies. Dr. Howard A. Schwrtdennan (left), drocunes potential Metecfaraiogy application* w#h Dr. Georgs A. Keyworth II (center), Science Advisor to the President, and Indian Prime Minister Ra)hr GandM at tbs national Academy ot Sciences, Washington, D.C. Dr. Philip Needleman (seated), Ahitnai Professor and Hsad of the Pharma cology Department at Washington University School of Merfidne, isolated and Identified atrial peptides now belag developed by Searta. According to Dr. Howard A.Schneiderman, Senior Vice President and Chief Scientist, Corporate Research and Development, "Monsanto has a powerful technological and scientific base on which to draw to ensure the economic future of the Company. A challenging and productive research environment attracts and keeps top scientists and engineers. As business objectives change, the supporting science and technology also change. But Monsanto's unswerving and durable commitment to good science remains the key to the corporation's technology and business strategy." Biotechnology and genetic engineer ing are important areas of research emphasis. An extraordinarily talented team of young scientists is looking for new ways to treat major human diseases, to improve meat and milk production and to enhance productivity in important agricultural crops. In each of these areas, Monsanto's biotechnology team has developed attractive product candidates which are moving steadily toward commercialization. Monsanto has established intimate associations with major research-based universities, such as Washington Univer sity, Oxford University and Rockefeller University, which have begun to pay divi dends by identifying new product leads and by expanding the scientific under standing needed to discover new products. New fibers, plastics, composites, high-performance polymers and polymer blends, coating materials, rubber chemicals and detergent materials are crucial areas i of major on-going research. In optimizing * Monsanto's traditional strengths, scientists ' and engineers are focusing on innovative j ways to shorten the time required to j develop products, including collaborative research with customers. In agriculture, new sources of product leads for herbicides and fungi cides come from both internal research and from aggressive licensing. Major efforts to increase the speed and effectiveness of screening candidate compounds have led to both improved processes to select candidate compounds and improved screens. While fundamental studies are essen tial building blocks for the future, there is a clear realization that exploratory proj ects must be directed toward the develop ment of important products for the market place. Relevant science, well executed on an urgent schedule, coupled with intense commercial development, are keys to a full pipeline of profitable new products. OSW 021653 STLCOPCB4006962 Monsanto 1985 Financial Report OSH 021654 STLCOPCB4006963 1985 Financial Report Contents Management Report Independent Auditors' Opinion Statement of Consolidated Income 23 23 24 Consolidated Results of Operations 25 Operating Unit Segment Data 27 Research and Development World Area Segment Data Quarterly Data Inflation-Adjusted Data Statement of Consolidated financial Position 30 31 32 33 34 Review of Liquidity and Capital Resources Statement of Changes in Consolidated financial Position Review of Sources and Uses of Funds 35 36 37 Statement of Consolidated Shareowners' Equity 38 Notes to Financial Statements 39 Significant Accounting Policies 39 Basis of Consolidation 39 Principal Acquisitions Restructuring Depreciation and Amortization Currency Translation Inventory Valuation Oil and Gas Activities Income Taxes Earnings per Share Supplemental Data Pension Plans 39 39 40 40 Year 40 Dollars in Millions 40 41 41 Funds Provided 41 From Operations 42 1983 $402 Short-Term Debt and Credit Arrangements 42 Long-Term Debt 42 Commitments and Contingencies 43 Capital Stock 43 Stock Option Plans 43 Segment Information 44 financial Summary 45 Unless otherwise indicated by the context, "Monsanto " means Monsanto Company and consolidated subsidiaries and "the Company" means Monsanto Company only. All dollars are in millions, except per share data. o Year____________________ 1983 Dollars in Millions $948 1984 $439 1985 $(98) ^aa 1984 $1,008 1985 $889 22 Monsanto Company and Subsidiaries DSM 021655 STLCOPCB4006964 Management Report Monsanto Company management is responsible for the fair presentation and consistency of all financial data included in this Annual Report. Where necessary, the data reflect management estimates. Management is also responsible for maintaining a system of internal accounting control to provide reasonable assurance that assets are safeguarded against material loss from unauthorized use or dispo sition and that authorized transactions are properly recorded to permit the preparation of accurate finan cial data. Cost-benefit judgments are an important consideration in this regard. The effectiveness of internal controls is maintained by: (1) personnel selection and training; (2) division of responsibilities; (3) establishment and communication of policies; and (4) ongoing internal review programs and audits. As ratified by shareowner vote at the 1985 Annual Meeting, Deloittc Haskins 8i Sells was appointed to examine, and express an opinion as to the fair presentation of, the consolidated financial statements. This opinion appears below. Monsanto's Audit Committee, consisting of five non-employee directors, meets with Controllership, Internal Audit and Deloitte Haskins 8c Sells personnel to review internal controls, financial reporting and accounting practices. Deloitte Haskins 8c Sells and internal auditors meet with the Committee, with and without management present, to discuss their examinations, the adequacy of internal controls and the quality of financial reporting. Richard J. Mahoney President and Chief Executive Officer* Francis A. Stroble Senior Vice President and Chief Financial Officer February 28, 1986 *Effective April l, 1986, Mr. Mahoney becomes Chairman of the Board and Chief Executive Officer. Independent Auditors' Opinion To the Shareowners of Monsanto Company: We have examined the statement of consolidated financial position of Monsanto Company and Subsidiaries as of December 31, 1985 and 1984, and the related statements of consolidated income, shareowners' equity and changes in financial position for each of the three years in the period ended December 31,1985. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. In our opinion, such consolidated financial statements present fairly the financial position of Monsanto/Company and Subsidiaries at December 31, 1985 and 1984, and the results of their operations and changes in their financial position for each of the three years in the period ended December 31,1985, in conformity with generally accepted accounting principles applied on a consistent basis. PjJnCtL f&d&j Saint Louis, Missouri February 28,1986 Monsanto Company and Subsidiaries 23 DSW 021656 STLCOPCB4006965 Statement of Consolidated Income (Dollars in millions, except per share) Net Sales Cost of goods sold Gross Profit 1985 $6,747 4,841 1,906 Marketing and administrative expenses Technological expenses Amortization of intangible assets Operating Income 919 548 88 1,555 351 Interest expense Interest income Other income -- net Income Before Unusual Item, Income Taxes and Extraordinary Items Restructuring cost -- net Income (Loss) Before Income Taxes and Extraordinary Items Income taxes Income (Loss) Before Extraordinary Items Extraordinary Items: Gain from repayment of debt Tax benefits from utilization of ex-U.S. loss carryforwards Net Income (Loss) (178) 63 23 (92) 259 (557) (298) (170) (128) 30 $ (98) Earnings per Share: Before extraordinary items Extraordinary items $ (1.67) 0.40 After extraordinary items $ (1.27) The above statement should be read in conjunction with pages 39 through 44 of this report. 1984 $6,691 4,839 1,852 722 446 7 1,175 677 (100) 92 38 30 707 707 268 439 $ 439 $ 5.42 $ 5.42 ] 1983 $6,299 4,734 1,565 : 681 ! 359 I 4i 1,044 521 (96) 73 72 49 570 570 201 369 33 $ 402 $ 4.48 0.41 $ 4.89 24 Monsanto Company and Subsidiaries DSW 021657 STLCOPCB4006966 Consolidated Results of Operations | Building for the Future Has a Pries Today ! The Company's principal long-term financial goal is | to improve return on shareowners' equity. To achieve ! that goal under current and projected economic condi| tions required taking bold steps that negatively | affected 1985 financial results. The two major steps ! taken were the acquisition of G. D. Searle Sc Co. and the completion of a companywide restructuring program. Monsanto's operating income for 1985 was $351 million, compared with $677 million in 1984. However, the costs associated with restructuring j Monsanto for the future resulted in a 1985 net loss j of $98 million, compared to 1984 net income of ! $439 million. Earnings per share for 1985 were a loss of $1.27, compared to income of $5.42 for 1984. operating income of the divested and discontinued product lines in 1985 were $931 million and $48 million, respectively. Key Strategic Objective Met with Searle Acquisition The acquisition of G. D. Searle Sc Co. in August 1985 accomplished a key corporate objective of becoming a major factor in the pharmaceutical industry: The acquisition provides resources to commercialize prod ucts resulting from Monsanto's pharmaceutical research activities. In addition, Searle's ongoing research activities complement those of Monsanto, adding to the number of new products expected in the future. Searle also brings to Monsanto the leading low-calorie sweetener -- NutmSweet. This product has rapidly established itself in the diet soft drink industry and other food categories, and is expected to continue to grow in the future. Searie's sales and operating income (after deducting intangible asset amortization expense) were $561 million and $30 million, respectively, for the August-December period of 1985. However, the interest expense associ ated with the debt incurred to finance the acquisition of Searle more than offset Searle's operating income. Major Restructuring AcconpBshod In the fourth quarter of 1985, the Company's Board of Directors approved a restructuring program and reorganization of Monsanto with the objective of redirecting Monsanto's financial and employee resources toward businesses with higher growth potential. These actions included withdrawals from selected low-return businesses and production facili ties, sales of certain assets which no longer had strategic importance and reductions in the number of employees. In connection with the approved plan, the Company provided $1,055 million for asset write downs and costs associated with the restructuring program. This charge was reduced by gains on the sale of Monsanto's oil and gas operations and the Seal Sands, United Kingdom, chemical intermediates plant, resulting in a net restructuring cost of $557 million ($341 million after tax, or $4.43 per share). Sales and Weak Agricultural