Document NeoG64pb4EKxzLGpmgVOOdzRw

Monsanto 1996 Annual Report to Shareowners lit 1901, Monsanto was a company. In 1996, we were clCJc&ilk (... this time with a few advantages.) TOWOLDMONOOI5949 GROWTH INVESTMENTS Contents Out of the Startina Gate: Growth Investments Monsanto has been moving toward a future in life sciences for the last decade. The strength ofour core products, coupled with acquisitions, investments in researchfind technology, new product launches and global growth initiatives, has set the stagefor a new business. Open the inside front cover and page l to see the range ofgrowth opportunities already in play for the life sciences business. Our Shareowners Start Anew -- A Letter from Chairman Robert B. Shapiro Page 2 Bob Shapiro, Monsanto's chairman and chiefexecutive officer, gives his view on how wejump-start the value waiting to be created in a new life sciences company. Starting Points for aNewLife Sciences Industry More people, older people, emerging economies, developed nations, a fragile environment -- these are the startingplacesfor a life sciences industry that will serve the needs ofthe next century. Monsanto's Potential in a Start-Up Industry Page 11 As a life sciences company, Monsanto starts with three businesses -- agriculture, food andpharmaceuticals. Were operating these while at the same time discovering the value in the connections among them. Starting Over with New Definitions of Success A successful life sciences company has to be first to invent andfirst to market. Monsanto is setting the pace to create more ideas, better andfaster. Creativity and speed define success. Value From the Start Page 17A insert Ultimately, a life sciences company is about creating new value. We explain where we startfinancially and how we'll measure progress. Financial Section Page 25 Officers and Board of Directors Page 63 Shareowner Information Inside back cover A new company requires a lot of explanation. Ifyou'd like to know more, we offer several waysfor you to get information. 1997 Monsanto Company We*re starting up In 1901, a 42-year-old high school dropout named John F. Queeny founded a new company to make saccharin on the shores of the Mississippi River in St. Louis, Missouri. He named it for his wife, Olga Monsanto Queeny. More than 95 years later, his little company -- built on faith, hope and $5,000 -- is starting up again. Monsanto Company is now spinning off its chemical businesses and forming a new life sciences company. Fast moving, technology driven, intensely competitive, this 95-year-old start-up life sciences company uniquely links a set of global businesses and dedicates them to producing more and healthier food and better health care in a world that demands solutions that respect the environment. John Queeny probably would not recognize this _ new enterprise, but he certainly would be intrigued with the opportunities. As an entrepreneur, he would love that this fledgling growth company kicks off with a few advantages: A base of best-selling products already serving the needs of the agriculture, nutrition and.health care markets. Approximately 5 products in the research pipeline. Record financial perform ance that balances operational excellence with growth invest ments. In 1996, net income reached a record $885 million, or a record $1.48 per share, before a one-time charge for the spinoff of the chemical businesses and other restructur ing actions. o A track record of creating value, like the 62 percent total return to shareowners in 1996. A global network of scientists equipped with extraordinary technologies. We're starting up. We'll show you why and we'll tell you how in this report. We hope to give you a sense of the products and ideas that will create value in this new field of life sciences. TOWOLDMONOOI5950 Current Major Products Investments and Relationships Ambien Short-Term Treatment for Insomnia This treatment is a leader in the U.S. sleep-aid market with a 45 percent market share in total prescriptions. Bollgard InsectProtected Cotton This cotton, developed through biotechnology, protects itself from specific insect pests. Caian and Covera-HS Calcium Channel Blockers Pharmaceuticals used to treat chest pain and hypertension. Covera-HS is the first calcium channel blocker with a unique delivery system that enables 24 hours of blood pressure control, with peak concentra tions of the drug delivered during the morning hours. . Cytofec Ulcer Preventive Drug Pharmaceutical treatment for the prevention of gastric ulcers caused by use of nonsteroidal anti-inflammatory drugs (NSAIDs), the most commonly used medications for treating arthritis symptoms. Daypro Arthritis Treatment Once-a-day NSAID treatment for osteoarthritis and rheumatoid arthritis. Equal Brand Sweetener High-intensity sweetener made with NutraSweet brand sweetener and used by consumers to sweeten such foods as tea, fruit, coffee and cereal. Harness and Lasso Herbicides Herbicides for use with com. Lasso is also used for weed control in soybean, peanut and milo (sorghum) crops. NewLeaf Inse ctProtected Potatoes Potatoes developed through biotechnology that protect themselves against the Colorado potato beetle, the most damaging insect pest in potato crops. NutraSweet Brand Sweetener High-intensity sweetener used as a food ingredient, primarily in beverages and dessert products. Ortho Brand Lawnand-Garden Products Herbicides, insecticides, fungicides and fertilizers for home gardening and lawn care. Roundup Herbicide The world's leading multipurpose, nonselective agricultural and industrial herbicide.. Roundup Ready Canola This canola, developed through biotechnology, tolerates Roundup herbicide. Growers can apply Roundup to Roundup Ready canola for weed control with no effect on crop performance. Roundup Ready Soybeans These soybeans, developed through biotechnology, tolerate Roundup herbicide. Growers can apply Roundup over the top of their soybeans to control weeds with no effect on crop performance. Xanthan Gums, Alginates and Gellan Gums Food ingredients used to improve the bulk, texture and processing of soups, sauces, gravies, dress ings, beverages, snack foods, breadings, batters, bakery prod ucts and dairy products. These ingredients also have pharmaceu tical applications. Seed Business We created one of the leading positions in seed through the investments we've made in the last two years in companies that create both the foundation, or parent, seeds and the seeds sold on the retail level to growers. These investments allow us to get our technologies into the varieties that growers want to plant and to bring these new products to market quickly. AgriPio Seeds Inc. The acquisition ofAgriPro's hybrid wheat seed business gave us access to their wheat germplasm. Asgiow Agronomics The acquisition of Asgrow strengthens our position in soybean and corn seeds. Calgene Inc. Our 54.6 percent equity invest ment in Calgene strengthens our research in plant oils, pro duce quality and cotton seed. DeKalb Genetics Corp. Our equity investment in DeKalb is for long-term biotechnology research and development in com and soybean seeds. Delta & Pine Land Go. This partnership provides us with access to leading U.S. cotton seed varieties and distribution methods. Holden's Foundation Seeds Inc., Corn States Hybrid Service Inc. and Corn States International S.a.r.l. Holdens is the world's leading foundation seed company, and Corn States and Com States International are the exclusive global marketing and sales representatives for Holdens products. These acquisitions, which are still pending, will give us an excellent delivery mechanism for our biotechnol ogy innovations and enable us to bring out latest technologies to the greatest number of seed companies more rapidly. Monsoy This Brazilian acquisition provides access to the world's second-largest soybean market. C X iSSIB ZBI -4s a life sciences company with a base in biotechnology, we continue to look for new ways to expand our under standing of plant genes. The investments we've made in various companies give us access to a library of genetic traits that will allow us to continue developing new products. Agracetug This acquisition strengthens our technology and capacity for genetic transformation of - plants, for cotton fiber modifi cation and for production of * proteins in plants. ' Asgrow Agronomics The acquisition of Asgrow also strengthens our position in proprietary soybean and corn germplasm and distribution. Biopol Our acquisition of the Biopol business provides the genes and associated technologies to develop biodegradable plastic polymers by fermentation and in plants. Ecogen Inc. Our investment in Ecogen purchased one of the world's largest libraries for Bacillus thuringiensis (Bt), a naturally occurring bacterium in soil known for its ability to control insects. We also have a research and development agreement with and an equity investment in the company. Empresas La Moderna S.A. (ELM) In this technology collabor ation, Monsanto is a "preferred provider" of agronomic and quality traits that ELM uses in its fruit and vegetable seed and produce businesses. i TOWOLDMONOOI5951 GROWTH INVESTMENTS Holden's Foundation Seeds Inc. This pending acquisition also gives us access to Holden's corn germ plasm and related technologies. Incyte Pharmaceuticals Inc. This partnership provides software used to analyze and manage plant genetics data. Japan Tobacco Inc. This joint research agreement is focused on developing an improved quality and higheryield rice for the Japanese market Synteni Inc. This agreement provides access to technology that simultaneously analyzes the expression of thousands of genes in plants. Pharmaceutical Relationships We're building on the base of our franchise pharmaceutical products with a number of acquisitions and partner ships. Through collaborations and licensing agreements, we're able to share costs, accelerate development and strengthen our business in markets where we want to establish a stronger presence and build our key therapeutic franchises worldwide. O Refer to the productpipeline for this symbol, which identifies the newpharmaceuticalproducts currently under development through these acquisitions, col laborations and agreements. Biolab Industrias Farmaceuticas S.A. Monsanto's acquisition of this Brazilian company broadens our presence in Latin America in cardiovascular, arthritis and womens health care products. Chiron Corp. This collaboration is for the development, manufacturing and marketing of tissue factor pathway inhibitor, which will be used in the treatment of sepsis. CoCensys Inc. An equity investment and agreement to co-develop and co-pro mote pharmaceutical treatments for insomnia. Ethical Holdings PLC Licensing alliance for hormone replacement therapy. Hybridon Inc. An equity investment and an agreement to research, develop and license treatments for rheumatoid arthritis and transplant rejections. Innovex Inc., Kendle Research Associates and Pazexel International Corp. Agreements with these compa nies provide global support for clinical development of new pharmaceuticals. Sanityo Company Ltd. This agreement to co-develop and co-market in Japan a phar maceutical that prevents blood clots will reduce costs, acceler ate development and expand' Searle's therapeutic franchise worldwide. Syntex By acquiring the Syntex prod uct lines, we strengthened Searle's long-standing market presence in women's health cate. Yamanouchi Pharmaceutical Co. Ltd. Collaboration to develop and market Searle's anti inflammatory drug, celecoxib, in Japan. Roundup Herbicide Franchise Roundup herbicide is entering 3 new growth phase as we introduce crops developed through biotechnology to tolerate this weed control product. The acquisitions and collaborations we've made in the seed and biotechnology arenas will help generate future growth for Roundup. Q Refer to theproduct pipeline for this symbol, which identifies the products underdevelopment that will help grow the business for Roundup. As grow Agronomics The acquisition of Asgrow strengthens our position in soybeans and corn, and will help bring Roundup Ready crops to market fester. DeKalb Genetics Corp. Our equity investment in DeKalb is for long-term biotechnology research and development in corn and soy bean seeds, including seeds with the Roundup Ready trait. Delta & Pine Land Co. This partnership provides us with access to leading U.S. cotton seed varieties and distribution methods; they will be an important partner in launching Roundup Ready cotton. Holden's Foundation Seeds Inc., Corn States Hybrid Service Inc. and Corn States International S.a.r.l. These pending acquisitions pro vide a delivery mechanism for our biotechnology innovations and enable us to bring these technologies, such as crops with the Roundup Ready gene, to more seed companies faster. Monsoy This Brazilian acquisition provides access to the world's second-largest soybean market, where we plan to commercialize Roundup Ready soybeans, Oils/Food Technologies During the last few years, we've made some significant investments in oils technology. In a life sciences company, the new products and technologies that are evolving from these investments can be used in our food business to make healthier food ingredients. C3 Refer to the productpipeline for this symbol, which identifies oils andfood technologyproducts currently under development. Calgene Inc. Our 54.6 percent equity invest ment in Calgene strengthens our research in plant oils, pro duce quality and cotton seed. Kelco The acquisition of Kelco strengthened our foundation in food ingredients used to improve the taste, texture or processing of foods. TOWOLDMONOOI5952 G RO W TH IN V E S TM E N TS Product Pipelin Monsanto has numerous products in its pipeline that will reinforce key franchises or serve as plat forms for growth. The symbols below show the connections between our pipeline products and the investments and collaborations outlined on the preceding pages. The yean noted here reflect the earliest estimated dates, of commercial launch. Commercialization depends on the successful completion of such-factors as research, field and clinical trials, and regulatory approvals. Q Oils/Food Technologies Pharmaceutical Relationships Q Roundup Herbicide Franchise 1997 Arthrotae Arthritis Treatment 0 A pharmaceutical treatmentfir arthritis, Arthrotec combines Cytotec ulcerpreventive drug with a nonsteroidal anti inflammatory drug (NSAID)fir significantly decreased incidence ofgastrointestinal ulcers. Arthrotec is already being sold in many countries, and a new drug application ispending with the US. Food and Drug Administration (FDA). Bollgiuxl Insect-Protected and Roundup Ready Cotton (D This cotton will offer both the insectprotection o/BoOgard and the weed control system of Roundup Ready through a technology that allows multiple traits to be included in a plant,- Cellulon (H A specialty celluloseproduct with applications in pharmaceuticals, foodproducts, oil drilling, and high-perfirmancepapers. Flagyl MBAnti-Infeetiv Drug An oral, modified releaseformulation of Flagyl usedto treat a common vaginal infiction. HirriLs 0 Highly unsaturatedfatty acids used in animalfeeds, aquaculture and infant nutrition, and as a food supplement andfortification ingredient. Insect-Protected Tomatoes6 Developed through biotechnology, these tomatoes protect themselvesfrom insectpests and offer improvedyields, higherquality crops and environmental benefits to growers. Laurical Oil* (H Canola plants developed through biotechnology to produce oils for applications such as cleaning andpersonal careproducts, and confectionery and otherfoodproducts. . NewLeal lasact- andVirus-Protected Potatoes Potatoes developed through biotechnolog thatprotect themselves against the Colorado potato beetle and thepotato virus Y. Quantum Wheat Hybrids Quantum wheat hybrids art developed with Monsanto's new Genesis hybridizing agent. Roundup Ready Cotton Q Through biotechnology, this cotton tolerates in-crop use of Roundupfir weed control ` , YleldGard Insect-Protected Corn Com modified through biotechnolog to protect itselfagainst the com borer and related insectpests. 1998 BXN Herbicide-Tolerant* and Bollgard Insect-Protected Cotton Cotton plants that require less chemical herbicide and insecticide use. Condrotec Arthritis Treatment Condrotec combines Cytotec ulcerpreventive drug with another NSAID to treat arthritis while greatly reducing the risk ofgastrointestinal damage. JVewLea/Plus Insect- and Virus-Protected Potatoes Potatoes developed through biotechnolog; theyprotea themselves from inseapests and viruses. Roundup Ready Corn Q Through biotecbnolog this com will offer growers the advantages ofin-crop weed control with Roundup. Xapane Arthritis Treatment Builds and expands on the success of Daypro through a "salt" formation that acts quickly to relievepain and inflammation. To be marketedfor the management ofpain, osteoarthritis and rheumatoid arthritis. 1999 Celecwdb Blocks an enzyme responsiblefor theproduction ofdamaging substances in thejoints and tissues ofarthritis sufferers. Unlike commonlyprescribed arthritis medicatiom, which can cause gastrointestinal damage, this highly selective COX-2 inhibitor should be an extremely safe and effective treatmentfor arthritis. Daniplestim A blood cellgrowthfactor that stimulates bone marrow to rapidly replace blood cells destroyed by cancer radiation therapy and chemotherapy. It may helpprotectpatientsfrom infictions and bleeding episodes that compromise their cancer cate. Hormone Replacement Therapy (HRT) HRT increases a woman's estrogen to premenopausal hormone levels as a medical treatmentfor the symptoms ofmenopause. Inulin 0 A plant-derived complex carbohydrate with applications as afat replacer, as a nutritiousfood and as a bulking agentfor use with high-intensity sweeteners. MON 32500 A herbicide that controls brome, a grass weed in wheat. Roundup Ready Oilseed Rape Through biotechnolog this oilseed rapeplant tolerates Roundup. Growers can apply Roundup over the top of Roundup Ready oilseed rape to control weeds with no effect on crop performance. Second-Generation Bollg&rd Insect-Protected Cotton This cotton willproduce a protein that willfatally damage specific insectpests, but will use a different mode ofaction than the original Bollgard cotton to help growers manage insect-resistance concerns. Virus-Protected Tomatoes* These tomatoes will be protected against plant viruses and offer improvedyields, higher-quality crops and environmental benefits. TOWOLDMONOOI5953 I1 ESEE1 High-Myristate Oil* 0 Canola plants created through biotechnobgy to produce oils that can be used as butter replacements and as raw materiah for milder soap andpersonal care products. High-Stearate Canola* 0 Canola plants created through biotechnology to produce oilsfor applications in margarine and shortening ingredients. High-Stearate Soy Oil 0 Afunctional oil with healthier properties for margarines andshortenings. High-stearate oil requires no hydrogenation and contains no trans-fatty acids, which increase cholesterol Insect- Protected Corn Com modified through biotechnology to protea itselfagainst the com rootworm and related insects. Meditun-Chain Triglyceride/ Medium-Chain Fatty Acid* 0 Canolaplants created through biotechnology to produce oils for use in medicalfoods and nutrition products. MON 48500 Herbicide primarilyforpre-emergence control ofbroadleaf weeds andgrasses in European cereals. MON 65500 Fungicidefor control oftake-all disease in wheat. Myelopoietin A second-generation blood cellgrowthfactor expected to help prevent infections in cancerpatients after chemotherapy. Roundup Ready Sugar Beets Through biotechnology, these sugar beets will tolerate Roundup for weed control SC-69124A An injectable COX-2 inhibitorfor the management ofacute pain (moderate to severe) in a hospital setting. Xemilofiban (?) An oral anti-platelet agent designed to prevent blood clotformation after coronary angioplastyfor coronary artery disease. 2001 Disease-Controlled Potatoes Potatoes developed through biotechnology to protect themselves fromfungal diseases. Eplerenone A pharmaceutical designed to treat high bloodpressure, congestive heartfailure arid complications ofkidney disease; it may have a morefavorable side-effectprofile than existing agents. Orbofiban An oral anti-platelet agent designedfor long-term use in treating chest pain andprevention ofsecondary blood clotting. * These product candidates are from the Calgene' Inc. pipeline. Monsanto holds a 54.6 percent equity interest In Calgene. Promegapoietin A second-generation blood cell growth factor expected to enhance bloodplatelet recovery after chemotherapy, which is key in preventingplatelet transfusions and bleeding in cancer patients. SC-65872 A second-generation COX-2 inhibitor with improvedpotency and a broader therapeutic range than celecoxib. This compound also has the potentialfor once-a-day dosingfor arthritis sufferers. SC-72393 Preclinical models indicate that this novel sleep aid has an improved safety profile as compared with current products on the market. Sweetener 2000 High-Intensity Sweetener 0 Replacementfor sugar and other sweeteners in all uses, including commercial and consumer cooking and baking applications. 2002 Boll Weevil-Protected Cotton Through biotechnology, this cotton will contain a gene that allows the plant to protect itselffrom the boll weevil Disease-Controlled Strawberries* 0 Developed through biotechnology, these strawberries will resist plant viruses and offer improvedyields, higher-quality crops, longer shelf lift, and environmental benefits to growers. Higher-Solids Potatoes 0 Potatoes developed through biotechnology to contain less moisture, so as to reduce the absorption offat or oil during cooking. Higher-Sngar Strawberries* 0 High-quality, fresh strawberries developed through biotechnology for improvedflavor. Tissue Factor Pathway Inhibitor (TFPI) A naturally occurringprotein that inhibits blood coagulation. TFPI is currently being developed to treat sepsis, a potentially lifethreatening condition resultingfrom severe infection ofthe blood. 2003+ Biodegradable Plastic Polymers Plants designed through biotechnology to produce biodegradable plastics. , . Higher-Yielding Corn Com developed through biotechnology to increase crop yieldforfarmers. Improved Oils* 0 Canola plants developed through biotechnology to improve oils that can be used to mike more nutritious foods. Improved Quality Potatoes Better-tastingpotatoes with extended shelflife, improved commercial storage properties and less discoloration cawed by bruising. Naturally Colored Cotton* Cotton plants with genes thatproduce natural colors, replacing the needfor a chemical dyeing process. TOWOLDMONOOI5954 G R O W TH IN V E S T M E N T S 1996 Financial Highlights (Dollar* In million*, except per share) 1996ul 1995" Net Sales Net Income Per Share:141 Net Income Dividends Shareowners' Equity Depreciation and Amortization Cash Provided by Operations Research and Development Expenses Return on Shareowners' Equity (ROE)l5) Percent ofTotal Debt to Total Capitalization Shareowners (year-end) Shares Outstanding (year-end, in millions)1" Employees (year-end) $9,262 $ 385 $ 0.64 $0,588 $ 6.31 $ 590 $1,203 $ 728 10.4% 38% 54,828 584 28,000 $8,962 $ 739 $ 1.27 $0,540 $ 6.46 $ 598 $ 823 $ 658 22.1% 35% 50,745 575 28,500 O Net income for 1996 included restructuring and other special charges of $500 million, or $0.84 per share, associated with the exit from the company's chemical businesses, the proposed spinoff, and other unusual items. 121 Net income for 1995 included net restructuring expenses and other unusual items of $ 105 million, or $0.18 per share, and the gain on the sale of the styrenics plastics business of $116 million, or $0.20 per share. (3> Net income for 1994 includeda net aftertax loss for restructuring and other unusual items of $ 1 million, or less than $0.01 per share. ' (9 Adjusted for the 1996 five-for-one stocksplit, (s) If the nonrecurring items recorded in 1996 were excluded, ROE in 1996 would have been 22.3 percent. (6> Represents percentage point change 1996 vs, 1995. 1994" % Chang* 1996 v*. 1995 $8,272 $ 622 3% (48)% $ 1.06 $0,494 $ 5.29 $ 561 $1,300 $ 609 21.4% 37% 53,694 560 29,400 (50)% 9% (2)% (1)% 46% 11% (11.7)1 3.0,6) 8% 2% (2)% Total Return to . Shareowners vs, S&F 500 Index - vs. S&P Chemicals Index vs. Life Sciences Peer Index By percent 1991-100 400i , TEbtal Marins* Capitalization Dollars in billions Operating Measures Dollars in millions What's in a Name? A lot. The Monsanto name has enormous value, but only one ofthe two new companies can keep it. At the time this annual report was printed, we were still considering which company would keep it and which would create a new name. When founder John Queeny named this company, he chose his wife's maiden name, Monsanto, so his employer wouldn't discover what he was doing. We, ofcourse, have already revealed our intentions, and the namesfor our new businesses willfollow soon. A In 1996, our total market capitalization reached $25 billion, a 54percent increasefrom market capitalization in 1995Total market capitalization includes short-term and long-term debt. 3 Operating Contribution Operating Income A Operating income in 1996 was affected by $739 million in restructuring and other special charges. Operating contribution -- which excludes the effect ofunusual items andgoodwill amortiza tion -- increased 21 percent from that in 1995. 91 92 93 94 9S 96 Mo&umta sap boo O S&P Chemicals life Sdeneea Peer Group A Monsanto's total return to shareowners has increased 234 percent since 1991. This improve ment compares with smaller percentage increases in the total return on both the Standard dr Poor's 500 and Chemicals indices, and on a special life sciences peergroup index. The companies in the life sciences index are: DuPont, Hoechst, Sobering Plough, Novartis (formerly Ciba-Geigy and Sandoz), Zeneca (a spinoffofICI), Dow Chemical and Eli Lilly. 1996 Monsanto Annual Report 1 TOWOLDMONOOI5955 Letter to Shareowners We're discovering some important advantages inside a surprising source -- a 95-year-old Start-up company 2 1996 Monsanto Annual Report In late 1996, your board of directors approved a plan to split Monsanto into two companies by spinning off our chemical businesses. In this letter, I want to explain why were taking this step, and where we think it will lead. ; For both businesses, this decision is the culmination of years of work. Beginning in the late 1970s, our chemical businesses have obsessively pursued three themes: business focus, market leadership and cost reduction. What was once a diffuse collection of technologies, plants and products has been drastically pruned and reshaped into a well-defined set of businesses with i leading market positions. A special pullout 1 section of this report (see page 19) describes the new company and the competitive philosophy it will follow. It will be an even tougher, lower-cost, more aggressive competitor than it is today. TOWOLDMONOOI5956 Over the same years, we also worked to bring about a transition from our heritage in chemicals toward a future based on the application of biological science to agriculture, food and human health. Like other companies, we found the opportunities for profitable With the opportunities for growth in life sciences growth in these industries very attractive. And, like other companies, we found that with the opportunities came difficult issues of competence, scale and risk. The strategy crafted by my predecessor, Dick Mahoney, was based on three propositions: have come difficult issues of competence, . scale and First, the profitability of Roundup herbicide ..... ... . could be sustained at least through the 1990s. Second, agricultural biotechnology would work, would reach the market, and would potentially transform agriculture. Third, sustained research investment in our Searle pharmaceutical business, at a scale larger than that which Searles revenues could Pharmaceuticals Operating Measures Dollars In millions support, would pay off in new products. Those ofyou who followed Monsanto through the late 1980s and early 1990s will 300 appreciate that none of these propositions was obvious. As it turned out, all were valid. 225 Roundup -- introduced in 1974 -- has proved to be the agricultural growth 150 product of the 1990s. In 1996, we sold more than three times as _.......................... much of it as we did in * Plant ^technology 75 III 1990, and 20 percent more than in the banner is here, nnd beginning to deliver On its promise, 94 95 96 Z Operating CoabrflraUoB Operating laooma year of 1995. Can this kind of growth go on forever? N. Nothing does. But with the continued growth of conservation tillage practices, the A Higher sales volumes have contributed to the significant improvement in SearU's operating contribution, which is operating income excludinggoodwill amortization and the effect of restructuring actions and unusual items. Operating income in all threeyears included chargesfor restructuring and other actions. introduction of Roundup Ready crops, and a focus on cost breakthroughs, we expect Roundup to continue generating substantial cash and earnings in the years ahead. Plant biotechnology is here, and in 1996 it began to deliver on its promise. Cotton with our Bollgard gene for insect protection was the largest and most success- fill launch of a new product in the history of agriculture. Sales of Roundup Ready soybeans were limited only by the availability f seed. The products performed well in the field, and we have strong momentum for launching Roundup Ready canon and YieldGard insect-protected corn in 1997. Regulatory approvals contin ued on track in Japan, Europe and North America. In some European countries, questions remain about the labeling and public acceptance . (continued on page 4) ' 1996 Monsanto Annual Report 3 TOWOLDMONOOI5957 We've continued to assemble the world-class capabilities needed to be first to invent -- and first to bring to market -- important new agricultural biotechnology products. 