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Monsanto Delivering on Commitments 1989 Annual Report DSW 021824 STLCOPCB4007133 ' &J* aM About the Cover 77i Branches of Promise, located at Monsanto's world headquarters in St. Louis, Missouri, is a 15-foot sculpture made of glass and Saflex plastic interlayer, a Monsanto product. The name comes from a line in an 18th<entury hymn: "making the branches of promise grow." Sculpted by British-born artist Edwina Sandys, the tree image of many branches and a unifying trunk captures the spirit of Monsanto -- a company whose values join its employees together in their continued effort to deliver on commitments. Table of Contents Delivering on Commitments In his letter to shareowners, Chairman and Chief Executive Officer Richard J. Mahoney reflects on another year of record financial performance in 1989 and on the enduring values behind the numbers. Commitment to Greatness Nine values go beyond financial performance to define Monsanto's character and set the standards by which Monsanto is measured. Safety -- "Taking five" adds up to a stellar safety record for the Antwerp. Belgium, plant -- and some unexpected side benefits. Environment and Neighbors -- The Everett, Massachusetts, plant gains recognition as an environmentally conscious corporate citizen by responding to community concerns. Globalization -- Meeting local needs helps to carve new niches in global markets for Monsanto Agricultural Company's glyphosatebased herbicides. Results -- Smart marketing of superior products by people determined to get results leads to Searie's success. Equal Opportunity -- Intensive seminars within Monsanto Chemical Company make employees sensitive to biases based on race, sex. age and culture. Empowerment -- Empowered employees totally revamp a manufacturing process to produce the most advanced product in one of Fisher Controls' oldest markets. Serving Customers -- Monsanto Chemical Company focuses on a growing number of new and improved products that meet -- and even anticipate -- customers' needs. Doing the Right Thing -- Concern for employees and the community, evident in word and in deed, helps soften the blow of a plant closing in Columbia. Tennessee. Serving Shareowners -- A careful balance of short- and long term financial performance is the right mix for Monsanto's shareowners. The Values of a Winner -- President and Chief Operating Officer Earle H. Harbison, Jr., summarizes Monsanto's guideposts to greatness. 6 7 10 12 13 14 16 17 18 Financial Section A complete listing of contents is found on page 19. 19 $.^'vv>..-:;*??:?. iVSMi* Officers Board of Directors Shareowner Information A Tribute to John Hanley 46 47 48 Inside Back Cover m, . t vr *. * '{lift \ ' ` ~.v .* .->; ffSpfeiiteg&AyAi -j&i y~--~ V; <8* DSW 021825 STLCOPCB4007134 Monsanto's Commitments Monsanto Company makes and markets high-value chemical and agricultural products, pharmaceuticals, low-calorie sweeteners, industrial process equipment, man-made fibers, plastics and other perfor mance materials. In doing so, we are committed to serving the interests of all our stake holders around the world by: Aiming for a consistent and superior return on equity for our shareowners; Meeting the needs of cus tomers with the highest standards of value, quality and service; Providing employees with safe and rewarding work in an environment where each has an equal opportu nity to succeed; and Striving for a lasting and rewarding partnership with neighbors. 01990 Monsanto Company Trademarks and service marks of Monsanto and its subsidiaries are indicated by italics throughout this publication. OSW 021826 STLCOPCB4007135 Operational Highlights f Dollars in millions, except per share) Net Sales Net Income Per Share: Net Income Dividends Shareowners' Equity Depreciation and Amortization Cash Provided by Operations Research and Development Expenses Return on Shareowners' Equity Percent of Total Debt to Total Capitalization Shareowners (year-end) Shares Outstanding (year-end. in millions) Employees (year-end) 1989 $ 8,681 S 679 1988 $ 8,293 S 591 1987 $ 7,639 $ 436 s 10.03 3.30 59.58 $ 8.27 2.95 55.21 S 5.63 2.75 52.65 $ 690 $ 703 $ 679 $ 1,037 $ 1,304 $ 902 $ 598 $ 575 $ 557 17.6% 15.4% 11.45 33% 34% 35` 61,942 66,066 68,032 66 42,179 69 45,635 74 49,734 ia OSW 021827 STLCOPCB4007136 Global Sales 'dollars in millionsI $9,000 3,000 7,000 6.000 5,000 4.000 3,000 2.000 1.000 0 1985 1986 1987 1988 1989 flf Sties In the United States I Sales outride the United Stases Value Added `dollars in mdhonsi Market Mix :pertent of total talas I .|| Agriculture Construction and Home Furnishings . LI 1985 1986 1987 1988 1989 I Value Added (Sales less energy and raw materials) Marketing, Administration and Technology Exports** (dollars m millions1 Vehicles 11 n% !Pharmaceuticals - HFood *% Capital Equipment 1 Personal Products 15% Chemicals and Others 16% 1985 DSW 021828 STLCOPCB4007137 chairman and chief executive officer (left), and Earle H. Harbison, Jr., presi dent and chief operating officer; DSW 021829 STLCOPCB4007138 Delivering on Commitments he statement on the cover of this report -- "Delivering on Commitments" -- makes a strong assertion. Over the past several years, we have stated publicly our commit ment to rewards for those who hold a stake in Monsanto -- importantly, shareowners, customers, employees and neighbors. In 1989, we took a major step toward the fulfill ment of those promises. For the fourth year in a row, we increased earn ings: Net income was up 15 percent over 1988 to $679 million. Earnings per share increased by 21 percent to $10.03. Nonrecurring gains from the sale of assets and other items were about the same in both years. The principal financial goal of the corporation is to reach and sustain a 20 percent return on share owners' equity (ROE). In 1989, we took another positive step toward that goal with ROE of 17.6 per cent, up from 15.4 percent in 1988. We used our strong cash position in 1989 to repur chase 3.3 million shares of stock and to increase quarterly dividends by 13 percent, the 17th year in a row of dividend increases. Monsanto's second consecutive year of record sales and earnings is a direct result of the individual accomplishments of our operating units in increasing the number of product lines contributing to our gains. When you look at the Chemical Company as one unit with $497 million in operating income, the breadth of the unit's overall product strength can be obscured. Nylon carpet fibers, Saflex plastic interlayer and many other value-added performance materials are the major reasons the Chemical Company has prospered and reduced its dependence on cyclical markets. Today, only about one-half of the unit's sales are tied to industrial business cycles, down from threefourths several years ago. This, in turn, has brought Monsanto's aggregate cyclical businesses to less than one-third of total corporate sales. Just as strong mar kets worldwide supported Chemical Company sales in 1989, the unit's increasing global involvement insu lated it from regional economic downturns. After nearly five years of investment since its acquisition, Searle had a positive operating income for the first time at $6 million, led by Calan SR anti hypertensive drug, now one of the top 15 U.S. phar maceuticals in sales. Earnings at Searle now have the potential to grow dramatically with an impressive pipeline of new products. The NutraSweet Company contributed $180 mil lion in earnings, with strong worldwide growth particularly in the carbonated soft drink segment. New uses for NutraSweet brand sweetener abound. Nearly 500 new products sweetened with NutraSweet were introduced in 1989, bringing the total to more than 3.000. Operating income for the Agricultural Products' Crop Chemicals unit increased more than 9 percent to $474 million. Lasso and Avadex herbicides posted gains in sales, and Roundup herbicide showed another dramatic increase, with volumes up 25 percent. In the unit's Animal Sciences Division, profits, have been affected by competitive pricing pressures and product development programs. Fisher Controls achieved the sales and earnings surge we have been confident could be demonstrated. Operating income more than doubled to $64 million, with PROVOAfplus process control systems becoming an increasingly important contributor. Monsanto's sales and earnings are well balanced around the world. All world areas saw growth in con tinuing businesses, with 41 percent of our total sales in markets outside the United States. While that per centage is down somewhat from 1988's 43 percent, our global position is actually stronger than at any other time in our history. Where sales were down, it was because of divestitures that moved us further away from commodity products and toward a stronger, higher-value-added product portfolio. In spite of our second consecutive record year, it is important to acknowledge that we aren't there vet. Monsanto's long-term goals will be fulfilled only through the continuing extraordinary efforts of our people and our continuing investment in future products. With our improved cash flow position, we rein vested $598 million in research and development for new or improved products and $607 million in capital to reduce costs, expand capacity and improve the environment. Our R&D expenditures remain high -- 7 percent of sales -- and the results are beginning to flow. A result with exciting potential is Simplesse all natural fat substitute. In February 1990, this product was affirmed as "generally recognized as safe" (GRAS) by the U.S. Food and Drug Administration (FDA) for use in frozen desserts. And The NutraSweet Company has introduced the first product to be made with Simplesse -- Simple Pleasures frozen dairy dessert. Simplesse may eventually be used in foods like mayonnaise, salad dressings and yogurt. In December 1988, Cytotec, a drug that prevents gastric ulcers in certain high-risk patients, was approved for marketing by the FDA, which called it "the most important [drug] approved this year [1988]." U.S. sales of Cytotec reached $39 million in 3B DSW 021830 STLCOPCB4007139 Delivering on Commitments (continued) 1989, contributing to worldwide sales of $60 million. Preventive medications like Cvtotec require more physician education than conventional treatment drugs. While the educational process takes longer, the effort should pay off in substantial sales increases in 1990 and beyond. Maxaquin (lomefloxacin), a novel anti-infective drug in the quinolone class, had its first country launch in 1989. We expect approval in several other countries in the next two years. In 1990, Searle will launch Kerlone, a once-a-day beta blocker for the treatment of hypertension. In the Agricultural Company, we expect Dimen sion herbicide -- a crabgrass treatment that really works -- to be approved and on the market in 1990. And products in five new classes of chemistry are in early to late development stages in the Agricultural Company; one new product should emerge each year in these new classes of products. The Chemical Company will continue to launch new high-performance products in 1990. If stain resis tance was the carpet trend of the 1980s, durability will set the pace in the 1990s. The Chemical Company is already there with Traffic Control Fiber System, a new performance blend of nylon and acrylic carpet fibers for textured carpets, and with Acrilan Plus car pet fibers for fashionable "berber"-style, natural-look carpets. The growing market for Saflex plastic interlayer in laminated architectural glass will be supported by the introduction of Saflex OptiColor System interlayer. This new product offers architects hundreds of new colors to enhance the beauty of their designs. A number of new high-performance Triax plastic alloys are slated to come from the Chemical Company. Also coming are several specialties products, includ ing the fifth generation of Skydrol fire-resistant hydraulic fluid. Unique, metallized textile materials for electromagnetic shielding for computers and other high-technology applications are also in the offing. Fisher Controls will introduce new PROVQXplus products that will integrate business systems, facili tate system-wide planning and improve engineering productivity and environmental control tools. In 1990, Fisher also will market improved rotary valve seals and the new energy-efficient S.402 gas regulator for homes. While Monsanto's pipeline is full, we can't help but be disappointed by delays in our efforts to bring bovine somatotropin (BST), a product that increases efficiency and improves milk production, to market. This product, which awaits FDA approval, is another in the continuing series of technology improvements for world agriculture. Opponents of new technologies have raised predictable charges against BST as dis ruptive to the supply-and-demand balance for milk. Nonetheless, upon its regulatory clearance, BST will join earlier technologies that have provided safe, highquality food supplies at a low cost to consumers in developed agricultural sectors worldwide. Looking back on 1989, we see solid performance from today's products and an impressive array of new, important products for future markets. In sum, the strategy is working. But a financial strategy alone isn't enough for Monsanto to achieve its goals. No strategy can be stronger than the basic values of the company and its people. The ability to deliver on our promises, to all our stake holders, rests squarely on a set of commitments and values that I believe increasingly characterize Monsanto and its employees. I won't dwell on them here, because we deal with them at length in the next few pages. I'll simply note that as times and conditions change, so must strategies adapt to those changes. But our commitments and values will endure. And they will always be the bedrock upon which we con struct the future strategies that will keep Monsanto prospering. In April 1990, three of our directors will retire from the board, having reached mandatory retirement age. Raymond Dahl, Richard Fricke and John Hanley will be sorely missed in our corporate deliberations. Their collective contribution to our current results has been invaluable. Jack Hanley, with 17 years of combined service as chairman, chief executive officer and board member, was instrumental in setting the current course of the corporation. A chronicle of his Monsanto years is on the inside back cover of this report. In closing, I would like to note that while 1989 was a good year for a number of companies in the industries in which we participate, it was especially important to us as a demonstration of the durability of our earnings growth, and we expect to report 1990 as the fifth successive year of income gains. Our people are delivering on commitments. Richard J. Mahoney Chairman and Chief Executive Officer March 5, 1990 14 DSW 021831 STLCOPCB4007140 . '^kjSSS!S0S 'iSii>s>JtSi :v$ * Commitment to Greatness aMr. V > "Money is not the single meas ?t? '*' "!N'.V.fa company or its managers A r'/-'^ Financial performance is the .. .;* ` j ^00' ''--i ''' `enabler' to greatness. To be tr _ -'V vgreatgre,at, a company must merit ithat - '^3*^ '? c&jj&fp tide frm a varied group of st< ` ; holders: its employees, its cus ., *-s,,- ''b.'v. "V_ ,,-k tometomresrs and the communities ini 1 which it operates. Only by com- V_> '* i'y'K. l - ' mitting ourselves to both financial results and the highest social, ethi- ........................ cal and moral standards -- those V nonfinancial commitments to greatness -- can Monsanto achieve and maintain such a A Commitment to Greatness was written and published in 1988 for Monsanto employees. It explores nine nonfinancial values that describe what Monsanto stands for, what it expects from its people and what people can expect from the company. They aren't nine easy steps to greatness. Nor are they exclusive to Monsanto. But together, they are what Monsanto must embrace if it is to earn the reputation for greatness from its stake holders. In the following pages, employees, customers and neigh bors describe how Monsanto is delivering on its commitments. sss'j-?' ? .$.. \ 'fir ' ?&:' ttf 0 %-Sn $5* 4% ._ f << mmtitmsms&xw.'ssr.si DSN 021832 STLCOPCB4007141 Commitment to Safety "I meet with every new employee, and my basic message is always the ;ame: Safety comes first," says Achiel Ossaer, manager of Mon santo's Antwerp, Belgium, plant. Evidence of "Pak de 5," the name of the plant's safety pro gram, can be seen everywhere -- on clipboards, bulletin boards, hard hats. "Pak de 5" means "Take five": five seconds, five minutes, whatever time is needed to think through what you're about to do. And do it safely. Ossaer says that attitude toward safety goes along with lower costs, improved quality and, ultimately, profits. He might have added employee ingenuity, as evi denced by the worker-designed mobile trolley for fire protection. Up until last year, weekly safety checks far too often uncov ered twisted fire hoses, missing branch pipes, wrong spare parts and damaged tools in the several fixed firefighting cabinets located throughout the plant. It was virtually impossible to keep the equipment in the cabinets shipshape. Various pieces were often removed to be close at hand during any maintenance job that involved "hot work," like welding or spark-generating grinding. Though the condition of the equip ment had not caused a problem, it was unacceptable given the plant's high standards. "We knew we had a conflict," says Eddy De Belva, leader of the quality circle that solved the prob lem. "So, for standby protection during hot work, our team devel oped a completely equipped mobile trolley, ready to go anywhere." Today the firefighting equip ment inside the cabinets is neatly arrayed, easily accessible, ready for its primary job: to do battle with fires involving any of the potentially dangerous raw mate rials used in the plant. As Ossaer says, safety and lower costs go together. The cost of maintaining the fixed fire cabi nets dropped from $17,500 a year to around $1,000. The cost of four trolleys, fully equipped: $7,000. SAFETY DETAIL DETAIL, o Monsanto training program on safety and environmental issues related to the proper handling of agricultural chemicals, is a winner with form-chemical dealers and their customers and neigh bors. The seven-part video series is an important educational resource in the farm community's drive to address con cern for safe chemical handling and environmental protection. In addition to offering valuable infor mation to farm-chemical handlers and users, their employees and their fanner customers, the videos are shown to dvic groups. "This helps the public evaluate the use of chemicals in agriculture," says Uayd Burling of the Illinois Fertilizer and Chemical Association, "local fire depart ments use the tapes to draw up emergency plans in case of spills or accidents." (a several states, including Iowa, New York, Oklahoma and Texas, people licensed to apply agricultural chemicals can receive continuing education credits by attending DETAIL training sessions. Earning such credits is required for license renewal. At the dealers' request, the next video series will include a comprehensive pro gram for the farm family entitled "Farm Chemical Safety." &6 Through a relentless emphasis on safety, workers at the Antwerp, Belgium, plant have achieved one ofthe best safety records in Europe. Here, employee fire fighters keep a blaze urtder control during a safety drill DSW 021833 STLCOPCB4007142 Emission reductions and open com munications with neighbors continue to increase commu nity recognition of Monsanto as a responsible corpo rate citizen in Everett, Massachu setts. Environmental Supervisor Greg DePagter tests water from the Mystic River as part ofrou tine monitoring of the plant's treated discharges. ENVIRONMENTALISTS AT WORK When Monsanto announced in 1988 Hs industry-leoding goal ; to reduce toxic oir emissions 90 percent by the eod of 1992, Terry Anderson. Bob Derrah, Steve Weichem and Russ Roeber were already working hard loward that goal. In 1985, this team at Monsanto Agricultural Company's Muscatine, Iowa, plant began working on a machine that uses a new recycling technology to eliminate most of the air emissions created in a plastic making process. The ne\v technology, expected to go on-line late this year, will achieve most of the 95 percent emission reduction planned for the unit. It will also pay for itself by saving more than $2.5 million in the first two years of operation. Commitment to Environment and Neighbors In 1986, Monsanto's chemical plant in Everett, Massachusetts, was in trouble with its neighbors in this Boston suburb. "When we polled them, one-third of the peo ple considered us a health threat," recalls John Dushney, plant manager. Pollution-abatement initiatives costing millions were already under way, but the community wanted more action and more information about what the plant was doing to clean up past prob lems. The plant was close to losing its neighbor-conferred right to operate. Clearly, everyone agreed. changes were needed. John Ragucci, an Everett city councilor, recalls, "In 1986, Monsanto began a dialogue that today remains totally open and honest. They tell the community as much as they can as often as they can about their actions to improve the site. John Dushney and his staff are involved members of this community." In the last several years, com munity support and acceptance of Monsanto have grown. Since 1988, for instance, Dushney has, by invi tation, served on the board of The Boston Harbor Association (TBHA), the acknowledged "con science of the Boston Harbor." Dan Curll, president of TBHA, has words of praise for Monsanto's response to a community's need to see and understand changes at the plant. "What they've done exceeds all requirements," Curll says. "Monsanto is a corporate citizen that is as responsible as it can pos sibly be within technical and economic bounds." He adds, "They have an honest worldview and a sincere long-term commitment that other industrial firms should emulate. Their investment will pay off." 7S DSW 021834 STLCOPCB4007143 Commitment to Globalization Back in the 1970s, when Monsanto patented and developed Roundup herbicide, the company recognized it had an astonishingly effective herbicide for an endless number of applications. And it saw this glyphosate-based product as one with truly global potential. But merely packaging Roundup in five-gallon containers wouldn't satisfy the specific needs of vast numbers of customers. "We asked end-users what they wanted in addition to the results that glyphosate offers," says David Duncan, director of Monsanto Agricultural Company's greens business. "Responding to cus tomer needs means going beyond chemicals. With Expedite delivery system, it meant developing an entire system of equipment and new formulations of glyphosate." Customers' feedback from around the globe taught Monsanto much about tailoring products for local needs. To adapt glyphosate to meet the needs of specific users, Monsanto product development specialists have worked in every world agricultural situation -- from French vineyards to develop Azural herbicide, to expansive Australian wheat fields to develop Roundup CT herbicide for moisture-conservation farming. They studied the weed control needs of Thailand to develop Scout herbicide, which they then pack aged in liter containers for the convenience of small-plot farmers. "Every formulation of glypho sate we sell is targeted to a specific need of farmers," says David Clifford, manager, glyphosates international, for Monsanto Agri cultural Company. "Monsanto now has close to 100 brands of glypho sate-based products used in more than 100 countries." No other group of products so well illustrates Monsanto's efforts to market globally by thinking locally. bf- 'fnSSiiV'.ta ' *-weft worth qfej^Stoek Oaffip-- / doling/ , ihfb^TVjr - 'z TRADE, COUNTERTRADE Eastern Europe may be opening up, but without hard currency -- that is, money readily accepted world wide, like the French franc -- people there can't buy our prod ucts. Or can they? 'There is a solution," says Don West, director of countertrade for Monsanto. "We exchange our prod ucts for some of their products, which we then sell to someone who does have the hard currency. That's ... countertrade." As an example. West cites Fisher valves recently sold in Romania. "We took ball bearings from Romania, sold the ball bearings in the United Kingdom and then con verted the British pounds into U.S. dollars." In 1989, countertrade contributed ^00 million in sales to Monsanto. DSW 021835 STLCOPCB4007144 Monsanto's line of glyphosate-based products are tailored to solve unique local agricultural prob lems around the world. Spark herbi cide was developed for the needs offruit growers and other small-plot farmers in Thailand. DSW 021836 9 STLCOPCB4007145 Commitment to Results Good science, good marketing and a determination to get results make a powerful combination for a pharmaceutical company like Searle. Searle applied that combina tion to Cytotec ulcer-preventive drug. Cytotec, originally developed for the treatment of ulcers, had become viewed by many as just another me-too acid suppressant. But after extensive new clini cal studies, Searle was able to reposition Cytotec as the first and only medicine that can prevent stomach ulcers caused by chronic use of arthritis medications in high-risk patients. This drive for results was also behind the repositioning of Searle's high-blood-pressure medi cine, Calan SR. After years of use for the treatment of angina, Calan was reformulated as a slowrelease, once-a-day medication for the much larger high-bloodpressure market. After this reformulation and repositioning in 1986, Calan SR quickly became a leader in the highly competitive hypertension market. In 1989, U.S. sales exceeded $364 million, and the Calan brand became the 12th most widely sold prescription product in the United States. Searle's total sales in 1989 passed the billion-dollar mark. The company also showed an operat ing profit for the first time since being acquired by Monsanto in 1985. Searle people are getting results. GOOD TASTE, GOOD HEALTH Imogine a fat substitute that is ail natu ral, yet provides the taste and texture of fat in foods. That's Simpkss* all natural fat substitute, a product that should appeal to people seeking to reduce the amount of fat in their diets. The first product made with Sim p/esse is Simple Pleasures frozen dairy dessert. Fcrt-free and with half the calo ries of premium ice cream, Simpfw Pleasures allows consumers to indulge their taste for rich, creamy desserts. Simpksse has potential for a broad range of foods -- mayonnaise, mar garine, sour cream, salad dressings, cheese and many more. The introduction of Simph Pleasures followed the recent affirmation by the U.S. Food and Drug Administration that Simp/esse fat substitute is "gener ally recognized os