and Semiconductor Economies i Impact Operating Profitability Operating income for 1985 declined 48 percent from 1984, due to weak economic conditions in several of Monsanto's markets, particularly agriculture and semiconductors. Continuing problems in the domestic farm econ omy significantly affected sales of Lasso and Roundup herbicides. Sales volume of Lasso herbicide, which is sold primarily in the United States, was 20 percent lower than 1984. Worldwide usage of Roundup herbi cide increased in 1985, but sales volume decreased 2 percent as United States customers reduced inven tory levels. Sales of Roundup continued to grow in all other world areas. The market for Monsanto's silicon materials was adversely affected by the depressed semiconductor industry. Based on leading industry indicators, the Company believes that the downturn reached its lowest point in the fourth quarter of 1985, and that 1986 should show at least moderate recovery in demand for high value, electronic-grade silicon wafers. Actions taken in 1985 have significantly lowered Monsanto's break-even point in plant capacity utiliza tion, which should favorably affect future profitability when the silicon materials markets return to higher demand levels. Monsanto's net income was also negatively affected by increased international competition for certain chemical-based products. The strength of the U.S. dollar throughout most of the year, though reduced somewhat from 1984 year-end levels, con tinued to fuel heavy imports from international competitors. Although the U.S. dollar had begun to return to more normal levels by year-end, Monsanto's United States markets will be slow to recover as international competitors have firmly established themselves in these markets. Monsanto Company and Subsidiaries 25 OSW 021658 STLCOPCB4006967 Sates Up Slightly Sales in 1984 increased 6 percent over 1983 on a Net sales increased slightly in 1985 to $6,747 million. volume increase of 5 percent, net of divestitures, and The additional 1985 net sales of the acquired Searle an increase of 1 percent due to higher selling prices. businesses more than offset the volume and pricing The volume increase resulted from the strong declines in other businesses. Sales volume declined economic recovery in the first half of 1984, which 4 percent, excluding divestitures and the acquisition affeaed most product lines. Market conditions weak of Searle. Selling prices in 1985 declined 3 percent. ened substantially later in the year, however, because Most operating segments had lower 1985 sales, of an economic slowdown in several industrial sectors reflecting reduced demand and increased competition and the persistent strength of the U.S. dollar, which for certain products. increased international competition and unfavorably The gross profit margin was 28 percent, affeaed the translation of ex-U.S. earnings into unchanged from 1984, despite lower levels of busi U.S. dollars. Net income in 1984 was 9 percent higher ness activity and pricing pressure from ex-U.S. com than the preceding year, as a result of the strong first petitors. Monsanto's asset management and cost half performance. Net income in 1983 was increased reduction programs, coupled with lower raw material by a $33 million extraordinary tax benefit from utili costs and the higher margins associated with Searle's zation of prior years' ex-U.S. loss carryforwards. products, were the principal contributing factors to maintaining these relatively good margins. Manufac Analysis of Change in Earnings per Share - turing facilities operated at approximately 70 percent Better (Worse) of capacity, down from 75 percent in 1984. Raw material costs declined approximately 3 percent. The year-to-year increase in marketing and administrative expenses refleas the inclusion of Searle's businesses, with their heavier marketingrelated expenses. Technological expenses in 1985 increased 23 percent over 1984, reflecting continuing commit ment to research and development programs and the acquisition of Searle. R8cD expenses were 7 percent of sales in 1985, compared with 6 percent in 1984 and Sales Related Factors: Selling prices Sales volume and mix Total Sales Related Factors Cost Related Factors: Raw material prices Other manufacturing costs Marketing and administrative expenses Technological expenses 198S vs. 1984 1984 vs. 1983 $(1.18) (1.98) (3.16) $ 0.56 1.07 1.63 0.52 0.40 (0.18) (0.24) 0.29 0.38 (0.27) (0.65) 5 percent in 1983. The increase in 1985 was concen trated in expenditures direaed toward emerging technologies. Amortization of intangible assets increased substantially as a result of acquired Searle patents and, to a lesser extent, goodwill and other intangible Total Cost Related Factors Other Factors: Acquisitions Operations Intangible asset amortization Divestitures 0.50 (0.25) 0.75 (0.62) 0.03 (0.03) (0.02) (0.10) assets. Interest expense was also substantially higher in 1985, reflecting the cost of the debt issued to acquire Searle. Interest income declined in 1985, Total Other Factors Operating Income 0.16 (2.50) (0.15) 1.23 reflecting lower interest rates and lower average levels of security investments. Net income in 1985 included a $30 million extraordinary gain from the repayment, at a discount, of $168 million in long-term debt. Net income as a percent of average shareowners' equity was a negative Interest expense: Acquisition related Other Interest income Other income -- net Effective tax rate Shares outstanding (0.84) 0.24 (0.22) (0.11) 0.65 0.12 -- (0.03) 0.15 (0.27) (0.23) 0.09 3 percent compared with 12 percent in 1984. Exclud ing the net restructuring cost and the extraordinary gain from repayment of debt, 1985 income as a percent of average shareowners' equity was 6 percent. Change in Income Before Unusual and Extraordinary Items Restructuring cost -- net Extraordinary items (2.66) (4.43) 0.40 0.94 (0.41) Change in Earnings per Share $ (6.69) $ 0.53 M Monsanto Company and Subsidiaries DSW 021659 STLCOPCB4006968 Operating Unit Segment Data Agricultural Products: Crop Chemicals Animal Sciences Chemicals Electronic Materials Fisher Controls NutraSweet Pharmaceuticals Oil and Gas Biotechnology Product Discovery Corporate Items and Eliminations Total consolidated 1985 Net Sales 1984 1983 $1,073 79 4,051 137 652 317 262 172 $1,256 82 4,360 220 550 15 203 $1,167' 83 4,148 120 535 241 455 $6,747 $6,691 $6,299 198S Operating Income (Loa) 1984 1983 $298 (55) 234 (67) 36 58 (84) 16 (31) (54) $351 $438 (49) 336 4 27 (30) 27 (24) (52) $677 $400 (33) 230 (56) 24 (15) 41 (21) (49) $521 1985 $110 32 128 16 20 11 96 31 26* $470 ' Corporate R&D expenses are allocated on a weighted average basis of investment to operating units in determining operating income (loss). Research and Development 1984 1983 $107 22 131 14 23 $ 78 14 112 14 13 24 15 24 21 25' 23* $370 $290 Agricultural Products: Crop Chemicals Animal Sciences Chemicals Electronic Materials Fisher Controls NutraSweet Pharmaceuticals Oil and Gas Biotechnology Produa Discovery Nonoperating Assets Total consolidated 1985 Total Assets 1984 1983 $1,061 174 2,982 302 636 1,862 1,438 33 389 $1,236 184 3,222 280 536 80 578 31 226 $1,214 187 3,201 253 503 3 543 15 508 $8,877 $6,373 $6,427 Capital Expenditure! 1985 1984 1983 $ 84 31 291 55 53 4 33 85 3 6 $645 $ 88 31 279 47 32 7 107 17 6 $614 $109 60 213 26 29 4 101 15 3 $560 Depredation and Amortization 1985 1984 1983 $ 89 21 248 37 28 73 39 59 2 3 $599 $ 80 20 273 30 21 $ 73 16 298 28 20 7 69 1 2 $503 1 85 1 1 $523 The above data should be read in conjunction with the "Segment Information" note to the financial statements on page 44. The Company realigned its financial reporting of Operating Unit Segments to closely align with the recent reorganization and to better reflea the future direaion of Monsanto's operations following the acquisition of G. D. Searie Sc Ca The fibers and inter mediates, industrial chemicals, polymer products and most of the fabricated products businesses have been combined to form a new Chemicals segment. Two new segments, Pharmaceuticals and NutraSweet, include the acquired operations of G. D. Searie Sc Co. The Electronic Materials business has been made a separate segment and the separations business, previ ously part of fabricated products, has been transferred to and combined with Fisher Controls, because they serve similar markets. The businesses in the former Biological Sciences segment have been realigned with the animal products now being separately reported as Animal Sciences, the Health Care Division has been merged with Searie and included in the Pharmaceuti cals segment and other products have been transferred to the Chemicals segment. Biotechnology Produa Discovery represents the Corporate basic RScD effort in biotechnology, a major thrust of the Company. Monsanto Company and Subsidiaries 27 OSW 021660 STLCOPCB4006969 i-r " *'* ........... . u Crop Chemicals Net Sales tition from ex-U.S. manufacturers. Operating losses increased over the three year period as a result of 1985 1984 1983 significant research expenses, along with expanded Herbicides and other agricultural chemicals $1,073 $1,256 marketing efforts. Significant progress continues to $1,167 be made in one of the Company's first biotechnol Sales and operating income for 1985 declined 15 and 32 percent, respectively, reflecting the lower sales volumes and prices in certain products. Sales volume of Lasso herbicide, primarily used in the United States during the spring planting season, de creased 20 percent, due to the weak United States farm economy. In addition, the uncertain demand for 1986 resulted in lower fourth quarter 1985 sales, when customers historically have purchased herbi ogy products, bovine growth factor, which research indicates increases the milk production of cows. It is expected the product will be accepted for commercial sale in the United Kingdom in the late 1980s. For 1984, sales were essentially level with the prior year as higher volumes were offset by lower sell ing prices, resulting from ex-U.S. competition. The continuing heavy R8cD and facility start-up costs resulted in an operating loss for both 1984 and 1983. cides in advance of the spring planting season. Worldwide usage of Roundup herbicide increased an Chemicals again in 1985, but sales volume declined 2 percent as United States customers reduced inventory levels. Strong demand in other world areas was more than offset by lower sales in the United States. Herbicide sales in Europe and Latin America benefited from unusually dry weather after harvest, which allowed farmers to apply Roundup herbicide to re-emerged weeds. The weak farm economy adversely affected Roundup herbicide sales in the United States. The United States Environmental Protection Net Sales Detergent materials Engineered products Man-made fibers Plastics Resin products Rubber chemicals and instruments Specialty chemicals 1985 $ 550 251 1,080 804 637 283 446 1984 $ 577 281 1,194 874 693 310 431 1983 $ 540 223 1,170 809 742 279 385 Agency (EPA) has begun their Special Review to In 1985, sales and operating