4 1996 Monsanto Annual Report (continuedfrom page 3) of food products from genetically modified crops. We'll continue to work with interested parties to help resolve those questions. Through a series of acquisitions, investments and other relationships (see "Investments and Relationships" when you open the inside front cover), we've continued to assemble the world-class capabilities we'll need to be first to invent important new agricultural biotechnology products and first to bring those products to market. Searle has been transformed into a profitable and promising pharmaceutical company. We've demonstrated an ability to Searle has been transformed into a profitable compete successfully in tough markets like nonsteroidal anti-inflammatory drugs for arthritis, and to revitalize whole categories, like pharmaceutical company with a full product pipeline. insomnia drugs. Most important, for the first time in memory, Searle's new product pipeline o is full and continues to move quickly through the development process (see inside page 1). In 1997, we'll have five compounds in Phase III clinical trials (the final stage before submission for regulatory approval), including celecoxib, our COX-2 inhibitor for arthritis. An additional five compounds, plus other possible indications for celecoxib, are expected to enter Phase III in 1998. By combining Kelco, the world's leading supplier ofxanthan gums and alginates, with our business for NutraSweet brand sweetener, we've created one of the world's largest food ingredient companies, with excellent technical capabilities and global presence. Our position in food and consumer markets is allowing us to develop an entirely new strategy for food and nutrition, based on closer integration with our ag biotech and human health capabilities. I'll say more about that a little later. These achievements by our people in both chemicals and life sciences have been reflected in our financial performance and in the returns to our investors. Financially, 1996 was by far the best year in our history. Before giving effect to charges related to the spinoff of the chemical business and other actions in 1996 ($500 million aftertax, or 84 cents per share) and to a nonrecurring gain in 1995 ($11 million aftertax, or 2 cents pet share), net income of $885 million exceeded our 1995 record by 22 percent, and record earnings per share of $1.48 were up 18 percent. Return on shareowners' equity (ROE) of 22.3 percent, excluding one-time charges, marked the third consecutive year in which we surpassed our TOWOLDMONOOI5958  For the second straight year, the total return on Monsanto's 20 Percent ^ ben^ark- shares was double that Investors continued to benefit from this, performance and from changed of the S&P 500 Index. perceptions about our business and its prospects. Monsanto stock opened the year at $24/i per share and closed it at $38%, a 59 percent increase. Including re invested dividends, our shareowners' total return of 62 percent far outstripped the 23 percent total return on the Standard & Poor's (S&P) 500 Index. This was the second straight year in which the return on Monsanto's shares more than doubled the return on the S&P 500 Index. I said earlier that there's opportunity for increased value to shareowners based on the performance of an independent chemical company. I think an even greater opportunity for value creadon will come from redefining Monsanto as a life sciences company. "We begin with good businesses in agriculture, food ingredients and pharmaceuticals, each ofwhich has a clear set of goals and clear strategies for achieving them. Each also has new products and new business opportunities within its domain, some ofwhich are described elsewhere in this report. We know there's plenty of value to be created We think there's more promise by successfully executing these individual business strategies, and, of course, we intend to do that. to the concept, of But we think there's more promise to the concept of a life sciences company than simply the skillful management of a portfolio of individual businesses, a life sciences company than simply each ofwhich makes use of the biological sciences. It's not difficult to see opportunities that can the skillful only be realized by integradng our capabilides in agriculture, food and health. These opportunities are of two general types: internally, the ability to management of a portfolio of istdividiial share knowledge and build scale; and, externally, the ability to apply a broad range of skills across businesses. the interconnecdons among agriculture, food, nutri- ------------ ------------ don and health. An obvious example of an internal opportunity can be found in shared technologies. It's already pretty clear that explosive new fields -- such as genomics, bioinformatics and powerful screening methods -- will apply broadly to agriculture, nutrition and health. They'll help us identify new targets for products and create new ways to discover and develop those products. For example, the ability to identify human genes that predispose people to specific illnesses or plant genes that affect crop yields or nutrient consumption creates possibilities for powerfully effective new products. More precise screening techniques can help us design product development programs that save time and money, as well as allow us to focus on the most promising candidates. Large-scale, state-of-the art capabilities in these fields, in addition to a network of relationships with specialized firms and universities, will be essential to companies that expect to be competitive. (continued on page 6) 1996 Monsanto Annual Report S TOWOLDMONOOI5959 ltfs a tribute to the income- generating . power of our businesses that we've continued tpproduce strong short-term financial growth while making increased investments for the future. S 1996 Monsanto Annual Report (continuedfrom page 5) Because of their scale, their costs, and, most important, the opportunities for shared learning and transferred knowledge, we think these kinds of activities need to be pursued on an integrated, enterprisewide basis, rather than separately in each of our businesses. One large external opportunity that we think can be usefully approached from the perspective of an integrated life sciences company is the field of nutrition. Until recendy, there have been two principal limitations on our ability to use diet to prevent or treat disease. ' First, our current knowledge of nutrition doesn't shed much light on the central question: Exacdy how do the components of our food cause or pre vent specific health outcomes? Second, even if we had much more informa- don about nutridon, we've been limited to the menu that nature (or, more accurately, centuries of breeding crops and animals) provides. Both of those obstacles are likely to diminish. New tools are beginning to create the possibility of a genuine science of nutridon, in which the effects of food on our health can be understood in considerable detail. As that occurs, nutrition can become an important and highly cost-effective part of our health care system. And plant biotech nology can help us design crops with the specific characteristics that demonstrably contribute to better health. One current example: We're starting to combine our work on better oils from genetically modified soybeans and canola (agriculture) with our capa bilities in food technology and in ingredient marketing (food ingredients) and with our knowledge of cardiovascular disease, clinical research, outcomes research and health-care marketing (pharmaceuticals). Even at this early stage, we think this integration of our capabilities will help us develop better products with more powerful benefits, demonstrate them convincingly, and get them to market faster. The most effective (and prob- ably the most cost-effective) strategies for dealing with cardiovascular disease are likely to involve a number of factors -- diagnosis, nutrition, exercise, stress and other lifestyle issues, as well as drugs and medical interventions. It seems plausible, then, that bringing a range of capabilities to bear on cardio vascular disease prevention and management may yield better results than addressing each factor separately. The same may be true of other diseases. We also suspect that a life sciences company may have something useful to contribute in addressing issues ofenvironmental sustainability. Certainly the prospect of a more sustainable agriculture is one of the promises of biotechnology. And our exploratory work in biopolymers -- biodegradable plastics and fibers that may one day be grown in crops -- may point toward more sustainable industrial practices as well. TOWOLDMONOOI5960 When we compare ourselves with other companies with similar aspirations, we feel good about our base in agriculture. We've put together much of what we'll need, and we think we're ahead of the competition. On the other hand, despite the fine progress at Searle, we would still like to expand our therapeutic breadth and geographic reach. Our strategy in food remains largely dependent on the unfolding of our agricultural capabilities. We don't think we have to own all the'capabilities that a life sciences company will need. Networks of alliances and relationships will in many cases be faster and better than internal development or acquisitions. But it's virtually certain that the major changes that drive these industries toward integration and consol idation will continue. There will be opportunities for acquisitions that add real value by bringing unique technology, by connecting technology to markets, or by connecting previously separate markets. The companies we compete with are very capable. In businesses where the prizes go disproportionately to the first company to bring a new technology to market, we don't underestimate the difficulty of what we've set out to do. That's why for the past sev eral years we've been steadily increasing the resources devoted to discovering and developing new products, to expanding our geographical reach, and to building the capabilities we'll need to market effectively against tough competition. It's a tribute to the income-generating power of our businesses that we've continued to produce strong short-term financial growth while making these increased investments. 1996 was a difficult year for many of our people. The year was full of notable accomplishments and successes for people to take great pride in, around the company and around the world. Yet the decision to split into two companies has caused mixed feelings. Along with the exhilaration of new challenges, there are unmistakable feelings of sadness and anxiety, caused in part by the loss of about 2,500 jobs as the two companies restructure themselves, and in part by the sense that a long and admirable era is drawing to an end. After 95 years, Monsanto is starting over. Each of the two new companies will create its own desuny. I believe the future is bright for the people and the shareowners of both. A Join us as we explore in this report theproducts, people and markets that are part ofour life sciences package We hope you find, as we have, some new ideas andpossibilities. Sincerely, Bob Shapiro Chairman and Chief Executive Officer March 3, 1997 1996 Monsanto Annual Report 7 i TOWOLDMONOOI5961 Billions of people, , one planet, and the to help ns lave better together A life sciences company starts with the convergence of what we know and what were still discovering. Here's what we know: Today, more than five-and-a-half billion people populate our planet. Roughly one billion of those people live in developed countries under economic systems that allow them to earn a comfortable living. Another oneand-a-half billion in emerging economies are within reach of a solid standard of living; they can aspire to a better future. Three billion -- most in the least developed nations -- face poverty. Economic sys tems worldwide are adjusting to these aspirations of greater wealth for more people. But the global environment is less adaptable. Todays productive systems will not work well as more people seek higher standards of living based on current practices in agriculture and industry that are environmentally unsustainable. (continued at top ofnext column) 8 1996 Monsanto Annual Report Information Technology in a growing world, it's the little fMngs (hat matter Jennifer Bahr is one ofa new breed ofscientist in a revolutionary field called molecular breeding. Scientists likeJennifer combine the know-how ofbiology and information technology to map a plant's genes and make stronger crops. A Rather than usepollen and traditionalplant breeding methods, Jennifer looks at plants on a molecular level andpinpoints desirable traits to be carriedforward . intofutureplant offspring. A Here's what she does: When a Monsanto plant breeder finch a plant with a unique natural trait, like higheryield, Jennifer takes a sample ofthe plant's DNA, its genetic identity. She then processes the sample to create a geneticfingerprint ofthe plant. On her computer, thefingerprint looks like thousands of tiny bars, similar to the scan code on afood label Each bar represents a different gene. This allows Jennifer to locate and mark the ones thatproduce the desired trait. A But that's only halfthejob. Once she's marked the good traits, she looksfor any indicators ofbad traits, too. With this information, Jennifer guides the plant breeder as to which plants to crossbreed and select so that superior varieties with optimum combinations ofgenes can be produced A _ TOWOLDMONOOI5963 (continuedfrom page 8flap) By approximately 2050, demographers believe the number of people on this planet will double to 10 billion. The overall amount of land, water, air and sunlight will, of course, remain virtually the same, but the land suitable for farming will be limited. Developed countries -- where a growing portion of the population is elderly -- face increasing demands , fo.r h. ealth. care . and diffic_ult . Ma.turi.ng popu.lat.i.ons i.n decisions about how to pay tor it. . . . .. . ,.r . developed nations will As a lire sciences company, increase the demand Monsanto believes there are for health care. promising approaches to problems like these. In particular, the interconnection of two major fields of technology -- biotechnology and information technology-- offers the prospect of profoundly changing the way we live, work and sustain our hopes for a good life. ' Biotechnology is, in a sense, a subset of information technology. Just as information technology is the science of encoding data onto silicon wafers, biotech nology is the science of encoding information into living systems. Biotechnology can give a plant the genetic information it needs to protect itself against insects, and it can provide the molecular information the human body needs to thwart the effects ofarthritis. Information technology and biotechnology are the most promising tools we have today to Information technology and biotechnology are the tools of the future to help farmers grow better food for more people on the same land. create better lives for more people on a sustainable basis. These technologies can multiply value while diminish ing waste and costs. It's already possible to imagine a day when the emerging science of nanotechnology will create value by encoding information into atoms. (continued on page 11) {22 < In 1900, the average male in the United States lived 45 years. By the year 2000, on average he'll live to age 74, in part became ofbetter nutrition and health care in de veloped countries. One ofthe challengesfar life sciences is to help this older population maintain a high quality oflife. TOWOLDMONOOI5964 Growing old in a growing world The diverse cultures of Japan, Europe and the United States face a common problem: How to provide health care at an affordable cost to an older population that is highly attuned to health and nutrition, demands the best possible care, and expects that its medical needs will be met. A As current debates in all these societies about the nature and funding of medical care demonstrate, this question may lead to deep controversy about the needs, rights and responsibilities of young and old, and about who deserves access to what level of health care. A This situation has two implications for a life sciences company. In the near term, pharma ceuticals continue to be the most cost-effective , _ treatment for health care problems. This fact is often hotly disputed in political debates about health care, but the benefits of pharmaceuticals relative to their cost are proven. A In the long term, the health care debate will inevitably shift to prevention. Medicine in developed countries is ,, no longer simply a drive to slow infectious diseases;., or to help people live longer. The goal now is to,-At- ensure the quality of life for people who are longer than ever before. Information; is pertinent here, too. In the formofbio; ___________________ Health Care it has begun to give us access to:gi sitions to specific diseases-In Population Growth Source: World Resources Institute mm WEEl Ml outcomes research, it helps us.pinpoint-Ulfe variables that make a difference between good health outcomes and poor ones. To begin to probe the implications of this field, Billion Billion Billion Monsanto has set up a health and lifestyle management group. Some of our partners in this effort study how behaviors affect health, quality of life, and vitality through out a lifetime. Other partners are experts at assessing health risks and creating custom ized solutions for patients. By integrating' our capabilities in plant biotechnology, nutrition and pharmaceuticals, we expect to help provide new approaches to disease A The world's population is expected to grow by more than 85 million people annually for the next 20years. By theyear 2050, todays population ofmore than 5 billion is likely to have doubled. prevention and management. A 1996 Monsanto Annual Report 9 TOWOLDMONOOI5965 Why we are what we eat of chromosomes, made up of millions of genes. Collectively, When Monsanto scientists tear back the husks of ears the genetic material of an organism is called a genome. of corn, they see beyond rows of kernels to the essence Through a massive, publicly funded global effort called the of plants -- their genes. In those genes are the foundation Human Genome Project, the location and purpose of every of a new life sciences industry. The study of the structure of genes and their organization into chromosomes is a new discipline called genomics. Every cell in the human body contains 23 pairs- ^; Crops V In 1997, Monsanto is launching _ YieldGard insect-protected com that is resistant to the com borer. Also in develop ment is Roundup Ready com, which is tolerant of Roundup herbicide. In the nearfuture, Monsanto will stack both traits in one plant so thatfarmers can have insect and weed confrnl in one iwfrm. Also ' con farmer nifi'er yiel- human gene is being pinpointed. At the same time, the mysteries o Genome astd of plant and bacterial Genomics: The totality genomes are being of all genes present in a unraveled. biological system is referred . As we identify to as a genome. The study of plant and human the genomes of organisms is a field known genomes, we can as genomics. begin to understand how human health is affected by the choices people make about how they live and what ey eat. Certain foods long have been thought provide health benefits, but we don't have a good understanding of why they may be beneficial or even if the benefits truly exist. If we can learn more about genomes and gene expression, we can become more precise about the way we' manage our health. The exploration of plant genomes also expands the possibilities of biotechnology. Specific traits might be inserted into a plant so that preventive treatment for a disease could be delivered by diet instead of drugs. This relationship between our health and our diet -- Definitions the foods that fuel and nourish us and give us energy -- has been critical to agriculture for thousands of years. A short list off words for a life sciences company As we study genomes, we can give plants new, more precise information more quickly rather than relying solely on the slow process of conventional plant breeding. 07- Biotechnology: Genomics has implications beyond creating ' Biotechnology harnesses the metabolic new products. By grasping the complexity of potential in living systems. Plant biotechnology, an the human genome, we may be able to improve extension of traditional plant breeding, is the addition of the effectiveness of clinical trials for new pharma selected gene traits to plants to develop useful new varieties, ceuticals. This, in turn, could enhance our ability At Monsanto, we're using biotechnology to convey insect protec- to discover new treatments more quickly. tion to plants, to change the nutritional composition of grains Genomics holds many promises: A doctor and to produce new therapeutics for cardiovascular disease, may one day diagnose the genetic cause of a among other scientific developments. disease and cute it instead of treating symptoms; Gene: a life sciences company may discover new Genes are the currency of biotechnology. They serve as components for foods that could help prevent templates for the production of proteins that regulate the that disease; and a farmer may even grow the metabolic activity in a cell, and are responsible for specific cure for it in his cornfield. A hereditary traits such as eye color or resistance to a disease. Chromosome: Generally located in the nucleus of the cell, chromosomes are clusters of genes that carry hereditary characteristics. 10 1996 Monsanto Annual Report TOWOLDMONOOI5966 Monsanto's Potential in a Start-Up Industry sciences exist at the explosion of interfaces." --Ganesh Kishore, assistant chiefscientist and chiefbiotechnologist IVIonsanto, as a life sciences company, starts with an advantage. After 95 years, our businesses have become uniquely around the prospect of creating products that provide better nutrition and health. We've always been interested in agriculture, food and wellness. That's not just where we're going; it's also where we've been. But the new emphasis on life sciences goes beyond the traditional model of running our After more than two businesses as separate decades on the market, organizations, each Roundup herbicide is entering yet another growth wlth own Ptentlal phase. Look inside to see and pipeline. We could how Roundup is growing. do that, and do it successfully, as we have in the past. Each sector has market-leading products, robust pipelines, outstanding financial perform ance, and a strong management team. The potential of life sciences, though, is in the connections -- the ties between agriculture and food, and between food and health, and the integration of all three. Common technologies solidify the base. Common goals -- better, sustainable nutrition and health -- fuel the growth. <3 When Ganesh "Kish" Kishore (left) gave a speech on plant sterols, an idea lit up in the mind ofJon Lawson (below, right). Sterols are unsaturated alcohols, like cholesterol that arefound in both plants and animals. BecauseJon was working on a pharmaceutical that uses a raw material similar to sterols, he saw a connection, (continued below) This integrated system --- not; the individual businesses -- is the* promise of life sciences. Although we have our eye on the promise, we haven't forgotten what brought us here. As we're pioneering a new company and a new industry, we're committed to growing the products that have already made us successful. Products like Roundup herbicide, NutraSweet brand sweetener, Ambien short-term treatment for insomnia, and Daypro arthri tis treatment have dual roles: They are the foundation for our strength today and the basis for our life sciences business tomorrow. (continuedfrom above) By sharing their ideas and technologies, Jon and Kish expanded thepotentialforJon's material into ingredientsfor anti-inflammatory agents and oral contraceptives. Kish calls connections like these an "explosion ofinterfaces"-- technologies developedfor one use spreading into a variety ofother uses in lift sciences. 1996 Monsanto Annual Report 11 TOWOLDMONOOI5967 Roundup Herbicide After more than 20- years on the market, it's not only about controlling weeds It's a story that's been told, bat one that bean repeating, for few companies have been fortunate enough to discover a product like Roundup herbicide. Glyphosate -- the active ingredient in Roundup -- was discovered as a herbicide by Monsanto scientist John Franz in 1970. Roundup is a postemergent Crops t> Roundup Ready soybeans, which are tolerant of Roundup herbicide, werefully sold out in their firstyear on the market. All available seed was planted on herbicide, which means that it works after the weed has sprouted. It is also nonselective, that is, it will roughly one million acres in the United States in 1996. Soybean growers who used kill growing plants -- both weeds and valuable crops. Roundup Ultra herbicide on This type of herbicide was new both to Monsanto and to farmers, but it quickly proved to be an extremely Roundup Ready soybeans reported extremely high satisfaction with the performance ofthe valuable tool. During its more than 20 years on the ' market, Roundup has grown in four distinct phases. technology, and indicated they would more than double their Roundup Ready soybean acres in 1997. Our seedpartners expect to have enough Roundup Ready It started as a premium-priced product for soybean seed to plant between eight million and high-value crops. The price was cut over time so the product could be used more broadly in previously 10 million acres in the United States. Another 250,000 to 300,000 acres have been planted for the 1996-1997growing untapped markets. This strategic pricing plan season in Argentina. substantially increased volumes, which more than offset difference in margins caused by the price decreases. As an added benefit, this strategy helped lower the unit costs of producing Roundup because of volume increases and major investments in manufacturing More than $200 million has been invested since 1995 to increase the manufacturing capacity for Roundup t orldwide. technology. We've invested more than $200 million since 1995 --with another $180 million planned in 1997 -- to increase capacity worldwide and maintain our position as the highest-quality, lowest-cost o producer. In the early 1990s, Roundup entered a third growth phase. We began to work with farmers who were adopting conservation tillage practices, and we were capturing greater value from our entry into emerging global markets. Conservation tillage began as an environmental trend. Farmers could reduce soil erosion by reducing or eliminat ing tillage practices, often used as a way to control weeds. *! As more farmers adopted this technique, they also found 'JfyimJBBj tMsSBBSwm wEBBBBmk WmrnmM H? they could reduce labor, energy and equipment costs. Hr Roundup is the herbicide of choice for conservation tillage W because it is effective and cost-efficient. More than 40 percent of the volume growth for Roundup in the last few years has come from expanded use of conservation tillage practices. ' (continued on page 11B) TOWOLDMONOOI5968 (continuedfrom page 11A) Conservation tillage is wellestablished in Brazil, Australia, Volume Growth for Roundup Herbicide 1991 through 1996 because it biologically degrades over time in the soil into natural products, such as carbon dioxide. As a major Argentina and the United States. force in the conservation tillage move But it is used on no more than 40 percent of potentially suitable farmland worldwide. Currently, conservation tillage is used on more than 185 million acres. By the year 2000, the practice should spread to more than 240 million acres. 200 ment, Roundup has helped reduce erosion on farms in areas like the Cerrados in Brazil. Here, five tons of topsoil are lost for every ton of soybeans harvested by farmers who plow to control weeds. Roundup also has been the herbicide of choice to help restore The fourth phase of growth for Roundup began in the 1996 growing Rest of World historic landmarks marred by weeds, such as the ruins of season, with the introduction of Roundup Ready crops, which are A In the lostfiveyears, Roundup herbicide has grown faster in countries Pompeii in Italy and the Forbidden City in China. On the Galipagos designed to tolerate Roundup. Roundup Ready crops are an integration of traditional agricultural solutions and biotechnology. After planting a crop that is tolerant of Roundup, a farmer can spray his field with Roundup without damaging the outside the United States, where it already has generic competition. More than 90 varieties of Roundup exist worldwide, each one designed specifi callyfor regional conditions, crops, andgrower needs. Adoption ofconser vation tillage techniques is the largest globalgrowth opportunityfor Roundup in the immediatefuture. Islands, Roundup was used to control invasive weeds introduced by man that were choking out the native plants of this unique ecosystem. . With biotechnology, Roundup is part of an integrated system that can increase yields, improve food growing crops. Roundup Ready crops have opened quality, and save soil. It meets the requirements of new markets for Monsanto, while providing farmers sustainable agriculture: It helps farmers provide with innovative, cost-effective solutions to weed control. food for the world's growing population, enhances In all of its growth stages, Roundup has contributed environmental quality, and ensures the economic to sustainability. Many farmers choose Roundup viability of farming. -1 3 : "4 Worldwide Conservation Tillage Adoption by 2000 In acres Source: Monsanto estimate Canada 1996 14,800,000 2000 19,000,000 United States 1996 100,000,000 2000 120,000,000 Latin America North 1*99*6 1 ,50o"()0o" 2000 4,000,000 A Roundup herbicideplays a key role in greaterfarmer use ofconservation tillage Brazil ------------------------ practices worldwide. By theyear 2000, 1996 16,700,000 conservation tillage practices are expected 2000 25,800,000 to be used on more than 240 million acres worldwide. Areas like China, Africa, Eastern Europe and theformer Soviet Union offer longer term opportunities _ _ __ forfarmers in these areas to adopt this 1996 10,800,000 technology. 2000 18,400,000 Western Europe 1996 9,600,000 2000 10,400,000 India Korea, Japan, Taiwan 1996 200,000 2000 700,000 1996 500,000 2000 2,700,000 Thailand _ Sri Lanka 1996 300,000 2000 600,000 1996 600,000 2000 2,300,000 Indonesia 1996 1,700,000 2000 4,500,000 Philippines 1996 100,000 2000 600,000 Malaysia 1996 300,000 2000 500,000 Australia 1996 31,600,000 2000 33,900,000 1996 Monsanto Annual Report 1 IB TOWOLDMONOOI5969 We're working with nature's most efficient factories * production powerhouses that use solar energy and are 100 percent biodegradable Take a plant, add water, sunlight and nutrients, and you beede. Roundup Ready soybeans and canola can grow after get natures most productive factory. Take a plant, add being sprayed with Roundup herbicide, while the weeds what Monsanto knows about genes.and biotechnology, around them die. Yet, each of these plants on the market and you get the most cost-efficient and sustain- # Inside eve plant t0<^ay ^as only one tra' mdified. able _ m, anu.factu, ring system ever. ,,. r. , . , Today, the plant factory is fairly simple. .li.es t.h, e po.ten.t.ia,l We're now expanding the information so that the . r. irr , ,, ^ g plant can protect itself in more than one way. ror Through biotechnology, we've put the informa- ` example, in 1997, we will commercialize cotton that tion inside the seed so that the plant can make what is both insect-protected and tolerant of Roundup. It's ' it needs to protect itself, Our Bollgard insect-protected being created through a technique known as gene stacking. cotton wards off budworms and bollworms. Our NewLeaf In the future, we'll add even more data to the seed, so potatoes make a protein that fends off the Colorado potato (continued on page 13) Biofactor In 1996, we acquired Biopol, a business that manufactures biodegradable plastic polymers used in consumer products and packaging. Currently, polymer is produced in a pilot project through the fermentation of micio organisms. On a test scale, we're now also making the biopolymer directly in plants through biotechnology, A We've already developed plants that produce biodegradable plastics au approximately S percent of their weight. At 10 percent, this will become an interesting commercial proposition. At 20 percent, it may become a breakthrough technology, A Because they're biodegradable, these polymers are ideally suited for products that could < be disposed through composting. Fibers, food packaging, grocery sacks, garbage bags, disposable dinnerware, and containers for food, cosmetics and personal care products someday might all be derived from a plant. A Of course, the plant "factory" itself is biodegradable: Once the plants are harvested and the polymer extracted, what remains can be composted and used for fertilizer. , Unlike polymers available today, which deplete our finite supply of fossil fuels, the future Biopol polymers will use renewable resources -- plants. A 12 1996 Monsanto Annual Report TOWOLDMONOOI5970 (continuedfrom page 12) that the plant will have a stronger root system that absorbs nutrients more efficiently, and so that it will better withstand drought, frost and other adverse weather conditions. , As the plant holds more complex information, the goal of agriculture will shift. Farming no longer will be driven principally by the quantity of commodity foods harvested; it also will be Through biotechnology, about,the quality of the we can increase the foods produced. We're healthful properties of foods. already working on tech Someday, healthier foods nologies that improve oils, may be ''prescribed" proteins, nutrients and to prevent diseases. vitamins in plants, and that deliver more nutrition from a given amount of food. Biotechnology will help us produce foods that are, in fact, better for our health. By combining our pharmaceutical, food o and agri cultural expertise, Monsanto expects to develop a range of interrelated products and services that prevent or treat disease. Our expertise in pharmaceuticals will guide us in understanding disease, defining the targets for treatment, and discovering the compounds that will make someone healthier. Our skills in biotechnology will help us determine the, best way to produce the product: as an enriched fbbd, as a food supplement, or as a phajn^ac^utical. A./ /. Crops /< Wheat has always been fdifficult to hybridize -- that is, to take two parent seeds and iss them to create a new variety. 