safe" (GRAS) for use in frozen desserts. Simp/esse also has been cleared for marketing in several other countries. DSW 021837 STLCOPCB4007146 Searle's drive for results helps people like Gladys and Gwillem Hughes, here strolling in a park near their sub urban London home, lead healthier and more active lives. For example, by developing Cytotec as the only drug that can pre vent gastric ulcers often caused by arthritis pain medi cations, Searle removes a signifi cant concern of these patients. DSW 021838 11 STLCOPCB4007147 Monsanto encour ages minority high school students like Vicki Tibbs to enter science and math careers through its Horizon internship program. Tibbs spent 10 weeks at Monsanto's Envi ronmental Health Jjib, some of it working with Dr. William Ribelin in the pathology group. Commitment to Equal Opportunity 'You have to be taught To be afraid Ofpeople whose skin Is a different shade." So goes the song from the musical South Pacific. Once the lessons are taught, the unlearning does not come easy. But it is being done. For instance. Monsanto Chemical Company offers seminars on "Managing a Diverse Work Force" -- two days of soul-searching and stereotype-debunking exercises. Through these seminars, more than 2,500 employees have become more sensitive to issues of race, sex, age and culture. As a supplement to these semi- m 12 nars, the Chemical Company conducts 14-day, intensive work shops on the ebb and flow of relationships. Graduates become "inside consultants" available to anyone having a problem with a co-worker, subordinate or boss. For any given situation, two consultants are paired together as a team ("consulting pair"), often reflecting the racial or gender makeup of the individuals involved. "Consulting pairs don't give the answer," says Steve Wil liamson of the Rubber and Process Chemicals Division. "We just get the employees to agree to take steps to address their issues." To get work relationships off to a good start, new employees go through a "joining up" process in which they, their supervisor and a pair of facilitators from the con sulting-pairs program meet and talk. They deal immediately with biases that otherwise might not surface for months, if at all. Bill Royal, of the finance and planning group, has assisted at more than two dozen "join-ups." Royal says, "Some managers come in thinking, 'Boy, is this a waste of time!' But soon they start talking about what it takes to succeed, about socializing so people do not feel excluded, about seeing their employee as someone who may bring special perspectives." DSW 021839 STLCOPCB4007148 Commitment to Empowerment "We first came here to work because we were good with our hands. But our empowerment pro gram shows that our heads and heaits will make the difference if our plant is to compete in the 1990s," states Rao Sanampudi, manufacturing engineer and facili tator for the eight-member HighInvolvement Work Team at the Fisher Controls plant in McKinney, Texas. The team's first project was to produce a redesigned service regu lator that maintains a constant downstream pressure of natural gas to homes. The story started when an informal group of managers and design draftsmen, who named themselves "The Skunkworks," decided to replace the 30-year-old S.102 regulator, which had been copied by many competitors. Both salespeople and customers were asked to provide a wish list of fea tures for the "perfect" regulator. The Skunkworks then began to design a prototype of the S.402, a new and improved regulator. "Developing the design based upon customers' requirements gave the customers satisfaction and us a surprising degree of suc cess -- and new patents have been and are about to be issued," says Don Rice, engineering manager. The High-Involvement Work Team then took over to guide the new regulator through production. Team members, who previouslyhad worked only single-skill jobs, had to learn every aspect of pro duction. They even redesigned a production line. "We used to feel like robots. Now we've specified the use of robots to manufacture this prod uct," says team member Maxine Travis. "We learned to do every thing required to produce this new product. People all over the plant w-ant to be on a team now." Success begets success. The McKinney plant manufactures hundreds of types of products, dozens of which are now benefit ing from the heads and hearts, as well as hands, of its empowered employees. HARMONIZING IN WALES pkjnt in South Wales, j ^fripd^^ment was the next logical step \ in'd process begun m 1982 when hourly workers leaved ter an ''annual hours" 'contract and the time clocks were , ,-thcbwn, away.: In, 1988, "harmonization" figCWBjevejyope at Newport an Individ- T ,ual staff contract with salary ranges, tzjoali, .broader responsibilities and a 'greaterknowledge of the company's aims; !; ; lan Gadd,- a maintenance fitter for .* TQ'yedrs of Newport, has seen the: plant^culture "go from a hierarchy to. a community" in the last two years. Gadd / ^ays( "Life is easier and more interest* . .-ing.-sme* we became one staff. Jobs get done quicker, and I'm free to delve ' into all aspects of my, - responsibilities" , Working with cus tomers, the sales force and technical experts, an eightmember team of empowered workers at the Fisher Con trols plant in McKinney, Texas, made the industry's most advanced house service regula tor a reality. Shown with manufactwing engineer Rao San ampudi are Isabel Benitez (left) and Anita Lemmond (right) of the HighInvolvemoit Work Team. DSW 021840 STLCOPCB4007149 Il^opr-A^&fgf v.*Vk-v-%. ._ . - - '-^ < * " ' suftwriw^: i^grieuHunrf ^J^AoriciiltunstCoj ^ ^^teys'at MorWp'trc) *-*.-^'Indiana -'-"Ovisited as a * :. :V Scientist" ;I^S; scientists 1iv$.'S4(tfv| *4`<firstfiand tf* , Re5eorcWsi*e*^&h<p -,*,--r.. . , >-v---2 L-j^-grouhdvrtjWrSJ.j.-.,^ ;^;ytiej<fa-tijWa^tf: 5*&$<JxtRS<ste{ Jfs cfbrmers * qj^buttc refiH^te`pw* ;;|^pterfeiJtfew^ii ^appo^eo^1:- < -``ThA-^xpefjet^ was IrrepkMS^Sf/^ A CUSTOMER'S HOLIDAY In July 1989, Polysar Limited in Ontario urgently needed an extra 80 barrels of Therminol 59 heat-transfer fluid to start up a new $100 million plant. Although it was a holiday weekend in both the United States and Canada, Jean Dussault of Monsanto Canada spent hours making dozens of phone calls to arrange imme diate shipment from the Anniston, Alabama, plant. "Wo stood to lose $200,000 a day," recalls a grateful Howard Whitton, Polysar's purchasing ogent. "Monsanto's people in Canada and Alabama never stopped trying, and they accomplished the impossible. They set up a weekend delivery and saved us five days of production." Commitment to Serving Customers "When you begin formulating products as a direct response to customers' requests, they quickly leam to ask for 'dream products.' Then it's our job to supply them," says John Kilkenny, director of new business development for Monsanto Chemical Company's Plastics Division. An increased focus on serving customers was basic to restructur ing the Chemical Company away from commodities and toward performance materials -- products that sell because of the value they add to customers' products. Two new products for the SS 14 automotive industry, for instance, satisfy specific customer needs: Lustran Elite HH, a high-heat plas tic, and Lustran Elite LGA, a lowgloss plastic for interior trim. The list of such responses to customers' needs since 1986 includes more than 60 new and improved products. The number will grow by more than 15 per year into the 1990s. Exemplifying the attitude toward serving customers is Bill Cloutier, marketing technical ser vice principal for Saflex plastic interlayer at the Indian Orchard Plant in Massachusetts. "If I'm at a windshield plant, I consider myself their employee," Cloutier says. 'I get a lot of satisfaction from my relationships with my customers." Satisfaction works both ways. Tom Russell, supply manager at Ford Motor Company's Dearborn, Michigan, windshield plant, loves to see Cloutier walk in the door. ''He's so knowledgeable, he antici pates needs we don't even know we have," says Russell. These kinds of alliances are good business for both customers and Monsanto. They also put Monsanto's global reach as near as a handshake. DSW 02X841 STLCOPCB4007150 Serving customers through new prod ucts or new uses of existing products is exemplified in the growing number ofapplications for Saflex plastic inter layer, The world's leading product for making automobile glass shatter-resis tant, Saflex is increasingly used in architectural glass, in works of art, and in designs such as l.M. Pei's glass pyra mids at the entrance to the Louvre in Paris. DSW 0218^2 STLCOPCB4007151 Commitment to Doing the Right Thing In Maury County, Tennessee, dig nity and stability are synonymous with the local community's strong work ethic. Monsanto's 50 years of mining and processing phospho rus at the Columbia plant provided three generations with good work. In 1985, however, as the body of ore neared exhaustion and de mand for phosphates continued to soften, Monsanto announced that the plant would close a year later. The immediate result was an uncer tainty that threatened the quality of life in this lush, rolling hill country in middle Tennessee, where family and jobs are the two central priorities. "Monsanto's closure announce ment was like hearing an old friend say goodbye," remembers Bill Chaffin, president of the Columbia Chamber of Commerce. "They could have just pulled up stakes, but they went out with as much class and concern for Columbia as they had operated with for 50 years." The story of furnace operator Jimmy Massey typifies what the work force of 414 people experi enced during the shutdown. "The company did everything it could possibly do to help us all find work." Massey recalls. "They opened up what we called the 'unemployment office,' and brought a firm in from Atlanta to teach us how to write resumes and handle ourselves in interviews. They invited other companies from hereabouts and from other states to come to the plant to do interviews." Massey continues. "Monsanto is family. I know that sounds corny, but you ask anybody. All of us got help from Monsanto, and we got jobs we wanted. We're all fine, but we wish Monsanto would somehow return." PATIENTS IN THE KNOW Portents have always wanted more information on their illnesses and medi- cations than is often roulitvely provided by their physicians. Searle's Patients in r the Know program provides patients ; with valuable information about their ( medicine in language they can read and understand. ? Acclaim for the program has been universal. As Senator Orrin Hatch of Utah noted the day the program was : announced, "This initiative by Scarle ' provides important information to mil- Hons of Americans. It is a simple but vitally important step in making prog * res?, toward solving what has been v termed'America's other .- . drug problem.'" . \, C 16 After closing its Columbia, Tennes see, plant, Monsanto brought in counsel ors and recruiters to ensure that employ ees like Jimmy Massey, shown here with his wife and children in down town Columbia, could find new jobs with mini mal disruption to their per sonal lives. DSInl 021843 STLCOPCB4007152 Monsanto's listing on the Tokyo Stock Exchange last Octo ber enhanced the company's visibility in Japan, not only with the financial community but also with customers, suppliers and other business partners. BREAKING THE CYCIE tmuAtAixctcariTTrox Monsanto Ikjs reduced its reliance on highly cyclical markets. Five years ago, those markets accounted for two-thirds of the company's soles, but today they are less than one-third. To maintain this recession-resistant posture, company strategy will continue to focus on highvalue-added products -- products whose prices and profit margins are determined more by value created for customers than by raw-material casts or near-term supply-and-demand factors. "When you add value, as we da to nylon carpet fiber by making it stainresistant, you ore aiming at the upper end of the market, which buys not on price but because of the special need the product fills," says Monsanto Chief Economist Nicholas Filippeilo. "Similarly, the tire-replacement market that uses our rubber chemicals and the windshield-replacement market that uses Sofia* plastic interlayer should support sales even if car produc tion slows. Altogether, this should mean a solid and less volatile earnings base." Commitment to Serving Shareowners Monsanto must serve the dual needs of its shareowners. On the one hand, the company must pro vide consistent near-term returns; on the other, steady long-term growth. Near-term, shareowners look for continual gains in earnings and dividends from industry leaders, says Monsanto Chief Economist Nicholas Filippeilo. "We concen trate on high-value-added products that are or can be market leaders," he notes. "We support those lead ership positions through R&D, licensing and acquisitions.'' The result of that focus is a strong earnings base and sub stantial cash flow that permit Monsanto to grow its current businesses, to invest in the devel opment of future products, and to pay steadily increasing dividends to shareowners. Monsanto has accomplished all of that while significantly reducing the debt incurred as a result of the acquisi tion of Searle in 1985. Monsanto's increase in dividend payments has continued during each of the past 17 years. "Our current leadership posi tions should carry us while we focus on product innovation, whether to bolster mature busi nesses or to break new frontiers in biochemistry and nutrition," Filippeilo explains. Long-term, therefore, new products top Monsanto's strategic focus. Abandoning its policy in the early 1980s of devoting about 3 percent of sales revenue to research and development, Monsanto has now more titan doubled that investment, to about 7 percent of sales today. Recently developed products include Kerlone antihypertensive drug, Acrilan Plus carpet fibers, Simptesse all-natural fat substitute and Dimension herbicide, with more to come. These products promise continued contributions to shareowner value. As Filippeilo notes, "Compa nies that can consistently return 20 percent on shareowners' equity enjoy superior market values." With a 17.6 percent return on equity in 1989 (up from 15.4 per cent in 1988 and 11.4 percent in 1987) and with an eye on the 20 percent goal, Monsanto has its sights firmly on serving the dual needs of shareowners. 