income declined 7 and ! determine whether Lasso herbicide may cause an 30 percent, respectively, as compared with 1984. | unreasonable adverse effect on humans or the envi Intense import competition and stagnant United States ! ronment. That review should continue through 1986. economic sectors associated with many of the Compa- i Pending the review results, Monsanto and the EPA ny's product lines resulted in lower selling prices and I agreed to modifications in the label for Lasso, which volumes for many products, including detergent mate- j do not significandy affect the majority of uses for rials, man-made fibers, rubber chemicals, plastics and ; Lasso. Monsanto's tests confirm that Lasso poses no resin products. The intensive import competition was j unreasonable adverse effects to humans or the envi due to the continuing strength of the U.S. dollar. In ; ronment, and the Company believes the EPA review addition, industry capacity expansion in the last half j will result in a similar conclusion. The Canadian of 1984 resulted in competitive pressures on styrene j Minister of Agriculture is reviewing Lasso herbicide monomer prices and volumes. Nylon fiber profitabil- j use in that country. Pending completion of the review, ity was also lower in 1985 versus 1984 from both j the Minister of Agriculture decided not to extend the lower selling prices and, to a lesser extent, sales ; temporary registration of Lasso for 1986. The Compa volume. Sales to the automotive industry remained j ny has appealed that decision. No significant effect ' relatively good during 1985. Overall, chemical plant ; on operating results is expected from these reviews. capacity utilization rates were lower in 1985. j Sales and operating income in 1984 increased However, the resulting higher unit manufacturing ! 8 and 10 percent, respectively. Sales volumes of Roundup and Lasso herbicides both increased costs were partially offset by the benefits from cost reduction programs and lower raw material costs. j j 6 percent year to year. The higher operating income During the fourth quarter of 1985, the decision was from greater sales volume more than offset the made to withdraw from selected low-return businesses increased research and development expenses. and production facilities. In December 1985, the Seal 1 BB Animal Sdencss Sands chemical intermediates plant was sold. Sales of ! these divested and discontinued chemical product lines i Net Sales Animal products 1985 1984 1983 in 1985 were $645 million. Sales in 1984 increased 5 percent over 1983 , $ 79 $ 82 S 83 due to strong sales volumes of branded nylon carpet ! Sales for 1985 declined 4 percent. Sales volume of fibers, higher sales volumes of products to the automo-1 Alimet animal feed supplement continued to grow, rive and housing industries, industrial chemicals and i but selling prices were negatively affected by compe^ increased construction project activity in Monsanto ; 28 Monsanto Company -aid Subsidiaries DSW 021661 STLCOPCB4006970 ! Enviro-Chem Systems, Inc. Operating income increased ; by continuing weak European performance, caused 46 percent, reflecting strong demand and improved by the adverse impact of the strong U.S. dollar on pricing for nylon carpet fibers and intermediates and United States exports and the depressed capital improved sales volumes of other products. The higher goods market. ! sales volumes also resulted in improved plant capacity ; utilization. In addition, 1984 was favorably affected m NutraSweet : by the elimination of 1983 divested business losses. Net Sales Co GO LA m Electronic Materials NutraSweet low-calorie sweetener produas and nonprescription pharmaceutical products $317 Net Sales Electronic-grade silicon materials 1985 $137 1984 $220 1983 $120 j Sales declined 38 percent in 1985, reflecting sharply lower demand for silicon wafers in the depressed semiconductor market. This resulted in a substantial operating loss in 1985. Based on leading indicators in *For the five month period, August-December 1985. This segment includes the NutraSweet, Equal and U.S. consumer products businesses acquired as part of Searle. The NutraSweet business, including Equal, is now operated as a separate subsidiary, The NutraSweet Company. Operating income in 1985 reflects strong NutraSweet profitability for the August- : [ ; j | the semiconductor industry, the Company believes December period, partially offset by amortization that the downturn reached its lowest point in the expense related to intangible assets recorded as part fourth quarter of 1985, and that 1986 should show of the Searle acquisition. Sales of NutraSweet in at least moderate recovery in demand for high value, 1985, including the period prior to its acquisition by electronic-grade silicon wafers. Actions taken during Monsanto, were 27 percent higher than 1984. The 1985 have significantly reduced Monsanto's break-even conversion of the carbonated soft drink industry from point in plant capacity utilization. This should result a NutruSweet/saccharin formulation to 100 percent in better performance when the silicon market returns NutraSweet was a major factor in the increase. In ! , ! i to higher levels. Electronic materials had strong growth in 1984, with silicon wafer sales increasing 83 percent, reflect 1985, a $130 million NutraSweet manufacturing facil ity was completed in Augusta, Georgia. The majority of the consumer products business was sold in ing both higher volume and prices. These factors, - December 1985. along with higher silicon materials plant capacity utilization, resulted in a $60 million operating profit Eaa Pharmaceuticals improvement over 1983. Net Sales 1985* 1984 on Fisher Controls Pharmaceutical products $262 $15 Net Sales Valves, regulators, electronic process controls and gas separation systems 1985 1984 1983 $652 $550 $535 Sales increased 19 percent in 1985. Sales of PR5VOX instrumentation systems continued to grow signifi cantly, and selling prices for other products were higher in 1985. Demand for control valves continues to be somewhat weak in North America. The Euro pean control valve business is strong and continues to grow, however, shipping problems hampered that growth in 1985. Sales of gas separation systems also grew significantly. Operating income in 1985 improved 33 percent as a result of these positive factors, partially offset by higher levels of marketing effort associated with launching PRoVOX, an operat ing loss of a small 1985 acquisition and currency devaluations in Mexico. Sales and operating income in 1984 increased 3 and 13 percent, respectively, over 1983. Improved operations in North and Latin America and higher sales of gas separation systems were offset by a one time acquisition-related technological expense and *Includes Searle for the five month period, August-December 1985. This segment comprises the pharmaceutical products of Searle and the former Monsanto Health Care Divi sion. The operating loss in 1985 refleas heavy R&cD j efforts and the amortization expense related to intan- ; gible assets recorded as part of the Searle acquisition. Including the sales of Searle prior to acquisition, sales of pharmaceutical produas were virtually the same in j 1985 as compared to 1984. Increased sales of Calart, j Nitrodisc, oral contraceptives and Theophylline-24 j were offset by declining sales of Searle's mature prod- j ucts and negative ex-U.S. currencies' impaa. Sales j of Searle's pharmaceutical products continue to be i affeaed by competition from new drugs and intensi- tied generic drug competition. Cytotec, Searle's new i ulcer treatment product, was introduced in Switzer land, Singapore and Malaysia during 1985, and Food and Drug Administration approval is being sought for introduction to the United States market. The 1984 and 1983 operating losses reflea Monsanto's pharmaceutical related research effort and the costs associated with the establishment of the former Health Care Division. Monsanto Company and Subsidiaries DSW 021662 STLCOPCB4006971 so OH and Gas m Biotechnology Product Discovery Net Sales Oil and gas 1985 $172 1984 S203 1983 $241 Reduced oil and gas volumes and prices resulted in lower sales and operating income in 1985 as compared with 1984, and in 1984 as compared with 1983. As part of Monsanto's restructuring program to divest of non-strategic businesses, the Company sold its oil and gas business in December 1985 (see notes to financial statements). 1985 1984 1983 Research and development expenses $31 $24 S21 These expenses relate to basic and applied biotech- i nological research aimed at developing new biotechnology-based product opportunities that are further developed and commercialized by the crop chemicals, animal sciences and pharmaceuticals busi- j nesses. The cost of the current biotechnology effort I directly related to crop chemicals, animal sciences and j pharmaceutical activities is included as an expense in i those segments. Continuing high levels of research j have resulted in increasing expenses over the three j year period. Research and Development In recent years, Monsanto's research has focused on emerging technologies -- biotechnology, plant biology, animal nutrition, human health care and electronic materials. In addition, substantial research efforts continue in support of traditional areas of strength, such as agricultural chemistry, catalysis, polymer science, industrial chemicals, chemical engineering systems and applications research, and in support of NutraSweet low-calorie sweetener. The continuing growth in research and develop ment expense is evidence of Monsanto's commitment to the strategy of developing new products and market opportunities from emerging technologies. For 1985, approximately one-half of total R&D expenses were directed toward these emerging technologies. In 1985, total R&D expenses increased to a record level and were 7 percent of sales, compared to 6 and 5 percent in 1984 and 1983, respectively. R&D expenses for 1985 include only five months of Searle's R&D expenses. Total R&D expenses for 1986 are expected to approximate $520 million. Acquisition of Saaria Expands Research Capabilities G. D. Searle & Co. significantly expands and complements Monsanto's research capabilities in j j biotechnology and human health care, adding both experienced professionals and facilities to Monsanto's existing research organization. In addition, Searle provides Monsanto with established organizations skilled at developing and marketing products that flow from the research program. The combination of the Company's strengths in basic and applied research in molecular biology and biotechnology, Washington University's powerful biomedical discovery capabili ties and Searle's strengths in product development and marketing will further Monsanto's goal of becoming a leading supplier in the pharmaceutical industry. This research focuses on diseases of the cardiovascular, gastrointestinal, central nervous systems and immune systems. i ! 