1onsanto's HybriTech Seedgroup as created new lines ofhybrid 1wheat by using the company's new SCeiisis hybridizing agent. The % new varieties are being introduced in France and the UnitedStates. Test results show that the wheat adapts better to cold and drought, md thatyields improve. A NewLeaf insect-protected potatoes were planted commerciallyfor the first time in 1996 in the United States and Canada. Future potato products will offer virus-protection and disease-control. We're also working on a potato with reduced water content. Ifthe moisture content can be cut, the potatoes will absorb lessfat,, and oil when fried. The results would be lower costsforprocessors and healthierfriedpotato productsfor consumers. Food Healthy foods from the deep blue seas * Deep down In the oceans live some micro algae that can improve the health of our eyes, brains, hearts and nervous systems -- with just a little help. By fermonting micro-algae harvested from the seas, Monsanto produces highly unsaturated fatty acids (HUFAs). These are oils typically found We sell these enhanced algae as feed for chickens, which in turn lay eggs enriched with HUFAs. These eggs, called Omega-3 DHA, were Jr commercially launched by our customer OmegaTech in Spain, Germany and Portugal in 1996. Almost 100 million Omega-3 DHA eggs were sold in their first year on the market. The product was honored with the Most Innovative Finished Food Product Award at the Food Ingredients Europe exhibition held in Paris in 1996. - 1996 Monsanto Annual Report 13 TOWOLDMONOQ15971 tarting Over with New Definitions of Success Life sciences redefine of innovation For 95 years, Monsanto people have continu and creativity are the cultural connections. ally reshaped the ways they (^yscover, create, sell The technologies that underlie the life and interact to meet changing expectations and conditions in the global marketplace. Now, as part of a start-up life sciences company, sciences are unfolding at Speed and creativity drive incredible speeds. breakthroughs -- and Today's product life cycles continuous improvements- Monsanto's people are again rekindling their are a fraction of those in the past. Competitive creative and competitive spark. The advantage requires the constant goal is to bring a stream of unique, development of new products. valuable products to market ,, And they must be launched ahead of the competition. simultaneously -- and Just as ur knowledge of powerfully -- in multiple genes and information are markets worldwide. Any position the technological connections other than first or second in the market of life sciences, speed is a lost opportunity. Speed and creativity are at the root of Culture the big breakthroughs -- and also of the continuous improvements in products, Growing growth. The challenge was to coax oat latent Ideas and energy across the organization. The solution was the costs and strategies that translate into value for our customers and shareowners. creation of dozens of global cross-fanctional teams that were given the resources, structure and encouragement to think beyond their day-to-day business and to make connections with others. The result was more than a thousand new ideas for growth. Of those ideas, 66 were chosen to be tested as full-scale business concepts. This list was further refined to 38 proposals, and later to 10 growth projects that were funded with internally generated start-up money. 14 1996 Monsanto Annual Report TOWOLDMONOOI5972 "The biggest mistake that anyone can make is moving slowly, because the game Is going to be Over before you start." --Hendrik VerfaiUie, executive vice president In one year, insect-protected Bollgard cotton made an incredible trip around the world, with stops in five countries. said they were either "satisfied" or "very satisfied" with the cotton's Cotton Acres Worldwide Its passport was a gene that helps cotton ward offseveral overall performance. Only 2 insect pests. Its ticket was speed. Our seed partners continue percent said they wouldn't The gene for Bollgardhelps control a to expand cotton seed buy Bollgard again in 1997. number of caterpillar insects that plague with the Bollgardgene But before these results the world's major cotton growing areas. for insect protection in were in -- even before the These insects are difficult and costly to desired varieties to meet first seed was planted in control with conventional insect sprays. market demand. U.S. soil -- cotton farmers Bollgard began its journey in the Cotton in Mexico were clamoring for Belt of the United States, the largest cotton-producing coun Bollgard Without access to try in the world in 1996. During the first year seed with the Bollgard gene, of commercialization, our cotton seed partner, they believed they would lose a 41 Xcxes witli BoUgzrd in 1997 - two million to three million acres projected _ Semellilog global cotton market- 79 million to 80 million acres Delta & Pine Land Co., offered two varieties of cotton with the Bollgard gene. Approximately 5,700 U.S. farmers purchased Bollgardcotton varieties, which were then planted on more than 1.8 million acres. competitive edge to their northern neighbors. Mexican farmers and cotton industry associations, working with Monsanto, won initial regulatory approvals to A Approximately threequarters ofthe 82 million acres ofcotton grown world wide are targetedfor sales of Bollgard insect-protected cotton. Caterpillar insects In 1997, Delta & Pine Land expects to sell signifi- candy more acres worth of seed. It takes several years for seed companies to produce allow precommercial, large-scale plantings of Bollgardcotton in the spring of 1996. Delta & Pine Land supplied seed for 2,200 acres in the South art prevalent on these acres and can he controlled more economically with Bollgard. Seed sales in 1997 are pro jected at two million to three million acres. sufficient seed in desired varie Tamaulipas region, which accounts ties to meet grower demand. By (continued on page 16) 1998, our seed partners, including Delta & Pine Land -- and its sub sidiaries Suregrow and Paymaster -- and Stoneville Pedigreed Strategy the uimth^Xd^ZStial Seed Co., expea to have How do yon create value for a brand-new enough seed in desired varieties product from a brand-new technology? to supply the U.S. market. In the past, insect control came in the form of a pesticide U.S. cotton farmers who package. Now, with Monsanto's new crops, developed used Bollgard saw an average yield improvement of 7 percent. Overall, growers saved approximately $33 per acre on land planted with Bollgardcotcn> ^improvementsand through biotechnology, insect control comes in the form of genetic information tacked inside the seed. In order to price the seed fairly, but in a way that funds future technology, we' created a licensing fee.This license is sold with the seed to give Monsanto the value it needs to support Mexican regulatory approvalsJbr the total COSES For lriSCCt control Bollgard cotton. In 1996, cotton were taken into account. In a sur- this innovative technology and to give the farmer a break through technology backed by our service. The fee also wi,h tllgard ri!\w??7nL vey of the growers who planted on 2,200 acres in Mexicot South , , r r pp Tamaulipas region, Bollgard cotton, four out of five rewards agricultural produets distributors for the major role they play in educating the farmer about insect control. 1996 Monsanto Annual Report 15 TOWOLDMONOOI5973 Worldwide Regmiatoiry Appxorols of Czop Years indicate earliest expected dace of approval Argentina 1996 Roundup toadysoybeans 1938 Roundup Ready soybeans 1999 We/dtordinsect-protected corn 2000 to//*ard insect-protected cotton Roundup Ready corn 2001 Roundup Readycotton MmmtwmUm 1996 Ingard insect-protectod cotton Roundup Ready soybeans 1998 Roundup Ready cotton Brasil 2000 to//fardinsect-protected cotton Roundup Readycorn YieldBard insect-protected com 2001 Roundup toadycotton Canada 1995 Roundup Readycanola 1998 Bollgard insect-protected cotton Hewleaf insect-protected potatoes Roundup ffeadysoybeans 199Z Hewleafflm insect- and virus-protected potatoes toirtea/Y insect- and virus-protected potatoes Roundup Readycotton Wa/dtordinsect-protectad corn China 1998 Bollgard Insect-protected cotton 1999+ YieldBard insect-protected com 1997 ' Hewleaf insect-protected potatoes 1998 MalsBard insect-protected corn 1999+ Roundup Readycorn Roundup Readyoilseed rape Roundup Ready sugar beets _ India _ __ 1999+ Bollgard insect-protected cotton YieldBard insect-protected corn Indonesia 1999+ toward insect-protected cotton Roundup Ready cotton y/e/dfordinsect-protected corn .......!!?."....... 1998 , Hewleaf insect-protected potatoes Roundup Ready oilseed rape Roundup Ready soybeans 1997 Bollgard insect-protected cotton Hewleaf insect-protected potatoes (new varieties) Roundup Readyootton YieldBard Insect-protected com 1998 Roundup Readycom Mesdco 1998 Hewleaf insect-protected potatoes 1997 Bollgard insect-protected cotton Roundup Ready cotton A Regulatory approvals ofproducts created through biotechnology are being sought simultaneously in multiple countries so that farmers around the world can have immediate access to these improved crops. In some countries, approvab are neededfor a food developed through biotechnology to be imported. 1998 Roundup Readycotton YieldBard insect-protected com 1999 Meetoa/Plus insect-protected potatoes Hewleaf Y insect-protected potatoes Roundup Ready com Sooth Africa 1998 Bollgard insect-protected cotton 1999+ Roundup Ready cotton We/d6ardinsact-protectad com Thailand 1999+ Bollgard insect-protected cotton Roundup Ready cotton We/dtordinsect-protected com United States 1994 towtaa/insect-protected potatoes 1999 to/ffardinsect-protected cotton Improved ripening tomatoes Roundup toadysoybeans 1998 Roundup Readycanoia Roundup Ready cotton Hewleaf insect-protected potatoes (new variety) YieldBard Insect-protected com 1998 toivlea/Ptus insect-and virus-protected potatoes Hewleaf Y insect- and virus-protected potatoes Roundup Readycom Vietnam 1999+ to/fcardlnsect-protected cotton Roundup Ready cotton Zimbabwe 1998 Bollgard Insect-protected cotton 1999+ Roundup toadycotton (continuedfrom page 15) for 30 percent of the total cotton acreage planted in that area in 1996. Enough seed for approximately 45,000 acres is expected to be available to Mexican cotton growers in 1997. The South Tamaulipas, La Laguna, and North and South Sonora regions will be the key growing areas for next year's crop of insect-protected cotton in Mexico. S&Ugswa Crowes tlie Pacific ses*it While Bollgard cotton was fighting off caterpillar insects in farms across the United States and Mexico, there was work being done an ocean away. Monsanto's Australian contingent was securing registration -- a year ahead of schedule -- for a limited commercial launch in New South Wales and Queensland. Currendy, the Australian cotton . industry spends approximately $100 million annually to control pests. Most of them are insects that can be controlled with Monsanto's insect-protected cotton, marketed in Australia under the trademark Ingard. While Australia was preparing for its first 84,000 acres of Ingard cotton, Monsanto and Delta & Pine Land were putting in place the systems that would allow farmers in China to have access to the Bollgard gene. China required a package of integrated solutions. Not only is the Bollgard gene within the seed; treatments to the outside of the seed help it resist diseases and insects that attack as it starts to grow. The result is a higherquality seed that germinates better and produces a more vigorous plant. To sell seed in China, the world's second-largest cotton region, we formed a joint venture with Delta & Pine Land and the Hebei Provincial Seed Industry Group Corp., a company that has extensive experience working with Chinese cotton farmers. This partnership is the first cotton seed joint venture in China formed with investment from outside of that country and the cooperation of a provincial Chinese seed company. By the spring of 1998, enough seed will be produced to plant approximately 500,000 acres. Bollgard cotton's next destination is Africa. Another joint venture has been created to supply Zimbabwe, plus other cotton growing regions in southern Africa. In an average year, farmers in Zimbabwe plant 500,000 acres of cotton and need to spray insecticides several times to control caterpillar insects. Further south on the African continent, we plan to market Bollgard cotton in South Africa in 1998, also through a cooperative arrangement with Delta & Pine Land's local seed partner. The itinerary for growth of Bollgard also-includes India, the third-largest producer of cotton. Initial launch of hybrid cotton with the Bollgard gene in India is expected in 1999, and full commercial sales may occur in 2000. A 16 1996 Monsanto Annual Report TOWOLDMONOOI5974 PULL Creativity "The most Important question In science is `What should 1 work on --Dr. Phil NeedUman, senior vice president and chiefscientist For 25 years, Philip Needleman, Ph.D., arthritis. He then set about to find the switch that - Monsanto's senior vice president and would mm off the creation of prostaglandins. By the chief scientist, has been piecing together mid-1980s, he had zeroed in on an enzyme called a puzzle to understand how inflammation cyclo-oxygenase (COX). occurs in the human body. Today, he is Phil's research team uncovered two types of within a few years ofseeing whether that cyclo-oxygenase --COX-1 and COX-2. COX-1 puzzle will be solved. is the desirable one -- it performs the basic func Phils quest started in a research laboratory at tions that keep the body running, like protecting Washington University in St. Louis. He was curioiis the stomach lining. COX-2 is the less desirable about prostaglandins, the hormone-like fatty acids one -- it is summoned by a signal like arthritis found throughout the body. They affect everyday and inflammation and causes swelling and pain. functions like blood pressure and body temperature. At this point, Phil had some great science, but His first 10 years of research were devoted to unrav was there a treatment to be found for people eling how prostaglandins are activated in the body. His laboratory group discovered that prostaglandins con centrate in a specific part of the body only in response to a specific stimulus, such as the inflammation of who suffer from arthritis? Promise let a ptaassle Today, the most widely prescribed treatments for the e Today, sales in the Key markets for arthritis treatments total $5 billion. Markets pain of arthritis are non steroidal anti-inflammatory drugs (NSAIDs). Daypro, Arthrotee and Cytotae perform NSAIDs work by blocking both COX-1 and Currently, nonsteroidal anti-inflammatory^ COX-2. This stops the pain and swelling, (NSAIDs) are the most widely used prescription but it also arrests the useful properties of arthritis treatments, with more than 30 on the A Dr. Phil NeedUman is senior COX-1. The result is that many market in the United States alone. Sales in the seven most significant arthritis markets total $5 billion. Searle, Monsanto's pharmaceutical business, vice president and chiefscientist at patients who take NSAIDs for Monsanto. Phil and his team are working end Up with potentially on a novel newpharmaceuticalproduct r. r ' that blocks the inflammation ofarthritis life-threatening stomach holds the No. 3 position in these key markets. . while protecting the gastrointestinal ulcers because the drugs pre In 1996, sales of Daypro arthritis treatment reached liningfrom ulcers. vent COX-1 from doing its job $276 million and ofArthrotec arthritis treatment, of protecting the stomach lining. $82 million. Cytotec ulcer preventive, which is often In 1989, Phil joined Monsanto. He quickly sold with arthritis treatments to prevent the potentially formed a molecular pharmacology group to start life-threatening ulcers sometimes caused by NSALD use the hunt for a new inhibitor that would block the added another $178 million in sales. . inflammation caused by COX-2, while keeping the (continued on page 18) 1996 Monsanto Annual Report 12 TOWOLDMONOOI5975 ... is the entire process by which ideas are generated, developed, and transformed into value." - Bob Shapiro, chairman and chiefexecutive officer Creativity isn't the purview only of scientists and artists. It's also essential for a management team charged with creating value in a growth company We do that in ways that reflect sound financial management and provide superior returns to our shareowners. (continued on back, page 17B) 1996 Monsanto Annual Report 17A TOWOLDMONOOI5976 (continuedfromfront, page 17A) ' Life sciences is an enormous field, spanning agriculture, food and health. Selecting the most promising targets for investment and growth, maintaining sound financial discipline and providing superior returns to shareowners while building the future -- these are the primary challenges for Monsanto's management. In 1996, the company significantly increased investments in acquisitions, research and technology, major product developments, new product launches, and other global growth initiatives. Yet, if a one-time charge for a reserve and other restructuring actions is excluded, Monsanto set a record for net income and earnings per share in 1996. Were using several tools to align our new life sciences company with the expectations inherent in a growth stock. On Jan. 1,1997, Economic Value Added (EVA) became our primary measure for financial performance. Simply stated, EVA is our aftertax operating earnings less a charge for the capital used in the business. EVA was chosen as our new financial measure because it correlates more closely with stock price than other financial measures do. Additionally, employees can incorporate ideas to improve EVA into a range of their daily business decisions. All incentive compensation plans are now tied to meeting EVA targets. Also during 1996, we granted stock options to the 95 percent of our employees who formerly did not participate in a stock option program. We made another grant in 1997. The revamped Monsanto compensation program for senior management includes a unique stock option program in which options vest only when the stock reaches set targets. The program also requires executives to purchase a substantial amount of stock with their own money, using full-recourse loans. The maximum incentive for the performance portion of this program will be triggered only ifMonsanto's total return is among the top quartile of the Standard & Poors Industrials during a period that ends Dec. 31, 2000. A 1996 Monsanto Annual Report (continuedfrom page 17) stomach protection of COX-1. Celecoxib was born from this work <3 Before an arthritis sufferer can have access to a new treatment Uke celecoxib and regain an active lifestyle, the drug mustpass through severalphases oftesting and approval They are: and that of scientists at Searle, Target Disease Identify illness Monsanto's pharmaceutical unit. Patient trials for celecoxib, Searle's working name for this compound, showed that it would relieve pain. ' Further Phase II studies demonstrated that celecoxib would treat both rheumatoid arthritis and osteoarthritis -- the two most common forms of arthritis -- without creating stomach Celecoxib could ulcers. Other studies showed become a blockbuster chat ^ ^ was safc ^ effective, product for pain and and that stomach ulcers did inflammation in arthritis not develop, patients, offering an alterna- The . of ^ puzzle five to NSAIDs as a treatment are now almost in place. Phil and the Searle research team are conducting Phase III trials. At the conclusion of these trials, the new drug application will be submitted for regulatory approval in Europe and the United States. These applications will probably be filed in 1998, with commercial launch anticipated in 1999. Arthritis Discovery Selectpotential compounds Preclinical Testing Determine efficacy and safety in animals Phase I Testfor tolerance and side effects Phase II Testfor desired effect Phase III Testfor safety and efficacy in targe patientpopulations New Drug Application Filefor approvals with regulatory agencies What started as one scientist's curiosity is today a high- stakes race between Searle and Merck 8c Co. Each company hopes to be first to bring this breakthrough therapy to market. But the race won't end there: Searle scientists already have backup versions of celecoxib and a second generation COX-2 inhibitor in clinical trials. . There are other intriguing possibili ties. Initial trials also suggest that inhibiting COX-2 may prevent some forms of colon cancer from progressing and possibly even from occurring. Trials with celecoxib Searle tabes total-patient approach to arthritis Arthritis is one ofthe mostprevalent incurable and irreversible diseases, and there are more than 140 different types. The most commonform -- osteoarthritis -- affects about 10 percent ofthe world's population. An estimated 50percent of already have started for some patients whose family medical histories put them at high risk for developing the disease. Possibilities also exist to apply what's been learned in developing celecoxib to finding a treatment for Alzheimer's disease, as inflammation also is found in the brain when Alzheimer's occurs. Although only the inflammation people over 60years old have it. There are currently an estimated . 18 million people with osteoarthritis -- and that number is expected could be treated and not the underlying cause, the understanding of COX-1 and COX-2 might lead to rise as the population ages. The second most common type -- rheumatoid to a way of slowing the progression of this arthritis -- affects about 2percent ofthepeople debilitating disease. worldwide, and two to three times as many women as men. Phil Needleman is one of the few- Searle, one ofthe world's largest developers ofarthritis treatments, scientists who may see their dreams has a three-pronged, total-patient treatment approach to managing through -- all the way from the arthritis. Called the Searle GlobalArthritis Initiative, it includes: Medical therapy to reduce and controlpain and inflammation, Searle Patient Partners in Arthritis, a program in which arthritis test tube to a human.drug proven safe and effective, and approved for use worldwide. His lifetime patients help medical students and doctors better understand the commitment to solving the disease. Theparticipants also encouragefeUow arthritispatients puzzle of inflammation could to become more involved in their own health care. lead Searle to one of its biggest Arthritis Connection, a program that introduces seniors with breakthrough drugs. A arthritis to the resources available on the Internet. It connects them with an online community wherepeople can get advice from others who have arthritis andfrom health care professionals. To connect to this Worldwide Web page, setyour browser software to: http://www,arthritisconnection.com 18 1996 Monsanto Annual Report TOWOLDMONOOI5978 When Monsanto Company spins off its chemical operations, it will send a start-up company into the marketplace that will immediately take its place on the Fortune 500 list with $3 billion in annual sales. The chemical businesses will have nearly a century's worth of advantages over a typical newly traded public company. In the past 95 years, the chemical businesses have established a leadership position as a globally competitive operation with . a history of proven financial, environmental and community leadership. Among its strengths are: * A chemical-industry focus and a starting position of strong operating cash flow and global reach, A proven management team with a history of achieving operational excellence, A commitment to reducing costs backed by a track record of being a low-cost, highquality producer that offers best-in-class service to its customers, and * A compensation philosophy that rewards shareowners first and ties employees to the shareowners' success. The purpose of the spinoff is. to allow this successful business to reach its maximum potential and thereby to unlock signifi cant value for shareowners. The 8,500 employees of the chemical businesses are dedicated to this purpose. Inside, we explain how we'll achieve these goals. < Products representedfrom top: Phos-Chek fire retardant, KeepSafe glassfor residential security windows, Resimene amino-crosslinkers for automotive coatings, and nylon fibers for Wear-Dated carpet. 1996 Monsanco Annual Report 19 TOWOLDMONOOI5979 VALUE FROM POSITION Streamlined, Flexible and Focused The chemical businesses will begin independent operations with the key components for continued success already in place: strong operating cash flow, proven management, and market-leading products. A Robert G. Rotter andJohn C. Hunter HI will lead the new manage ment teamfor the chemical businesses. Potter brings 32years ofexperience with Monsanto's chemical operations to his newposition as chairman and chiefexecutive officer. Hunter will serve as president and chiefoperating officer. Most recently, he headed the company's fibers businesses. Add to that base a decade's worth of continually reshaping operations to improve earnings, reduce costs, increase productiv ity, and provide excellent quality and service to our customers. The result is a new public company -- streamlined and focused on the value to be created from a world-class player in the chemical industry. The chemical businesses compete in a multibillion-dollar industry where success is measured by quality and customer service, and by the ability to adapt products to constandy changing market needs at competitive prices. We already have a global presence, with roughly 35 percent of our sales generated outside the United States. We have bases in Asia, Europe, South America and North America. We will start out with the resources necessary to compete, and an organization flexible and agile enough to act quickly on new opportunities. We expect to be a tougher and stronger global competitor and to build on our leading positions in our key markets. VALUE FROM ORGANIZATION Large Enough for Presence, Small Enough for Speed We're organizing our chemical businesses so that they're large enough to have a significant presence in their markets, but small enough to be nim ble and responsive. The businesses will be responsible for worldwide profitability and stewardship. They will be supported by a focused organization designed to help make the businesses highly competitive and to take quick advantage of oppor tunities in the marketplace. Overall, we want to be closer to our customers and provide better resources for mar keting and technology support when and where our customers need them. Our new operating process will enable us to shorten decision times, put the proper priorities on the use of assets, and shift resources more quickly to anticipate and take advan tage of market opportunities. This process is designed to provide worldclass customer service, technical support, and application of products to constantly changing market needs. We're strengthening our partner ships with our customers. We're focusing our entire business process on their needs -- from our raw materi als all the way to the consumers of our customers' products. Our research efforts are more tightly linked to mar ket needs and market value. We'll be as quick to stop an idea without a market application as we are to launch a research initiative to meet an identified market need. 20 1996 Monsanto Annual Report t i TOWOLDMONOOI5980 VALUE FROM PERFORMANCE Improved Earnings Fueled by Operational Excellence Operating Meaauxai Dollars in millions 800 600- 400 Over the last three years, operating income for the chemical businesses has steadily improved, if nonrecurring charges for restructuring and the income from divested businesses or businesses transferred to joint ventures are excluded. Sales likewise have grown in the same time period, if sales from businesses that have been divested or formed into joint ventures are excluded. Much of the ongoing improvement can be attributed to a major effort to redesign operations and reduce costs. The redesign process yields millions of dollars in cost reductions each year. This process is being carried forward and will remain a priority in the new organization. Although we are not attempting to save our way to prosperity, we will never stop looking for improvements in costs, productivity and service. Our emphasis on cost reduction and productivity improvements frees resources and allows us to take immediate advantage of market opportunities. Our bias will be toward incurring variable rather than fixed costs to remain as flexible as possible and to reduce cyclicality. Our cost reduction effort is focused on two areas: manufacturing effi ciencies and marketing, administra tive and technology (MAT) costs. Most of the near-term capital projects we have planned will both increase volumes and lower the cost of manu facturing our products. We're also implementing a reengineering program based on a technologically advanced software system that will support every part of the supply chain, such as production, logistics, procurement, customer service, capital projects and inventory management. We plan to have this system fully operational before the year 2000. We expea that it will significantly reduce costs and working capital. Net Sales Dollars in millions 94 93 96 & World Eutps UiitedStete* A Salesfor the chemical businesses wouldhave increased 6percent in 1996ifsalesfrom businesses that were divested or transferred tojoint ventures were excludedfrom 1995 sales. Higher sales volumes and an improved sales mix contributed to the increase. Operating Coatrtbmtioa Operating Income A Operating income in 1996would have been up 3 percent ifone-time chargesfor restructur ing and other items in both 1996and 1995 were excluded, as well as income contributions .r from businesses divested or combined intojoint _ ventures. Operating contribution, which is oper ating income excludinggoodwill amortization and the effect ofrestructuring actions and un usual items, was down slightly because oflower average sellingprices, higher spending on growth initiatives andhigher manufacturing costs. Priority on Balancing Demands for Cash The chemical businesses have always generated consid erable cash from operations. Balancing the demands for this cash will be a priority for the management team. The businesses should have suHicient cash (low to service debt while maintaining an investmentgrado credit rating. We expect to spend more in the future on capital investments for technology-driven cost reductions and on debottleneck ing existing facilities. The chemical businesses also plan to continue to implement an Economic Value Added ' (EVA) measurement of financial per forma nee. 1996 Monsanto Annual Report 2i TOWOLDMONOOI5981 VALUE FROM GROWTH OPPORTUNITIES Growth F^ozn Capital Investments, New Applioations, New Products and Global Expansion Although the chemical businesses are focused on operational excellence, opportunities also exist for earnings growth. These will come primarily through increased capacity and process improvements, new applications of existing products, introduction of new products, and global expansion to meet the needs of global customers. Increased Capacity/ Capital Investments Over the next three years, capital investments will focus on improving manufacturing yields and efficiencies, debottlenecking manufacturing processes, and reducing costs through new technol ogy. Capital spending has been roughly equal to depreciation the last several years, and spending is expected to increase in the future. All earnings projects must have returns in excess of the cost of capital. * We've developed a new one-step process for manufacturing phenol from benzene. The process offers higher yields and lower raw material and production costs. No wastes are created, there is nothing to be disposed, and the process is safer than the existing one. In addition to using this process ourselves, we may choose to license this technology to others. The manufacturing facilities for the Santosol solvents line are being expanded in 1997 to meet strong , market acceptance. These environ mentally friendly products are used in a variety of solvent applications and chemical intermediates. New Applications for Existing Products Three opportunities exist for expanding sales of SafUx plastic interlayer: side and rear windows in automobiles, residential windows and commercial windows. Today, islN. y ... By Country: Technical and Sales Ceaten @ Plant Sites and Cnest Operations @ JointVentnns 22 1996 Monsanto Annual Report A In 1996, more than one-third ofour chemical businesses net sales camefrom outside the United States, Manufacturing is concentrated in the United States at 17facilities, but they effectively service'global markets. The reach ofour chemical businesses isfurther extended through a number ofjoint ventures. TOWOLDMONOOI5982 Performance Highlights in 1996 products like Saflex are required only in car windshields. Saflex in a car's side and rear windows offers personal protection, security from theft, and better acoustics for quieter cars. The product is now standard for side windows in the 1997 Audi A8 model, and in one 1997 European Mercedes model. In 1996, we launched test markets for KeepSafe glass for use in home security windows. The product will be introduced nationally in 1997. In commercial applications, we expect significant growth in Asia, especially in China, where many commercial buildings and airports are planned or under construction. Saflex has already been specified in the laminated glass to be installed in the new Hong Kong airport, now under construction. Skydrol 5 aviation hydraulic fluid was introduced in 1996 to meet the needs of the next generation of jet aircraft. In addition to its fireresistant properties, Skydrol 5 offers enhanced thermal stability. It also has improved erosion protection, improved toxicity characteristics and weight advantages. Skydrol 5 saves airlines money because the fluid reduces fuel consumption, operates for longer periods of time at higher temperatures, and improves the reli ability of the planes components. Santotac flooring polymer is a new raw material for resilient flooring. New Products Glacier metal-cutting fluid is the first new class of metal-working fluids in a decade. The product is Higher sales volumes and an improved sales mix led to a 6 percent increase in sales, if sales from businesses that were divested or transferred to joint ventures in 1995 are excluded. Operating income in 1996 was up 3 percent, if one-time charges for restructuring and other items in both 1996 and 1995 are excluded, as well as income contributions from businesses divested or combined into joint ventures. Higher sales volumes and lower raw material costs contributed to the increase........... ............................ Greater demand in the carpet industry led to significantly higher sales volumes for nylon fibers. The market share for nylon staple increased. Sales volumes for nylon carpet fibers backed by the Wear-Dated guarantee rose 20 percent above the average for the last five years. Increased demand in U.S. markets and higher export sales drove higher volumes for Actilan acrylic fibers. Sales of Saflex plastic interlayer increased moderately in 1996. Record sales volumes were partially offset by lower average selling prices. Sales increased substantially for architectural applications. Sales for specialty products were down modestly, as slightly.......... higher sales volumes were offset by lower average selling prices. Sales volumes were particularly strong for Therminol heat transfer fluid, Skydrol fire resistant hydraulic fluids, Dequest water treatment chemicals, and Phos-Chek fire retardant. Sales for phosphorus-based performance materials increased slightly because of higher average selling prices, increased sales volumes, and an improved sales mix. biodegradable and nontoxic, and generates no oil mist while in use. Glacier was designed to meet increasing customer demand for low maintenance, environmental compatibility, and worker safety in metal-working operations. Intro duced in 1996, it is expected to serve amultimillion-dollar market. * Leverage leavening agent is a new patented heat-activated leavening agent that does not contain aluminum, unlike other leavening agents currendy available to the baked goods market. This phosphorus-based product rein forces our premier position as a supplier to the bakery industry. . Global Expansion ' * The chemical businesses are expanding sales of adhesives and binders into Europe and Asia to serve growing markets in these areas. * As noted previously, Saflex is being expanded into the Asian commercial construction market. We will be the only supplier of plastic interlayer with manufacturing on four continents. A finishing facility for Saflex in Singapore will be online in the third quarter of 1997. 1996 Monsanto Annual Report 23 TOWOLDMONOOI5983 VALUE FROM PRODUCTS Chemical Product Portfolio Holds Market-Leading Positions Worldwide The chemical businesses provide cost-effective solutions to their customers through a portfolio of market-leading, branded products. Most of its product lines are first or second in their relevant markets. The markets served include auto motive, housing, electronics and food. Acrylic Fibers Our acrylics business holds the top market position in North America, and it is a leading supplier worldwide. Products include Acrilan acrylicfibers for homefurnishings and sweaters, SmartYarns for socks, and Wintuk and Sayelle yamsfor hand knitting. Dequest Water . Treatment Chemicals Dequest is thefamily ofleading water treatment chemicalsfor industrial water systems. Intermediates The chemical businesses are a leading supplier ofnylon intermediates used in industrial products worldwide. Other important intermediates soldfor industrial applications include tetraethyland our family ofchlorobenzenes. Phosphorus and Derivatives Ourphosphates and derivatives are used in dozens ofproducts that preservefood and enhanceflavor. These ingredients arefound in meats, seafood soft drinks, bakery products, processedpoultry, andpowdered drink mixes. Phosphates also are used in a number of industrialproducts. Ourphosphorus business is the world's lowest-cost and most profitable producer ofelementalphosphorus. After the spinoffofthe chemical businesses, the elemental phosphorus mining and operations will be run as ajoint venture with the life sciences business, which uses phosphorus compounds in the manufacture of Roundup herbicide. Flexsye This rubber chemicalsjoint venture with Akzo NobelS.A is the world's largest producer ofrubber chemicals. Advanced Elastomer Systems (AES) Thisjoint venture with Exxon Corp. is a leadingproducer ofthermoplastic elastomers. Therminol Heat Transfer Fluids The top line ofheat transferfluids globally, Therminol fluids help manufacturing facilities run efficiently and safely Vydyne Nylon Plastics Vydyne nylon plastics products are used in numerom automotive, electronic and other industrial applications. Saflex Plastic Interlayer Saflex plastic interlayer is used in laminated flossfor the automotive and architectural markets, and in KeepSafe glassfor me in residential security windows. The benefits of safety, security, solar and sound control have led to the increased me of Saflex and to its market-leadingposition around the world. Skydrol Fire Resistant Hydraulic Fluids Used by the majority ofthe world's commercial airlines, Skydrol hydraulic fluids keep aircraft running smoothly and safely They are the world's largest-sellingfire-resistant aviation hydraulic fluids. Nylon Fibers This business is the world's leading manufac turer ofnylon carpet staplefor use in residential and commercial markets. Ourfibersfor Wear-Dated residential carpet are backed by a consumerguarantee ofthefinished carpet's performance. We also supply nylon fibers for industrial applications, such as tire cord Specialty Resins This business produces a number ofspecialty resinsfor adhesives and coatinp, and unique plasticizersforflooring applications. 24 1996 Monsanto Annual Report TOWOLDMONOOI5984 Financial Section Table of Contents Management Report, Audit Committee Report, , Independent Auditors' Report Page 26 Statement of Consolidated Income Page 28 Statement of Consolidated Financial Position Page 44 Statement of Consolidated Cash Flow Page 46 Statement of Consolidated Shareowners' Equity Page 49 Notes to Financial Statements Page SO Financial Summary Page 62 Unless otherwise indicated by the context, "Monsanto" means Monsanto Company and consolidated subsidiaries, and "the company" means Monsanto Company only. In tables, all dollars are in millions, except per share data. 1996 Monsanto Annual Report 25 TOWOLDMONOOI5985 Management Report Monsanto Company's management is responsible for the fair presentation and consistency, in accordance with generally accepted accounting principles, of all the finan cial information included in this annual report. Where necessary, the information reflects Management's best estimates and j udgments. ' Management is also responsible for maintaining a sys tem of internal accounting controls with the objectives of providing reasonable assurance that Monsanto's assets are safeguarded against material loss from unauthorized use or disposition and that authorized transactions are properly recorded to permit the preparation of accurate financial information. Cost/benefit judgments are an important consideration in this regard. The effectiveness of internal controls is maintained by personnel selection and training, division of responsibilities, establishment and communication of policies, and ongoing internal review programs and audits. Management believes that Monsanto's system of internal accounting controls as of Dec. 31,1996, was effective and adequate to accomplish the objectives described above. Robert B. Shapiro Chairman and Chief Executive Officer Audit Committee Report The audit committee, composed of five nonemployee members of the board of directors, met four times during 1996. The committee reviews and monitors Monsanto's internal accounting controls, financial reports, account ing practices, and the scope and effectiveness of the audits performed by the independent auditors and inter nal auditors. The committee also recommends to the full board of directors the appointment of Monsanto's princi pal independent auditors, and it approves in advance all significant audit and nonaudit services provided by such auditors. As ratified by shareowner vote at the 1996 annual meeting, Deloitte Si Touche LLP was appointed independent auditor to examine, and to express an opin ion as to the fair presentation of, the consolidated finan cial statements. This report follows. The audit committee discusses audit and financial reporting matters with representatives of the company's financial management, its internal auditors, and Deloitte Sc Touche. The internal auditors and Deloitte Sc Touche meet with the committee, with and without management representatives present, to discuss the results of their examinations, the adequacy of Monsanto's internal accounting controls, and the quality of its financial reporting. The committee encourages the internal audi tors and Deloitte Sc Touche to communicate directly with the committee. The audit committee has reviewed the financial sec tion of this annual report. Pursuant to the recommenda tion of the committee, the board of directors has approved the financial section. --------- Robert B. Hoffman Senior Vice President and Chief Financial Officer Feb. 28,1997 Frank A. Metz Jr. Chair, Audit Committee Feb. 28,1997 26 1996 Monsanto Annual Report TOWOLDMONOOI5986 Independent Auditors'Report To the shareowners of Monsanto Company. We have audited the accompanying statement of consolidated financial position of Monsanto Company and subsidiaries as of Dec. 31.1996 and 1995. and the related statements ofconsolidated income, shareowners' equity and cash flow for each of the three years in the period ended Dec. 31,1996. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentadon. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial state ments present fairly, in all material respects, the financial posidon of Monsanto Company and subsidiaries as of Dec. 31, 1996 and 1995, and the results oftheir operadons and their cash flows for each of the three years' in the period ended Dec. 31,1996, in conformity with generally accepted accounting principles. 9" Deloitte & Touche LLP St. Louis, Missouri Feb. 28,1997 1996 Monsanto Annual Report 27 TOWOLDMONOOI5987 Statement of Consolidated Income (Dollars In millions, except per shire) Net Sales Cost of goods sold Gross Profit Marketing expenses Administrative expenses Technological expenses Amortization of intangible assets Restructuring expenses and other special charges -- net Operating Income Interest expense Interest income Gain on sale of styrenics plastics business Other income (expense) -- net Income Before Income Taxes Income taxes Net IncomeY v"'/: / 7Ti;' -7C*\ : `. EamingsperSharb *C ?; ;; . ' .' The above statement should be read in conjunction with pages 50 - 61 of this report. Key Financial Statistics As a Percent of Net Sales: Gross Profit Marketing, Administrative and Technological Expenses Research and Development Expenses10 Operating Income Net Income Effective Income Tax Rate Return on Shareowners' Equity 1,1 Research and development expenses are included in total technological expenses. 1996 $9,262 4,918 4,344 1,426 750 788 151 632 597 (1711 51 63 540 155 $ 385 $0.64 1995 58,962 5,109 3,853 1,282 598 713 119 156 985 (190) 59 189 44 1,087 348 $ 739 1994 58,272 4,774 3,498 1,191 589 674 81 40 923 (131) 81 22 895 273 $-622: $ 1.27 . $ 1.06 '_ ' : - _ : 1996 47% 32 8 6 4 29 10.4 1995 43% 29 7 11 8 32 22.1 1994 42% 30 7 11 8 31 21.4 28 1996 Monsanto Annual Report TOWOLDMONOOI5988 Review of Consolidated Results of Operations Monsanto Announces the Formation of Two Separate Companies; 1996 Results Are Record, Excluding Special Charges The year 1996 was one of transition for Monsanto Company, as the company's board of directors approved a plan to spin off the chemical businesses. The plan is to form two separate publicly-traded companies -- a life sciences company that serves the agriculture, food and health care markets, and a chemical company that makes and markets an array of high-performance chemical-based products. This strategic decision was driven by the recog nition that these businesses have different markets, prod ucts, research needs, investment needs, and plans for growth. Separating them into two independent compa nies will enhance their ability to focus on strategic initia tives and new business opportunities. It will also permit improved cost structures and operating efficiencies. Net income for 1996 totaled $385 million, or $0.64 per share, down 48 percent and 50 percent from fast year's net income and earnings per share, respectively. In December 1996, the company recorded pretax restruc turing and other special charges totaling $716 million ($500 million aftertax, or $0.84 per share). These charges cover the costs necessary to exit the chemical businesses and to complete the spinoff; and the costs associated with the closure or rationalization of certain facilities, asset write-offs, and work force reductions. If the one time charges are excluded, net income would have been $885 million, or $1.48 per share, both records. It is the company's goal to complete the spinoff and the majority of the restructuring actions by the end of 1997. However, the spinoff is subject to several conditions, including shareowner approval. The company has filed a request for a ruling from the U.S. Internal Revenue Service (IRS) that this transaction would be free from federal income taxes. In 1996, the company continued its superior performance. Net sales for 1996 were $9.3 billion, up $300 million, or 3 percent from last year's record of approximately $9 billion. The Agricultural Products and Pharmaceutical segments contributed significandy to the net sales increase. Increased sales for Agricultural Products were driven by higher worldwide sales volumes for the family ofRoundup herbicides. Higher Pharmaceutical sales were primarily attributed to continued strong sales performances ofAmb'ten, a short-term treatment for insomnia, and Daypro and Arthrotec arthritis treatments. Sales from the women's health care product lines acquired in the third quarter of 1995 also contributed to the sales growth. If sales of divested businesses were excluded from the prior-year's results, net sales for the Chemicals segment would have shown a modest increase on the strength of higher sales volumes. The Food Ingredients segment also contributed to the sales increase, principally because of higher sales volumes of NutraSweet brand sweetener, the company's trademark aspartame product, tabletop sweeteners and biogum products. Events Affecting Comparability In December 1996, the board of directors approved a plan, subject to shareowner approval and certain other conditions, to spin off the company's chemical businesses to its shareowners. In addition, the board approved the recording of pretax restructuring and other special-charges totaling $716 million ($500 million aftertax, or $0.84 per share). These charges cover the costs necessary to exit the chemical businesses and to complete the spinoff; and the costs associated with the closure or rationalization of cer tain facilities, asset write-offs, and work force reductions. Approximately 2,500 positions are expected to be elimi nated by these actions. These actions are expected to have a favorable effect on future net earnings and aftertax cash flows in the range of $120 million to $140 million annually. In December 1995, Monsanto sold its worldwide styrenics plastics business for $580 million. In a separate but related transaction, Monsanto sold its shares in Monsanto Premier Kasei Co. Ltd., a styrenics plastics manufacturing joint venture in Thailand, to one of its joint-venture partners. These transactions resulted in a pretax gain of $189 million ($116 million aftertax, or $0.20 per share). Monsanto's results of operations for 1995 included net sales and operating income of $663 million and $12 million, respectively, from the styrenics plastics business. As part of the company's overall strategy to reduce costs and eliminate redundant functions, the board ofdirectors approved a restructuring plan in December 1995. The pretax charge of $169 million ($125 million aftertax, or $0.22 per share) associated with this action was used to cover the costs of work force reductions, business consolidations, facility closures and the exit from nonstrategic businesses and facilities. The plan, which was substantially completed by the end of 1996, reduced worldwide employment by approximately 470 people. . 1996 Monsanto Annual Report 29 TOWOLDMONOOI5989 Review of Coaaolidated Remit* of Operation* A charge was taken in the first quarter of 1995 for actions associated with the formation of the Flexsys L.P. joint venture, which is discussed in the Notes to Financial Statements. The venture partners, Monsanto and Akzo Nobel N.V., agreed to bear the ontf-time costs to integrate their respective rubber chemical businesses into the joint venture. For Monsanto, these integradon costs totaled $40 million pretax ($25 million aftertax, or $0.04 per share). The charge covered primarily the costs of reducing the work force by approximately 120 people and providing special termination benefits for approxi mately 300 people who transferred from Monsanto to the joint venture. Other items affected results in 1995. These included the receipt in the first and third quarters of setdement payments from various insurers related to environmental and other insurance litigation. Combined, these setdements totaled $92 million pretax ($57 million aftertax, or $0.10 per share). In addition, Monsanto setded a law suit related to a contractual dispute concerning cleanup obligadons at a Superfund site by paying $41 million pretax ($25 million aftertax, or $0.04 per share). The payment was recorded by Monsanto in the third quarter of; 1995- The company also recorded approximately $20 million in favorable pretax adjustments ($13 million aftertax, or $0.02 per share) under certain sales rebate programs in the United States for product sales made in prior years. Without the unusual events in 1996 and 1995, net income for 1996 would have been $885 million, compared with $728 million for the prior year, an increase of 22 percent. Earnings per share in 1996 would have been $1.48, an 18 percent increase from 1995 earnings per share. Net Sales Set Record Net sales in 1996 were approximately $9.3 billion, 3 percent higher than sales in 1995. However, ifsales from businesses that were acquired or divested in 1996 and 1995 were excluded, the sales increase in the underlying base businesses in 1996 would have been 13 percent. The Agricultural Products, Pharmaceuticals and Food Ingredients segments all contributed to the increase, primarily because of higher sales volumes. After adjusting for prior year sales of divested businesses, the Chemicals segment also contributed to the increase, principally because of higher sales volumes. The effects of lower average selling prices, particularly for the Agricultural Products and Chemicals segments, pardally offset the increase in net sales. 30 1996 Monsanto Annual Report Net sales for Agricultural Products in 1996 increased 23 percent from those in 1995, to a record $3 billion. This increase was primarily the result of higher world wide sales volumes for the family of Roundup herbicides. Most world areas posted solid sales volume gains in 1996, Continued increases in conservation tillage practices, favorable weather conditions in certain key markets, and an increase in planted acreage have driven the increased demand. Higher sales of lawn-and-garden products and higher sales ofPosilac bovine somatotropin also contributed to the sales increase. The increase in Pharmaceuticals' net sales can be attributed to sales ofkey products, principally Ambien, a short-term treatment for insomnia, and Daypro and Arthrotec arthritis treatments. In addition, sales from the women's health care product lines acquired from Syntex in the third quarter of 1995 contributed to the sales growth. Lower sales for the family of Cabin calcium channel blockers partially offset the increase in net sales. Chemicals' net sales from continuing businesses for 1996 were approximately 6 percent higher than those in 1995, primarily because of higher sales volumes. Net sales for the Food Ingredients segment increased, principally on the strength of higher sales volumes of NutraSweet brand sweetener, tabletop sweeteners and biogum products. Monsanto's net sales in markets outside the United States represented 42 percent of 1996 net sales, com pared with 43 percent in 1995. An analysis of the company's sales change, along with comparative data, follows: Selling Price and Volume Change* 1680 1895 1994 Selling prices Sales volumes and mix (net ofacquisitions and divestitures) (21% 2% (2)% 567 TotalCbange 3% 8% 5% Operating Results Adversely Affected by Special Charges Operating income in 1996 was $597 million, $388 million lower than operating income in 1995. If the net pretax restructuring charges, special charges and unusual items of $739 million and $125 million in 1996 and 1995, respectively, were excluded, operating income would have increased by approximately $226 million, or 20 percent, in 1996. This significant increase in operating income was related principally to higher sales volumes and an improved gross profit. The increase in gross profit can be attributed primarily to an improved sales mix. TOWOLDMONOOI5990 Himvim* of Consolidated Revolts of Operations Current-year operations reflect an increased percentage of higher-margin sales in Agricultural Products and Pharmaceuticals, and they no longer include the styrenics plastics and rubber chemical businesses that were part of the Chemicals segment last year. The gross profit improvement was partially offset by higher marketing, administrative and technological expenses. If the aforementioned restructuring charges, special charges and unusual items in 1996 and 1995 were excluded, operating results in 1996 would have improved significandy from the prior year for the Agricultural Products and Pharmaceuticals segments. In 1996, operat ing income for the Agricultural Products segment ben efited from significantly higher worldwide sales volumes for Roundup herbicide. In addition, higher sales oflawnand-garden products and higher sales of Posilac bovine somatotropin also contributed to the operating income improvement. The increase in operating income for the Pharmaceuticals segment can be attributed primarily to higher sales volumes of key products, principally Ambien, a short-term treatment for insomnia, and Daypro and Arthrottc arthritis treatments. Sales from the women's health care product lines acquired from Syntex in the third quarter of last year also contributed to the increase. If the results ofdivested businesses and other nonrecur ring items in 1996 and 1995 were excluded, operating income for the Chemicals segment would have been up slightly from the prior year. The effect of higher . Chemicals' sales volumes and lower raw material prices on operating results was offset by lower average selling prices and higher manufacturing costs. Net of nonrecur ring items, operating income in 1996 improved moder ately for Food Ingredients, primarily because of the effect of higher sales volumes, combined with lower manufacturing costs. Increased marketing expenses in 1996 supported higher sales and new product launches for Agricultural Products and Pharmaceuticals. Administrative expenses increased, principally because ofhigher costs associated with employee incentive programs, and increased spend ing on growth initiatives and other programs. Techno logical expenses were up because of higher research and development expenses in the Agricultural Products and Pharmaceuticals segments. Gist sharing payments from alliances partially offset this increase. If the effect of unusual charges is excluded, amortiza tion of intangible assets would have increased, primarily . because of the increase in intangible assets associated with current-year investments and acquisitions in biotechnol ogy businesses. If one-time charges are excluded, "Other income (expense) -- net" would have decreased, princi pally because of lower income from equity affiliates. Monsanto Adopts EVA Performance Measurement In 1996, Monsanto put in place a new performance measurement system called economic value added (EVA). The company will begin measuring its performance against EVA targets in 1997. The company will continue to report its return on shareowners' equity (ROE), which was 10.4 percent in 1996. If the nonrecurring items that were recorded in 1996 were excluded from the calculation, the company's ROE in 1996 would have been 22.3 percent. The company's ROE was 22.1 percent and 21.4 percent in 1995 and 1994, respectively. Cost Savings Continue In prior years, Monsanto has taken steps to make worldwide operations more focused, productive and costeffective. The effect of these actions benefited operating ' income in excess of $300 million in 1996. These savings are in line with original expectations, and are expected to continue. Business redesign and other productivity efforts have yielded significant benefits as well. These initiatives will continue as the company responds to increased global competition and higher customer expectations. Commitment to New Product Development Continues New product development and commercialization con tinue to be strategic priorities for Monsanto. Recent suc cesses from these efforts include five agricultural products that were launched in 1996. These products are Roundup Ultra herbicide, Roundup Ready soybeans, Roundup Ready canola, NewLeaf insect-protected potatoes and Bollgard insect-protected cotton. Monsanto's research and develop ment (R&D) expenditures were $728 million in 1996, or 8 percent of net sales, a level that reflects management's strong long-term commitment to R&D. The discovery and development of pharmaceutical and agricultural prod ucts continue to be the goals of most of these expenditures. Significant R&D efforts in existing product technologies and new product applications also continue across all business groups. Additionally, Monsanto's research program includes new technologies and proprietary information obtained through licensing and strategic acquisitions. As a result, Monsanto has many potential products in the R&D pipeline. Several of them should be commercialized in the next few years. 