17 OSW 021844 STLCOPCB4007153 The Values of a Winner ".ftSsv ' By Earle H. Harbison, Jr., President and Chief Operating Officer Values -- whether for an individ ual or a corporation -- are guideposts on the road to achieve ment. A great company must produce sustainable financial returns, but that cannot be its only objective. It's unlikely that any company can succeed over time without clearly stated and agreedupon values that reflect firm com mitments to those who have a stake in its actions. We have such values at Monsanto, and they directly affect our way of life. They underlay the steady growth in our sales and income for the past several years, including our record financial per formances in 1988 and 1989. Our values are basic. Doing the right thing is the foundation of our entire philosophy. We tell our peo ple, "If you are ever in doubt, do what's right." We have other important sign posts as well. Nothing can come before the safety of our workers, or the protection of the environ ment and our neighbors, whether near or distant. If we don't deliver for our shareowners as they believe we should, they'll find better things to do with their money. As the world changes, other values take on added importance because markets are rapidly becoming more and more global. Today's customers have unprece dented options; more than ever before, they can go elsewhere. World-class quality no longer rep resents the margin of victory -- it's merely the entry fee to play the game. Thus, becoming more global in our thinking is urgent. Focusing on customers' needs, by providing new products and unequaled ser vice, is essential. What can be more important than tapping the full talents of everyone in this company? That means empowering them to do their jobs, and giving each a real opportunity to succeed. And, like doing the right thing, a drive for results must reside at the core of every endeavor we undertake. These are the central values of our company, and we strive to live by them every day. We believe they are the values of a winner. w- -V- rr ' * . ft; m ''AS DSW 021845 STLCOPCB4007154 Financial Section Contents Management Report 20 Audit Committee Report 20 Independent Auditors'Opinion 21 Statement of Consolidated Income 22 Review of Consolidated Results of Operations 23 Operating Unit Segment Data 23 Geographic Data 31 Quarterly Data 33 Statement of Consolidated Financial Position 34 Review ofChanges in Financial Position 33 Statement of Consolidated Cash Flaw 36 Review ofCash Flow 37 Statement of Consolidated Shareowners' Equity 33 Notes to Financial Statements 39 Significant Accounting Policies 39 Basis ofConsolidation 39 Currency Translation 39 Principal Acquisitions and Divestitures 39 Depreciation and Amortization 39 Inventory Valuation 40 Income Taxes 40 Short-Term Debt and Credit Arrangements 41 Long-Term Debt 41 Pension Benefits 41 Other Postretirement Benefits 42 Stock Option Plans 42 Earnings per Share 43 Capital Stock 43 Commitments and Contingencies 43 Supplemental Data 44 Segment Information 44 Financial Summary 43 Unless otherwise indicated by the context, "Monsanto" means Monsanto Company and consolidated subsidiaries, and "the Company" means Monsanto Company only. All dollars are in millions, except per share data. Monsanto Company and Subsidiaries 19 H DSW 021846 STLCOPCB4007155 Management Report Monsanto Company management is responsible for the fair presentation and consistency of all financial data included in this Annual Report in accordance with generally accepted accounting principles. Where necessary, the data reflect management's best estimates and judgments. Management also is responsible for maintaining a system 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 data. Cost-benefit judgments are an important consideration in this regard. The effectiveness of internal controls is maintained by: (1) personnel selection and training; (2) division of responsibilities; (3) establishment and communication of policies; and (4) ongoing internal review programs and audits. Management believes that Monsanto's system of internal controls as of December 31, 1989, is effective and adequate to accomplish the above described objectives. /Ci4 Richard J. Mahoney Chairman and Chief Executive Officer Francis A. Stroble Senior Vice President and Chief Financial Officer February 23,1990 Audit CommittM Report The Audit Committee is composed of five non employee members of the Board of Directors and met four times in 1989. It reviews and monitors Monsanto's internal controls, financial reports, accounting practices and the scope and effectiveness of the audits performed by the independent auditors and internal auditors. The Committee also recommends to the full Board of Directors the appointment of Monsanto's principal independent auditors and approves in advance all significant audit and non-audit services provided by such auditors. As ratified by shareowner vote at the 1989 Annual Meeting, Deloitte & Touche (formerly Deloitte Haskins & Sells) was appointed as independent auditors to examine, and express an opinion as to the fair presentation of, the consolidated financial statements. This opinion follows. The Audit Committee discusses audit and financial reporting matters with representatives of the Company's financial management, its internal auditors and Deloitte & Touche. The internal auditors and Deloitte & 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 financial reporting. The Committee encourages the internal auditors and Deloitte & Touche to communicate directly with the Committee. The Audit Committee has reviewed the financial section of this Annual Report. Pursuant to the recommendation of the Committee, the Board of Directors has approved the financial section. Buck Mickel Chairman, Audit Committee February 23, 1990 O 20 Monsanto Company and Subsidiaries DSW 02184? STLCOPCB4007156 Independent Auditors' Opinion To the Shareowners of Monsanto Company: We have audited the accompanying statement of consolidated financial position of Monsanto Company and Subsidiaries as of December 31, 1989 and 1988, and the related statements of consolidated income, shareowners' equity and cash flow for each of the three years in the period ended December 31,1989. 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 presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly in all material respects the financial position of Monsanto Company and Subsidiaries at December 31, 1989 and 1988, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1989, in conformity with generally accepted accounting principles. Deloitte & Touche Saint Louis, Missouri February 23, 1990 Monsanto Company and Subsidiaries 21 DSW 021848 STLCOPCB4007157 Statement of Consolidated Income (Dollars in millions, except per share) Net Sales Cost of goods sold Gross Profit Marketing expenses Administrative expenses Technological expenses Amortization of intangible assets Restructuring expense (income) - net Operating Income Interest expense Interest income Other income -- net Income Before Income Taxes Income taxes Net Income 1989 $8,681 5,035 3,646 1,154 516 672 226 1,078 (182) 57 62 1,015 336 $ 679 Earnings per Share $10.03 The above statement should be read in conjunction with pages 39 through 44 ofthis report. 1988 $8,293 4,972 3,321 1,013 474 648 231 955 (174) 46 66 893 302 $ 591 $ 8.27 1987 $7,639 4,755 2,884 918 424 615 225 (32) 734 (172) 42 69 673 237 $ 436 $ 5.63 Key Financial Statistics Percent Change from Prior Year; Net Sales Operating Income Net Income Earnings per Share As a Percent of Net Sales: Gross Profit Marketing, Administrative and Technological Expenses Research and Development Expenses Operating Income Net Income Effective Income Tax Rate Return on Shareowners' Equity 1989 5% 13 15 21 42 27 7 12 8 33 17.6 1988 9% 30 36 47 40 26 7 12 7 34 15.4 1987 11% 16 1 1 38 26 7 10 6 35 11.4 B 33 Monsanto Company and Subsidiaries DSW 021849 STLCOPCB4007158 Review of Consolidated Results of Operations 1989 - Another Record Year Monsanto continues to deliver on its commit ments as evidenced by the second consecutive year of record sales and earnings -- and the fourth consecu tive year of improved financial performance. This exceptional performance resulted from a combination of reasonably active markets and successful commer cial strategies that increased sales volume. Earnings also benefited from the success of Monsanto's strategy to concentrate on higher value-added products. In addition to strong income performance, the stock purchase program contributed to the improvement in earnings per share and return on shareowners' equity (ROE). Sales Demand Was Strong Across Most Businesses Net sales increased 5 percent in 1989, principally from higher sales volume (up 9 percent for retained businesses), as demand was strong across most busi ness and geographic markets. Roundup herbicide contributed significantly to volume growth (up 25 per cent worldwide) in 1989. Reductions in selling price on most glyphosate products and new formulations continued to make the herbicide cost-effective for weed control for a broad range of crop, industrial and residential uses. Sales of the Calan calcium channel blocker products for hypertension grew approximately 50 percent due to the unique once-a-day dosage of Calan SR. Strong consumer demand for NutraSweet brand sweetener resulted in 20 percent worldwide volume growth. Chemicals 1989 net sales remained strong. Fisher Controls net sales were level with 1988, but excluding divestitures, sales grew 14 percent on continuing operations. Markets outside the United States continued to be significant and contributed 41 percent of Monsanto's 1989 net sales. In compar ing year-to-year results, Monsanto's 1988 net sales included $391 million of sales revenue associated with subsequently divested businesses. Overall selling price increases generated $29 million in additional sales revenue, in spite of the $131 million adverse effect of translation of non-U.S. dollar denominated sales into a generally stronger U.S. dollar. Chemicals, Fisher Controls and Pharma ceuticals selling prices increased, while glyphosatebased herbicides, NutraSweet brand sweetener and Alimet animal feed supplement prices declined. The global pricing strategy for glyphosate herbicides low ered average selling prices 7 percent, but revenue from the additional sales volume exceeded the pricing loss. Average selling price for NutraSweet brand sweet ener declined 3 percent due to a combination of price declines and sales mix. Quality of Product Portfolio Enhanced Operating Income Operating income in 1989 was a record $1,078 million, and 13 percent higher than the prior year. The operating profit margin was 12 percent of net sales, and operating income improved for the fourth consecutive year. Sales volume and mix was the principal factor for the higher operating income. Higher selling prices and lower raw material costs also contributed to a lesser extent. Monsanto's sales mix was favorable because a larger portion of sales came from higher-margin products (Crop Chemicals, NutraSweet and Pharmaceuticals). Searle achieved a milestone by earning an operating profit in 1989 for the first time since the Pharmaceuticals unit was acquired by Monsanto in 1985. Fisher Controls oper ating income in 1989 was more than double its 1988 income. Crop Chemicals, Chemicals and NutraSweet had record operating income from continuing busi nesses, but Animal Sciences operating loss was greater than the prior year. Marketing expenses increased 14 percent and were 13 percent of net sales in 1989 versus 12 percent the prior year. An increase in sales through commission agents, higher promotional expenditures, and costs associated with product introductions were the princi pal reasons for the change. Administrative expenses in 1989 increased 9 per cent due principally to the cost of various employee incentive programs and, to a lesser extent, inflation. Research Expenditures Remained Significant Research expenditures of 7 percent of net sales demonstrate Monsanto's strong commitment to research and development. A major focus continues to be the discovery and development of pharmaceutical and agricultural products. Research in existing prod uct technology and new applications also continues across all business segments. University collaboration and opportunities for licensing remain an integral part of Monsanto's overall research program. Other income was down slighdy in 1989. Signifi cantly higher gains in 1989 from divestitures of various businesses were more than offset