30 Morumto Company and Subiidiarm DSW 021663 STLCOPCB4006972 World Area Segment United States Europe-Africa Canada j Latin America Asia-Pacific 1 Unallocated corporate items 1 Affiliates' eauity income included ! in individual world areas 1 Total consolidated 1985 $4,451 1,073 310 360 553 1984 $4,498 968 292 360 573 Net Sales 1983 $4,243 943 274 305 534 $6,747 $6,691 $6,299 Operating Income (Loss) 1985 1984 1983 $222 87 66 26 29 (54) $516 93 61 22 55 (52) $452 44 51 11 27 (49) (25) $351 (18) $677 (15) $521 As required by generally accepted accounting princi ples, world area segment data (page 44) in the notes to financial statements are prepared on an "entity basis." This means sales ami income of the legal entity are assigned to the area where the entity is located (e.g., a sale from the United States to Latin America is reported as a United States sale). The above table summarizes Monsanto's results on an "area basis" wherein sales and income are assigned to the customer location (e.g., a sale from the United States to Latin America is reported as a Latin American sale). an United States Approximately two-thirds of Monsanto's worldwide sales are to customers in the United States. Sales for 1985 declined 1 percent. However, on a comparable year-to-year basis excluding the acquisition of G. D. Searle & Co. and divestitures, sales declined approximately 10 percent. A combination of a diffi cult United States farm economy, the downturn in the semiconductor materials market and stiff competition from ex-U.S. manufacturers resulted in lower 1985 sales. The strength of the U.S. dollar and the resulting increased competition from ex-U.S. manufacturers continued to negatively affect prices and volumes of many chemical-based product lines. These factors, coupled with lower plant capacity utilization and higher levels of technological expense, resulted in operating income declining sharply from $516 million in 1984 to $222 million in 1985. In October 1985, the Company announced a restructur ing program and in December 1985, the Company sold its oil and gas business (see notes to financial statements). For 1984, sales increased 6 percent from 1983 due to the stronger economy and the discontinuation of the 1983 United States government's Payment-in Kind (PIK) agricultural program. Operating income in 1984 increased 14 percent due to improved sales volume and better plant capacity utilization, offset to some extent by greater import competition from exU.S. competitors as a result of the strong U.S. dollar. mm Europe-Africa Sales in 1985 increased 11 percent over the preceding year on the strength of chemicals, crop chemicals and Fisher Controls sales and the inclusion of Searle's businesses for the August-December period. Sales volumes increased as European customers had higher production levels to meet their increased competitive ness with United States manufacturers. Operating income, however, declined 6 percent due to the higher operating expenses of the former Health Care Divi sion. The strong U.S. dollar hurt the competitiveness of United States exports, but benefited Monsanto's sales of European manufactured products. In December 1985, the chemical intermediates plant at Seal Sands, United Kingdom, and Monsanto's North Sea oil and gas properties were sold (see notes to financial statements). Sales in 1984 increased 3 percent as compared to 1983, reflecting the improved European economic conditions. Operating income for 1984 more than doubled, benefiting from strong acrylonitrile and nylon intermediates profits, and increased sales of Roundup herbicide. n Canada Sales in 1985 increased 6 percent and operating income increased 8 percent from the inclusion of Searle's operating results and sales volume increases in many other product lines. The higher operating income was partially offset by the adverse trans lation effect of the strong U.S. dollar. During 1985, Monsanto benefited from strong Roundup herbicide sales, increased sales to the automotive industry and higher sales of Fisher Controls valves and PRoVOX systems. Avadex herbicide sales volumes, however, declined due to inventory reductions by distributors. Sales and operating income increased in 1984 as compared to 1983 from good detergent product and crop chemicals sales. Monsanto Company and Subsuiiarias 31 OSW 021664 STLCOPCB4006973 wm Latin America Sales in 1985 were level year-to-year, but operating income increased 18 percent. The higher profitability resulted from significant currency translation gains of Monsanto's Mexican equity affiliate, Industrias Resistol, S.A. This was partially offset by lower agricultural products sales in Brazil. Sales in 1984 increased 18 percent from the prior year, due primarily to higher agricultural products sales in Brazil. Operating income in 1984 doubled to S22 million due to higher earnings of Industrias Resistol and higher agricultural products sales. m Asla-Pacfflc Sales decreased 3 percent and operating income decreased 47 percent. Product mix and the effect of the strong U.S. dollar on the competitiveness of United States exports were negative factors. In addi tion, sales and profitability were adversely affected by the translation effect on ex-U.S. currency denomi nated results, especially the products manufactured and sold by the Company's Australian subsidiary. Agricultural product sales and profitability were lower in 1985 due to a drought in Australia and lower ship ments to the People's Republic of China. Electronic materials operating results also were lower than the prior year. Sales were higher in 1984 principally due to agri cultural products sales volume growth. Operating income in 1984 was up 104 percent over 1983, due to improved results in Australia and increased sales of agricultural products. A reconciliation of 1985 area basis sales and operating income to ex-U.S. entity basis sales and operating income (reflected in the notes to financial statements) follows: Ex-U.S. entities U.S. exports U.S. expenses allocated to ex-U.S. products Ex-U.S. affiliates' equity income Less: Inter-area eliminations Ex-U.S. entities' operating income on sales to U.S. Ex-U.S. area basis U.S. area basis Affiliates' equity income included in individual world areas Unallocated corporate expenses Total consolidated Net Sales $2,114 902 Operating Income $216 43' (720) (42) 27 2,296 4,451 (36) 208 222 $6,747 (25) (54) $351 'Net ofallocated costs. Quarterly tfafa `~ Net Sales Gross Profit Income (Loss) Before Extraordinary Item Net Income (Loss) . Earnings per Share Before Extraordinary Item After Extraordinary Item 1985 1984 1985 1984 1985 1984 1985 1984 1985 1984 1985 1984 first Quarter $1,624 1,732 441 527 87 175 87 175 ....- - Second Quarter $1,627 1,801 471 535 124 145 124 145 1.12 1.60 2.13 1.77 1.12 1.60 2.13 1.77 .....---------- ----- . ... __ ----- Third Quarter $1,741 1,599 470 413 31 78 31 78 Fourth Quarter $1,755 1,559 524 377 (370) 41 (340) 41 Total Year $6,747 6,691 1,906 1,852 (128) 439 (98) 439 0.42 (4.81) (1.67) 0.97 0.55 5.42 0.42 (4.41) (1.27) 0.97 0.55 5.42 Crop chemicals sales historically are concentrated in the first half of the year and generally are more profit able than sales of other segments. Net income in each quarter of 1985 was lower than 1984 due to the diffi cult economic environment for United States chemicalbased industries that has persisted since mid-1984, and the currendy depressed United States farm economy. The second half of 1985 financial results include G. D. Searle 5c Co., acquired in August 1985. Fourth quarter 1985 results were affected by the exclusion of the operating results of divested and discontinued product lines. The only 1985 major nonrecurring or unusual items affecting net income were in the fourth quarter and were the net restructuring cost of $341 million, or $4.43 per share, and the gain from repayment of debt of $30 million, or $0.40 per share. There were no major nonrecurring or unusual items in 1984. 32 Monsanto Companyand Subsidiaries DSW 021665 STLCOPCB4006974 Adjusted Data Year Ended December 31,1985 Historical Cost Current Cost Net sales Cost of goods sold, excluding depredation Depreciation expense All other expenses -- net Income taxes Net income before restructuring cost and extraordinary item Restructuring cost -- net (after tax) Loss before extraordinary item $6,747 4,364 477 1,647 46 213 (341) $ (128) $6,747 4,365 632 1,647 46 57 (341) $ (284) Current cost amounts shown above attempt to mea sure the effect of inflation on cost of goods sold and depreciation. Other historical amounts, including income taxes, are not adjusted for inflation to arrive at current cost net income. All current cost amounts are stated in average 1985 dollars using the U.S. Consumer Price Index (the "translate-restate" method). The 1985 increase in current cost of inventories and property, plant and equipment was $84 million. At December 31,1985, the current cost of inventory and property, plant and equipment (net of accumu lated depreciation) was $1,505 million and $3,452 million stated in year-end 1985 dollars. The current cost of inventories was estimated using the FIFO (first-in, first-out) inventory method. Cost of goods sold on a current cost basis was approximated using the LIFO method, or similar techniques. The current cost of property, plant and equipment was estimated generally by using construc tion and equipment indexes. Current cost accumulated depreciation and related expenses were estimated using the same overall method and lives as used on a historical cost basis. Sdctod Financial Data 1985 1984 1983 1982 1981 Historical cost, as reported1: Net sales Income (loss) -- Before extraordinary items -- Per share Total assets Long-term debt Dividends per common share $6,747 (128) (1.67) 8,877 2,087 2.45 $6,691 439 5.42 6,373 824 2.25 $6,299 369 4.48 6,427 937 2.075 $6,325 329 4.10 6,077 1,003 1.975 $6,948 445 5.75 6,069 1,110 1.875 Current cost (average 1985 dollars): Net sales Income (loss) -- Before extraordinary items -- Per share Purchasing power gain on monetary items Increase in speafic prices of inventory and property over (under) increase caused by general inflation Aggregate foreign currency adjustment, net of taxes Net assets $6,747 (284) (3.69) 66 (108) 97 4,164 $6,930 309 3.81 33 1 (148) 4,844 $6,802 289 3.51 31 (243) (107) 5,026 $7,050 106 1.33 37 (244) (184) 5,218 $8,218 272 3.51 116 (14) 5,771 Other data (average 1985 doOan): Dividends per common share Year-end common stock price Average consumer price index $ 2.46 46.99 322.2 $ 2.34 44.94 311.1 $ 2.25 55.86 298.4 $ 2.21 42.02 289.1 $ 2.24 40.13 272.4 iIn 1982, the requirements of Statement of Financial Accounting Standards No. 12, "Foreign Currency Translation," were adopted. Monsanto Company and Subsidiaries 33 DSW 021666 STLCOPCB4006975 Statement bf Consolidated Financial Position (Dollars in millions, except per share) Assets Current Assets: Cash, time deposits and certificates of deposit Short-term securities, at cost which approximates market Trade receivables, net of allowances of $42 in 1985 and $49 in 1984 Miscellaneous receivables and prepaid expenses Deferred income tax benefit Inventories Intangible Assets, net of accumulated amortization of $110 in 1985 and $33 in 1984 Investments in Affiliates Other Assets Property, Plant and Equipment, at Cost: Land Buildings Machinery and equipment Mineral rights and oil and gas properties Construction-in-progress Less accumulated depreciation Total Assets UabHftfas and Shareowners' Equity Current Liabilities: Accounts payable Wages and commissions Income and other taxes Miscellaneous accruals Short-term debt Long-Term Debt Deferred Income Taxes Other Liabilities Shareowners' Equity: Common stock -- authorized, 200,000,000 shares, par value $2; issued, 82,197,097 shares in 1985 and 1984 Additional contributed capital Accumulated currency adjustment Reinvested earnings Less treasury stock, at cost (5,444,544 shares in 1985 and 3,916,071 shares in 1984) Total Liabilities and Shareowners' Equity The above statement should be read m conjunction with pages 39 through 44 of this report. n^-- At December 31 j' 1985 1984 j $ 195 98 1,218 402 267 1,097 1 S 149 310 1,078 181 40 839 3,277 2,597 2,199 164 203 123 i 119 160 101 961 5,460 34 284 6,840 3,806 3,034 $8,877 81 732 5,094 765 247 6,919 3,545 3,374 $6,373 $ 522 129 348 675 704 2,378 2,087 584 421 164 854 (191) 2,824 3,651 244 3,407 $8,877 $ 497 110 ! 