1996 Monsanto Annual Report 31 TOWOLDMONOOI5991 Review of Consolidated Results of Operations Prior Year Review Monsanto's operating results in 1995 were substan tially higher than those in 1994. The Agricultural Products segment contributed significantly to the com pany's strong operating performance, as worldwide sales volumes of Roundup herbicide continued to grow. Sales volumes and operating income for acetanilides, such as Harness herbicide, were stronger in 1995. The Chemicals segment's operating results increased because of the effects of selective pricing actions and continued costreduction efforts, despite the combined effects of higher raw material costs and worldwide competitive conditions. The Pharmaceuticals segments operating performance more than doubled from operating income in 1994, primarily because of higher sales volumes of key growth products and higher income from alliances. Operating income for the Food Ingredients segment declined in 1995, primarily because of restructuring charges. Net of unusual items, operating results for the Food Ingredients segment, which included 10 months of operations from the acquired Kelco business, were up moderately and benefited from higher international sales. The increase in international sales, however, was more than offset by declining U.S. sales of aspartame. As a result, net income for 1995 was $739 million, or $1.27 per share, compared with income of $622 million, or $1.06 per share, in 1994. Both years' results, however, were affected by unusual events. As described in the Notes to Financial Statements, Monsanto sold its worldwide styrenics plastics business and its shares in a styrenics plastics manufacturing joint venture in 1995. As a result of these transactions, Monsanto recorded an aftertax gain of $116 million, or $0.20 per share. The company also recognized an aftertax restructuring charge of $125 million, or $0.22 per share, in 1995, as well as an aftertax charge that totaled $25 million, or $0.04 per share, associated with the formation of the Flcxsys L.E joint venture. Other items that affected results in 1995 included the receipt of settlement payments from various insurers related to environmental and other insurance litigation. The combined effect of these settlements totaled $57 million aftertax, or $0.10 per share. In addition, Monsanto settled a lawsuit related to a contractual dis pute concerning cleanup obligations at a Superfund site by paying $25 million aftertax, or $0.04 per share. The company also recorded approximately $13 million, or $0.02 per share, in favorable aftertax adjustments under certain sales rebate programs in the United States for product sales made in prior years. In December 1994, Monsanto recognized a net restructuring charge of $22 million aftertax, or $0.04 per share. The company also settled certain tax matters related to the 1985 acquisition of Searle with the IRS and recognized an aftertax gain of $21 million, or $0.04 per share, in interest on the settlement. Net sales in 1995 were approximately $9 billion, 8 percent higher than those in 1994. The increase came primarily from the continued strong performances by the Agricultural Products and Pharmaceuticals segments. After adjusting for prior-year sales of businesses con tributed to Flexsys, Chemicals' net sales were up moder ately because ofhigher average selling prices. The increase in Food Ingredients' net sales primarily reflects the inclusion of 10 months of net sales from the acquired Kelco business. ` Net sales for Agricultural Products in 1995 increased 11 percent from those in 1994, to $2.4 billion, primarily because of a significant increase in worldwide sales volumes for Roundup herbicide. Worldwide demand continued to be strong for this family ofglyphosate-based herbicides because of continued global expansion of conservation tillage techniques, effective pricing and new end-use strategies. Sales of acetanilide products, such as Harness herbicide, also contributed to the increase in net sales. The increase in Pharmaceuticals' net sales can be attrib uted to sales of key growth products, principally Daypro and Arthrotec arthritis treatments, and Ambten, a short term treatment for insomnia. Lower sales for the family of Calan calcium channel blockers partially offset the growth in net sales. Chemicals' net sales from continuing businesses for 1995 were approximately 7 percent higher than those in 1994, primarily because of higher average selling prices. Net sales for the Food Ingredients segment, exclusive qf the sales of the acquired Kelco business, declined, primarily because of lower average selling prices for aspartame. Operating income of $985 million in 1995 increased by $62 million from operating income in 1994. If the net pretax restructuring and unusual items of $125 mil lion and $40 million in 1995 and 1994, respectively, were excluded, operating income would have increased by approximately $ 147 million, or 15 percent, in 1995. :1Jj, 32 1996 Monsanto Annual Report TOWOLDMONOOI5992 Review of Consolidated Results of Operations This significant increase in operating income was princi pally related to higher sales volumes and better pricing. The increase in operating results was partially offset by higher raw material costs experienced by the Chemicals segment and higher marketing and technological expenses overall. If the aforementioned restructuring charges and unusual items in 1995 and 1994 were excluded, operat ing results would have improved for all segments, with the largest increase occurring in the Pharmaceuticals segment. Operating income for the Agricultural Products segment in 1995 benefited from significantly higher worldwide sales volumes for Roundup herbicide. Strong sales volumes of acetanilide products also contributed to the increase in operating income. Operating results for the Chemicals segment benefited from higher average selling prices and lower operating costs, but were hurt by the effect of higher raw material costs. Competitive pressures worldwide limited the ability of the Chemicals businesses to recover the increased costs fully through selling price increases. If restructuring charges and unusual items in 1995 and 1994 were excluded, the Pharmaceuticals segment would have more than tripled its operating income, principally through the success of key growth products and higher income from alliances. Net of restructuring and unusual items, operating income in 1995 improved significantly for Food Ingredients, primarily because of the addition of Kelco income and the benefit of higher sales of tabletop sweet ener products. Lower aspartame sales and higher operat ing expenses partially offset this increase. Marketing and technological expenses increased in 1995, principally because of higher marketing expenses used to support higher sales, and inclusion of 10 months of operating expenses from the acquired Kelco business. Amortization of intangible assets increased, primarily because of the increase in intangible assets associated with the Kelco and pharmaceutical product line acquisi tions. Interest expense increased in 1995, primarily because of higher short-term debt levels related to the acquisition of Kelco. Interest income was higher in 1994, primarily because of the inclusion of the aforementioned settlement with the IRS. The increase in "Other income (expense) -- net" was principally the result of higher income from joint ventures and equity affiliates. Analysis of Change in Earnings per Share Sales-Related Factors: Selling prices Sales volumes and mix Bttw (Worwl ISM w, 183S vs, 199S 1984 $(0.19) $ 0.16 0.83 0.35 ". A ' 0.64 ' Cost-Related Factors: Raw material and manufacturing costs Marketing, administrative and technological expenses Amortization of intangible assets 0.11 (0.21) (0.48) (0.13) (0.01) (0.01) ~;.A- ; Yv. ". .. ? ;(0i3St (,QC3)j Other Factors: Change in shares outstanding Divestitures Other expenses -- net (0.02) 0.0 V (0.01) --_ -- 0.02 -a;: . Change in Earnings per Share Before Restructuring and Unusual Factors Restructuring and unusual factors 0.23 0.19 (0.86) 0.02 ; 1996 Monsanto Annual Report 33 TOWOLDMONOOI5993 Review of Consolidated Resnlts of Operations Sales Volume Index 1991 = 1.0 <3 The sales volume index increase in 1996 was led by a significant increase in worldwide sales volumesfor Roundup herbicide and by tales volume increasesfor key pharmaceuticals. The Agricultural Products segment is discussed on pages 35 - 37 and the Pharmaceuticals segment on pages 37- 39. Selling Price Index 1991 = 1.0 1-Si iiii 1.0 94 93 96 <3 The index ofselling prices has remained relatively constant over the last several years. It decreased slightly in 1996, primarily because ofthe effect oflower sellingpricesfor the Agricultural Products and Chemicals segments. The Agricultural Products segment is discussed on pages 35 - 37 and the Chemicals segment is discussed on pages 41 - 42. Raw Material Cost Index 1991 - 1.0 <3 The raw material cost index declined slightly in 1996 andprimarily affected the Chemicals segment The Chemicals segment is discussed on pages 41 - 42. Segment Data Agricultural Products Pharmaceuticals Food Ingredients Chemicals111 Corporate Agricultural Products Pharmaceuticals Food Ingredients Chemicals01 Corporate Totals Net Sales Operating CoatrlbnHoa11* Operating Income (Loss)111 1996 199S 1994 1996 199S 1994 1996 1995 1994 $2,997 1,995 1,206 3,064 $2,441 1,711 1,117 3,693 $2,195 1,520 915 3,642 $ 701 220 224 334 (68) $ 536 142 200 348 (60) $ 502 51 194 316 (63) $ 539 76 91 67 (176) $516 131 115 286 (63) * $477 54 178 282 (68) mmm jgggggS mmm iMO: - $ 597:; $985 $923 Total Assets Capital ExptadKares Depreciation and Amortization 1996 199S 1994 1996 1995 1994 1996 1995 1994 $ 3,331 2,362 2,144 2,658 696 $ 2,571 2,561 2,140 2,759 580 $2,410 2,037 1,050 3,078 316 $259 89 88 251 5 $127 78 64 228 3 $104 61 33 210 1 $149 130 115 191 5 $135 127 105 226 5 $136 110 60 253 2 SI*S $500r , $409;; , $5901:S $598 $561 As ofJan. 1, 1996, the industrial business of the Food Ingredients segment was transferred to Chemicals and Chemicals' food phosphate business was transferred to Food Ingredients. In addition, a small business was trans ferred from Agricultural Products to Chemicals. Segment information for 1995 and 1994 has been reclassified to conform to the current presentation. (1) Totals for the Chemicals segment in 1995 and 1994 include amounts for the plastics and rubber chemical businesses. (2) Operating contribution is a measure of a segment's cash- based operating profitability. It excludes goodwill amorti zation and the effects of restructuring actions and unusual items from operating income. (3) Operating income was affected by the 1996, 1995 and 1994 restructurings and other unusual items as follows: ___________________ ' Income (Expense) Segment 1996 1995 1994 Agricultural Products Pharmaceuticals Food Ingredients Chemicals Corporate ' $(144) $ (10) $(16) (125) 7 20 (105) (69) (7) (257) (50) (33) (108) (3) (4) ; $(739) $(125) $(40) 34 1996 Monsanto Annual Report TOWOLDMONOOI5994 Segment Data Although inflation is relatively low in most of Monsanto's major markets, it continues to affect operat ing results. To mitigate the effect of inflation, Monsanto has implemented measures to control costs, to improve productivity, to manage new fixed and working capital, and to raise selling prices when government regulations and competitive conditions permit. In addition, the current costs of replacing certain assets are estimated to be greater than their historical costs presented in the financial statements. Accordingly, the depreciation expense reported in the Statement of Consolidated Income would be greater if the expense were stated on a current-cost basis. Sales between segments were not significant. Certain corporate expenses, primarily those related to the overall 1996 Net Sales Percent by segment management of Monsanto, were not allocated to the seg ments or geographic areas. Corporate assets are primarily investments in affiliates and a portion of the cash balance. The principal factors that accounted for the segments' performances in 1996 and 1995, along with the factors that are expected to affect SetbmHsralFnxise* operating results in the near 9 nusueettteals term, are described on the IbodlBgxedtosta following pages. Agricultural Products 1990 IMS 19M Net Sales $2,997 $2,441 $2,195 Operating Contribution10 701 536 502 Operating Income 539 516 477 Total Assets 3,331 2,571 2,410 Capital Expenditures 259 127 104 Depreciation and Amortization 149 135 136 "* Operating contribution is operating income excluding goodwill amortization and the effect ofrestructuring actions and unusual items. The Agricultural Products segment is a leading worldwide developer, producer and marketer of crop protection products and lawn-and-garden products. This group also develops and markets products enhanced by biotechnology. These products improve the efficiency of food production and preserve envi ronmental quality for agricultural, industrial, turf and residential uses. More than half of the unit's her bicide net sales are made outside the United States.' Weather conditions in agricultural markets world wide affect sales volumes. Net sales for the Agricultural Products segment increased to a record $3 billion in 1996, 23 percent higher than sales in 1995. This increase is primarily Agricultural Products Net Sales Dollars in millions the result of higher worldwide sales volumes for the family of Roundup herbicides. Most world areas posted solid sales volume 4,000, gains in 1996. The increased demand can 3,000 be attributed to continued increases in conservation tillage practices, favorable weather 2, conditions in key markets and an increase in planted acreage. Selling price reductions, princi pally in markets outside the United States, made Roundup cost effective for weed control lessor TKtal4 E&iapa tteitedSSatw in a broader range of crop and industrial uses. The effect of generic competition, especially in certain foreign markets, dampened selling prices modesdy. 1996 Monsanto Annual Report TOWOLDMONOOI5995 Segment Data However, the effect of increased sales volumes on operat ing income exceeded the effect of lower selling prices. Higher sales volumes of Harness herbicide also con tributed to the 1996 sales increase. Net sales in 1996 benefited from higher sales of lawnr-and-gafden products and higher sales of Posilac bovine somatotropin (BST). In addition, successful introductions of new products such as Roundup Ultra herbicide. Roundup Ready soy Agricultural Predueta Operating Measaxes' Dollars in millions beans and BoUgard irisectprotected cotton helped fuel sales growth. 800, , 1 1 Operating income increased from last year's level by 4 percent However, operating income was affected by unusual items in both 1996 and 1995, In 1996, the unusual items included $144 million in charges for restructuring and other actions, principally related 94 93 98 Operating CoBtarifeatlaa Opantiag Income to the cost ofwork force reductions. In 1995, unusual items included $10 million in restructuring charges and other actions for facility closures and the cost ofwork force reductions. If unusual items in 1996 and 1995 were excluded, 1996 operating income for Agricultural Products would have increased $ 157 million, or 30 percent. In addition to the effect of sales volume increases, operating contribution and operating income in 1996 benefited from lower manufacturing costs. The effects of higher sales volumes and lower manufacturing costs were partially offset by higher marketing expenses that supported new product introductions and by higher biotechnology research and development spending. Prior Year Review Net sales for Agricultural Products in 1995 were 11 percent higher than net sales in 1994. Both operating contribution and operating income increased from 1994 levels, up 7 percent and 8 percent, respectively. The increase in operating income was affected by unusual items in both 1995 and 1994. The unusual items included in 1995 operating income were $10 million in restructuring charges and other actions, principally related to facility closures and the cost of work force reductions. Operating income in 1994 included $30 mil lion in restructuring charges for employment reductions and costs to terminate a program. The 1994 charges were partially offset by $14 million in reversals of prior-year restructuring reserves, primarily for higher-than-anticipated proceeds from the sale of the pyridine research program. If the unusual items in 1995 and 1994 were excluded, 1995 operating income for Agricultural . Products would have increased $33 million, or 7-percent. The increase in net sales was driven by significantly higher sales volumes of Roundup herbicide. Demand for the family of Roundup glyphosate-based products continued to be strong worldwide. It was attributed to further increases in the use of conservation tillage practices, effective pricing, and new end-use strategies. Selling price reductions, principally in markets outside the United States, made Roundup cost effective for weed control in a broader range of crop and industrial uses. The effect of generic competition, principally in certain foreign markets, dampened selling prices modestly. However, the effect of increased sales volumes on. operat ing income exceeded the effect of lower selling prices. Net sales in 1995 also benefited from higher sales ofPosilac bovine somatotropin and Harness herbicide. Net sales of Harness increased significantly from those in 1994, primarily because of higher volumes. However, these factors were somewhat offset by lower net sales of lawn-and-garden products. This decline was caused by unfavorable weather conditions in the western United States, which is a large consumer market for garden products. In addition, distribution changes designed to move product sales closer to the time of consumer demand effectively moved sales from 1995 into 1996. Operating contribution and operating income in 1995 also benefited from lower manufacturing costs. Higher marketing expenses used to support the base business and new-product introductions partially offset the increases in operating contribution and operating income. 36 1996 Monsanto Annual Report TOWOLDMONOOI5996 Segment Data Agricultural Products Outlook Roundup and other glyphosate-based herbicides face competition from generic producers in certain markets outside the United States. Patents protecting Roundup in various countries expired in 1991, while compoundperse patent protection for the active ingredient in Roundup herbicide continues in the United States through the year 2000. Management expects the recent technological breakthroughs in manufacturing processes and formulation advancements, as well as rapidly expanding capacity to produce Roundup, to improve Monsanto's cost position and to help maintain its leadership position. New valueadded formulations ofRoundup, such as Roundup Ultra and' Roundup Pro in the United States, and Roundup Bioforce and Roundup Geoforce in Europe and Australia, have been successfully introduced. Significant growth potential for Roundup remains in conservation tillage applications worldwide, and the recent introduction of crops tolerant of Roundup opens up major new growth opportunities. Four biotechnology-related plant sciences products -- Roundup Ready soybeans and canola, and cotton and potatoes protected from certain insects -- were introduced on a lim ited basis in 1996. These products were developed either by Monsanto or in partnership with biotechnology and seed production companies. Market acceptance has been strong and volumes for each of these products are expected to increase in 1997. Roundup Ready cotton and YteldGard insect-protected corn products will be launched in 1997. It is expected that a significant number of new herbicides and biotechnology-related products currendy in the research and development pipeline will be commercialized worldwide in the next few years. Monsanto is addressing issues ofcon sumer acceptance for some of these products, particularly in Europe, and is involved in patent disputes with several parties. Posilac bovine somatotropin (BST) experienced significant sales growth in 1996. The year also marked the completion of a two-year, post-approval monitoring program for Posilac, which resulted in a solid reaffirmation from the U.S. Food and Drug Administration of the product's safety as a dairy production enhancement tool. As discussed in the Notes to Financial Statements on page 52, Monsanto has reached separate agreements to acquire Holden's Foundation Seeds Inc., Corn States Hybrid Service Inc. and Corn States International S.a.r.l. These acquisitions are expected to close in 1997. In addi tion, the company acquired the Asgrow Agronomics seed business from Empresas La Modema SA in February 1997. It is anticipated that one-time charges associated with acquired research will be recorded in conjunction with these acquisitions. Pharmaceuticals 19M lees 1894 Net Sales $1,995 $1,711 $1,520 Operating Contribution1" 220 142 51 Operating Income 76 131 54 Total Assets 2,362 2,561 2,037 Capital Expenditures 89 78 61 Depreciation and Amortization 130 127 110 rating contribution is operaring income excluding goodwill amortization and the effect of restructuring actions and unusual items. The Pharmaceuticals segment reflects the opera tions of Searle. Searle develops, produces and markets prescription pharmaceuticals. Its products include medications to relieve the symptoms of arthritis, to control high blood pressure, to relieve insomnia, to prevent the formation of ulcers, to treat certain infections, and to provide better women's health care. Net sales for the Pharmaceuticals segment increased 17 percent to a record $2 billion. The sales growth was fueled by higher sales volumes, led by strong perform- ' ances from Daypro and Arthrotec arthritis treatments and Ambien, a short-term treatment for insomnia. In 1996, sales of these products increased 39 percent from sales in Pharmaceutie&ls Net Sales Dollars in millions the prior year. In total, these key products contributed approxi mately $660 million to 1996 net 4,000 sales. Sales and earnings growth also benefited from the women's 3,000 health care product lines acquired from Syntex in September 1995. The 1996 net sales increase for 2,000 Pharmaceuticals was partially offset by lower sales for the 1,000 family of Calan calcium channel blockers. Sales in 1995 included the effect of approximately $20 million in favorable adjust Bostotwuid ments under certain sales rebate programs in the United States EbTMp* UaitedftatM for product sold in prior years. r r' 1996 Monsanto Annual Report 37 TOWOLDMONOOI5997 Segment Data Operating income for Pharmaceuticals decreased from the 1995 results by 42 percent. However, operating results in 1996 and 1995 were affected by unusual items. Operating income in 1996 includes $125 million in restructuring and other actions, principally related to the cost ofwork force reductions arid facility rationalizations. Operating income in 1995 included a $13 million charge for restructuring, principally related to work force reduc tions and other actions. Operating results in 1995 also reflected the aforementioned $20 million in favorable sales adjustments. If the effect of these unusual items was excluded, operating income would have been $201 million in 1996 and $124 million in 1995. The significant improvement in operating income and operating contri Pharmaceuticals Operating Mmums Dollars in millions bution was primarily the result of higher sales volumes. Increased expenditures for 800, marketing and product devel opment costs were offset, in part, by higher cost-sharing 600 payments from alliances and licensing agreements. 400 Searle's investment in research and development 200 (R&D) continues to be significant. R&D expenditures, 0 94 93 SO Operating Coatrfbatiom O Operating Income before cost-sharing payments from alliances, were 22 percent and 21 percent of the segment's net sales in 1996 and 1995, respectively. Future R&D spending is also expected to be significant. Searle will continue to seek R&D collaborations. Such agreements should allow Searle to share development costs, accelerate product development and enhance market penetration. This investment reflects the segment's commitment to securing a continuing stream of new products. PriorYear Review Net sales for the Pharmaceuticals segment in 1995 were $1.7 billion, or 13 percent higher than net sales in 1994. This strong increase was driven by higher sales volumes, principally from key products, such as Daypro and Arthrotec arthritis treatments, and Ambien, a short term treatment for insomnia. Each of these products had double-digit increases in net sales vs. those in 1994. In total, these key products contributed approximately $500 million to 1995 net sales. Sales and earnings growth also benefited from the women's health care product line acquired from Syntex. In addition, the sales increase reflects the effect ofapproximately $20 million in favor able adjustments under certain sales rebate programs in the United States for product sales made in prior years. The 1995 net sales increase for Pharmaceuticals was partially offset by lower sales for the family of Calan calcium channel blockers. - Both operating contribution and operating income for Pharmaceuticals more than doubled from the 1994 amounts. Operating results in 1995 and 1994 were affected by unusual items. Operating income in 1995 included a $13 million charge for restructuring, princi pally related to work force reductions, and other actions. Operating results in 1995 also reflected the aforementioned $20 million in favorable sales adjustments. Pharmaceuticals' operating income in 1994 included $ 15 million in restructuring charges, primarily for work force reductions, and a $35 million gain from the reversal of prior year restructuring reserves. The reversal of the reserves was primarily caused by higher-than-anticipated proceeds and lower-thamexpected exit costs related to certain divested facilities. If the effect of these unusual items was excluded, operating income would have been $124 mil lion in 1995 and $34 million in 1994. The significant improvement in operating income came primarily from higher sales of key growth products. Higher income from cost-sharing alliances also benefited operating results in 1995. The increase in operating income was partially offset by higher marketing expenditures incurred to support the sales growth in key products. ! ' > ; ' * *" 38 1996 Monsanto Annual Report TOWOLDMONOOI5998 Segment Data Pharmaceuticals Outlook Ambien, a short-term treatment for insomnia, continues as the leader in the hypnotic market. Direct-to-patient promotion should continue to build growth in this high potential market. Ambien is licensed to a joint venture of which Searle is a general partner. The joint venture partner has the right to purchase all or part of Searle's interest in the venture beginning in December 1999. Sales ofDaypro, Searle's leading treatment for arthritis, should also continue to grow. In addition) the exclusivity of Daypro was extended for two years, through late 1999. Arthrotee arthritis treatment was launched in Italy and several other markets in Europe and Asia during 1996. A new drug application lot Arthrotee is also pending with the U.S. Food and Drug Administration (FDA). Covera-HS, Searle's new verapamil product, was introduced in the.United States in 1996. This product is designed to provide peak protection from hypertension and angina at the time of day when patients are most vulnerable to rises in blood pressure and heart rate, which differentiates it from other calcium channel blockers and anti-hypertensive drugs. Canadian approval is expected for Covera-HS in 1997, and registration submissions, in 25 other Countries are under way. In the United States, generic competition and continu ing controversy following the results of a study about the use ofcalcium channel blockers may continue to negatively affect the sales of all calcium channel blockers, including Searles Calan and Covera-HS. Searle has a number of compounds in various stages of development. Drugs being developed for the treat ment of cardiovascular conditions include xemilofiban and orbofiban, anti-platelet agents to inhibit the clotting of blood vessels; tissue factor pathway inhibitor (TFPI) to treat sepsis; and eplerenone to treat congestive heart failure, high blood pressure and the complications of kidney disease. Searle's participation in the arthritis mar ket potentially could increase with the development of Xopane, a fast-acting formulation ofDaypro; Condrofec, which combines an ulcer preventive drug with an anti inflammatory drug; and celecoxib products that seleclively treat arthritis and pain without gastrointestinal side effects. Also in development are three adjunctive therapies for the oncology market. These compounds -- daniplesrim, myelopoietin and promegapoietin-- are being developed to stimulate the replenishment ofwhite blood cells and platelets in chemotherapy patients. Food Ingredients ISM IMS 1984 Net Sales . $1,206 $1,117 $ 915 Operating Contribution111 224 200 194 Operating Income 91 115 178 Total Assets 2,144 2,140 1,050 Capital Expenditures 88 64 33 Depreciation and Amortization 115 105 60 ^Operating contribution ti operating income excluding goodwill amortization and the effect of restructuring actions and unusual items. The Food Ingredients segment manufactures and markets sweeteners, including NutraSweet brand sweetener and Equal and Canderel tabletop sweeteners. It also develops, produces and markets alginates, biogums and other food ingredients. In 1996, net sales for Food Ingredients increased 8 percent from the prior year's net sales. Results in 1996 include a full year of sales from the Kelco business that" was acquired in February 1995. The sales increase was primarily the result of higher sales of NutraSweet brand sweetener, the company's trademark aspartame product, and higher sales volumes of tabletop sweeteners. Higher Food Ingredients Operating Measures Dollars m millions sales of tabletop sweeteners were driven by increased spending on advertising and 800 promotion. The majority of the volume increment for tabletop sweeteners came from 600 international markets. Higher sales volumes of biogum prod 400 ucts also contributed to the sales increase. 200 IhL 94 9! 90 OfSSBttee Csta1festtea Operating income decreased from last year's level by 21 per cent. Certain unusual items affected earnings in both years. In 1996, operating income included restructuring and other charges of $105 million, principally for the cost ofwork force reductions arid facility rationalizations. Operating income in 1995 was reduced by $69 million in restructuring charges, pri marily to exit a production facility and to effect work force reductions. If these unusual items were excluded, operat ing results for Food Ingredients would have increased moderately, primarily because ofhigher sales and lower 1996 Monsanto Annual Rrport 39 TOWOLDMONOOI5999 Segment Data manufacturing costs. The effect of higher sales and lower manufacturing costs was partially offset by higher advertising and promotion costs for tabletop sweeteners, higher administrative expenses associated with growth initiatives, and other costs. Operating contribution increased 12 percent from 1995 because of these factors. Prior Year Review In 1995, Food Ingredients' net sales were up $202 mil lion, or 22 percent, from sales in 1994. Results in 1995 included sales from the acquired Kelco business. Without these sales, net sales for Food Ingredients would have declined from those in 1994, primarily because of lower average selling prices for aspartame. Sales of tabletop sweeteners were up 6 percent, primarily because ofhigher sales volumes. A large portion of the increased sales vol umes came from international markets that the Food Ingredients segment aggressively pursued. Lower sales of NutraSweet brand sweetener, the company's trademark . aspartame product, essentially offset this increase. Despite an increase in unit sales volumes for aspartame, the effects of lower average pricing were more than offsetting. Kelco sales benefited from strong sales of biogum products. Operating contribution in 1995 for Food Ingredients increased significantly from the segment's contribution in 1994, primarily because of the addition of Kelco., Operating income declined significantly from 1994s results. Certain unusual items affected earnings in both years. In 1995, operating income included restructuring and other charges of $69 million, principally for costs to exit a production facility and for work force reductions. Operating income in 1994 was reduced by $7 million in restructuring charges for work force reductions. If these unusual items were excluded, operating income for Food Ingredients would have been essentially even with operat ing income in 1994. The effects of the additional Kelco income, the benefit of higher Sales of tabletop sweeteners, and manufacturing efficiencies were offset by lower aspartame sales and higher operating expenses. Food Ingredients Outlook Competition from generic aspartame producers has lowered selling prices for NutraSweet brand sweetener. However, the worldwide market share for this product has been maintained because ofseveral competitive advantages, including a low cost position and superior quality and customer service. Other new sweeteners also compete with NutraSweet in markets outside the United States. These sweeteners are now being reviewed by the U.S. Food and Drug Administration (FDA), and their possible approval could negatively affect future sales, operating income and cash flow. International markets offer the greatest growth potential, particularly for tabletop sweeteners. The company is developing next-generation, high-intensity sweeteners and expects to file a food additive petition with the FDA near the end of this decade. The Kelco lines of alginates and biogums hold strong positions in their food ingredients markets. While there has been some increased competition for biogums in certain industrial applications, the effect has not been significant. Seaweed is the raw material for alginates, and, because the worldwide supply is tight, its sotircing continues to be an area of focus. 