by higher currency losses and lower miscellaneous income. The principal 1989 divestiture gain resulted from the sale of the analgesics business -- $56 million pre-tax ($36 million, or $0.53 per share after-tax). The impact of nonrecurring items in 1989 was about the same as the total of a number of small, nonrecurring items in the prior year. Monsanto Company and Subsidiaries 23 8 DSW 021850 STLCOPCB4007159 Review of Consolidated Results of Operations (continued) ROE Improved Progress continued toward achieving manage ment's target of a 20 percent ROE by the early 1990s. On the strength of higher profitability and aided by the stock purchase program, ROE for 1989 improved to 17.6 percent (16.6 percent excluding the analgesics divestiture gain), versus 15.4 percent in 1988. Earnings Potential Emerged In 1988 The continued success of strategies established in prior years and growth in key worldwide markets pro duced strong sales demand that translated into profit improvements for Monsanto in 1988. The increased sales demand was experienced across all operating units. Markets outside the United States accounted for 43 percent of net sales and contributed heavily to the improved sales performance. New applications and market expansion contributed to robust demand for established agricultural products such as Roundup and Lasso herbicides. Aiimet animal feed supplement had a record sales year, with a substantial increase in volume. Products such as Saflex plastic interlayer and Lustran ABS thermoplastics experienced vigorous demand, and sales of stain-resistant carpet fiber for Wear-Dated carpet continued to grow. The volume growth of NutraSweet brand sweetener reflected the continued strength of the U.S. diet carbonated soft drink market and further penetration of international markets. Sales of the Calan pharmaceutical products increased 79 percent. Strong demand supported selling price increases for a number of products in 1988, and overall selling prices were favorable despite the reductions in some glyphosate herbicide selling prices. The continued weakness of the U.S. dollar in 1988 gave U.S.-pro duced goods a competitive advantage in certain world area markets, and the translation of sales denomi- , nated in other currencies into the U.S. dollar was also favorable. Monsanto's strategy to exit from cyclical com modity chemicals businesses in favor of higher valueadded products improved the quality of the product portfolio and resulted in a significant improvement in operating income. Additionally, higher selling prices exceeded raw material cost increases. Marketing and administrative expenses increased in 1988 primarily because of inflation, higher sales agents commissions from the higher sales volumes, and greater employee incentive compensation associ ated with improved earnings. The higher profit performance, supplemented by the stock purchase program, produced a 15.4 percent ROE. This was a considerable improvement over the 11.4 percent ROE attained in 1987. B 24 Monsanto Company and Subsidiaries Analysis of Change in Earnings per Share -- Better (Worse) 1989 vs. 1988 vs. 1988 1987 Sales-Related Factors: Selling prices Sales volume and mix $ 0.26 3.94 $ 1.78 2.47 Total Sales-Related Factors Cost-Related Factors: Raw material costs Other manufacturing costs Marketing, administrative and technological expenses 4.20 4.25 0.18 (0.70) (2.18) (1.02) 0.19 (1.30) Total Cost-Related Factors (2.70) (2.13) Other Factors: Restructuring -- net Divestitures (0.41) (0.24) (0.26) Total Other Factors (0.41) (0.50) Operating Income 1.09 1.62 Interest expense Interest income Other income -- net Change in income taxes Change in shares outstanding (0.08) 0.10 (0.04) 0.16 0.33 (0.01) 0.03 (0.02) 0.33 0.64 Change in Famlngs per Share $ 1.76 $ 2.64 Sales Volume Index (I9S5 - i.Oi : 0.9 1987 Selling Price Index (ms > l.o) I 1988 1989 -- 0.9 1987 Raw Material Cast Index U985 - l.Oi n 1988 1989 ....... 0.9 ____________________ Ill L987 1988 1989 DSW 021851 STLCOPCB4007160 Operating Unit Segment Data Agricultural Products: Crop Chemicals Animal Sciences Chemicals Electronic Materials Fisher Controls NutraSweet Pharmaceuticals Biotechnology Product Discovery Corporate Total Net Sales 1989 1988 1987 $1,558 159 4,065 852 869 1,178 $1,377 169 3,989 209 840 736 973 $1,178 127 3,858 185 749 722 820 $8,681 $8,293 $7,639 Operating Income (Loss) 1989 1988 1987 $ 474 (42) 497 64 180 6 (47) (34) $1,078 $434 (10) 486 11 29 154 (62) (47) (40) $955 $359 (43) 450 (5) 26 145 (119) (43) (36) $734 Research and Development 1989 1988 1987 $119 $110 $ 94 43 43 47 104 108 108 68 17 19 18 39 35 31 218 198 199 47 47 43 11 9 9 $598 $575 $557 Total Assets Capital Expenditures Depreciation and Amortization 1989 1988 1987 1989 1988 1987 1989 1988 1987 Agricultural Products: Crop Chemicals Animal Sciences Chemicals Electronic Materials Fisher Controls NutraSweet Pharmaceuticals Biotechnology Product Discovery Corporate $1,173 316 2,993 634 1,344 1,814 54 276 $1,001 260 2,883 217 682 1,484 1,604 67 263 $ 918 221 2,856 234 654 1,724 1,484 78 286 $109 $101 $ 71 39 22 21 300 329 287 10 11 29 25 22 49 36 31 71 56 50 676 446 $ 81 $ 85 $ 82 25 25 22 247 235 231 20 17 31 37 34 215 209 206 79 79 75 10 11 8 224 Total $8,604 $8,461 $8,455 $607 $590 $505 $690 $703 $679 The above data should be read in conjunction with the Segment Information note to the financial statements on page 44. The countries in which Monsanto operates have experienced varying degrees of inflation; therefore, the historical cost of certain assets is generally lower than current cost. Generally accepted accounting principles require financial statements to be prepared at historical cost. Consequently, the depreciation and amortization expense reported above is less than that which would be reported using current cost The 1988 operating results of the Electronic Materials business, which was sold in March 1989, included the 10 months ended October 31. This busi ness was not reported as a discontinued operation in the Statement of Consolidated Income because the effect was immaterial. The principal factors that accounted for the operating units' strong performance in 1989 and 1988, along with the factors that are expected to affect operating results in 1990, are described on the follow ing pages. 1989 Nat Sales (percent by operating unit) ^ 47% Chemicals 2% Animal Sciences 18% Crop Chemicals 13% Pharmaceuticals 10% NutraSweet 10% Fisher Controls Monsanto Company and Subsidiaries 25 8 DSW 021852 STLCOPCB4007161 Operating Unit Segment Data (continued) Crop Chemicals Net Sales Operating Income 1989 $1,558 474 1988 $1,377 434 1987 $1,178 359 The Crop Chemicals operating unit is a leading worldwide producer and marketer of herbicides, inclu ding Roundup, Lasso, Far~Go, Avadex and Machete. Regional weather conditions in the agricultural mar kets throughout the world affect Crop Chemicals sales volume, and more than half of Crop Chemicals net sales are to markets outside the United States. Crap Chemicals Me* Salas (dotlars in millions) $2,000 Outlook -- Crop Chemicals Roundup and other glyphosate herbicides consti tuted the major portion of 1989 Crop Chemicals net sales. They will continue to be the dominant products for Crop Chemicals for the near future. Manufactur ing capacity for glyphosate increased significandy in 1989. The patents protecting glyphosate herbicide have dates expiring between 1991 and 2000. Crop Chemicals has a significant number of new products in the research and development pipeline. The focus continues to be on a number of traditional as well as biotechnology-related products. Some com mercialization is in the early stages, but it will not materially affect 1990 sales. Animal Science* Net Sales Operating Income (Loss) 1989 $159 (42) 1988 $169 (10) 1987 $127 (43) 0 1987 U.S. Europe Rest of World 1988 1989 Crop Chemicals herbicide sales were strong in most key markets in 1989, with net sales increasing 13 percent and operating income growing 9 percent. Sales volume of Roundup and other glyphosate herbi cides was up 25 percent in 1989 despite dry weather in northern Europe. This excellent 1989 performance is the fourth consecutive year of volume growth of 25 percent or more. Selling price reductions have made glyphosate herbicides more cost effective to use, and the consequent sales volume increase more than compensated for the lower prices. The expansion of existing markets and the entrance into new markets were factors in setting a record sales volume for Roundup herbicide. Sales volume for Lasso herbicide was strong because of increased plantings of com and soybeans in the United States despite continuing dry conditions in several sectors of the com belt. In 1988, Crop Chemicals net sales increased 17 percent, and operating income improved 21 per cent. Selling price reductions for glyphosate herbi cides facilitated, expansion into new markets, while an increase in the planted acreage of com and soybean crops in the United States contributed to higher net sales of Lasso herbicide. Operating results outside the United States also benefited from the translation of local currencies into the U.S. dollar. B 26 Monsanto Company and Subsidiaries The Animal Sciences business focuses on animal nutrition and growth products. The major commercial products are Alimet animal feed supplement and Santoquin feed antioxidant. Sales volume for Alimet animal feed supplement grew substantially in 1989, but net sales and earnings declined because of price attrition brought about by intense competition. Facility start-up costs for several products also adversely affected operating results. Approval by the U.S. Food and Drug Admin istration (FDA) is currently being sought for biotech nology-produced BST, a naturally occurring protein that enhances the efficiency of milk production in dairy cows. Expenditures for BST were higher in 1989 than 1988. The BST expenditures and the continuing research and development costs associated with por cine somatotropin (PST), a feed efficiency and growth rate enhancer that results in leaner pork, exceeded the profit generated by Animal Sciences product sales in 1989. The BST-related assets are a significant part of Animal Sciences total assets. In 1988, Animal Sciences had record sales, pri marily because of a substantial increase in the sales volume of ARmet animal feed supplement. Profit from product sales was not sufficient to generate operating income for the segment because of the high level of research and development costs associated with BST and PST. Outlook -- Animal Sciences The market for Alimet animal feed supplement is expected to grow 4 to 5 percent per year, but pricing will continue to be a question for 1990 as competition DSW 021853 STLCOPCB4007162 Operating Unit Segment Data (continued) remains intense. An Alimet production capacity expansion, started up in late 1989, increased the pro duction capacity for Alimet 25 percent, positioning Animal Sciences to participate in the expected market growth. BST is not expected to be approved in the United States before late 1990. This product is also being reviewed for approval by the European Economic Community. BST is believed to have significant value to the dairy industry through the reduction of milk production costs, but it continues to meet opposition from factions that are opposed to products utilizing biotechnology. Animal Sciences is positioned to take advantage of BSTs commercial potential immediately upon approval by the various regulatory bodies. The cost to maintain that state of readiness will continue to affect profitability adversely in 1990. Chemicals 1989 Net Sales: Detergents and phosphates $ 492 Engineered products 134 Man-made fibers 986 Plastics 8SS Resin products 512 Rubber and process chemicals 627 Specialties 459 Total Operating Income 54,065 497 1988 $ 465 109 962 887 509 588 469 $3,989 486 1987 $ 457 200 950 804 490 518 439 $3,858 450 The Chemicals unit produces a wide range of chemicals, plastics, fibers and other products listed in the table above. The unit's principal strengths are nylon carpet fiber, high-performance plastics, Saflex plastic interlayer, detergent ingredients, phosphates, rubber chemicals and maleic anhydride. Chemicals Nse Sedas !dollars in mtthons) $5,000 Chemicals recorded another solid year in 1989, with net sales and operating income up 2 percent. Sales volume and selling prices were strong for almost all businesses, although some slackening of demand in the automotive markets in the United States and Canada did occur late in the year. Most raw material costs peaked in the first quarter, then generally decreased throughout the remainder of the year. Raw material costs for the full year 1989 were slightly lower than 1988. Capacity utilization, an important factor for Chemicals profitability, was 82 percent, ver sus 83 percent in 1988. Operating profit margin was unchanged at 12 percent of net sales. Sales volume for Lustran ABS thermoplastics, Vydyne nylon and high-performance alloys and blends remained strong in 1989. Elastics profitability bene fited as raw material costs declined year to year. Market demand softened somewhat in the United States and Canada late in the year due to the slow down in automotive markets. Saflex plastic interlayer sales benefited from con tinued advances in quality, technological innovations, and a worldwide motor vehicle market that was rea sonably strong during the first three quarters of the year. Market and technology programs, which focused on the architectural business, have helped sustain above average growth rates and market shares. Archi tectural products have become a larger share of the Saflex business, helping to offset some of the cyclical ity of the automotive markets. A major Belgian capacity expansion was completed with additional expansions under way in Brazil and Belgium. Sales volume in 1989 for fibers products increased somewhat from 1988. Stain-resistant carpet fibers for Wear-Dated brand carpet continued to generate strong customer acceptance and demand. Selling price increases essentially recovered increases in overall raw material costs. Selling price improvement occurred for acrylic products. Rubber and process chemicals products set rec ords for sales volume in 1989. The rubber chemicals market is principally the replacement tire segment of the industry, where high demand has sustained pric ing and profitability. Maleic anhydride, a process chemical, remained sold out for most of 1989 and additional capacity started up late in 1989. 