69 249 277 1,202 824 661 52 164 855 (319) 3,110 3,810 176 3,634 $6,373 34 Monsanto Company end Subsidiaries DSW 021667 STLCOPCB4006976 Review of Liquidity and Capital Resources I Financial Strength Demonstrated Monsanto's strong financial position, which resulted from the Company's comprehensive asset manage ment and cost reduction programs, was demonstrated in the acquisition of G. D. Searle & Co. in 1985. This strong financial position enabled the Company to secure a $3.0 billion line of credit, which was used to finance initially the $2,754 million acquisition of Searle. Debt Reduction Program on Target To restore debt levels and financial ratios to accept able levels after the Searle acquisition, the Company advanced the program to dispose of several businesses and assets that did not match Monsanto's long-term strategies. During 1985, the sales of such businesses and facilities generated gross cash proceeds of $1,612 million, which were used primarily to reduce the debt incurred in the acquisition of Searle. At yearend 1985, the long-term debt to total capitalization level was 38 percent, as compared with 18 and 20 percent in 1984 and 1983, respectively. Manage ment believes the long-term debt to total capitaliza tion ratio should approximate 33 percent over time. The interest coverage ratio (times interest earned) was affected by the debt incurred to acquire Searle and by lower earnings. That ratio (excluding the cost of the restructuring program, the extraordinary gain and the effect of capitalized interest) was 2.3 in 1985, as compared to 6.9 in 1984 and 5.3 in 1983. Monsanto's current ratio (current assets divided by current liabilities), an indicator of liquidity, was 1.4:1 at year-end 1985, compared to 2.2:1 in 1984. Management believes a 2.0:1 ratio is desirable. Work ing capital was $899 million at year-end 1985, com pared to $1,395 million in 1984. Working capital was reduced by higher short-term debt and by restructur ing cost accruals, net of related income tax benefits. Inventories increased principally due to the acquisi tion of $earle. Receivables increased due to die acquisition of Searle and a $140 million miscellaneous receivable, which was collected in January 1986, related to the sale of assets. The Company has available various short and medium-term bank credit lines, which are discussed in the "Short-Term Debt and Credit Arrangements" and "Long-Term Debt" notes to the financial statements (page 42). The Company has made use of pollution control and industrial development bonds to finance qualified projects. Pollution control and industrial development bond obligations were 13 percent of all outstanding long-term debt at year-end 1985. To a limited extent, Monsanto has used other forms of financing, princi pally lease arrangements and joint venture arrange ments, when the effective interest cost is attractive or the nature of the capital project requires their use. Monsanto's assets generally are free from lien and not used to collateralize debt. Intangible assets substantially increased as a result of the acquisition of Searle. The assets of Searle were recorded at their estimated fair values at the date of acquisition, and included patents ($1,265 million), goodwill ($582 million) and other intangible assets ($319 million). Patents are being amortized over their legal lives (approximately 8 years); goodwill and other intangible assets are being amortized over their estimated useful lives (approximately 40 and 13 years, respectively). Property, plant and equipment in 1985 reflect the addition of Searle's assets, the sale of Monsanto's oil and gas properties and the $eal $ands, United Kingdom plant, and the write-down to estimated fair values of other facilities to be shut down or sold at less than book value under the restructuring program. The second half 1985 weakening of the U.3. dollar, relative to ex-U.S. currencies in which Monsanto conducts business, resulted in the accumu lated currency adjustment account decreasing to $191 million at year-end 1985. Currency adjustments are accumulated in this account until the related ex-U.S. investment is sold or liquidated. Ksy Fbiandai Statistics TO>rkmg Capital (Current assets less current liabilities) Current Ratio (Current assets divided by current liabilities) Percent of Long-Term Debt to Total Capitalization* Percent of Long-Term Debt to Total Shareowners' Equity *Total capitalization is tht sum of long-ttrm dabt plus shareowners' equity. 1985 $899 1.4 38% 61% 1984 SUM 2.2 18% 23% Montanto Company and Subsidiaries JS OSW 021666 STLCOPCB4006977 Statement of Changes in Consolidated Financial Position (Dollars in millions) Sources (Uses) of Funds Operations: Income (loss) before extraordinary items Charges not using (credits not providing) funds: Depreciation and amortization Deferred income taxes Other Restructuring cost -- net (after tax) Funds provided from operations, before changes in working capital and extraordinary items Investment and Other Transactions: Extraordinary items Working capital changes: Trade receivables Inventories Other current assets Accounts payable and accrued liabilities Short-term debt Total working capital changes Foreign currency adjustments on working capital Property, plant and equipment additions Net proceeds from investment and property disposals (gross proceeds of $1,612 in 1985) Repayment of short-term acquisition debt Acquisitions and investments (other than Searle) Other Acquisition of Searle: Acquisition financing Searle assets and liabilities acquired: Current assets, excluding cash Intangible assets Other noncurrent assets Current liabilities Noncurrent liabilities Searle cash, time deposits and certificates of deposit at acquisition financial Transactions: Long-term financing Long-term debt reduction "Treasury stock purchases Dividends Increase (Decrease) in Funds 1985 $ (128) 599 93 (16) 341 889 30 2 (54) (258) 28 (108) (390) 69 (645) 1,402 (1,154) (78) 82 (684) 2,754 (549) (2,166) (1,023) 828 372 216 415 (723) (91) (188) (587) $ (166) Increase (Decrease) in Elements of Funds: Cash, time deposits and certificates of deposit Short-term securities $ 46 (212) Increase (Decrease) in Funds $ (166) The above statement should be read in conjunction with pages 39 through 44 of this report. 1984 $ 439 503 103 (37) 1,008 37 (61) (16) (42) 24 (58) (58) (614) 39 (94) 60 (725) 12 (127) (184) (182) (481) $ (198) $ (15) (183) $ (198) 3S Monsanto Company and Subsidiaries DSW 021669 -* oo 1983 ' S 369 ; 523 i 71 (15) : 33 ! i (39) ! 46 (65) 147 122 211 (47) ! (560) j 39 1 (208) 49 (483) 49 (87) (14) (170) (222) $ 243 S 21 222 S 243 STLCOPCB4006978 Review of Sources and Uses of Funds I Monsanto's 1985-1983 sources and uses of funds are shown in the Statement of Changes in Consolidated Financial Position on the preceding page. Monsanto's combined cash and short-term secu rities declined primarily as a result of using excess cash to reduce debt incurred to acquire G. D. Searle &c Co. In 1985, Monsanto acquired Searle for $2,754 million, which was initially financed through borrowings under a $3.0 billion credit line arranged for that purpose. The line of credit was reduced to $2.0 billion at year-end 1985. Those borrowings were subsequently repaid in late 1985 through sales of assets, which generated gross proceeds totaling $1,612 million, and the issuance of commercial paper and long-term debt. The Company issued $400 million of domestic long-term debt in November 1985. In January and February 1986, the Company issued $300 million of long-term debt in the domestic and ex-U.S. financial markets. Proceeds from these borrowings were used to reduce the Company's commercial paper outstanding. The Company plans to issue additional debt and may issue equity securi ties, depending upon future financing needs and market conditions. Expenditures for property, plant and equip ment in 1985, including capitalized interest, totaled $645 million. The more significant 1985 expenditures were for additional capital projects at the Life Sciences Research Center in St. Louis County, Missouri, a new Fisher Controls PRoVOX systems assembly plant in Austin, Texas, and the silicon wafer plant at Milton Keynes, United Kingdom. In addition, capital expenditures included $85 million for the oil and gas business, which was sold in December 1985. In recent years, capital expenditures generally have been financed by cash from operations. Year Dollars in Millions 1983 $948 1984 $1,008 1985 $889 Operations Provide Substantial Financial Resources Despite the downturn in many of Monsanto's busi nesses and the effects of the restructuring program, funds provided from operations continued to be at a high level in 1985. These funds are the primary source of support for the significant research and develop ment expenses and growth investment. DMdends Increase for 13th Consecutive Year The Company has paid dividends on its common shares without interruption or reduction since 1928 and has increased the dividend in each of the past thir teen years. Dividend payout for 1985 was 21 percent of funds provided from operations. The Company's dividend policy reflects a desired long-term payout percentage based on Monsanto's expectation of future growth and profitability levels. In any individual year, additional consideration is given to expected financial position and results, working and fixed capital needs, scheduled debt repayments and economic conditions, including inflation. Monsanto's common stock is traded principally on the New York Stock Exchange. The number of shareowners of record as of February 28,1986, was 72,933 and the high and low common stock prices on that date were $60 and $58%. Monsanto Company and Subsidiaries 37 DSW 021670 STLCOPCB4006979 Statement of ConsoHated Shareowners' Equity (Dollars in millions, except per share) 1985 Common Stock: Balance, January 1 New shares issued (138,117 shares in 1984 and 11,289 shares in 1983) Par value of stock issued in two-for-one stock split $ 164 Balance, December 31 $ 164 Additional Contributed Capital: Balance, January 1 New shares issued Par value of stock issued in two-for-one stock split Other Balance, December 31 $ 855 (1) $ 854 Accumulated Currency Adjustment: Balance, January 1 Translation adjustments Income taxes Balance, December 31 S (319) 131 (3) $ (191) Reinvested Earnings: Balance, January 1 Net income (loss) Preferred dividends ($2.06 per share in 1984 and $2.75 per share in 1983) Common dividends ($2.45, $2.25 and $2,075 per share for 1985-1983, respectively) Balance, December 31 $3,110 (98) (188) $2,824 Common Stock in Treasury: Balance, January 1 Shares purchased (2,052,300, 4,053,300 and 159,570 shares in 1985-1983, respectively) Conversion of convertible securities and issuances under employee stock plans (523,827, 349,837, and 471,966 shares in 1985-1983, respectively) Balance, December 31 $ (176) (91) 23 $ (244) The above statement should be read in conjunction with pages 39 through 44 of this report. 