40 1996 Monsanto Annual Report Segment Date Chemicals 19M lfW 1*94 Net Sales $3,064 $3,693 $3,642 Operating Contribution10 334 348 316 Operating Income 67 286 282 Total Assets 2,656 2,759 3,078 Capital Expenditures 251 228 210 Depreciation and Amortization 191 226 253 ^'Operating contribution is operating income excluding goodwill amortization and the effect of restructuring actions and unusual items. The Chemicals segment produce and markets a range of high-performance chemical-based materials -- including nylon and acrylic fibers, Safl&e plastic inter layer, phosphorus and its derivatives, and specialty chemicals. These materials ate used by customers to make consumer, household, automotive and industrial products. Chemicals' net sales decreased $629 million in 1996, and operating income decreased by $219 million from 1995 results. However, as further discussed in the Notes to Financial Statements, net sales and operating results for the prior year included amounts from the styrenics plastics business that was divested at the end of 1995 and from the rubber chemicals business that became pan of the Flexsys L.P. joint venture in May 1995. Sales and operating results for these businesses are no longer Chemicals ' Not Sales. Dollan in millions included in consolidated totals. If the sales from these businesses were excluded in 1995, Chemicals' sales in 1996 would have increased 6 percent from those in 1995. Most business units included in the Chemicals segment posted sales gains in 1996 from prior-year amounts. The sales increases for these units can be attributed primarily to higher sales volumes and to an improved sales mix. 94 8S Mwawa Xante UelMStaias 8 Net sales for fibers products increased moderately, primarily because of higher sales volumes of nylon and acrylic fibers. Nylon fiber sales were consider ably higher than sales last year because of higher demand in the carpet industry. Increased demand in U.S. markets and higher export sales, particularly in China, drove the sales volume growth for acrylic fibers. A decline in aver age selling prices partially offset the increase in nylon and acrylic fiber sales. Sales of specialty, products in 1996 were down slightly from those in 1995, principally because lower average selling prices offset the effect of slightly higher sales volumes. Net sales of performance materials increased moderately from sales in 1995 on the strength of higher average selling prices, higher sales volumes and an improved sales mix. Higher sales volumes, partially offset by lower average selling prices, resulted in a modest increase in the net sales of Saflex plastic interlayer in 1996. Operating contribution and operating income for the Chemicals segment decreased in 1996 from those in 1995. A number of unusual items affected profitability in both years. Operating income in 1996 included a net charge of $257 million for restruc turing and other actions, pri marily for the costs ofwork force reductions, asset write offs and facility rationaliza- dons. Operating income in 1995 was reduced by $50 mil lion in restructuring charges, principally related to employ ment reducrions and the costs to dose several facilities. If the unusual items in 1996 and 1995 and the effects of divested businesses were exduded, 1996 operating income for the Chemicals segment would have been up slightly from the comparable amounts in 1995. The positive effect of higher sales volumes and lower raw material costs on operating contribution and operat ing income was offset by lower average selling prices, by significantly higher spending on growth iniriarives, and by higher manufacturing costs. The manufacturing cost increase was prindpally associated with maintenance downtime and capadty expansion projects. Worldwide competitive pressure continue to limit the Chemicals segment's pricing flexibility. Prior Year Review Chemicals' net sale increased slightly in 1995. Operating contribution increased 10 percent and operating income increased 1 percent from 1994 results. However, net sales and operating results for the first four months of 1995 and for all of 1994 indude the results from the company's rubber chemicals business. As further discussed in the Notes to Financial Statements, Monsanto and Akzo Nobel N.V. formed a 50-50 joint venture in 1995, known as Flexsys L.P., by combining their respective 1996 Monsanto Annual Report 41 TOWOLDMONOOI6OOI Segment Data rubber chemicals businesses. Operations for Flexsys com menced on May 1,1995. As a result, sales and operating results for the company's rubber chemicals business are no longer included in consolidated totals. If the sales from this business were excluded in both 1995 and 1994, Chemicals' sales in 1995 would hare increased 7 percent from those in 1994. All business units included in the Chemicals segment posted sales gains in 1995 from the 1994 amounts. The sales increases for these units can be attributed primarily to higher average selling prices and to an improved sales mix. Net sales for fibers products increased modesdy, pri marily because of higher selling prices for acrylic fibers and intermediates. Nylon fiber sales were down moder ately compared with sales in 1994 as the carpet industry experienced lower consumer demand in 1995. Nylon intermediate sales in 1995 increased significantly from sales in 1994, primarily on the strength of higher selling prices. Demand for acrylic fibers in U.S. markets was soft during 1995 and negatively affected sales volumes. This decline was partially offset by higher export sales, particularly in China. Sales of specialty products in 1995 increased from those in 1994, principally because higher average selling prices offset the effect of slightly lower sales volumes. Net sales of performance materials were up slightly from sales in 1994 on the strength of higher sales volumes and an improved sales mix, although the increase was par tially offset by lower average selling prices. Net sales of SafUx plastic interlayer increased modestly from sales in 1994, principally because of favorable exchange rates. Sales volumes were essentially even with those in 1994, as expected growth in the global automotive markets failed to materialize in 1995. Net sales of plastics products in 1995 were higher than those in 1994, primarily because ofhigher average selling prices. As further discussed in the Notes to Financial Statements, Monsanto sold its worldwide styrenics plastics business in December 1995 for $580 million. This sale resulted in an aftertax gain of $116 million. Monsanto's 1995 results included net sales and operating income of $663 million and $12 million, respectively, from the styrenics plastics business. Operating contribution and operating income for the Chemicals segment increased in 1995 from those in 1994. A number of unusual items affected profitability in both years. Operating income in 1995 included a net charge of $50 million for restructuring and other actions, primarily for the costs to close several facilities. Operating income in 1994 was reduced by $33 million in restructuring charges, principally related to work force reductions and costs to close several facilities. If these unusual items were excluded, operating income for Chemicals would have increased by 7 percent from operating income in 1994. Operating contribution and operating income were positively affected by higher selling prices, the effect of continued cost-reduction efforts, and manufacturing efficiencies, but were hurt by higher raw material costs. Competitive pressures worldwide limited the Chemicals segment's ability to recover the increased raw material costs fully through increased selling prices. Chemicals Outlook As discussed on page 29, the company intends to. spin off its chemical businesses to shareowners in 1997. The spinoff is subject to several conditions, including shareowner approval. The company has filed a request for a ruling from the U.S. Internal Revenue Service that the spinoffwould be free from federal income taxes. Upon receipt ofshareowner approval, the results from these businesses will be reported as a discontinued operation. The Chemicals segment is affected by economic conditions, particularly as they relate to the automotive and housing industries. The prices of purchased raw materials used by these businesses have been coming down as the world econo my slows and as production capacity comes on line worldwide. If global economic growth remains in line with expectations, continuing announcements of new capacity should result in somewhat lower raw material costs for the chemical businesses in the next few years. However, global competition and customer demands for efficiency will condnue to make price increases difficult. The Chemicals segment intends to improve its perform ance through cost reductions and by capitalizing on growth opportunities. These opportunities exist through expansion into global markets, the development of new products and new markets for existing or modified products, and strategic acquisitions, partnerships or joint ventures. 42 1996 Monsanto Annual Report TOWOLDMONOOI6002 Geographic Data United States Europe-Africa Asia-Pacific Canada Lacin America Incerarea Eliminations Corporate Total Nit Saks to Unifflllatid Customer* Operating Incam (Lossl111 Tots! Amts 1996 1995 1994 1996 1995 1994 1996 1995 1994 $5,940 1,760 636 345581 $5,631 1,891 662 364 414 $5,376 1,653 552 318 373 $491 184 61 18 45 (261 (1761 $721 240 39 17 63 (32) (63) $507 $ 7,965 S 7,181 340 1,881 1,927 39 619 702 37 145 161 65 654 372 3 (7691 (312) (68) 696 580 S 5,844 1,947 586 135 300 (237) 316 , $9,261-- ; $8,962 $8r272cv; $.&: ;;o$98itv A $923; $11,191 $10,611 $8,891. The data above are prepared on an "entity basis," which means that net sales, operating income and assets of each legal entity are assigned to the geographic area where that legal entity is located. Foe example, a sale from the United States to Latin America is reported as a U.S. export sale. Interarea sales, which are sales between Monsanto locations in different world areas, were made on a market price basis. Interarea sales have been excluded from the above table and were: 1996 199S 1994 World area shipped from: United States Europe-Africa Asia-Pacific Canada Latin America Interarea Eliminations $ 968 $ 878 257 293 31 36 33 61 12 (1,2901 (1,270) $682 248 5 44 2 (981) Total Following is a reconciliation of foreign operating income and total assets to the net income and net assets of consolidated foreign subsidiaries: 1996 199S 1994 Operating income Interest and other income (expense) -- net Income taxes $ 301 $ 359 $ 481 (531 (32) (33) (88) (112) (133) Net Income of Consolidated' Foreign Subsidiaries $ ter $c 215.-$-- Total operating assets Total liabilities Net Assets of Consolidated. Foreign Subsidiaries $3,299 $3,162 $2,968 1,209 873 1,088 . . $2,09r $2,289 $t*88tti The operating income reported for the individual geo graphic areas does not include the full profitability gener ated by sales of Monsanto products imported from ocher locations, principally from the United States. Direcc export sales from the United States to third-party cus tomers outside the United States were $557 million for 1996, $550 million for 1995, and $399 million for 1994. Sales and operating income for the geographic seg ments do not include financial results from joint-vencure. companies in which Monsanto does not have manage ment control. Monsanto's share of the income or loss of these companies is reflected in "Other income (expense) -- net" in the Statement of Consolidated Income. Monsanto's share of the unconsolidated net sales and income or loss of chese companies for 1996 follows: Monunto'i Share Nit Income Sill! ILoul United States Europe-Africa Asia-Pacific Latin America $253 378 40 131 $(35) 5 1 5 111 Geographic area operating income was affected by the 1996, 1995 and 1994 restructurings and other unusual items as follows: Income (Expense) United States Europe-Africa Asia-Pacific Canada Latin America Corporate . 1996 1995 1994 $(438) $ (64) $(105) (1301 (4) 69 (21) (40) (11) (14) (13) 2 (281 (1) 9 (1081 (3) (4) - . $(738T $U25) $ .(40) 1996 Monsanto Annual Report 43 TOWOLDMON0016003 Statement of Consolidated Financial Position (Dollars In millions, except per share) ASSETS Current Assets: Cash and cash equivalents Trade receivables, net of allowances of $53 in 1996 and $57 in 1995 Miscellaneous receivables and prepaid expenses Deferred income tax benefit Inventories Total Current Assets Property, Plant and Equipment: Land Buildings Machinery and equipment Construction in progress Total property, plant and equipment Less accumulated depreciation Net Property, Plant and Equipment Investments in Affiliates Intangible Assets, net of accumulated amortization of $807 in 1996 and $638 in 1995 Other Assets Total Assets LIABILITIES AND SHAREOWNERS'EQUITY Current Liabilities: Accounts payable Wages and benefits Income and other taxes Restructuring reserves Miscellaneous accruals Short-term debt Total Current Liabilities Long-Term Debt Deferred Income Taxes Postretirement Liabilities Other Liabilities Shareowners' Equity: Common stock (authorized: 850,000,000 shares, par value $2) Issued: 821,970,970 shares in 1996 and 164,394,194 in 1995 Additional contributed capital Treasury stock, at cost (237,594,831 shares in 1996 and 48,923,899 shares in 1995) Reserve for ESOP debt retirement<l) Unrealized investment holding gain Accumulated currency adjustment Reinvested earnings Total Shareowners' Equity Total Liabilities and Shareowners' Equlff i The above statement should be read in conjunction with pages 50-61 of this report. (l) ESOP stands for Employee Stock Ownership Plan. As of Dec. 31, 1996 1995 $ 166 1,930 382 386 1,476 4,340 $ 297 1,629 596 415 1,368 4,305 136 1,229 5,800 423 7,588 4,575 3,013 652 2,165 1,021 $11,191 118 1,231 5,549- 339 7,237 4,405 2-,832 -544 ' 1,964 966 $10,611 $ 715 623 20 350 1,039 654 3,401 1,608 50 1,508 934 $ 648 456 240 163 940 365 2,812 1,667 85 1,415 900 1,644 65 (2,661) (174) 11 10 4,795 3,690 $11,191 329 902 (2,550) (181) 34 101 5,097 3,732 $10,611 44 1996 Monsanto Annual Report TOWOLDMONOOI6004 Rmwlmw of Changes in Financial Polities Financial Position Remains Strong Monsanto's financial position remained strong in 1996, as evidenced by the company's current "A" debt rat ing. Financial resources were adequate to, support existing businesses and to fund new business opportunities. At the end of 1996, working capital was $554 million lower than working capital at the end of 1995. Trade receiv ables at year-end 1996 increased compared with those at the prior year-end, primarily because of higher sales levels for the Agricultural Products and Pharmaceuticals segments. In addition, the increase in receivables can be attributed to sales and marketing program changes in these segments. Such changes drove the increase in the "Trade Receivables - Day Sales Outstanding" statistic in 1996. Inventories at year-end 1996 increased, primarily because of higher inventories in the Agricultural Products segment. These increases were more than offset by lower cash and cash equivalent balances, increased restructuring reserve balances, higher accrued liabilities, and higher short-term debt levels. The amount of net property, plant and equipment was higher than the amount at the end of 1995, as $692 million in capital additions and the effects of acquisitions exceeded 1996 depreciation expense and divestitures. Total deferred tax benefits, both current and noncur rent, of $644 million at year-end 1996 are primarily related to U.S. operations, which generally have a strong earn ings history. As discussed in the Notes to Financial Statements, the increase in "Investments in Affiliates" was principally the result of the equity position taken in DeKalb Genetics Corp. and the increase in "Intangible Assets" was primarily attributable to the acquisition of the plant-biotechnology assets of Agracetus. ' As further discussed in the Notes to Financial Statements, the company announced agreements to acquire Holden's Foundation Seeds Inc., Gom States Hybrid Service Inc. and Corn States International S.a.r.1. The total cost of these acquisitions will be up to $1.02 billion, and they are expected to close in 1997. The company also acquired the Asgrow Agronomics seed business from Empresas La Modema SA, for $240 million in February 1997. These acquisitions will be financed initially with the proceeds of commercial paper borrowings. These investments are expected to have a dilutive effect on net income in 1997. Monsanto uses financial markets worldwide for its financing needs. It has available various short- and r medium-term bank credit facilities, which are discussed - in the Notes to Financial Statements on pages 54-55.' These credit facilities give Monsanto the financing flex ibility to take advantage of investment opportunities that may arise and to satisfy future funding requirements. To maintain adequate financial flexibility and access to debt markets worldwide, Monsanto management intends to maintain an "A" debt rating. Monsanto's commitments and contingencies are described in the Notes to Financial Statements beginning on page 59. Key Financial Statistics Return on Shareowners' Equity (KOI) (Net income divided by average shareowners'equity) Current Ratio0' (Current assets divided by current liabilities) Trade Receivables -- Days Sales Outstanding (Fourth-quarter trade receivables divided by fourth-quarter net sales times 30 days) Inventory Turnover Ratio01 (Cost ofgoods sold divided by inventory) Interest Coverage01 (Income before interest expense and income taxes divided by total interest cost) Cash Provided by Operations/Total Debt Total Debt/Total Capitalization01 im 10A% 1.S S3 3.3 3.8 53% 38% 1995 22.1% 1.5 71 3.7 6.4 41% 35% 1994 21.4% 1.6 67 3.9 7.3 76% 37% 01 The decrease in the current ratio in 1996 wai primarily became ofhigher current liability balances related to restructuring reserves and the reclassification of long-term incentive compensation accrual related.to the company's three-year incentive plan, which ended in 1996. 01 If the effects of the plastics business were erduded from the 1995 statistic, the inventory turnover ratio would have been virtually the same in 1996 and 1995. 01 Ifthe effects of the restructuring and other special charges were excluded, the interest coverage ratio would have been 7.7 in 1996. *9 Total capitalization is the sum of short-term debt, long-term debt and shareowners' equity. . 1996 Monsanto Annual Report 45 TOWOLDMONOQ16005 Statement of Consolidated Cash Flow (Dollars In millions) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1993 1995 1994 OPERATING ACTIVITIES: Net income Add income taxes ' Income before income taxes Adjustments to reconcile to Cash Provided by Operations: Income tax payments Items that did not use cash: Depreciation and amortization Restructuring expenses and other special charges -- net Other Working capital changes that provided (used) cash: Accounts receivable Inventories Accounts payable and accrued liabilities Other Nonoperating pretax gains from asset disposals Other items Total Cash Provided by Operations INVESTING ACTIVITIES: Property, plant and equipment purchases ' Acquisition of Kelco and pharmaceutical product line Acquisition and investment payments Investment and property disposal proceeds Proceeds from sale of styrenics plastics business $ 385 155 540 (308) 580 632 113 (267) (66) (74) 41 (9) 11 1,203 $ 739 348 1,087 (335) 598 156 (6) (36) (198) (198) (67) (125) (5.3) 823 $ 622 273 895 (196) 561 40 43 (88) 15 (125) 74 (11) r 92 . 1,300 (692) (750) 187 (500) (1,296) (197) 128 580 (409) (185) 202 Cash Used In Investing ActlvHles FINANCING ACTIVITIES: Net change in short-term financing Long-term debt proceeds Long-term debt reductions Treasury stock purchases Dividend payments Common stock issued under employee stock plans Other financing activities (1,255) 297 122 (177) (253) (343) 142 133 (1,285) 53 658 (403) (306) 194 56 (392) 89 49 (152) (478) (289) 82 25 Cash Provided by (Used In) Financing Activities INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS: Beginning of year (79) (131) 297 252 (210) 507 (674) 234 273 Indofyear . $ 166 $ 297 $ 507 The above statement should be read in conjunction with pages 50 - 61 of this report. The effect of exchange rate changes on cash and cash equivalents was not material. Cash payments for interest (net of amounts capitalized) were $190 million. $189 million and $129 million in 1996, 1995 and 1994, respectively. 46 1996 Monsanto Annual Report TOWOLDMONOOI6006 Review of Cash now Cash Flow Remains Strong Cash provided by operations of $1.2 billion was strong in 1996, increasing from last year's level of $823 million. The change was primarily due to higher net income before restructuring and other special charges and lower working capital levels. Working capital as a percent of net sales was 10 percent compared with 17 percent last year. Monsanto's operations have historically generated suffi cient cash to fund ousting businesses and growth-related research and investments. Investment and property disposal proceeds in 1996 were $187 million, primarily related to nonstrategic investments and asset sales associated with restructuring actions. Invest ment and property disposals in 1995 generated more than Gash Provided by Operations Dollars in millions $700 million in cash, principally related to the sale of the styrenics plastics business. The principal proceeds in 1994 were from the sales ofvarious businesses associ ated with restructuringactions. In December 1995, Monsanto sold its styrenics plastics business for $580 million. Approximately $ 150 million ofthe proceeds was earmarked to prefund certain 1996 capital expenditures. The balance of the sale proceeds was used to reduce short-term debt. Major uses of cash in 1996, 1995 and 1994 included dividends and capital expendi tures. Treasury stock purchases were made in 1996 and 1994. The equity investment in DeKalb Genetics Corp., the investment in Calgene Inc. and the acquisition of the plant-biotechnology assets of Agracetus were also major uses of cash in .1996. Major investments in 1995 included the acquisition of the Kelco business and the Syntex pharmaceutical product line. Monsanto's capital ' expenditures, which focused on improved technology, capacity expansions and environmental projects, totaled $692 million in 1996. Business redesign efforts and productivity enhancements were successful in increasing effective capacity at many facilities, thereby reducing the need for additional capital expenditures. Monsanto continually evaluates risk retention and insurance levels for product liability, property damage and other potential areas ofrisk. Monsanto devotes significant effort to maintaining and improving safety and internal control programs, which reduces its exposure to certain risks. Management decides the amount of insurance coverage to purchase from unaffiliated companies and the appropriate amount of risk to retain based on the cost and availability of insurance and the likelihood of a loss. Since 1986, Monsanto's liability insurance has been on the "claims made" policy form. Management believes that the current levels of risk retention are consistent with those of other companies in the various industries in which Monsanto operates. There can be no assurance that Monsanto will not incur losses beyond the limits of, or outside the coverage of, its insurance. Monsanto's liquidity, financial position and profitability are not expected to be affected materially by the levels of risk retention that the company accepts. Monsanto Maintains Strong Environmentid' Commitment Monsanto remains strongly committed to complying with various laws and government regulations concerning environmental matters and employee safety and health. Compliance with stringent requirements will continue to be an obligation of Monsanto, its competitors and industry in general. Monsanto is dedicated to long-term environmental protection and compliance programs that reduce and monitor emissions of hazardous materials into the environment, as well as to the remediation of identified existing environmental concerns. Expenditures in 1996 were approximately $48 million for environmental capital projects and approximately $203 million for the management of environmental programs, including the operation and maintenance of facilities for environmental control. Monsanto estimates that during 1997 and 1998 approximately $40 million to $50 million per year will be spent on additional capital projects for environmental protection. Monsanto intermittently receives notices from the U.S. Environmental Protection Agency (EPA) alleging that it is a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), commonly known as Superfund. In 1996, Monsanto received three such notices. For many of Monsanto's notices, it has resolved disputes, entered partial and complete consent decrees, and executed administrative orders with EPA settling a portion or all of Monsanto's liability. Monsanto's policy is to accrue costs for remediation ofwaste disposal sites in the accounting period in which the responsibility is established and the cost is estimable. 1996 Monsanto Annual Report Review of Cash Flow Monsanto's estimates of its liabilities for Superfund sites, which ate based on evaluations of currently available facts with respect to each site, take into consideration factors such as existing technology, presently enacted laws and regulations, and prior experience in remediation of contaminated sites. Monsanto does not discount these liabilities, and they have not been reduced for any claims for recoveries from insurance or from third parties. Monsanto has an accrued liability for Superfund sites of $58 million as of Dec. 31,1996. As assessments and remediation activities progress at individual sites, these liabilities are reviewed periodically and adjusted to reflect additional technical, engineering and legal information that becomes available. Major Superfund sites in this category include the noncompany-owned Brio, Fike/Artel, Motco and Woburn sites, which account for $34 million of the accrued amount. Monsanto's estimate of its Superfund liability is affected by several uncertainties. These include, but are not limited to, the method and extent of remediation, the percentage of material attributable to Monsanto at the sites relative to that attributable to other parties, and the financial capabilities of the other potentially responsible parties (PRPs) at most sites. Because of these uncertainties, primarily related to the method and extent of remediation, potential future expenses could be as much as $10 million for these sites based upon existing technology and other currently available information. These potential future expenses may be incurred over the next decade. There are various other lawsuits, claims and proceed ings that state agencies and others have asserted against the company, seeking remediation of alleged environmental impairments. Monsanto is in the process of determining its involvement, if any, at 36 of these sites. Monsanto has an accrued liability of$72 million as of Dec. 31, 1996, for these matters and for environmental reserves at certain former Monsanto plant sites. The company s estimate of its liability related to these sites is affected by several uncer tainties. These include, but are not limited to, the extent of Monsanto's involvement, and the method and extent of remediation. Because of these uncertainties, potential future expenses could be as much as $50 million for these sites based upon existing technology and other currently avail able information. Four sites in this category account for $43 million of the accrued amount and for substantially all ofthe potential future expenses. ' Monsanto spent $43 million in 1996 for remediation of Superfund and other waste disposal sites. Most of these expenditures were related to the Chemicals segment. Similar or greater amounts can be expected in future years. For hazardous and other waste facilities at operating locations, Monsanto recognizes postclosure environ mental costs and remediation costs over the estimated remaining useful life of the related facilities, not to exceed 20 years. Monsanto spent $19 million in 1996 for remediation of these facilities and has an accrued liability of $45 million as of Dec. 31,1996, for these sites. Uncertainties related to these costs include evolving government regulations, the method and extent of re mediation, and future changes in technology. Monsanto's estimated closure costs for these facilities are approximately $75 million based upon existing technology and other currently available information. Although the ultimate costs and results of remediation of waste disposal sites cannot be predicted with certainty, Monsanto's liquidity, financial position and profitability are not expected to be materially affected. Treasury Stock Purchased in 1998 . Monsanto's board of directors authorized in October 1992 the purchase of 60 million shares of Monsanto common stock, of which 17 million shares have been purchased. This is in addition to the authority granted to purchase shares for compensation and benefit programs. In the first half of 1996, Monsanto purchased a total of 8.2 million shares at a cost of $253 million. Dividend Increased for 24th Consecutive Year Monsanto has paid quarterly dividends on its common shares without interruption or reduction since 1928, and has increased the dividend per share in each of the past 24 years. Dividend payout for 1996 was 29 percent of cash provided by operations. Monsanto's dividend policy has reflected a desired long-term payout percentage based on the company's expectations of future growth and profitability levels. In any given year, additional consider ation has been given to expected financial position and results, acquisitions, 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 share owners of record as of Feb. 28, 1997, was 57,479. The high and low common stock prices on that date were $36% and $35%. ' 48 1996 Monsanto Annual Report i TOWOLDMONOQ16008 Statement of Consolidated Shareowners1 Equity (Dalian Ira millions, except per tliire) COMMON STOCK: Balance, Jan. 1 Par value of stock issued in five-for-one stock split 1836 $ 329 1,315 1995 $ 329 1994 $ 329 ADDITIONAL CONTRIBUTED CAPITAL: Balance, Jan. 1 Employee stock plans and