0 1987 1988 1989 B U.S. B Europe B Rest of World Monsanto Company and Subsidiaries 27 DSN 021854 STLCOPCB4007163 Operating Unit Segment Data (continued) Manufacturing difficulties and start-up costs had Fisher Controls an unfavorable effect on the detergents and phosphate results in 1989. Demand was also soft for phosphate- 1989 1988 1987 based detergent ingredients, as state and local govern ments continued to consider and enact phosphate bans. Specialties products sales performance was mixed. In 1988, net sales in the Chemicals business over all increased 3 percent over 1987. Excluding businesses subsequently divested, 1988 net sales increased 9 percent. All continuing product lines Net Sales: Final control systems Instrumentation Other Total Operating Income $436 208 208 $852 64 $404 196 240 $840 29 $346 172 231 $749 26 enjoyed strong demand, particularly in the interna tional markets. U.S. export sales increased 22 percent and sales of ex-U.S. manufactured products increased 16 percent for the continuing product lines in 1988. Overall, operating income in 1988 was up 8 percent, as higher 1988 sales volume and selling prices gener Fisher Controls is a leading worldwide producer of process control equipment, which includes indus trial valves and regulators, PROVOX electronic process instrumentation and Perinea gas separation systems. ated solid income gains. Higher plant capacity utilization (83 percent versus 80 percent in 1987) also contributed to the improved operating income. In addition, the translation of financial results denomi Fisher Controls Net Scries (dollars in miHUms) $1,000 nated in other currencies into U.S. dollars had a positive effect on 1988 sales and operating income. Operating income in 1987 included $30 million in income from the actions instituted under the 1985 restructuring program. Outlook--Chemicals The Chemicals unit will be challenged to improve profitability in 1990 because of an anticipated slow down in the U.S. economy, particularly the automotive market. But modest growth is anticipated in most other markets, and volume gains are expected from new production capacity for certain products. In addi tion, continued volume growth is expected in stainresistant carpet fibers. Resolution of detergents and phosphates manufacturing problems experienced through much of 1989 and elimination of start-up costs in the detergents and phosphates and specialties product areas should provide volume and profit growth opportunities. 0 1987 U.S. Europe Rest of World 1988 1989 Fisher Controls operating income more than doubled in 1989. Principal factors were strong selling prices and higher demand, especially for final control systems and PROVOX electronic process instrumen tation. These benefits were reduced by higher raw material costs. Comparisons to 1988 are affected by net sales of $96 million and operating loss of $6 mil lion in 1988 few subsequently divested businesses. Excluding divestitures, sales grew 14 percent on con tinuing operations, with significant strength in the chemical, pulp and paper markets. In 1988, net sales increased 12 percent on the strength of customer demand and improved selling prices. In addition, this unit benefited from the favor able currency effect of a weaker U.S. dollar. Operating income increased 12 percent in 1988 despite raw material cost increases for specialty metal castings and electronic components and adverse inventory adjustments in part of the European operations. 28 Monsanto Company and Subsidiaries DSW 021855 STLCOPCB4007164 Operating Unit Segment Data (continued) Outlook - Fisher Controls Fisher Controls business is dependent primarily upon worldwide capital expenditures in the chemical, oil and gas, and pulp and paper industries. Sophisti cated control valves and control systems may take months to produce. As a result, booked orders for production is a key indicator for future business performance. Booked orders and profit margins on those orders remained strong at year-end 1989, particularly in markets outside the United States. His torically, Fisher Controls performance has lagged behind the capital spending in its customers' markets by about nine months. NutraSweet Net Sales Operating Income 1989 1988 1987 $869 $736 $722 180 154 145 The NutraSweet Company manufactures and markets NutraSweet brand sweetener, which is sold worldwide. The company also markets Equal lowcalorie tabletop sweetener throughout the United States. On the strength of the best operating performance in its history, NutraSweet net sales in 1989 were up 18 percent and operating income up 17 percent. Fac tors favorably affecting the year-to-year increase in operating income included a 20 percent increase in volume led by strong demand from diet carbonated soft drink markets, and continued decreases in pro duction costs. These factors were somewhat offset by 3 percent lower worldwide average selling prices and 27 percent higher marketing expenses, partially attrib utable to prelaunch costs for Simplesse all-natural fat substitute. NutraSweet assets declined in 1989 primar ily because of the amortization of the aspartame patent. In 1988, operating income increased 6 percent compared to 1987, principally because of production cost reductions and 10 percent higher sales volume for NutraSweet brand sweetener. The increased sales volume was attributable to the growth of the diet car bonated soft drink markets worldwide. While sales volume was higher, net sales increased only 2 percent because of lower worldwide average selling prices. Operating expenses increased as a result of higher marketing costs and expanded technological expenses associated with Simplesse. Outlook - NutraSweet The demand for low-calorie products worldwide is projected to continue to grow. However, the United States will continue to be the principal market for NutraSweet brand sweetener in 1990. Several projects to expand production capacity are under construc tion, including facilities in the United States and Brazil. NutraSweet's aspartame use patents have already expired in most countries and will expire id the United States in 1992. Competition from both generic aspartame and other sweeteners will likely lower sell ing prices over time. However, consumer trends bode well for the future growth of low-calorie products con taining aspartame, and the franchise value of the NutraSweet brand of aspartame is increasing. Simplesse all-natural fat substitute was affirmed as "generally recognized as safe" (GRAS) for use in frozen desserts by the U.S. Food and Drug Admin istration in February 1990. The use of Simplesse is already permitted by regulatory authorities in certain countries, including the United Kingdom and West Germany. Simplesse will begin generating revenue in 1990 as initial products using the fat substitute are launched, but will not have a material impact on 1990 sales. Pharmaceuticals Net Sales Operating Income (Loss) 1989 $1,178 6 1988 $973 (62) 1987 $820 (119) Searie is a research-based, worldwide pharmaceu tical business concentrating on drugs for the treatment of cardiovascular, gastrointestinal, immnnn-inflammatniy, infective and central nervous system diseases. as. ------- rUUi IHBBWHHIW IwT OISD (dollars in mUhonsj 0 1987 U.S. Europe Rest of World 1988 1989 Monsanto Company and Subsidiaries 29 DSW 021856 STLCOPCB4007165 Operating Unit Segment Data (continued) In 1989, Pharmaceuticals exceeded $1 billion in net sales and recorded its first year of operating prof itability since the acquisition of Searle in 1985. Sales grew 21 percent, driven by an approximate 50 percent increase in sales for the Colon calcium channel blocker products for hypertension. Colon sales were $364 million in 1989. Cytotec ulcer preventive drug, the only drug approved for the prevention of gastric ulcers caused by many common arthritis medications, was launched in the United States. Net sales for Cytotec grew to $60 million in 1989 versus $13 million in 1988. The marketing and technological expenses associated with the launch and product development negated the profit contribution from Cytotec. In addition to the U.S. market, Pharmaceuticals has significant presence in most other major pharma ceutical markets throughout the world. Sales volume increases were achieved in various markets in Europe and Canada. Net sales in 1989 included full-year results of the Italian pharmaceuticals company formed in September 1988. Another major step toward a stronger presence in Europe was achieved with the acquisition of a West German pharmaceuti cals company in October 1989. Improved participation in the Japanese pharmaceuticals market continues to be an important focus for Searle. Japan is the only major market where Searle has not yet established a significant presence. Outside the United States, Searle sells Equal low-calorie tabletop sweetener, also mar keted as Canderel, which accounted for $112 million in sales in 1989, up 32 percent from 1988. Financial results continue to reflect significant investment in research and development (R&D). Phar maceuticals R&D expenditures were 19 percent of net sales in 1989. This spending level demonstrates the commitment to product discovery that is aimed at securing a sound long-term financial performance for Pharmaceuticals. In 1988, Pharmaceuticals had a sales growth of 19 percent, driven by the Colon calcium channel blocker products, which had a 79 percent increase in net sales in North America. Pharmaceuticals sales grew 13 per cent outside the United States and several strategically important mergers, joint ventures and restructurings were completed to strengthen presence in the key world markets of West Germany, Italy and the United Kingdom. The operating loss in 1988 was reduced by 48 percent from 1987. Outlook -- Pharmaceuticals Cytotec ulcer preventive drug is expected to begin contributing to profitability in 1990 as volume grows. Cytotec is anticipated to be launched in additional countries during the year. The Colon products are expected to continue with strong sales. Because pat ent protection in the United States has expired, this product could be subject to generic competition in 1990. Kerlone, a new beta blocker for the treatment of high blood pressure, received U.S. regulatory approval in 1989 and will be launched commercially in 1990. Several products are positioned in the pipeline for commercialization in the next few years. These include misoprostol/diclofenac, an antiarthritis drug; topical spironolactone for the treatment of acne; Maxaquin, the first once-a-day anti-infective drug in the quinolone class; and Zolpidem, the first of a new class of sleeping aid. Products currently in various stages of scientific development include products to reduce the rejection of transplanted organs, to treat Alzheimer's disease and schizophrenia, to treat AIDS (acquired immune deficiency syndrome) and other viral diseases, and to treat abnormal heart rhythms. A collaborative discovery program with Washington University in St. Louis continues; it encompasses almost 40 research projects. The collaboration with Oxford University in the United Kingdom is pursuing a newly emerging technology related to the role of body sugars in biological processes, which could hold the key to unlocking the mechanisms of many diseases. Biotechnology Product Discovery The mission of Biotechnology Product Discovery is to generate product candidates and new technology in the area of human health, animal nutrition, plantrelated agriculture and chemical products. The bio technology capabilities developed over the past several years have been integrated with enhanced research expertise to maximize the application of biotechnol ogy for the discovery of protein and chemical (non protein) products. This research is coordinated with the strategic direction of the Crop Chemicals, Animal Sciences and Pharmaceuticals businesses. When product leads and new technologies are refined and clarified, they are transferred to these operating units for further development and commercialization. 