1984 $ 82 _ 82 S 164 $ 936 _ (82) 1 $ 855 $ (200) (121) 2 $ (319) $2,853 439 -- (182) $3,110 $ (4) (184) 12 $ (176) 1983 S 82 _ S 82 S 931 _ 5 S 936 S (122) (84) 6 $ (200) $2,621 402 -- (170) $2,853 S <22} (14) 32 $ (4) Key Financial Statistics _ Commr Stock Dvto Stock Price* Per Common Share High Low Dividends Shareowners' Equity * Based on daily reported high and low stock prices. 1985 $ 5SV, 40V, 2.45 44.38 1984 S 53v 40 v. 2.25 46.43 1983 S 58n 2.0"5 44.83 38 Monsanto Company and Subsidiaries DSW 021671 STLCOPCB4006980 Notes to Financial Statements j ; on Significant Accounting Policies I The Company's significant accounting policies ; are italicized in the following Notes to Financial j Statements. i mm Basis of Consolidation : The consolidated financial statements include ; the Company and its majority-owned subsidiaries. : Intercompany transactions have been eliminated in I consolidation. Companies in which Monsanto has an ownership interest between 20 and SO percent are included in "Investments in Affiliates'' in the Statement of Consolidated Financial Position and Monsanto's share of these companies' income or loss is included in "Other income -- net" in the Statement of Consolidated Income. mm Principal Acquisitions In August 1985, Monsanto acquired G. D. Searle Sc Co. for $2,754 million. Searle researches, manufac tures and distributes prescription pharmaceutical products and aspartame-based, low calorie sweetener products. The acquisition of Searle was accounted for using the purchase method, and Searle's assets and liabilities have been recorded at their estimated fair values at the date of acquisition. The excess of the purchase price over the fair value of the identifiable net assets acquired ($582 million) is being amortized on a straight-line basis over 40 years. Searle's results of operations have been included in the Statement of Consolidated Income from August 1985. The following table presents unaudited, pro forma operating results as if the acquisition of Searle and the sales of certain assets (described below) had occurred on January 1, 1985 and 1984. Net sales Net income (loss) Earnings per share, after extraordinary item 1985 $7,150 (136) (1.77) 1984 $7,469 331 4.09 The pro forma operating results include Searle's results of operations for the indicated years, less increased amortization of intangible assets, increased interest expense on the acquisition debt, and related income tax effects. In addition, the pro forma results reflea lower interest expense that would have resulted from using the net proceeds from certain sales of assets to reduce debt, as if those transactions had occurred on January 1 of the years presented. Asset sales include the sale of Searle's investment in Pearlc i Health Services, Inc. and Searle's nonprescription pharmaceuticals business; and Monsanto's oil and gas business, the Seal Sands, United Kingdom plant and certain other assets. The gross sales proceeds from these transactions were $1,612 million. Where deter minable, the operating results associated with the above described assets have been eliminated from the pro forma data presented above. Nonrecurring gains and losses from the sales of these assets have been excluded from the pro forma operating results. The pro forma operating results do not purport to present Monsanto's actual operating results had the acquisition of Searle and the other transactions referred to above occurred on January 1 of the years presented, nor to present Monsanto's consolidated operating results for any subsequent period. In 1983, Monsanto purchased for $178 million the minority interest in Fisher Controls International, Inc. (FCII), increasing the Company's ownership to 100 percent from the previous 66Vi percent. The excess purchase price above FCII's net assets attribut able to the minority interest was $81 million, which is being amortized on a straight-line basis over 20 years. assa Restructuring In Oaober 1985, the Company's Board of Direaors approved a restructuring and reorganization program. The approved actions included the withdrawal from seleaed low-return businesses and production facili ties, the sale of certain assets which no longer have strategic importance and reductions in the number of employees. In connection with this program, in the fourth quarter of 1985 the Company provided a $557 million charge to "Restructuring cost -- net" in the Statement of Consolidated Income, comprising the following: Asset write-downs Cost of employee reductions, including a Special Incentive Retirement program Other costs Gains on sales of assets Restructuring cost -- net $ 530 252 273 (498) $ 557 The impaa on net income was $341 million (net of estimated tax benefits of $216 million), or $4.43 per share. As part of the restructuring and reorganization program, several sales of businesses and production facilities have occurred or are planned. In the fourth Monsanto Company and Subsidiaries 33 OSW 021672 STLCOPCB4006981 1 quarter of 1985, the Company sold its oil and gas 0 Currency Translation operations at a net gain of S201 million ($392 million Most of Monsanto's ex-U.S. operations' financial before tax), or $2.61 per share. Also in the fourth statements are translated into U.S. dollars using quarter of 1985, Monsanto sold its Seal Sands, United current exchange rates. Unrealized currency adjust Kingdom fiber intermediates plant at a net gain of ments in the Statement of Consolidated Financial $82 million ($105 million before tax), or $1.06 per Position are accumulated in shareowners' equity. The share. The Company intends to sell the Texas City, financial statements of ex-U.S. operations that operate Texas chemical plant and will close several operations, in hyperinflationary economies, including Brazil, including the facilities at Columbia, Tennessee and Mexico and Argentina, are translated at either current Anniston, Alabama. or historical exchange rates, as appropriate, and Subsequent to its acquisition by Monsanto, currency adjustments are included in net income. Searle sold its investment in Pearle Health Services, Major currency exposures are the British pound Inc. and its nonprescription pharmaceuticals business. sterling and Belgian franc. Other important currencies Because Monsanto recorded the assets of these busi include the German mark, French franc, Canadian nesses at their fair values as of the date of acquisition, dollar, Australian dollar, Japanese yen, Brazilian no gain or loss resulted from these sales. cruzeiro and Mexican peso. Currency restrictions Net sales of the divested and discontinued prod are not expected to have a significant effect on uct lines in 1985 were $931 million, principally in the Monsanto's cash flow, liquidity or capital resources. Chemicals segment. Management expects the restructuring program Inventory Valuation to be substantially complete by the end of 1986. Inventories are stated at cost or market, whichever A Special Incentive Retirement program was is less. Actual cost is used for raw materials and effective in November and December 1985. Of the supplies, and standard cost, which approximates 3,880 United States employees eligible under the actual cost, is used for finished goods and goods program, 2,358 elected to accept early retirement. in process. Standard cost includes direct labor, raw mm Degradation and Amorttattaa material and manufacturing overhead based on practical capacity. The cost of substantially all Depredation and depletion Amortization of intangible assets Obsolescence 1985 $477 88 34 1984 $449 7 47 1983 United States inventories is determined using the lastin, first-out (LIFO) method, generally reflecting the $456 effects of inflation on cost ofgoods sold sooner than 4 other inventory cost methods. The cost of other 63 inventories (approximately 20 percent of all invento Total depreciation and amortizatioo ries) generally is determined using the first-in, first-out $599 $503 $523 . (FIFO) method. The cost of plant and equipment is depreciated using, Inventories at December 31,1985 and 1984 the straight-line method over weighted average periods would have been $408 million and $432 million, of 22 years for buildings and 11 years for machinery ' respectively, higher than reported if the FIFO method and equipment. of inventory valuation (which approximates current Patents ($1,219 million and $33 million at cost) had been used for all inventories. Monsanto's December 31,1985 and 1984, respectively) are being LIFO inventory policies make it impracticable to iden amortized over their legal lives (approximately 8 years tify inventories by classification (i.e., finished goods, in 1985). Other intangible assets (5330 million and goods in process, raw materials and supplies). $14 million at December 31,1985 and 1984, respec tively) are being amortized over their estimated useful lives (approximately 13 years in 1985). Goodwill ($650 million and $76 million at December 31,1985 and 1984, respectively) is amortized over periods of 0 08 ad Qas Activities Oil and gas exploration and production activities were accounted for using the successful efforts method. 5 to 40 years. 