ESOP (l) Par value of stock issued in five-for-one stock split : >.: v: ;&; "XX; : X: XXxX iXx,; XX TREASURY STOCK: Balance, Jan. 1 Shares purchased121 (8,244,500 shares in 1996 and 30,850,080 shares in 1994) Net shares issued under employee stock plans 1 (15,269,164 shares in 1996; 19,675,660 shares in 1995; and 8,647,650 shares in 1994) i r;:.x x; vr Xv(X .,,;:XxxX;. x xxs* RESERVE FOR ESOP DEBT RETIREMENT: Balance, Jan. 1 Allocation of ESOP Shares ;.X-:XiX:. -X X,-, XLX' UNREALIZED INVESTMENT HOLDING GAIN: Balance, Jan. l Net change in market value Xixxx. ~ .xXx. X- xf. ACCUMULATED CURRENCY ADJUSTMENT: Balance, Jan. 1 Translation adjustments Bdii^i)i^3^;;XX:.;X X' .Xv-X:.XlX-XX? X x -S REINVESTED EARNINGS: Balance, Jan. 1 Net income Dividends (net of ESOP tax benefits) Par value ofstock issued in five-for-one stock split ;.XXriX.X.cX'X'ir-XX' ' ^V*'? i The above statement should be read in conjunction with pages 50 - 6\ of this report. (l)ESOP stands for Employee Stock Ownership Plan. Adjusted for the 1996 five-for-one common stock split. Key Financial Statistic*111 Stock Price High Low Year-End Per Share Dividends Shareowners' Equity Average Daily Share Trading Volume (thousands ofshares) (3)Based on daily reported high and low stock prices. $ 902 133 (970) $ 849 53 nnmmmm $ 826 23 llfffllPl $(2,5501 (253) $(2,744) $(2,348) (478) 142 194 82 $ (181) 7 $ (199) 18 Hi $ (218)19 numms $ 34 (23) H if $ 19 $ 15 15 4 *>Ki.UfiWHiMivstWiJw/jv*a?. m. * $ 101 (91) $ 33 68 $ (59) 92 $ 5,097 385 (342) (345) $4,661 739 (303) V* mm $ 4,325 622 (286) wmmm 1996 $ 43`/ 23 38% :588 6.31 1,052 1998 $ 25 l33/< 24)4 .540 6.46 1,710 1994 $ 17% 133/s 14% .494 ' 5.29 1,880 1996 Monsanto Annual Report 49 TOWOLDMON0016009 Notes to Financial Statements Where applicable, per share amounts and the number of shares have been restated to reflect the May 1996 five-for-one common stock split effected in the form of a stock dividend. Significant Accounting Policies Monsanto's significant accounting policies are italidzed in the following Notes to Financial Statements. Previously reported amounts have been reclassified to make them consistent with the 1996 presentation. Basis of Consolidation The consolidatedfinancial statements include the com pany and its majority-owned subsidiaries. Intercompany transactions have been eliminated in consolidation. Other companies in which Monsanto has a significant ownership interest (generally greater than 20 percent) are included in "Investments in Affiliates" in the Statement ofConsolidated Financial Position. Monsanto's share ofthese companies' net earnings or losses is included in "Other income (expense) -- net" in the Statement ofConsolidated Income. Use of Estimates Thepreparation offinancial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affect the reported amounts ofassets and liabilities and disclosure ofcontingent assets and liabilities at the date ofthefinan cial statements and that affect revenues and expenses during theperiod reported. Estimates are adjusted when necessary to reflect actual experience. Significant estimates are used when accountingfor restructuring reserves, environmental reserves, self-insurance reserves, employee benefitplans, asset impair ments, and contingencies. Currency Translation Thefinancial statementsfor most ofMonsanto's ex-US. entities are translated into U.S. dollars at current exchange rates. Unrealized currency adjustments in the Statement of Consolidated Financial Position are accumulatedin shareowners'equity. Thefinancial statements ofex-U.S. entities that operate in hyperinflationary economies, principally Brazil, are translated at either current or historical exchange rates, as appropriate. These currency adjustments are included in net income. Major currencies are the U.S. dollar, British pound sterling, Belgian franc and Japanese yen. Other important currencies include the Brazilian real, Canadian dollar, French franc, German mark and Italian lira. Currency restrictions are not expected to have a significant effect on Monsanto's cash flow, liquidity or capital resources. Currency option contracts are purchased to manage currency exposure for anticipated transactions (for example, expected export sales in the following year denominated in foreign currencies). Currency option and forward contracts are used to manage other currency exposures, primarily for receivables and payables denominated in currencies other than the entity's currency. This hedging activity is intended to protect the company from adverse fluctuations in foreign currencies vs. the U.S. dollar. As of Dec. 31, 1996, Monsanto had currency forward contracts to purchase $102 million and to sell $226 million and purchased currency option contracts to sell $87 million of other currencies, principally the Belgian franc, Japanese yen, German mark, Brazilian real and British pound sterling. Gains and losses on contracts that are designated and effective as hedges are deferred and are included in the recorded value ofthe transaction being hedged. Net deferred hedging losses as of Dec. 31,1996, were not material. Gains and losses on other currency forward and option contracts are included in net income immediately Monsanto is subject to loss if the counterparties to these contracts do not perform. Restructuring and Other Actions In December 1996, the board of directors approved a plan to spin off the company's chemical businesses to the shareowners. Under the spinoff, each Monsanto share owner will receive a pro rata share of the voting common stock of the chemical businesses in a special dividend. The chemical businesses will become a separately traded, pub licly held company. The spinoff is subject to several condi tions, including shareowner approval. The company has filed a request for a ruling from the U.S. Internal Revenue Service that this transaction would be free from federal income taxes. Upon receipt ofshareowner approval, the results from these businesses will be reported as a discon tinued operation. In December 1996, the company recorded pretax restructuring and other special charges totaling $716 million ($500 million aftertax) to cover the exit costs incurred to separate the chemical businesses prior to shareowner approval; and the costs associated with the closure or rationalization of certain facilities, asset SO 1996 Monsanto Annual Report i 1 ' : < * ; \ ! j TOWOLDMONOOI6OIO Notes to Financial Statements write-offs, and work force reductions. Approximately 2,500 positions are expected to be eliminated by these actions. Included in these charges were aftertax amounts for asset impairments totaling S73 million. These write offs were necessary primarily because of excess production capacity. Asset values were written down to their discounted cash values, using appropriate discount rates. In December 1995, the board of directors approved a restructuring plan. The pretax charge associated with these actions was $ 169 million ($125 million aftertax) and covered the costs of work force reductions, business consolidations, facility closures, and the exit from nonstrategic businesses and facilities. This plan was substantially completed by the end of 1996 and reduced employment by approximately 470 people. The other actions taken in 1995 were associated with the formation of the Flexsys joint venture, which is discussed in "Principal Acquisitions and Divestitures." The venture partners, Monsanto and Akzo Nobel N.V., agreed to bear the one-time costs required to integrate their respective rubber chemicals businesses into the joint venture. For Monsanto, these integration costs, which totaled $40 million pretax ($25 million aftertax), were primarily for reducing the work force by approxi mately 120 people and for special termination benefits for approximately 300 people who transferred from Monsanto to the joint venture. The charge for these actions was recorded in the first quarter of 1995. Other items that affected results of operations in 1995 included the receipt in the first and third quarters of settlement payments from various insurers related to environmental and other insurance litigation. The combined effect of these settlements totaled $92 million ' pretax ($57 million aftertax). In addition, Monsanto settled a lawsuit related to a Superfund site in La Marque, Texas. The suit was brought by IT Corporation (IT), a subsidiary of International Technology Corp., and claimed, among other things, breach of a contract calling for IT to perform incineration and remediation work at the site. Monsanto settled the suit by paying $41 million pretax ($25 million aftertax), and recorded the payment in the third quarter of 1995. The company also recorded approx imately $20 million in favorable pretax adjustments ($13 million aftertax) under certain sales rebate programs in the United States for product sales made in prior years. In December 1994, the board of directors approved a plan to eliminate redundant staff activities across the company and to consolidate certain staff and administra tive business functions. The plan, which was substantially completed by the end of 1995, reduced worldwide employment by approximately 450 people. In addition, the company closed certain facilities and terminated certain programs. The pretax expense related to these actions was $89 million ($55 million aftertax). In the fourth quarter of 1994, the board approved the reversal of $49 million pretax of excess restructuring reserves from prior years. The excess was due primarily to higher-than-expected proceeds and lower-than-expected exit costs from the sale and shutdown of nonstrategic businesses and facilities included in the 1993 and 1992 restructuring actions. In September 1994, Monsanto received $67 million from the U.S. Internal Revenue Service in settlement ofcertain tax matters related to the 1985 acquisition of Searle. This settlement included interest of $33 million pretax ($21 million aftertax), recorded as a one-time gain. Most of the remainder of the proceeds reduced the balance of unamortized goodwill related to the Searle acquisition. The components of the pretax expense (income) related to the restructuring programs and the other actions were: 1996 * 1995 ' 1994 Cost of employee reductions Shutdown and consolidation of various facilities and departments Asset impairments Insurance-related settlement (income) Litigation settlement Joint venture integration costs Exit costs Other costs (income) Gains on business sales $412 $ 62 $ 68 90 107 (25) 107 (92) 41 40 84 23 (20) (189) (22) (14) $716 $ (51) $ 7 Restructuring expenses are recorded based on estimates prepared at the time the restructuring actions are approved by the board of directors. The balance in restructuring reserves as of Dec. 31, 1996, was $810 million. It is earmarked primarily for work force reduction costs, asset impairments, and the costs associated with the shutdown and consolidation of various facilities and departments. Management believes that the balance of these reserves as of Dec. 31, 1996, is adequate for completion of those activities. Restructuring actions during the last three years have reduced these liabilities by approximately $600 million. Approximately two-thirds of these reduc tions were recorded for write-offs and expenditures related to the termination or sale of nonstrategic prod ucts and facilities. The remaining reductions were pri marily related to the cost of work force reduction programs, most of which have been completed. 1996 Monsanto Annual Report - TOWOLDMONOQ16011 Notes to Financial Statements The pretax expenses (income) related to the restruc turing programs and the other unusual items were recorded in the Statement of Consolidated Income in the following categories: 1996 1995 1994 Net sales Cost of goods sold Amortization of intangible assets Restructuring expenses and other special charges -- net $ (20) $ 84 (ID 23 632 156 $ 40 Decrease in operating,income Interest income Gain on sale of styrenics plastics business Other (income) expense -- net(l) 739 (23) 125 (189) 13 40 (33) Total decrease (increase) In income before income taxes $716 $ (51) $ 7 1,1 In 1996, other expense included reversals of restructuring reserves that were no longer required, Monsanto's shate of 1996 restructuring actions undertaken by the Flcxsys joint venture, and minority interest associated with restructuring and other unusual items recorded by Calgene Inc. In 1995, other expense reflected Monsanto's share of 1995 restructuring actions undertaken by the Flexsys joint venture. Net income decreased by $500 million, or $0.84 per share, in 1996; was increased by $11 million, or $0.02 per share, in 1995; and was reduced by $ 1 million, or less than $0.01 per share, in 1994 because of these restructurings and unusual items. Principal Acquisitions and Divestitures In February 1997, the company acquired the Asgrow Agronomics seed business from Empresas La Moderna S.A. for $240 million. In January 1997, Monsanto announced that it had reached separate agreements to acquire Holdens Foundation Seeds Inc., the world's leading foundation seed corn company, and Corn States Hybrid Service Inc. and Corn States International S.a.r.L, the exclusive worldwide marketing and sales representa tives for Holdens products. The total costs of these acquisitions will be up to $1.02 billion. It is anticipated that one-time charges associated with acquired research will be recorded in conjunction with these acquisitions. In March 1996, Monsanto acquired significant equity positions in Calgene Inc. and DeKalb Genetics Corp. In November 1996, Monsanto acquired a controlling interest in Calgene. This gave Monsanto the right to nominate five of the nine authorized directors on Calgene's board. The combined investment in these plant-science businesses totaled approximately $340 mil- . lion. In May 1996, Monsanto acquired the plant-science assets of Agracetus from W.R. Grace & Co. for approxi mately $ 150 million. In December 1995, Monsanto sold its worldwide styrenics plastics business. In a separate but related transaction, Monsanto sold its shares in Monsanto Premier Kasei Co. Ltd., a styrenics plastics manufac turing joint venture in Thailand, to one of its jointventure partners. As a result of these transactions, Monsanto received $580 million, which resulted in an aftertax gain of $116 million (net of applicable income taxes of $73 million). Monsanto's results of operations for 1995 included net sales and operating income of $663 million and $ 12 million, respectively, from the styrenics plastics business. In September 1995, Searle acquired the women's health care assets, primarily product rights, of the former Syntex Corp., a subsidiary of Roche Holding Ltd., for __ approximately $240 million. The results of operations., for the acquired product rights were included in the Statement of Consolidated Income from the date of acquisition. The product rights are being amortized over 10 years. In February 1995, Monsanto completed its acquisi tion of the worldwide business of Kelco, the specialty chemicals division of Merck & Co. Inc., for approxi mately $ 1.062 billion. The acquisition included total assets with a fair value of $1.172 billion and liabilities of $110 million. The excess of the purchase price over the estimated fair value of net assets acquired is being amortized over 30 years. The financial results of the Kelco business were included in the Statement of Consolidated Income from the date of acquisition. On a pro forma basis, results of operations for the year ended Dec. 31, 1994, would not have been significantly different if the acquisition had occurred at the beginning of that year. In December 1994, Monsanto and Akzo Nobel N.V. agreed to form a 50-50 joint venture by combining their respective rubber chemicals businesses. On May 1, 1995, the joint venture, known as Flexsys L.P., began operations and is accounted for as an equity affiliate. Accordingly, Monsanto's share of Flexsys' earnings since that date has been reflected in "Other income (expense) -- net" in the Statement of Consolidated Income. Certain integra tion costs that were incurred by Monsanto upon the for mation of the joint venture are more fully described in "Restructuring and Other Actions." H 1996 Monsanto Annual Report TOWOLDMON0016012 Notes to Financial Statements Depreciation and Amortization 1996 Depreciation $434 Amortization of intangible assets 128 Obsolescence 28 Total $590 1995 $459 119 20 $598 1994 $442 81 38 $561 Property, plant and equipment is recorded at cost. The cost ofplant and equipment is depreciated over weighted average periods of18 yearsfor buildings and 10 yearsfor machinery and equipment, by the straight-line method. In 1996, total amortization of intangible assets reflected in the Statement of Consolidated Income includes $23 million of charges for asset impairments. Intangible assets are recorded at cost less accumulated amortization. The components of intangible assets and their estimated remaining useful lives were: Estimated Remaining Ufa111 1996 1995 Goodwill Patents Other intangible assets 24 $1,517 $1,370 7 70 81 12 578 513 Total $2,165 $1,964 fi) Weighted average, in years, as of Dec, 31, 1996. Goodwill and other intangible assets increased in 1996, primarily because of the Calgene and Agracetus acquisitions. Goodwill is the cost ofacquired businesses in excess ofthe fair value oftheir identifiable net assets and is amortized over the estimatedperiods ofbenefit (5 to 40years). Patents obtained in a business acquisition are recorded at thepresent value ofestimatedfuture cashflows resultingfrom patent ownership. The cost ofpatents is amortized over their legal lives. The cost ofother intangible assets (principally product rights and trademarks) is amortized over their estimated useful lives. Impairment tests oflong-lived assets are made when conditions indicate a possible loss. Such impairment tests are based on a comparison ofundiscounted cashflows to the recorded value ofthe asset. Ifan impairment is indicated, the asset value is written down to its discounted cash value, using an appropriate discount rate. Investments Certain investments, primarily equity securities, are classified as available-fior-sale securities, and are recorded at their market values. When a decline in market value is deemed other than temporary, the reduction to the invest ment in a security is charged to expense. As of Dec. 31, these equity securities were detailed as follows: 1996 1995 Aggregate fair value Gross unrealized holding: Gains Losses $80 SI63 31 63 11 7 In 1996, proceeds and realized gains from sales of available-for-sale securities were $80 million and $33 million, respectively. Debt securities held are recorded at amortized cost, because the company has the ability and intent to hold these securities to their maturity date. Most of these secu rities mature in less than five years. As of Dec. 31,1996 ' and 1995, the total amortized cost of these securities was $150 million and $272 million, respectively. Inventory Valuation Inventories are stated at cost or market, whichever is less. Actual cost is used to value raw materials and supplies. Standard cost, which approximates actual cost, is used to valuefinishedgoods and goods in process. Standard cost includes direct labor and raw materials, and manufacturing overhead based on practical capacity. The cost ofcertain inventories (66percent as ofDec. 31, 1996) is determined by using the last-in, first-out (LIFO) method, which gen erally reflects the effects ofinflation or deflation on cost of goods sold sooner than other inventory cost methods. The cost ofother inventories generally is determined by using thefirst-in, first-out (FIFO) method. The components of inventories were: 1996 1995 Finished goods Goods in process Raw materials and supplies $ 888 $ 874 334 305 461 434 Inventories, at FIFO cost Excess of FIFO over LIFO cost 1,683 1,613 (207) (245) Total - -L $1,476: $1,368 Inventories at FIFO approximate current cost. The effect of 1995 LIFO inventory liquidations was primarily related to the sale of the styrenics plastics business and totaled $24 million. It was included in the gain on the sale of the styrenics plastics business. 1996 Monsanto Annual Report 53 TOWOLDMONOQ16013 Notes to Financial Statements Income Taxes The components of income before income taxes were: ISM 1995 1994 United States Outside United States $285 $ 760 $447 255 327 448 Tolars T-". $895;. The components of income tax expense charged to operations were: 1996 1995 1994 Current: U.S. federal U.S. state Outside United States $ 61 $ 288 17 19 122 121 200 428 $118 17 94 229 Deferred: U.S. federal U.S. state Outside United States IWSfeTr ii (4| (7| (34) (45) ,, $1551 $ (80) 9 (9) (80) 2 3 39 44 Factors causing Monsanto's effective tax rate to differ from the U.S. federal statutory rate were: 1668 1995 1994 U.S. federal statutory rate Benefits attributable to: U.S. export earnings Puerto Rican operations Higher (lower) ex-U.S. rates Nondeductible goodwill Nondeductible exit costs Valuation allowances U.S. state income taxes Other 35% 35% 35% (7) (2) (1) (4) (2) (2) ------ 21 1 6 1 (1) 121 (4) (3) (2) Effective Income tax rat#Ci-i Deferred income tax balances were related to: 1996 Asset Liability 1995 Asset Liability Property $(384) Postretirement benefits 539 Restructuring reserves 254 Environmental liabilities 54 Inventory 44 Other 305 Valuation allowances (168) $ 35 6 (19) 28 $(388) 508 130 65 38 312 (90) $39 7 (3) 42 Total^T;: VVgV $^64# $ 50 The balance in valuation allowances includes $107 million for Calgeneas of Dec. 31, 1996, primarily related to net operating loss carryforwards. Monsanto cannot utilize these deferred tax assets as Calgene is not included in the company's consolidated tax return in 1996. Income taxes and remittance taxes have not been recorded on $1.1 billion in undistributed earnings of subsidiaries, either because any taxes on dividends would be offset substantially byforeign tax credits or because Monsanto intends to reinvest those earnings indefinitely. If such earnings were paid as dividends, the estimated U.S. income tax would be $ 139 million. Short-Term Debt and Credit Arrangements Short-term debt was: 1996 1995 Notes payable to banks Commercial paper Bank overdrafts Current portion of long-term debt $129 332 112 81 $ 61 93 113 98 Total $654 $365 Weighted average interest rates of notes payable as of Dec. 31: Banks111 Commercial paper 7.7% 5.5% 7.0% 5.8% Includes the effect of notes in certain countries where local inflation results in high interest rates. Monsanto had aggregate short-term loan facilities of $450 million, under which loans totaling $129 million were outstanding as of Dec. 31, 1996. Interest on these loans is related to various bank rates. Monsanto has a $1 billion credit facility, expiring in 2001, which allows the company to request that lenders increase their com mitments up to an aggregate of $ 1.6 billion. There were no borrowings under this credit facility as of Dec. 31, 1996. This facility is used to support the issuance of commercial paper. Interest on'amounts borrowed under this agreement is expected to be at money market rates. Covenants under this credit facility restrict maximum borrowings. The company does not anucipate that future borrowings will be limited by the terms of this agreement. 54 1996 Monsanto Annual Report TOWOLDMONOQ16014 Notes to Financial Statements Long-Term Debt Long-term debt (exclusive of current maturities) was; 1996 1993 Industrial revenue bond obligations, average rate in 1996 of 5.24%, due 1998 to 2028 Medium-term notes, rates in 1996 ranging from 8.55% to 9%, due 1998 to 2005 Commercial paper01 6% notes due 2000 7.09% and 8.13% amortizing ESOP(2) notes and debentures due 2000 and 2006, guaranteed by the company 8/4% debentures due 2009 5.6% yen note due 2016 8.7% debentures due 2021 8.2% debentures due 2025 Other $ 338 $ 335 145 185 325 425 ISO 150 138 150 59 99 88 100 100 ISO 150 75 73 Total $1,608 $1,667 01 $ 150 million swapped to an effective rate of 8.6 percent through February 1996. <2) ESOP stands for Employee Stock Ownership Plan. ' Maturities and sinking-fund requirements on long term debt are $81 million in 1997, $81 million in 1998, $77 million in 1999, $207 million in 2000, and $50 million in 2001. Commercial paper balances of $325 million and $425 million as of Dec. 31, 1996 and 1995, respectively, have been classified as long-term debt. Monsanto has the ability and intent to renew these obligations beyond 1997. Interest-rate swap agreements are used to reduce inter est rate risks and to manage interest expense. By entering into these agreements, the company changes the fixed/variable interest-rate mix of its debt portfolio. As of Dec. 31, 1996, Monsanto was party to interest-rate swap agreements with an aggregate notional principal amount of $ 165 million related to existing debt. The agreements effectively convert floating-rate debt into fixed-rate debt. This reduces the company's risk of incur ring higher interest costs in periods of rising interest rates. Monsanto is subject to loss if the counterparties to these agreements do not perform. Interest differentials to be paid or received became ofswap agreements are accrued as interest rates change over the related debtperiod. Fair Values of Financial Instruments ' The estimated fair values of Monsanto's financial instruments were: 1996 199S Recorded Fair Amount Value Recorded Fair Amount Value Assets: Investments in securities and other assets $ 210 $ 229 $ 378 $ 433 Liabilities: Currency swaps Interest-rate swaps Long-term debt _ 1 1,608 1 12 1,681 1 5 1,667 4 19 1,781 The recorded amounts of cash, trade receivables, discounted receivables, third-party guarantees, foreign currency forward contracts, accounts payable, and short-term debt approximate their fair values. - Fair values are estimated by the use of quoted market prices, estimates obtained frorn brokers, and other appro priate valuation techniques based on information avail able as of Dec. 31, 1996. The fair-value estimates do not necessarily reflect the values Monsanto could realize in the current market. Postretirement Benefits -- Pensions Most Monsanto employees are covered by noncon tributory pension plans. The components of pension cost were: 1996 1995 1994 Service cost for benefits earned during the year Interest cost on benefit obligation Assumed return on plan assets01 Amortization of unrecognized net (gain) loss $ 83 $ 70 $ 75 287 291 269 (3221 (326) (317) 9 (25) (12) $ 57 :$" 15 '"Actual returns (losses) on plan assets were $558 million, $671 million and $(142) million in 1996, 1995 and 1994, respectively. 1996 Monsanto Annual Report SS TOWOLDMONOQ16015 Notes to Financial Statements Pension benefits are based on the employee's years of service and/or compensation level. Pension plans are funded in accordance with Monsanto's long-range projections of the plans' financial conditions. These pro jections take into account benefits earned and expected to be earned, anticipated returns on pension plan assets, and income tax and other regulations. Pension costs are determined through the use of the preceding year-end rate assumptions. Assumptions used as of Dec. 31 for the principal plans were: 1808 188S 1804 Discount rate Assumed long-term rate of return on plan assets Annual rates of salary increase (for plans that base benefits on final compensation level) 7.50% 7.25% 8.50% 9.50% 9.50% 9.50% 4.50% 4.50% 5.00% The funded status of Monsanto's pension plans at year-end was: 189 1995 Plan assets at fair value $3,817 $ 3,690 Actuarial present value of plan benefits: Vested $3,495 $ 3,457 Nonvested 154 145 Accumulated benefit obligation Effect of projected future salary increases 3,649 3,602 377 385 Projected benefit obligation"1 $4,026 $3,987 Deficiency of plan assets over projected benefit obligation Less: Unrecognized initial net gain Unrecognized prior service costs Unrecognized subsequent net gain (loss) $ (209)$ (297) 94 119 (264) (192) 241 (5) HHHHMMB 111 Included $228 million in 1996 and $204 million in 1995 for unfunded plans. Included $138 million in 1996 and $152 million in 1995 for unfunded plans. The accrued net pension liability was included in: Postretirement liabilities Less other assets $348 $277 (68) (58) Included in the preceding table are plan assets and projected benefit obligations for the principal U.S. plans of approximately $3,327 billion and $3,264 billion, respectively, as of Dec. 31, 1996. Plan assets consist principally of common stocks and U.S. government and corporate obligations. Contributions to these plans were neither required nor made in 1996, 1995 and 1994 because the company's principal pension plans are adequately funded, using assumed returns. Postretirement Benefits -- Health Care and Other Monsanto provides certain health care and life insur ance benefits for retired employees. Substantially all of Monsanto's regular, full-time U.S. employees and certain employees in other countries may become eligible for these benefits if they reach retirement age while employed by Monsanto. These postretirement benefits are unfunded and are generally based on the employee's years of service and/or compensation level. The costs of postretirement benefits are accrued by the date the ' employees become eligible for the benefits. - The components of the cost of these postretirement benefits, principally health care and life insurance, were: 199S 1995 1994 Service cost for benefits earned during the year $ 25 Interest cost on benefit obligation 88 Amortization of unrecognized net (gain) loss 2 $ 21 $ 23 94 87 (2) 7 $115 $113 $117 Postretirement costs are determined by using the preceding year-end rate assumptions. Assumptions used as of Dec. 31 for the principal plans were: 1996 1995 1994 Discount rate Initial trend rate for health care costs01 Ultimate trend rate for health care costs 7.50% 7.25% 8.50% 8.00% 9.00% 11.50% 5.00% 5.00% 5.50% 111 The initial trend rate for health care costs declines by 1 percent per year to 5 percent for years after the year 2001. A1 percent increase in the assumed trend rate for health care costs would have increased the cost of 1996 postretirement health care benefits by $4 million and the accumulated benefit obligation by $48 million as of Dec. 31, 1996. 