30 Monsanto Company and Subsidiaries DSW 021857 STLCOPCB4007166 Geographic Data United States Europe-Africa Canada Latin America Asia-Pacific Inter-area Eliminations Corporate Total Net Sales to Unaffillated Customers 1989 1988 1987 $5,590 1,800 430 315 546 $5,219 1,801 377 304 592 $4,883 1,537 329 293 597 $8,681 $8,293 $7,639 1989 $ 721 282 50 23 60 (4) (54) $1,078 Operating Income (Loss) 1988 1987 $638 245 37 27 74 (26) (40) $501 181 31 2 49 6 (36) $955 $734 1989 $6,169 1,657 150 254 388 (290) 276 $8,604 Total Assets 1988 $6,240 1,447 149 242 478 (358) 263 1987 $6,431 1,256 116 235 513 (382) 286 $8,461 $8,455 The data above are prepared on an "entity basis," which means that net sales, operating income and assets of a legal entity are assigned to the geographic area where the legal entity is located (e.g., a sale from the United States to Latin America is reported as a United States sale). Inter-area sales between Monsanto entities have been excluded from the above table; they are shown in the Segment Information note to the financial statements on page 44. The reported operating income for the ex-U.S. geographic areas does not include the full profitability generated by sales of Monsanto products imported from other locations, principally from the United States. Operating income for the geographic segments does not include the equity income from Monsanto's joint venture companies, the largest of which are in Latin America and Asia-Pacific. Such equity income is reflected in "Other income -- net" in the Statement of Consolidated Income. Monsanto's share of these unconsolidated sales in 1989 was $216 million for Latin America and $281 million for Asia-Pacific. Monsanto's net income included equity income of $5 million in Latin America and $9 million in Asia-Pacific. United States Sales and Profit Increased Net sales by entities in the United States increased 7 percent in 1989 on the strength of sales volume growth by Crop Chemicals herbicides, NutraSweet brand sweetener and, within Pharmaceuticals, the Colon antihypertensive drugs and first-year sales of Cytotec ulcer preventive drug in the United States. Chemicals and Fisher Controls products also had a solid year in net sales and operating income. Monsanto's U.S. operating income grew by 13 per cent, primarily because of the sales growth from higher margin products. Direct export sales from the United States to non-U.S. third party customers were $467 million, $502 million and $408 million for 1989 1987, respectively. In 1988, net sales increased 7 percent and profit grew 27 percent, with improvement experienced across all business segments. Crop Chemicals herbi cides, Alimet animal feed supplement, and certain Chemicals and Pharmaceuticals products, primarily Colon SR calcium channel blocker, generated the most pronounced improvement. U.S. export sales vol ume, especially for Crop Chemicals and Chemicals, expanded during 1988 because of worldwide economic conditions and competitive pricing. Europe-Africa Had Record Profit Net sales in 1989 were level with 1988, principally because of Fisher Controls and Electronic Materials divestitures, which had 1988 net sales of $138 million. In addition, translation of European denominated currency sales into a strengthened U.S. dollar adversely affected 1989 net sales. Herbicides, rubber chemicals and Saflex plastic interlayer had higher sales volumes. Dry weather in northern Europe caused some moderation of the growth of glyphosate herbicides in the second half of the year, but volume still increased 30 percent year to year. Pharmaceuti cals sales grew because of increasing market penetration for Canderel tabletop sweetener and the full-year sales of the Italian company formed in late 1988. Fisher Controls continuing businesses had significant increases in 1989 sales. Operating income for 1989 was a record, up 15 percent. European profitability benefited from higher sales of Pharmaceuticals, Chemicals and con tinuing Fisher Controls products. Operating income was adversely affected by an increase in Animal Sciences BST costs. The expansion of Saflex plastic interlayer extrusion capacity and start of construction of a new Butvar resin plant, both in Belgium, along with the acquisition of a West German pharmaceuti cals company, were highlights for the increasing investment in Europe. Monsanto Company and Subsidiaries 31 DSW 021858 STLCOPCB4007167 Geographic Data (continued) In 1988, net sales increased 17 percent, and operating income was up 35 percent. Selling price reductions, expansion of differentiated products, and innovative marketing programs produced a significant gain in sales volume and profit for glyphosate herbi cides. Lustran ABS thermoplastics, Saflex plastic interlayer, rubber chemicals and pharmaceutical products also had improved sales volumes and profits due to strong market demand. Canada Growth Continued Sales increased 14 percent, while operating income improved 35 percent in 1989. Strong overall demand, broader applications for glyphosate herbi cides and increases in the planted acreage for cereal grain produced higher Crop Chemicals sales and income. Strong Canadian capital investment and exports from Canada contributed to growth in sales volume for Fisher Controls. Chemicals sales and operating income were stable, with growth in new products and applications countering the effect of weaker housing and automotive markets. Pharmaceu ticals also experienced sales growth for Cytotec ulcer preventive drug and Isoptin (sold as Colon SR in the United States). In 1988, net sales increased 15 percent, and oper ating income increased 19 percent. Glyphosate and Avadex BW herbicides continued to be the principal products contributing to Canada's financial results. Pharmaceuticals had record sales, and Fisher Controls sales and operating income improved. Translation of a stronger Canadian dollar into the U.S. dollar was favorable for reporting financial results. Latin America Results Were Mixed Latin American sales increased $11 million, while operating income declined $4 million. Glyphosate herbicides sales increased 28 percent in 1989 led by growth in Brazil. Chemicals operating income was down year to year, as volume growth in Brazil did not compensate for the depressed economic climate in Argentina. Government-controlled selling price increases were not adequate to recover the high inflation rates on costs throughout Latin America. Profitability of Pharmaceuticals declined. Modest sales of NutraSweet brand sweetener were made in Brazil and Mexico during the year. Capital spending continued, with construction of new production facili ties in Brazil for Saflex plastic interlayer, rubber chemical raw materials and NutraSweet brand sweetener. In 1988, net sales increased 4 percent over 1987 in Latin America, and operating income grew significandy. Increases in glyphosate and Lasso herbicide sales volumes contributed to the sales and profit improvement. Sales volumes for rubber chemicals were higher in 1988 than in 1987. Asia-Pacific Continuing Businesses Prospered While 1989 net sales and operating income in Asia-Pacific declined 8 percent and 19 percent, respec tively, results from continuing operations actually improved in 1989. The growth in the continuing busi nesses was not adequate to replace the $101 million in sales and $23 million in operating income in 1988 from subsequently divested nonstrategic businesses. Overall economic conditions were generally robust in the major Asian countries, with the exception of the People's Republic of China. Glyphosate herbicides sales increased 22 percent. Extraordinarily rapid volume growth for glyphosate products occurred in several countries, particularly in Australia. Fisher Controls net sales grew 19 percent. On a continuing product basis, Chemicals net sales were up 15 percent across a diverse group of products. In 1988, economic growth was very strong in AsiaPacific, as operating income increased 51 percent despite a slight decline in net sales caused by the sale of the Australian commodity chemicals and plastics businesses early in 1988. The profit improvement in 1988 was generated principally from Crop Chemicals. The Chemicals businesses, led by plastics and special ties, also had solid financial performance. The Electronic Materials business, sold in 1989, contrib uted significantly to the positive 1988 results. 33 Monsanto Company and Subsidiaries OSW 021859 STLCOPCB4007168 Quarterly Data Net Sales Gross Profit Operating Income Net Income Earnings per Share Dividends per Share Common Stock Price 1989 1988 1989 1988 1989 1988 1989 1988 1989 1988 1989 1988 1989 1988 High Low High Low First Quarter $2,265 2,127 979 890 364 329 222 210 3.24 2.86 0.75 0.70 955/ 80% 89% 74 Second Quarter $2,348 2,263 1,051 977 397 365 241 220 3.54 3.04 0.85 0.75 111 937/* 89% 75% Third Quarter $2,061 2,022 845 764 216 187 126 116 1.88 1.67 0.85 0.75 124% 105 923/. 73% Fourth Quarter $2,007 1,881 771 690 101 74 90 45 1.37 0.70 0.85 0.75 122 108 V. 83% 75 Total Year $8,681 8,293 3,646 3,321 1,078 955 679 591 10.03 8.27 3.30 2.95 124 V* 80% 92% 73% Net sales and net income for each quarter of 1989 were higher than the comparable 1988 quarter. Monsanto's net income is historically higher during the first half of the year attributable primarily to a concentration of the generally more profitable Crop Chemicals sales in the first half of the year. In addi tion, NutraSweet sales fluctuate from quarter to quarter. The only significant unusual item affecting quar terly net income was the fourth quarter 1989 gain of $36 million on the sale of the analgesics business. Monsanto Company and Subsidiaries 33 OSW 021860 STLCOPCB4007169 Statement of Consolidated Financial Position (Dollars in millions, except per share) Assets Current Assets: Cash, time deposits and certificates of deposit Short-term securities, at cost which approximates market Trade receivables, net of allowances of $23 in 1989 and $28 in 1988 Miscellaneous receivables and prepaid expenses Deferred income tax benefit Inventories Total Current Assets Intangible Assets, net of accumulated amortization of $1,029 in 1989 and $798 in 1988 Investments in Affiliates Other 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 Total Assets Liabilities and Shareowners' Equity Current Liabilities: Accounts payable Wages Income and other taxes Miscellaneous accruals Short-term debt Total Current Liabilities Long-Term Debt Deferred Income Taxes Other Liabilities Shareowners' Equity: Common stock -- authorized, 200,000,000 shares, par value $2; issued, 82,197,097 shares in 1989 and 1988 Additional contributed capital Accumulated currency adjustment Reinvested earnings Treasury stock, at cost (16,050,656 shares in 1989 and 13,364,917 shares in 1988) Total Shareowners' Equity Total Liabilities and Shareowners' Equity The above statement should be read in conjunction with pages 39 through 44 ofthis report. 14 Monsanto Company and Subsidiaries At December 31, 1989 1988 $ 198 55 1,309 295 194 1,197 3,248 $ 203 18 1,234 284 188 1,170 3,097 1,682 204 297 1,790 205 223 105 1,100 5,370 362 6,937 3,764 3,173 $8,604 111 1,122 5,388 305 6,926 3,780 3,146 $8,461 $ 514 223 126 554 505 1,922 1,471 621 649 $ 545 208 124 547 556 1,980 1,408 588 685 164 877 24 4,120 (1,244) 3,941 $8,604 164 874 52 3,662 (952) 3,800 $8,461 DSM 021861 STLCOPCB4007170 Review of Changes in Financial Position Monsanto's financial position remained strong in 1989. Financial resources were readily available to support existing businesses and to fund new busi ness opportunities. Working capital at year-end 1989 was $1,326 mil lion, $209 million higher than year-end 1988. The higher 1989 year-end working capital principally resulted from higher trade receivables and lower short-term debt. Trade receivables at year-end 1989 increased $75 million, primarily because of the higher sales level during the last quarter of 1989. Inventories at year-end increased $27 million from 1988, with a turnover ratio approximating 4 times per year. Intangible assets declined due to amortization, principally of The NutraSweet Company's aspartame patent, which had a recorded value of $518 million at year-end 1989. Intangible assets acquired during 1989, primarily in the Pharmaceuticals business, totaled $120 million. Net property, plant and equip ment increased slightly in 1989, as $607 million of capital additions exceeded depreciation and the effect of divested businesses. The increase in other assets in 1989 resulted primarily from miscellaneous long-term investments. As mentioned in the notes to financial statements on page 40, Monsanto has not yet adopted Statement of Financial Accounting Standards No. 96, the new income tax accounting standard, which must be adopted by 1992. Total short- and long-term debt at year-end 1989 was about the same level as the prior year-end. Pro ceeds of $261 million from 1989 long-term debt financings were used to retire existing short- and long-term debt. In order to maintain adequate finan cial flexibility and access to debt markets worldwide, Monsanto management intends to maintain an "A" debt rating in the United States. An important factor in establishing that rating is the interest coverage ratio, which improved to 5.9 in 1989 from 5.5 in 1988. Monsanto's current debt rating is "A" or better. Monsanto uses international financial markets for its financing needs and has available various shortand medium-term bank credit facilities, which are dis cussed in the notes to financial statements (page 41). These credit facilities provide the financing flexibility to take advantage of investment opportunities that may arise and to satisfy future funding requirements. Monsanto's commitments and contingencies are described in the notes to financial statements on page 43. Monsanto continually evaluates risk retention and insurance levels for product liability, property damage and other potential areas of risk. Monsanto devotes significant effort to maintaining and improving safety and internal control programs, which reduce its expo sure to certain risks. Based on the cost and availability of insurance and the likelihood of a loss, management decides the amount of insurance coverage to purchase from unaffiliated companies and the appropriate amount of risk to retain. This risk includes liability insurance on the "claims made" policy basis. Manage ment believes that the current levels of risk retention are appropriate and are consistent with those of other companies in the various industries in which Monsanto operates. Monsanto's liquidity, financial position and profitability are not expected to be affected materially by the current levels of risk retention. Monsanto's principal financial target is a sus tained return on shareowners' equity (ROE) of 20 percent or greater. The ROE and other key financial statistics are presented in the table below. Kay Financial Statistics Return <m Equity (ROE) (Net income divided by average shareowners' equity) Working Capital (Current uxu less current labilities) Current Ratio (Current assca divided by current liabilities) Interest Coverage Cash Provided by Operatkms/Total Debt Total Debt/Total CapHalhadoa* 1989 17.6% $1,326 1.7 5.9 52% 33% *Total capitalization is the sum ofshort-term debt, long-term debt and shareowners' equity. 