49 Monsanto Company and Subtidioriat DSW 021673 STLCOPCB4006982 mm Income Taxss Investment tax credits are recorded as a reduc The components of income before income taxes were: tion of income tax expense in the year they reduce 1985 1984 1983 the federal income tax liability. Investment tax credits, u.s. $(590) S442 5 net of recapture, for 1985-1983 were $10 million, S419 $30 million and $26 million, respectively. Ex-U.S. 292 265 151 Income taxes have not been provided on Total $(298) S707 $570 $371 million of undistributed earnings of subsidiaries The components of income tax expense were: either because any taxes on dividends would be offset substantially by foreign tax credits or because 1985 1984 1983 Monsanto intends to indefinitely reinvest those Current: Federal $ 44 S 72 $103 earnings. Deferred: State Ex-U.S. Federal State Ex-U.S. 13 154 211 (338) (21) (22) 21 56 149 72 3 44 6 45 bb Earnings per Share 154 Earnings per share were computed using the weighted average number of common and common equivalent 11 shares outstanding each year (76,995,625, 4 80,909,755 and 82,215,156 in 1985-1983, respec (1) tively). Common share equivalents (116,247, 335,979 (381) 119 14 and 563,622 in 1985-1983, respectively) consist Tax effect of loss carryforwards 33 primarily of common stock issuable upon exercise of Total $(170) $268 $201 outstanding stock options. Earnings per share assum ing full dilution were not significantly different from The sources of timing differences in the recogni- the primary amounts. tion of revenue and expense for tax and financial statement purposes and the tax effect of each were: a Supptemwrtal Data Depreciation, depletion and obsolescence Restructuring program Intangible drilling and development costs Capitalized interest Other Total 1985 1984 $ 70 (346) (98) -- (7) $(381) S 92 11 -- 16 $119 1983 $ 19 (3) 8 (10) $ 14 Factors causing the effective tax rate to differ from the statutory rate were: 1985 1984 1983 Federal statutory rate Lower ex-U.S. tax rates Investment and other tax credits Benefits attributable to export earnings Dividends from ex-U.S. subsidiaries Reversal of prior years' foreign tax credits Other (46)% (12) (9) (3) 9 8 (4) 46% (3) (5) (2) -- 2 46% (1) (6) (3) -- (1) Raw material and energy costs Employee compensation and benefits Current income and other taxes Rent expense Technological expenses: Research and development Engineering, commercial development and patent Total technological expenses Interest expense: Operations Searie acquisition Less capitalized interest Net interest expense Equity in affiliates' income Foreign currency gains (losses) including equity in affiliates' currency gains and losses 1985 1984 1983 $2457 $2,522 $2,345 1,886 435 92 1,739 363 80 1,687 354 83 470 370 290 78 76 69 548 446 359 97 117 126 95 (14) (17) (30) 178 100 96 25 18 15 (13) 2 5 Effective income tax rate (57)% 38% 35% Monsanto Company and Subsidiaries 41 DSN 021674 STLCOPCB4006983 cat Pension Plans Most Monsanto employees are covered by noncontributorv pension plans. Upon retirement, many Monsanto employees also receive other benefits, principally medical and life insurance. Pension costs are funded as accrued and include current service and amortization of unfunded prior service costs generally over periods of 10 to 30 years. < Other postretirement benefits are not currently funded and are expensed as incurred. \ Pension expense for all plans was S85 million, : S116 million and $131 million in 1985-1983, respec; tively. The 1985 decrease in pension expense I principally resulted from the updating of actuarial | assumptions and the change of the actuarial cost | method for one plan, offset in part by the pension j expense of Searle since its acquisition by Monsanto. ! During 1985, the Company changed its actuarial cost | method for one of its principal plans from the entry | age normal method to the projected unit credit j method. The assumed rate of return used for funding j and cost assumptions was increased from 7.5 percent to 8.5 percent for the two principal United States plans. The effect of these changes was to lower total pension cost by $28 million. I The 1985-1983 expense recorded for other post- j retirement benefits was $18 million, $18 million and I $13 million, respectively: j Estimated benefit and asset information at year| end for Monsanto's pension plans is presented below, j Net assets of the pension trusts were measured at fair j valueiand accumulated benefits were estimated from actuarial valuations, principally using the projected ; unit credit actuarial cost method. Actuarial present value of plan benefits: Vested Nonvesred Accumulated benefits Effect of projected future salary increases Total 1985 $1,994 154 2,148 318 $2,466 1984 $1,554 184 1,738 312 $2,050 Plan assets at fair value $2,672 $2,074 j The actuarial present value of plan benefits in j 1985 includes Searle's pension plans and additional benefits resulting from the Company's 1985 Special Incentive Retirement program and from plan amend : ments effective January 1, 1986. ; United States salaried and hourly employees are covered by two principal plans. The actuarial assump tions also include an overall average annual salary increase of 6.5 percent for the salaried employees plan. The actuarial present value of plan benefits and plan assets included in the above table for the two principal United States plans were approximately $2,100 million and $2,215 million, respectivelv, at December 31, 1985. mm Short-Term Debt and Credit Arrangements Notes payable: Banks Commercial paper Bank overdrafts Current portion of long-term debt Total 1985 $ 130 468 81 25 $ 704 1984 S 45 111 123 S2 Maximum amount of notes pavable and bank overdrafts outstanding at any month-end Average notes payable and bank overdrafts outstanding Weighted average interest rate dunng the year Weighted average interest rate at December 31 $1,962 S l "6 $ 730 S 142 9% 19% 9% 21% To finance the acquisition of Searle, Monsanto entered into a $3.0 billion bank credit agreement, which was subsequently reduced to $2.0 billion. Of that credit agreement, $500 million is a short-term facility expir ing July 1986. Interest on amounts borrowed under this agreement is at the U.S. "prime" interest rate, or a margin above rates paid on certificates of deposit or the London interbank offered rate. The credit agree ment may also be used to support the issuance of commercial paper. At December 31,1985, all of the short-term facility was unused. In addition, certain ex-U.S. subsidiaries have aggregate short-term loan facilities of $289 million, under which loans totaling $130 million were out standing at December 31, 1985. Interest on these loans is related to various ex-U.S. bank rates. bb Long-Term Debt Long-term debt (exclusive of current maturities) was: Industrial development bond obligations, weighted average interest rate of /'/;%, due 1987 to 2021 Commercial paper to be refinanced on a long-term basis, weighted average rate of 8 */% 10'/*% notes due 1992 4J/% promissory notes due 1993 9'/% sinking fund debentures due 1997 8'/;% sinking fund debentures due 2000 3'/,% income debentures due 2002 4 V*% income debentures due 2008 8V'4% sinking fund debentures due 2008 ll'/n0/o sinking fund debentures due 2015 Capitalized lease obligations Other Total 198S $ 264 950 149 66 127 169 250 17 95 $2,087 1934 S252 39 6' 12' 50 169 5 58 35 24 42 Monsanto Company and Subsidiaries DSW 021675 STLCOPCB4006984 ---------------------------------------------- -------------------- 1 In November 1985, the Company repaid, prior I to maturity, $168 million principal amount of deben- one Common $tock Purchase Right on each outstand- ! ing share of Monsanto common stock. A right will ! tures and notes due 1993 to 2008. Because these also be issued with each share of Monsanto common i debentures and notes were repaid at less than face | value, the Company recorded an extraordinary net 1 gain of $30 million ($59 million before tax), or stock that becomes outstanding prior to the time the rights become exercisable or expire. If a person or group acquires a beneficial ownership of 20 percent $0.40 per share. Maturities and sinking fund requirements on long-term debt are $25 million, $23 million, ! $28 million, $27 million and $27 million for or more, or announces a tender offer that would j result in a beneficial ownership of 30 percent or j more, of Monsanto's outstanding common stock, 1 the rights become exercisable and each right will enti- ! 1986-1990, respectively. The $2.0 billion bank credit agreement used to finance the acquisition of Searle (described above) tie its holder to purchase one share of Monsanto i common stock for $150. If Monsanto is acquired in a ; business combination transaction, each right will enti- | j includes a $1.5 billion intermediate-term facility expir tie its holder to purchase, for $150, common shares of j ing ratably from 1988 to 1993. At December 31,1985, the acquiring company having a market value of all of this facility was unused. In November 1985 $300. Alternatively, if a 20 percent holder were to and February 1986, the Company registered with the acquire Monsanto by means of a reverse merger in Securities and Exchange Commission $1.0 billion which Monsanto and its stock survive or were to aggregate principal amount of unsecured debt engage in certain "self-dealing" transactions, each I securities. Subsequently, $400 million in 1985 and right not owned by the 20 percent holder would enti- j $150 million in 1986 of those securities were issued tie its holder to purchase, for $150, common shares i and the proceeds were used to refinance short and of Monsanto having a market value of $300. The j intermediate-term borrowings. The remaining unis Company can redeem each right for 5 cents at any | sued debt securities may be issued in the future, time prior to its becoming exercisable. The rights depending on financing needs and market conditions. expire in 1996. These rights may cause substantial Covenants under the bank credit agreement and ownership dilution to a person or group who certain loan agreements restrict maximum borrowings attempts to acquire the Company without approval of and dividend payments and require the maintenance Monsanto's Board of Directors. The rights should not of certain financial ratios. It is not anticipated that interfere with a business combination transaction that future borrowing needs will be affected by these has been approved by the Board of Directors. As of restrictions. Of the Company's reinvested earnings, the close of business on February 3,1986, $300 million were available for dividend payments 76,783,448 rights were outstanding. at December 31,1985. m Stock Option Pirns on Commitments and Contingencies At December 31,1985, there were 2,871,626 shares Commitments in connection with uncompleted addi under options outstanding for the Company's 1974 tions to property and investments in affiliates were and 1984 Management Incentive Plans at prices rang approximately $166 million at December 31, 1985. ing from $26.16 to $57.59. Options for 1,703,124 Monsanto was contingently liable as guarantor of shares were exercisable at December 31,1985. During bank loans and for discounted customers' receivables 1985, 568,200 options were granted and 275,886 totaling approximately $88 million at December 31, options, granted at prices ranging from $24.25 to 1985. $46.31 per share, were exercised. Under the 1984 Monsanto is a party to a number of lawsuits, Management Incentive Plan, 2,681,022 shares remain which it is vigorously defending, arising in the normal available for grant. course of business. Certain of these actions seek Stock appreciation rights (SARs) are authorized damages in very large amounts. While the results of to be granted under both the 1974 and 1984 Plans, litigation cannot be predicted with certainty, manage including retroactive