56 1996 Monsanto Annual Report TOWOLDMONOOI6OI6 Notes to Financial Statements As of Dec. 31, the status of Monsanto's postretirement health care and life insurance benefit plans, and employee disability benefit plans was: 19% 199S Accumulated benefit obligation: Retirees Eligible active employees Other active employees ' $ 938 $1,006 60 52 251 213 Total $1,249 $1,271 Unrecognized benefits from prior service Unrecognized subsequent net loss 27 34 (28) (81) Accrued liability $1,248 $1,224 The accrued liability was included in: Miscellaneous accruals Postretirement liabilities $ 88 $ 86 1,160 1,138 Accrued liability $1,248 $1,224 The assumptions used to compute the accumulated benefit obligation of the principal plans were changed as of Dec. 31, 1996. That resulted in a decrease of approximately $28 million in the obligation. Employee Savings Plans For some employee savings plans, employee contri butions are matched in part by Monsanto. The value of these contributions for such plans was $30 million in each of the years 1996, 1995 and 1994. Monsanto has established an Employee Stock Ownership Plan (ESOP), which holds 18.6 million shares of Monsanto common stock as of Dec. 31, 1996. The ESOP acquired shares by using proceeds from the issuance of long-term notes and debentures that are guaranteed by Monsanto. The ESOP also borrowed $50 million from Monsanto. A portion of the ESOP shares is allocated each year to employee savings accounts as matching contributions. In 1996, 752,515 shares were allocated to participants under the plan, leaving 12,623,080 unallocated shares as of Dec. 31, 1996. Unallocated shares held by the ESOP are considered out standingfor earningsper share calculations. Compensation expense is equal to the cost ofthe shares allocated to partici pants, less dividends paid on the shares held by the ESOP Dividends on the common stock owned by the ESOP are being used to repay the ESOP borrowings, which totaled $180 million as of Dec. 31, 1996. Total ESOP expense Interest portion of total ESOP expense Cash contribution Dividends paid on ESOP shares held 19% $17 14 16 11 1%S $26 16 18 10 1994 $29 17 19 9 Stock Option Plans Effective fan. I, 1996, Monsanto adopted Statement ofFinancialAccounting Standard (SFAS) No. 123, 'Accountingfor Stock-Based Compensation. "As permitted by the standard, the company has elected to continue following the guidance ofAccounting Principles Board (APB) Opinion No. 25, "Accountingfor Stock Issued to Employees, "for measurement and recognition ofstockbased transactions with employees. Accordingly, no compensation cost has been recognized for the company's option plans. Had the determination of compensation cost for these plans been based on the fair value at the grant dates for awards under these plans, consistent with the method of SFAS No. 123, the company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: 19% 1995 Net income: As reported Pro forma $385 $ 739 305 721 Earnings per share: As reported Pro forma $0.64 $1.27 0.52 1.24 The resulting compensation expense may not be rep resentative of compensation expense to be incurred on a pro forma basis in future years. The company has two fixed option plans. Under the Management Incentive Plan of 1996, the company may grant options to key officers and management employees for up to 46,250,000 shares of common stock. Under this plan, the exercise price of each option equals not less than the fair market value of the company's stock on the date of grant, and an opuon's maximum term is 10 years. Options are granted at the discretion of the board of directors' Executive Compensation and Development Committee (the committee) or its delegate. Options gen erally vest upon the earlier of the achievement of business performance targets or upon the ninth anniversary of the option grant date. Options granted to senior manage ment vest upon the attainment of pre-established 19% Monsanto Annual Report 52 TOWOLDMONOQ16017 Notes to Financial Statements prices within specified time periods. Under the com pany's Shared Success Stock Option Plan, the majority of regular full-time and regular part-time employees of the company have been granted options on 200 shares of common stock. The maximum number of shares for which stock options may be granted under this plan totals 13,500,000. Approximately 5,246,200 options, which vest in April 1999, are outstanding under this plan. Under this plan, the exercise price of each option is determined by the committee and generally equals the market price of the company's stock on the date of grant. An option's maximum term is 10 years. The fair value of each option grant is estimated on the date of grant by using the Black-Scholes option-pric ing model. The following weighted-average assumptions were used for grants in 1996 and 1995-' 1996 1995 Expected dividend yield Expected volatility Risk-free interest rates Expected option lives (years) 1.5% 25.0% 6.0% 4.0 3.0% 20.0% 7.1% 4.5 A summary ofthe status of the company's stock option plans for the three-year period ended Dec 31,1996, follows: Dec. 3 ii 1993 Outstanding Exercisable Shares Shares WeightedAverage Exercise Price 28v62iO;6Z^v66>31i3;Oi^iv 1994: Granted Exercised Expired 12,896,470 (9,106,225) (1,559,370) 15.55 9.83 10.02 Dec. 31, 1994 v 35,842,995 -:58^3^m( 1995: Granted Exercised Expired 7,278,725 (20,135,570) (417,745) 16.01 10.83 14.12 Dec. 31, 1995-, V 12.63 1996: Granted Exercised Expired : 25,004,150 (16,327,617) (801,605) 33.38 11.93 22.59 Dec.31il99@e 3i,362,$4^U;153;i4i23ti 20.90 The weighted-average fair values of options granted during 1996 and 1995 were $6.43 and $3.99, respectively. The following tables summarize information about stock options outstanding as of Dec. 31, 1996: Options Outstanding Range of Exercise Prices Shares Weighted-Average Remaining Contractual Life WeightedAverage Exercise Price $ 6 to 9 10 to 14 15 to 18 20 to 29 30 to 36 40 to 55 2,556,640 21,777,088 14,114,885 6,326,575 11,817,050 6,552,000 1.6 years 5.3 7.5 9.1 9.3 9.4 $ 8.42 11.57 15.70 26.96 31.84 42.39 $ 6 to 55 63,144,238 7.2 $20.90 Options Exercisable Range of Exercise Prices $ 6 to 9 10 to 14 15 to 18 20 to 29 $' 6 to 55 Shares 2,556,640 21,672,088 14,074,715 59,500 38,362,943 WeightedAverage Exercise Price S 8.42 11.56 15.70 20.38 $12.88 In February 1994, Monsanto established a grantor trust and contributed 12.5 million shares of Monsanto common stock to be used to satisfy compensation and benefit arrangements and obligations, including issuance of shares upon the exercise of certain stock options. Shares held by the grantor trust are included in earnings per share calculations only after they are transferred to employees. Earnings Per Share . Earnings per share were computed using the weighted average number of common shares and common share equivalents outstanding each year (598,865,032 in 1996; 580,639,360 in 1995; and 584,924,800-in 1994). Common share equivalents (17,659,844 in 1996; 13,391,325 in 1995; and 11,996,225 in 1994) consist primarily of common stock issuable upon exercise of outstanding stock options. Earnings per share assuming full dilution were not significantly different from the primary amounts. 58 1996 Monsanto Annual Report TOWOLDMONOOI6OI8 Notes to Financial Statements Capital Stock As of Dec. 31, 1996, there were 41,407,395 common shares reserved for employee stock options. In January 1990, the company's board of directors declared a dividend of one preferred stock purchase right on each then-outstanding share of the fcompany's common stock. If a person or group acquires beneficial ownership of 20 percent or more, or announces a tender offer that would result in beneficial ownership of 20 percent or more, of the company's outstanding common stock, the rights become exercisable and, as a result of two subsequent stock splits, for every 10 rights held, the owner will be entitled to purchase one one-hundredth of a share of a new series of preferred stock for $450. If Monsanto is acquired in a business combination transaction while the rights are outstanding, for every 10 rights held, the holder will be entided to purchase, for $450, common shares of the acquiring company having a market value of $900. In addition, if a person or group acquires ben- . eficial ownership of 20 percent or more of the company's outstanding common stock, for every 10 rights held, the holder (other than such person or members of such group) will be entided to purchase, for $450, a number of shares of the company's common stock having a mar ket value of $900. Furthermore, at any time after a per son or group acquires beneficial ownership of 20 percent or more (but less than 50 percent) of the company's outstanding common stock, the board of directors may, at its option, exchange part or all of the rights (other than rights held by the acquiring person or group) for shares of the company's common stock on a one sharefor-every-10-rights basis. At any time prior to the acqui sition of such a 20 percent position, the company can redeem each right for $0.001. The board of directors is also authorized to reduce the aforementioned 20 percent thresholds to not less than 10 percent. The rights expire in the year 2000. Commitments and Contingencies Commitments, principally in connection with uncompleted additions to property, were approximately $90 million as of Dec. 31, 1996. Excluding the ESOP notes and debentures, Monsanto was contingently liable as a guarantor for bank loans and for discounted cus tomers' receivables totaling approximately $172 million and $388 million as of Dec. 31,1996 and 1995, respec tively. Future minimum payments under noncancelable operadng leases and unconditional inventory purchases are $161million for 1997, $122 million for 1998, $78 million for 1999, $29 million for 2000, $20 million for 2001, and $56 million thereafter. The more significant concentrations in Monsanto's trade receivables at year-end were: 1996 199S U.S. agricultural product distributors European agricultural product distributors Pharmaceutical distributors worldwide Customers in the former Soviet Union $361 $257 156 . 399 46 f17 357 21 Management does not anticipate losses on its trade receivables in excess of established allowances. Costsfor remediation ofwaste disposal sites are accrued in the accountingperiod in which the responsibility is established and when the cost is estimable. Monsanto's Statement of Consolidated Financial Position included accrued liabilities of $175 million and $210 million as ofDec. 31, 1996 and 1995, respectively, for the remedia tion of identified waste disposal sites. Expenditures related to remediation activities were $62 million in 1996, $74 million in 1995, and $65 million in 1994. Monsanto's future remediation expenses for waste disposal sites are affected by a number of uncertainties, including, but not limited to, the method and extent of remediation, the percentage of material attributable to Monsanto at the sites relative to that attributable to other parties, and the financial capabilities of the other potentially responsible parties (PRPs), Because of the uncertainties associated with remediation activities, Monsanto's potential future expenses to remediate these sites could approximate an additional $60 million. ! 1996 Monsanto Annual Report 59 TOWOLDMONOQ16019 Notes to Financial Statements Postclosure and remediation costsfir hazardous and other wastefacilities at operating locations are accrued over the estimated life ofthefacility aspart ofits anticipated closure cost. Monsanto's estimated closure costs for these facilities could reach approximately $75 million based upon existing technology and currendy available information. Uncertainties related to these costs include evolving government standards, the method and extent of remediation, and future changes in technology. In October 1996, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 96-1, "Environmental Remediation Liabilities," which is effective for Monsanto in 1997. SOP 96-1 establishes authoritative guidance regarding the recognition, measurement and disclosure of environ mental remediation liabilities. The preliminary estimate of the one-time charge resulting from the adoption of this statement is in the range of $20 million to $25 mil lion aftertax. Monsanto is a party to a number of lawsuits and claims, which it Is vigorously defending. Such matters arise out of the normal course of business and relate to product liability, government regulation, including environmental issues, and other issues. Certain of the lawsuits and claims seek damages in very large amounts. Although the results of litigation cannot be predicted with certainty, management's belief, based- upon the advice of company counsel, is that the final outcome of such litigation will not have a material adverse effect on Monsanto's consolidated financial position, profitability or liquidity in any one year, as applicable. Supplemental Data Supplemental income statement data were; 1995 Raw material and energy costs Employee compensation and benefits Current income and other taxes Rent expense $2,178 $2,265 $2,375 2,184 2,283 2,193 491 681 477 140 133 124 Technological expenses; Research and development Engineering, commercial development and patent 728 658 609 60 55 65 Total technological expenses 788 713 674 Interest expense: Total interest cost Less capitalized interest 188 (14) 201 '141 (ID '(10) Net interest expense 171 190 131 Currency losses including equity in affiliates' currency gains and losses 8 9 23 Segment Information Certain segment data and geographic data for 1996, 1995 and 1994 that appear on pages 34 and 43 are integral parts of the accompanying financial statements. The company's principal product lines are discussed in the segment data. 60 1996 Monsanto Annual Report TOWOLDMONOOI6020 Note* to Financial Statement* Quarterly Data-- Unaudited FM ThM Fourth Total Quarto Quarto Qewto Qussto Year Net Sales 1996 1995 1994 $2,304 $2,579 $2,176- $2,203 $9,262 2,318 2,482 2,048 2,114 8,962 2,001 2,269 1,912 2,090 8,272 Gross Profit 1996 1995 1994 1,117 994 893 1,283 1,124 1,045 1,028 868 733 916 4,344 867 3,853 827 3,498 Operating Inmm (Lots) 1996 1995 1994 401 512 281 (601) 597 361 445 224 (45) 985 319 397 131 76 923 Net Income (Loss) 1996 1995 1994 260 365 170 (410) 385 229 290 140 80 739 194 258 116 54 622 Earnings (Loss) per Shaft 1996 1995 1994 0.43 0.40 0.33 0.62 0.51 0.44 0.28 0.23 0.19 (0.69) 0.13 0.10 0.64 1.27 1.06 DMdends per Sham 1996 1995 1994 0.138 0.126 0.116 0.150 0.138 0.126 0.150 0.138 0.126 0.150 0.138 0.126 0.588 0.540 0.494 Common Stock Pries 199 High 31% 34% 37% 43% 43% Low 23 28% 26% 36% 23 1995 High Low 16/. 18% 20% 25 25 137. 157. 18 . 19% 13% 1994 High Low 16/r 16% 17% 16% 17% 14% 14% 15 13% 13% Historically, Monsanto's net income is higher during the first half of the year, primarily because of the concentration of generally more profitable sales of the Agricultural Products segment during that part of the year. Net income for the fourth quarter of 1996 included an aftertax charge of $500 million, or $0.84 per share, associated with the exit from the company's chemical businesses, the proposed spinoff and other unusual items. Net income in the first quarter of 1995 included an aftertax gain of $25 million, or $0.04 per share, for insurance-related settlement payments and an aftertax charge of $25 million, or $0.04 per share, for integration costs related to the formation of the Flexsys joint venture. In the third quarter of 1995, net income included an aftertax gain of $32 million, or $0.06 per share, for the receipt of settlement payments related to environ mental insurance litigation, and an aftertax charge of $25 million, or $0.04 per share, for the settlement of a lawsuit related to a Superfiind site in La Marque, Texas. Third-quarter net income also included favorable adjustments ofapproximately $13 million aftertax, or $0.02 per share, related to certain sales rebate programs in the United States for product sales made in prior years. Net income for the fourth quarter of 1995 included an aftertax charge of $125 million, or $0.22 per share, for restructuring actions and an aftertax gain of $116 million, or $0.20 per share, resulting from the sale of the styrenics plastics business. In the third quarter of 1994, net income induded an aftertax gain of $21 million, or $0.04 per share, for inter est on the amount of the settlement of certain tax matters with the U.S. Internal Revenue Service related to the 1985 acquisition of Searle. Net income for the fourth quarter of 1994 induded an aftertax expense of $55 million, or $0.09 per share, for a work force reduction plan approved by the board of direc tors and for costs to dose or to exit from certain facilities and programs. Also induded in the quarter was an after tax gain of $33 million, or $0.06 per share, from the reversal of excess restructuring reserves from prior years. 1996 Monsanto Annual Report 61 TOWOLDMON0016021 Financial Summary (Dollar* li million*, exeapt par ahar*) 198S111 1994"' 1993w 1992"' 1991'" Operating Results Net Sales Gross Profit As a Percent of Sales , Operating Income As a Percent of Net Sales Income (Loss) from Continuing Operations As a Percent of Net Sales Income from Discontinued Operations Cumulative Effect of Accounting Changes Net Income (Loss) Return on Shareowners' Equity $ 9,262 4,344 47% 597 6% 385 4% 385 10.4% $ 8,962 3,853 43% 985 11% 739 8% 739 22.1% $ 8,272 3,498 42% 923 11% 622 8% 622 21.4% $ 7,902 3,338 42% 810 10% 494 6% 494 16.9% $ 7,763 $ 7,936 3,053 39% 58 1% 3,417 43% 475 6% (126) 238 (2)% 3% 578 58 (540) (88) 296 (2.6)% 7.6% Earnings par Shar17* Income (Loss) from Continuing Operations Net Income (Loss) Year-End Financial Position Total Assets Working Capital Property, Plant and Equipment: Gross Net 1 . ' Long-Term Debt Shareowners' Equity Current Ratio Percent ofTotal Debt to Total Capitalization Other Data Property, Plant and Equipment Purchases Depreciation and Amortization Interest Expense Research and Development Expenses Income Taxes Cash Provided by Continuing Operations $ 0.64 0.64 $11,191 939 $ 7,588 3,013 $ 1,608 3,690 1.3 38% $ 692 590 171 728 155 1,203 $ 1.27 1.27 $ 1.06 1.06 $ 0.82 0.82 $ (0.20) $ 0.37 (0.14) 0.47 $10,611 1,493 $ 7,237 2,832 $ 1,667 3,732 1.5 35% $ 8,891 1,448 $ 7,555 2,817 $ 1,405 2,948 1.6 37% $ 8,640 1,377 $ 7,382 2,802 $ 1,502 2,855 1.6 38% $ 9,085 1,512 $ 9,227 1,536 - $ 7,602 3,005 $ 7,510 3,191 $ 1,423 .$ 1,871 3,005 3,654 1.6 36% 1.7 38% $ 500 598 190 658 348 823 $ 409 561 131 609 273 1,300 $ 437 572 129 626 235 1,022 $ 586 765 169 651 (48) 912 $ 554 714 166 610 116 1,180 Stock Price:17* High . Low . Year-End Price/Earnings Ratio on Year-End Stock Price $ Five-Year Market Return to Shareowners(8> 43% 23 38% 60 334% $ 25 13% 24 'A 19 298% $ 17% 13% 14% 13 139% $ 15 97. 14% 18 198% $ 14% 9%' 11% -- 147% $ 15% 9% 13% 29 182% Per Share:(7) Dividends Shareowners' Equity Shareowners (year-end) . Shares Outstanding (year-end, in millions)*7* Employees (year-end) $ 0.588 6.31 54,828 584 28,000 $ 0.540 6.46 50,745 575 28,500 $ 0.494 5.29 53,694 560 29,400 . $ 0.460 4.92 56,601 580 30,000 $ 0.440 4.99 60,074 600 33,800 $ 0.409 5.94 60,152 615 39,300 (l> Net income for 1996 included restructuring and other special chargee of $500 million, or $0.84 per share, associated with the exit from the company's chemical businesses, the proposed spinoff, and other unusual items. "* Net income for 1995 included net restructuring expenses and other unusual items of $105 million, or $0.18 per share, and the gain on the sale of the styrenics plastics business of $116 million, or $0.20 per share. *3* Net income for 1994 included a net aftertax loss for restructuring and other unusual items of $1 million, or less than $0.01 per share. "* Net income for 1993 included a net aftertax gain for restructuring and other unusual items of $15 million, or $0.02 per share, Loss from continuing operations and net loss for 1992 included a net aftertax loss for restructuring and other unusual items of $472 million, or $0.76 per share. *** Net income for 1991 included net restructuring expenses of $325 million, or $0.51 per share. 171 Per share amounts and shares outstanding were restated to reflea the May 1996 five-for-one stock split. "* Assumes reinvestment of quarterly dividends. 62 1996 Monsanto Annual Report TOWOLDMONOOI6022 Officers Chairman, President and Chief Executive Officer Robert B. Shapiro1*' Vice Chairman Nicholas L. Reding1*' Executive Vice Presidents Robert 6. Potter1** Hendrik A. Verfalllle1*' ' Senior Vice President and Chief Financial Officer Robert B. Hoffman1** Senior Vice President, General Counsel and Secretary R. William Ida III1'* Senior Vice Presidents Stoven L. Engelbert1*2 Philip Needleman, Ph.D.u Virginia V. Weldon, M.D.1-* Vice Presidents Kees Been Philip H. Brodsky, Ph.D. Robert A. Clausen A. Nicholas FlllppeUo, Ph.D. Linda J. Fisher Patrick I. Forteno, Ph.D. Pierre Hochall1** Donna A. Hindi14 Frank N. Kotsonls, Ph.D. Richard A, Overton Michael A. Pterio Robert W. Reynolds1** Steve R. Stetz Jr. Michael W.WInkel Vice President and Controller Michael R. Hogan Vice President and Treasurer Juanita H. Hlnshaw Chairman and Chief Executive Officer G.D. Searle 8c Co. ' Richard U. Do Schutter1 President, Fibers Business Unit John C. Hunter III14 (1> Executive officers as defined by die Securities and Exchange Commission. <2> These officers are members of the Monsanto Executive Management Committee and are responsible lor corporate policy and coordination; 131 These officers are also members of the Monsanto Management Board. This group, chaired by Bob Shapiro, is responsible for corporate direc tion, resource allocation and measurement ofbusiness performance. Advisory Directors Monsanto established advisory directors in 1981 to provide counsel to the board of directors on board matters. Currently, six executives serve as advisory directors. They are: Richard U. Da Schuftar, 56, is chairman and chief executive officer of G.D. Searle & Co., the pharma ceutical subsidiary of Monsanto. He joined Searle in 1985 as a corporate executive vice president. Prior to his tenure at Searle, Mr. De Schutter held a variety of positions in Monsanto's chemical businesses for 21 years. He has been an advisory director for one year. Robert B. Hoffman, 60, is senior vice president and chief financial officer of Monsanto; Mr. Hoffman joined the company in April 1994. Prior to joining Monsanto, he worked for several companies in finance and international assignments. Mr. Hoffman has been an advisory director for two years. Philip Needtoman, Ph.D., 58, is senior vice president and' chief scientist of Monsanto, and president of research i ' 1 ""`lopment of G.D. Searle & Co., the pharma ----------------- ; 'f Monsanto. Dr. Needleman joined Monsanto in 1989 and has been an advisory director for six years. .Robert 6 Potter, 57, joined Monsanto in 1965 and has held a variety ofsales, marketing and administrative positions in Monsanto's chemical businesses, including president of the former Chemical Group from 1986 through 1994. He is an executive vice president of Monsanto, and has been an advisory director for 10 years. Hendrik A. Vorfallllo, 51, is an executive vice president of Monsanto and has been an advisory director for four years. Mr. Verfaillie joined Monsanto in 1976 and has served in marketing and administrative assign ments in Brussels and St. Louis, including president of the former Agricultural Group from 1993 through 1994. Virginia V. Weldon, M.D., 61, joined Monsanto in 1989. She is senior vice president of public policy and is responsible for identifying public policy issues affecting the company and orchestrating Monsanto's approach to these issues. Dr. Weldon has been an advisory director for six years. Ago and yean of,service as of March 1, 1997. 1996 Monsanto Annual Report 63 TOWOLDMONOOI6023 Board of Directors Retort B. Shapiro, 58, of St. Louis, is chairman and chief executive officer of Monsanto. He joined Searle, a subsidi ary of Monsanto, in 1979. Mr. Shapiro has also served as the head of the NutraSweet businesses, and as the head of Monsanto's agricultural businesses. He has t(een a director for four years. Mr. Shapiro chairs file boards executive committee. Joan T. Boh, 67, ofWestborough, Massachusetts, is chairman of the board ofNew England Electric System, a public utility holding company. She has been a Monsanto director for 10 years. Mrs. Bok chairs the boards corporate social respon sibility committee and is a member of the finance committee. Robert M. Heyssel, M.D., 68, ofSeaford, Delaware, is a consult ant and president emeritus of the Johns Hopkins Health System, a group of not-for-profit medical centers in Baltimore. He is the retired president and chief executive officer of the Johns Hopkins Health System and the Johns Hopkins Hospital. Dr. Heyssel has been a Monsanto director for eight years. He chairs the board's pension and savings funds committee and is a member of the audit, nominating and executive compensation and development committees. Gwendolyn S. King, 56, of Philadelphia, is senior vice president, corporate and public affairs for PECO Energy Co., an electric and natural gas provider for the greater Philadelphia area. She is also a former commissioner of the U.S. Social Security Administration. Mrs. King has been a Monsanto director for three years. She is a member of the board's audit and corporate social responsibility committees. Philip Leder, M.D., 62, of Boston, is chairman of the Department of Genetics at Harvard Medical School. He is also senior investigator for the Howard Hughes Medical Institute. Dr. Leder has been a Monsanto director for seven years. He is a member of the board's executive and pension and savings funds committees. H award M. Love, 66, of Pittsburgh, is the retired chief executive officer of National Intergroup Inc., a holding company formed to effect a corporate restructuring of National Steel Corp. He has been a Monsanto director for 19 years. Mr. Love chairs the board's executive compensa tion and development committee, and is a member of the nominating and pension and savings funds committees. Frank A. Metz Jr., 63, ofSloatsburg, New York, is a retired senior vice president of finance and planning, and chief financial officer of IBM Corp., an international computer and data processing enterprise. He has been a Monsanto director for seven years. Mr. Metz chairs the board's audit committee, and is a member of the finance, nominating, and executive compensation and development committees. Jacebus F.M. Peters, 65, ofWassenaar, the Netherlands, is the retired chairman of the executive board and chief executive officer ofAEGON N.V., an international insurance and financial services company. He has been a Monsanto director for four years. Mr. Peters is a mem ber of the board's finance and pension and savings funds committees. Nicholas L. Reding, 62, of St. Louis, is vice chairman of the board ofMonsanto. He has been a director for four years. Mr. Reding joined Monsanto in 1956 and headed the company's agricultural businesses for 14 years. He also has served as an executive vice president of Monsanto, with responsibility for environmental, safety and health, and manufacturing operations. . Jahn S. Read, 58, of New York, is chairman and chief executive officer of Citicorp and Citibank N.A. financial service companies. He has been a Monsanto director for 11 years. Mr. Reed chairs the board's finance committee. Jahn i. Rebson, 66, of San Francisco, is an investment banker and senior adviser of Robertson, Stephens & Co., an investment banking firm. He is a former president and chief executive officer of G.D. Searle &C Co. before it became a subsidiary of Monsanto. He is also a former deputy secretary of the U.S. Treasury Department, chairman of the Civil Aeronautics Board, dean of the Emory University School of Business Administration, and corporate attorney. This is Mr. Robson's first year as a Monsanto director. He is a member of the board's finance committee. William D. Ruckelshau*, 64, ofHouston, is chairman of Browning-Ferris Industries Inc., a waste management firm, and a principal of the Madrona Investment Group L.L.C. He is a former administrator of the U.S. Environmental Protection Agency. Mr. Ruckelshaus has been a Monsanto director for 11 years. He chairs the board's nominating committee and is a member of the audit, corporate social responsibility and executive compensation and development committees. Jahn B. Slaughter, Ph.D., 62, ofLos Angeles, is president of Occidental College, an undergraduate school that special izes in the liberal arts and sciences. Before assuming this position, he served as chancellor of the University of Maryland at College Park. He is a former director of the National Science Foundation. Dr. Slaughter has been a Monsanto director for 13 years. He is a member of the board's audit, executive and corporate social responsibility committees. - Ages and years ofservice as of March l, 1997. 84 1996 Monsanto Annual Report TOWOLDMONOOI6024 Shareowner Information Dividend Policy The declaration and payment of quarterly dividends is made at the discretion of Monsanto's board of directors. The dividend is reviewed by the board quarterly. Monsanto has paid quarterly dividends on its common shares without interruption since 1928 and has increased the dividend in each of the past 24 years. Dividend Reinvestment Plan Registered shareowners (shareowners whose stock certificates state that they are the holders of shares in Monsanto) may reinvest their dividends in common shares of Monsanto. For more information, or to request an enrollment form, please call or write Shareholder Services. Direct Deposit of Dividends Registered shareowners may have their quarterly . dividend check deposited directly to their bank account. For more information, or to request an enrollment form, please call or write Shareholder Services. Duplicate Mailings Ifyou receive duplicate mailings of Monsanto's annual report and would like for us to eliminate the extra copies, please send us your written permission. Duplicate mailing? can occur if shares are held in multiple accounts, are registered under different names, or are registered with slight differences in names and addresses. Please send the labels from the copies you do not want or the names if the accounts to Shareholder Services. Ifyou have the1 account numbers, that is also helpful. To request or send information contact: Shareholder Services Monsanto Company 800 North Lindbergh Boulevard St. Louis, Missouri 63167 U.SA Telephone: (314)694-5432 Fax:(314)694-5515 This report is printed with soy-based inks on recycled paper, of which a minimum of 15 percent is derived from postconsumer waste. A portion of the postconsumer waste content of the paper for pages 25-64 was derived from paper waste gathered at Monsanto's St. Louis offices. Trademarks and service marks owned or licensed by Monsanto and its subsidiaries are indicated by special type throughout this publication. Laurical is a registered trademark of Calgene Inc. BXN is a registered trademark of Rhone Poulenc Agrochimie. Omega-3 DHA is a trademark of OmegaTech. EVA is a trademark ofStern Stewart & Co. This annual report includes forward-looking statements, particularly in the oudook sections and in sections regarding product pipelines and regulatory approvals. Additional Information Shareowner, financial and other information about Monsanto is available to you free of charge from several sources throughout the year. These materials include quarterly earnings statements, significant news releases, Forms 10-K and 10-Q, which are filed with the Securities and Exchange Commission, and a data disk, which incorporates additional historical years of data to the information in the financial section of this report. There are a number of ways you can access this information: Or the Internet: You can access financial and other infor- . mation, such as significant news releases, Forms 10-K and 10-Q; the text of this annual report, and the supplemental data disk, on the Internet at http://www.monsanto.com By fax-back system: You can also retrieve much of the same information through our fax-back system. To receive a menu of available materials, dial (314) 694-5432 and select the fax-back option. You can choose which items you'd like to order from the menu, which is updated periodically. By telephone: You can obtain the additional information listed above through our automated telephone system by dialing (314) 694-5432. ' By writing: Yeu can also request these materials by writing: Monsanto Company - D2000 800 North Lindbergh Boulevard St. Louis, Missouri 63167 U.SA Annual Meeting The next annual meeting of the shareowners of Monsanto will be held at 1:30 p.m., Friday, April 25, 1997, in K Building at the company's world headquarters at 800 North Lindbergh Boulevard, St. Louis, Misseuri. A formal notice of the meeting, together with a proxy statement, is being mailed to each shareowner. Transfer Agent and Registrar First National Bank of Boston c/o Boston EquiServe P.O.Box 8040 Boston, Massachusetts 02266-8040 U.SA MTC Monsanto's stock is traded principally 1BMM on the New York Stock Exchange. NYSE Our stock symbol is MTC. TOWOLDMONOOI6025 Monsanto 800 North Lindbergh Boulevard St. Lewis, Missouri 63167 USA TOWOLDMONOOI6026