grants for unexercised options. ment believes, based upon the advice of Company At December 31,1985, SARs related to options for counsel, that the final outcome of such litigation will 792,365 shares were outstanding; of these, 387,524 not have a material adverse effect on Monsanto's were exercisable. During 1985, SARs related to consolidated financial position. options for 121,509 shares were granted and 91,246 were exercised. oa Capital Stock At December 31, 1985, there were 5,631,994 common shares reserved for employee stock options. In January 1986, the Company's Board of Direc tors declared a dividend to shareowners consisting of Monsanto Company and Subsidiaries *3 OSW 021676 STLCOPCB4006985 m Segment Information Certain operating unit segment data for 1985-1983 appear on page 27 and are integral parts of the accompanying financial statements. The principal product lines included in each operating unit are shown in this segment data. Sales between operating units are not significant. Inter-area sales, which are sales from one Monsanto location to another Monsanto location in a different world area, were made on a market price basis. Net sales in 1985 of businesses divested or discontinued that are included in the Chemicals segment were $645 million. Certain corporate expenses, primarily those related to the overall management of the Company, were not allocated to the operating units or world areas. Restructuring cost -- net, interest expense, interest income and other income -- net, as shown in the Statement of Consolidated Income, are the only reconciling items between operating income and income before income taxes. Nonoperating assets principally include investments, a portion of cash, time deposits and certificates of deposit, short-term securities and certain miscellaneous receivables. Net sales by entities in each world area were: United States Europe-Africa Canada Latin America Asia-Pacific Eliminations Total consolidated 1985 $4,824 1,076 268 220 359 Unaffiliated Customers 1984 1983 $4,914 945 278 203 351 $4,596 924 259 192 328 $6,747 $6,691 $6,299 Inter-Area (Between Monsanto Entities) 1985 1984 1983 $ 529 163 5 2 21 (720) $ 534 207 9 6 33 (789) S 526 188 6 4 25 (749) $- $-- $- Operating income and total assets by entities in each world area were: United States Europe-Africa Canada Latin America Asia-Pacific Eliminations Corporate expenses Nonoperating assets Total consolidated Operating Income (Loss) 1985 1984 1983 $ 177 164 34 6 12 12 (54) $ 475 192 25 4 31 2 (52) $ 433 137 24 (4) 15 (35) (49) $ 351 $ 677 $ 521 1985 $7,077 1,019 120 232 299 (259) 389 $8,877 Total Assets 1984 1983 $5,088 772 105 178 257 (253) $5,110 696 92 180 203 (362) 226 $6,373 508 $6,427 Following is a reconciliation of ex-U.S. operating income and total assets to the Company's equity in the net income ana net assets of consolidated ex-U.S. subsidiaries: Operating income Restructuring cost -- net Interest expense Interest income Other income -- net Income taxes (including extraordinary tax benefits of loss carryforwards) Net income of consolidated ex-U.S. subsidiaries 1985 $ 216 14 (26) 38 (20) (70) $ 152 1984 $ 252 (53) 36 29 (108) $ 156 1983 $ 172 (65) 28 36 (45) $ 126 Total operating assets Total liabilities Net assets of consolidated ex-U.S. subsidiaries $1,670 847 $ 823 $1,312 519 $ 793 $1,171 470 $ 701 44 Monumto Company and Subtidioriat OSH 021677 STLCOPCB4006986 Financial Summary (Dollars in millions, except per share) Operating Results Net Sales Operating Income Net Income (Loss) As a Percent of Net Sales As a Percent of Average Shareowners' Equity As a Percent of Average Capital Employed5 Earnings per Share Year-end Financial Position Total Assets Working Capital Property, Plant & Equipment Gross Net Long-Term Debt Shareowners' Equity Current Ratio Percent of Long-Term Debt to Total Capitalization Other Data Property, Plant & Equipment Additions Depreciation and Amortization Interest Expense Research and Development Expense Income Taxes Stock Price High Low Price/Earnings Ratio on Year-end Stock Price 198S1 1984 19832 19823'4 1981 $6,747 351 $ (98) (1)% $6,691 677 $ 439 7% (3)% 12% --% $ (1.27) 10% $ 5.42 $6,299 521 S 402 6% $6,325 479 - $ 352 6% $6,948 702 $ 445 6% 11% 10% 15% 10% $ 4.89 9% $ 4.39 11% $ 5.75 $8,877 899 $6,373 1,395 $6,427 1,535 $6,077 1,503 $6,069 1,486 $6,840 3,034 $2,087 3,407 1.4 38% $6,919 3,374 $ 824 3,634 2.2 18% $6,639 3,284 $ 937 3,667 2.3 20% $6,530 3,313 $1,003 3,490 2.6 $6,218 3,184 $1,110 3,330 2.4 22% 25% $ 645 599 178 470 (170) $ 55Y8 405/a $ 614 503 100 370 268 $ 53% 40% 8 $ 560 523 96 290 201 $ 58% 37Va 11 $ 673 439 82 264 172 $ 44% 28V4 9 $ 668 263 101 233 248 $ 43% 293/4 6 Per Common Share Dividends Shareowners' Equity Common Shareowners Common Shares Outstanding (in millions) Employees $ 2.45 44.38 72,081 77 56,103 $ 2.25 46.43 71,343 78 50,754 $ 2.075 44.83 69,787 82 48,835 $ 1.975 42.99 75,943 81 52,199 $ 1.875 42.18 79,029 79 57,391 Net loss for 198S includes net restructuring cost of $341 million, or $4.43 per share, and an extraordinary gain of $30 million, or $0.40 per share, from repayment of debt. *Net income for 1983 includes extraordinary tax benefits of $33 million, or $0.41 per share, from the utilization of ex-U.S. loss carryforwards. 'Net income for 1982 includes an extraordinary gam of $23 million, or $0.29 per share, from an exchange of debt for common shares. In 1982, the requirements of Statement of Financial Accounting Standards No. S2, "Foreign Currency Translation," were adopted. 5Capital employed is the sum ofshort-term debt, long-term debt and shareowners' equity. The beginning of the year and the end of the year capital employed are averaged and divided into net income after adding back the aftertax effect ofinterest costs. Monsanto Company and Subsidiaries 48 DSW 021678 STLCOPCB4006987 Board of Directors | Hchard J. Mahoney I St. Louis i President and ; Chief Executive Officer | (Chairman of the Board and | Chief Executive Officer)* | Monsanto Company I Dr. Louis Fernandez St. Louis Chairman of the Board (retiring as Chairman of the Board and Director)* Monsanto Company Dr. Donald C. Carrel Upper Darby, Pennsylvania Chairman CGW Data Services, Inc. C, Raymond DaM San Francisco Retired Chairman of the Board Crown Zellerbach Corporation Francis J. FfcqpnM St. Louis Executive Vice President (Director, President and Chief Operating Officer)* Monsanto Company Mchard L Fricke Montpelier, Vermont Chairman and Chief Executive Officer National Life Insurance Company MmW. Haalay North Palm Beach, Florida Retired Chairman of the Board and Chief Executive Officer Monsanto Company Eario H. Harfefeoo, if. St. Louis Executive Vice President (Director and Vice Chairman of the Board)* Monsanto Company HiivflMwHwifden MMa LAmiVW Pittsburgh Chairman of the Board and Chief Executive Officer National Intergroup, Inc. Dr. fm Mayer Medford, Massachusetts President Tufts University Buck Mkkel Greenville, South Carolina Vice Chairman, Fluor Corporation and Chairman of the Board Daniel International Corporation (a subsidiary of Fluor Corporation) Edward L Palmar New York Retired Chairman of the Executive Committee Citicorp and Citibank, N.A. Mm $. Reed New York Chairman Citicorp and Citibank, N.A. WHfam D. RuckaMmus Seattle Attorney Perkins, Coie Dr. Mm B. Slaughter College Park, Maryland Chancellor University of Maryland at College Park fmBmw wbMMI IsnsSr U.S. Navy, Retired McLean, Virginia Lecturer and Writer Margaret Bush WBeeo St. Louis Attorney Wilson, Smith and Seymour Advisory Dtrectars: Robert L. Berra Harold J. Corbett Francis J. Fitzgerald** Earle H. Harbison, Jr.** Robert G. Potter* Nicholas L. Reding Dr. Howard A. Schneiderman Francis A. Stroble Effective April 1,1986 Until April 1,1986 Committees of the Board AudK Committee Dr. Jean Mayer, Chairman Buck Mickel John S. Reed Dr. John B. Slaughter Margaret Bush Wilson Corporate Social RespousiMtty Committee Admiral Stansfield Turner, Chairman Dr. Louis Fernandez Dr. Jean Mayer William D. Ruckelshaus Dr. John B. Slaughter Executive Commutes John W. Hanley, Chairman Dr. Louis Fernandez Richard J. Mahoney Margaret Bush Wilson Compeasatioa and Development Committee Howard M. Love, Chairman Richard I. Fricke John W. Hanley Buck Mickel Finance Committee Edward L. Palmer, Chairman Dr. Donald C. Carroll C. Raymond Dahl John W. Hanley Richard J. Mahoney Margaret Bush Wilson MiwwIiieHog lie--Wee Buck Mickel, Chairman C. Raymond Dahl Howard M. Love Peaatoa and Savings Fends Richard I. Fricke, Chairman Dr. Donald C. Carroll Dr. Louis Fernandez Admiral Stansfield Turner Officers President and Chief Executive Officer Richard J. Mahoney1 : , Chairman of the Board Dr. Louis Fernandez2 ; ! Executive Vice Presidents Francis J. Fitzgerald2 Earle H. Harbison, Jr.4 Nicholas L. Reding 1 i I Senior Vice Presidents Robert L. Berra Harold J. Corbett Dr. Howard A. Schneiderman j j Senior Vice President sad Chief Financial Officer Francis A. Stroble j Senior Vice President, Secretary and Qenerai Counsel Richard W. Duesenberg Group Vice Presidents Thomas L. Gossage Robert G. Potter Donald H. Swan Iifkf--i r^rma 1tm-1B. Earl N. Brasfield Leonard A. Cohn Stewart D. Daniels Dr. S. Allen Heininger John F. Hussey Martin J. Kallen Thomas H. Lafferre James H. Senger David L. Sliney Vice President and Controher Lawrence B. Skatoff Treasurer B. Clare Harris Effective April 1,1986: 1 To become Chairman of the Board and Chief Executive Officer. 2 Retiring as Chairman of the Board. 2 7b become President and Chief Operating Officer. * 7o become Vice Chairman of the Board. 66 Monsanto Company and Subsidiaries OSH 021679 STLCOPCB4006988 Shareowner Information Animal Meeting The next Annual Meeting of the shareowners of Monsanto Company will be held at 1:45 p.m., Friday, April 25,1986, in K Building at the Com pany's General Offices, 800 N. Lindbergh Blvd., St. Louis, Missouri. A formal notice of the meet ing, together with a proxy statement is being mailed to each shareowner. 10-K Report, Corporate Data Book and Investor News A copy of Monsanto Company's 1985 Form 10-K Report filed with the Securities and Exchange Commission; 1985 Corporate Data Book, which contains additional information relating to Monsanto; and Investor News can be obtained by writing to: Investor Relations Department Monsanto Company 800 N. Lindbergh Blvd. St. Louis, Missouri 63167 Quarterly Common Stock Data 1985 first Second Third Fourth Stock Price High Low $46*1 49 55V. 49*. $41*. 42*. 44*. 40*. 1984 First Second Third Fourth $53*. 49 51 46*. $41*. 42 41*4 40*. 1983 first Second Third Fourth $46*4 47. 58*. 58*. $37*. 39*4 42*. 50*. Stock Symbol = MTC Stock Exchanges/Bourses United States New York Chicago (options) Europe Amsterdam Brussels Frankfurt Geneva London Paris Zurich Itatsfer Ageotand Registrar The First National Bank of Boston Box 644 Boston, Massachusetts 02102 Dividend $0,575 0.625 0.625 0.625 $0,525 0.575 0.575 0.575 $0.50 0.525 0.525 0.525 Monsanto Company and Subsidiaries 47 OSW 021680 STLCOPCB4006989 Monsanto Company 800 North Lindbergh Boulevard St. Louis, Missouri 63167 DSW 021681 STLCOPCB4006990