1988 15.4% $1,117 1.6 5.5 66% 34% 1987 11.4% $1,203 1.7 4.5 43% 35% Monsanto Company and Subsidiaries 35 DSW 021862 STLCOPCB4007171 Statement of Consolidated Cash Flow (Dollars in millions) Increase (Decrease) in Cash and Cash Equivalents Operating Activities: Net income Add income tax expense Income before income taxes Adjustments to reconcile to Cash Provided by Operations: Income tax payments Items that did not use (provide) cash: Depreciation and amortization Restructuring income -- net Other Working capital changes that provided (used) cash: Accounts receivable Inventories Accounts payable and accrued liabilities Other Nonoperating pre-tax gains from asset disposals 1989 $ 679 336 1,015 (294) 690 (27) (131) (90) (48) (17) (61) 1988 $ 591 302 893 (235) 703 14 (46) (136) 86 67 (42) Cash Provided by Operations 1,037 1,304 Investing Activities: Property, plant and equipment purchases Acquisition and investment payments Investment and property disposal proceeds (607) (211) 307 (590) (100) 121 Cash Used in Investing Activities (511) (569) Financing Activities: Net change in short-term financing Long-term debt proceeds Long-term debt reductions Treasury stock purchases Dividend payments Other financing activities Cash Used In Financing Activities (50) 261 (196) (335) (221) 47 (494) 53 21 (167) (457) (211) 24 (737) Increase (Decrease) in Cash and Cash Equivalents Cash and Cash Equivalents*: Beginning of year 32 (2) 221 223 End of year $ 253 $ 221 The above statement should be read in conjunction with pages 39 through 44 ofthis report The effect ofexchange rate changes on cash and cash equivalents was not material. Cash payments for interest (net ofamounts capitalized) were $171 million, S167 million and $167 million, for the years 1989-1997, respectively, *Includes cash, time deposits, certificates ofdeposit and short-term securities. 1987 $ 436 237 673 (229) 679 (32) 37 (172) (22) 13 (19) (26) 902 (505) (59) 75 (489) 150 26 (122) (339) (212) 33 (464) (51) 274 $ 223 9 M Monsanto Company and Subsidiaries DSW 021863 STLCOPCB4007172 Review of Cash Flow Monsanto's cash flow for the three-year period of 1989-1987 is shown in the Statement of Consolidated Cash Flow on the preceding page. Cash from operations in 1989 was generated prin cipally by the Chemicals unit, with Crop Chemicals and The NutraSweet Company also contributing significandy. Cash provided by operations was strong, totaling $1,037 million, but declined 20 percent from 1988, because of the increased working capital needed to finance sales growth. Monsanto's operations have generated sufficient cash to fund existing businesses, growth-related research and investments. Manage ment expects cash provided by operations, supple mented by periodic borrowings, to be adequate to fund its future requirements. Investment and property disposals in 1989 gener ated $307 million of cash. The principal proceeds in 1989 were related to the divestitures of the Electronic Materials and the analgesics businesses and, in 1988, to the sale of the Australian commodity chemicals and plastics businesses. Major uses of cash included capital expenditures, stock purchases, dividends and acquisitions. The principal acquisitions were a West German pharmaceuticals company in 1989 and the formation of an Italian pharmaceuticals company in 1988. Monsanto's 1989 capital expenditures focused on improved technology and capacity expansions and totaled $607 million, up slightly versus the prior year. The more significant expenditures were for expansion of production capacity for glyphosate herbicides, Alima animal feed supplement, Saflex plastic interlayer and the NutraSweet business. Long-term debt proceeds in 1989 included $99 million in 20-year, 87A percent debentures and $50 million from the issuance of medium-term notes. These proceeds enabled Monsanto to refinance short term commercial paper borrowings to obtain a more balanced mix of short- and long-term debt. Monsanto is subject to various laws and govern mental regulations concerning employee health, product safety and environmental matters. Monsanto anticipates that increasingly stringent requirements will be imposed upon Monsanto and the entire chemi cal industry. Monsanto is dedicated to a long-term environmental protection program that reduces emis sions of hazardous materials into the environment, as well as to the remediation of identified existing envi ronmental concerns. In 1988, management committed to a 90 percent reduction in hazardous air emissions by the end of 1992, a goal that will require the devel opment and installation of new technology. Reduction of 17 percent was accomplished through 1988. Com pilation of data for 1989 is not complete; however, further reduction has been achieved. The cost to accomplish this target is not expected to materially affect operating results in any given year. Expenditures in 1989 were approximately $60 million for environmental capital projects and approximately $225 million for operation and main tenance of environmental protection facilities. Monsanto is negotiating with various government agencies concerning Superfund cleanup sites and is a defendant in various suits related to a waste disposal site in which the plaintiffs make claims for large amounts of actual and punitive damages. Monsanto spent $27 million in 1989 for remediation of waste disposal sites. Most of these expenditures relate to the Chemicals segment, and similar or greater amounts can be expected in future years. Monsanto's policy is to accrue these costs in the accounting period in which the responsibility is established and the cost is estimable. Monsanto's liquidity, financial position and profitability are not expected to be affected materially by the cleanup costs for Superfund and other waste disposal sites, or the outcome of litigation with other parties. Monsanto Stock -- A Sound Investment In December 1989, Monsanto's Board of Directors authorized the purchase of an additional 5 million shares of Monsanto common stock. By year-end 1989, Monsanto had purchased all of the 13 million shares authorized in 1987 and 1988, at a cost of $1,131 mil lion. Management believes the stock purchase program represents a sound economic investment for Monsanto's shareowners. Stock purchases favorably affect earnings per share and aid in the achievement of management's 20 percent return on equity target. Dividends Increase for the 17th Consecutive Year Monsanto has paid dividends on its common shares without interruption or reduction since 1928, and has increased the dividend in each of the past 17 years. Dividend payout for 1989 was 21 percent of cash provided by operations and 33 percent of net income. Monsanto's dividend policy reflects a desired long-term payout percentage based on Monsanto's expectations oifuture growth and profitability levels. In any individual year, additional consideration is given to expected financial position and results, working and fixed capital needs, scheduled debt repayments, and economic conditions, including inflation. Monsanto's common stock is traded principally on the New York Stock Exchange and is listed on the exchanges of Tokyo and seven European cities. The number of shareowners of record as of February 23, 1990, was 61,723, and the high and low common stock prices on that date were $ 111 '/< and $ 108Vi. Monsanto Company and Subsidiaries 37 DSM 021864 STLCOPCB4007173 Statement of Consolidated Shareowners' Equity (Dollars in millions, except per share) Common Stock: Balance, January 1 and December 31 1989 $ 164 Additional Contributed Capital: Balance, January 1 Employee stock plans Balance, December 31 $ 874 3 $ 877 Accumulated Currency Adjustment: Balance, January 1 Translation adjustments Income taxes Balance, December 31 $ 52 (17) (ID $ 24 Reinvested Earnings: Balance, January 1 Net income Dividends $ 3,662 679 (221) Balance, December 31 $4,120 Treasury Stock: Balance, January 1 Shares purchased (3,274,400; 5,605,300 and 4,120,100 shares in 1989-1987, respectively) Shares issued under employee stock plans (588,661; 339,963 and 558,528 shares in 1989-1987, respectively) $ (932) (335) 43 Balance, December 31 $(1,244) The above statement should be read in conjunction with pages 39 throutf144 ofthis report. 1988 $ 164 $ 872 2 $ 874 $ 100 (53) 5 $ 52 $3,282 591 (211) $3,662 $ (517) (457) 22 $ (952) 1987 $ 164 $ 861 It $ 872 $ (98) 197 1 $ 100 $3,058 436 (212) $3,282 $ (204) (339) 26 $ (517) Kory Financial Stotistks Stock Price* High Low Year-end Per Share Dividends Shareowners' Equity Average Daily Share Trading Volume (thousands of shares) *Based on daily reported high and low stock prices. 1989 $ 124V4 80Vi 1153/k 3_30 59.58 213 1988 $ 92V 73 Vi 813/4 2.95 55.21 323 1987 $ 100`/ 57 83 2.75 52.65 372 M Monsanto Company and Subsidiaries DSW 021865 STLCOPCB4007174 Notes To Financial Statements Significant Accounting Policies Monsanto's significant accounting policies are italicized in the following Notes to Financial Statements. Basis of Consolidation The consolidated financial statements include the Company and its majority-owned subsidiaries. Intercompany transactions have been eliminated in con solidation. Other companies in which Monsanto has a significant ownership interest (generally greater than 20 percent) are included in "Investments in Affiliates" in the Statement of Consolidated Financial Position, and Monsanto's share of these companies' income or loss is included in "Other income - net" in the Statement of Consolidated Income. In March 1989, Monsanto sold its Electronic Materials business. Searle's Italian pharmaceuticals subsidiary was merged with another Italian pharmaceuticals company in September 1988. The acquisition was accounted for using the purchase method. This transaction increased intangible assets $50 million. Monsanto's Australian commodity chemicals and plastics businesses (with net sales of $60 million for the first quarter of 1988 and $164 million for the fullyear 1987) were sold in March 1988. The pro forma operating results of the acquired businesses and the income effect of the divested busi nesses (other than the analgesics business) were not material. Depreciation and Amortization Currency Translation Most of Monsanto's ex-U.S. entities'financial state ments are translated into U.S. dollars using current exchange rates. Unrealized currency adjustments in the Statement ofConsolidated Financial Position are accu mulated in shareowners' equity. The financial statements ofex-U.S. entities that operate in hyperinflationary econ omies, including Brazil, Mexico and Argentina, 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 and Belgian franc. Other important currencies include the Brazilian cruzado, Canadian dollar, French franc, Italian lira, Japanese yen, Mexican peso and West German mark. Currency restrictions are not expected to have a significant effect on Monsanto's cash Sow, liquidity or capital resources. Principal Acquisitions and Divestitures In October 1989, Searle acquired Heumann Pharma GmbH Si Co., a West German pharmaceuti cals firm. The acquisition was accounted for using the purchase method. Intangible assets increased by $93 million as a result of this acquisition. Heumann's results of operations from October are included in the Statement of Consolidated Income for 1989. During November 1989, Monsanto sold its analge sics business (with net sales of $70 million for the first 10 months of 1989 and $75 million for the full-year 1988). A pre-tax gain of $56 million ($36 million after tax gain and $0.53 per share) was recognized on the sale of this business. 1989 1988 1987 Depreciation $438 $435 $421 Amortization of intangible assets 226 231 225 Obsolescence 26 37 33 Total $690 $703 $679 Property, plant and equipment is recorded at cost. The cost ofplant and equipment is depreciated over weighted average periods of23 years for buildings and 12 years for machinery and equipment, using the straight-line method. Intangible assets are recorded at cost less accumu lated amortization. The components of intangible assets, and their estimated remaining useful lives, were as follows: Estimated Remaining Life* 1989 1988 Patents Goodwill Other intangible assets Total 4 34 21 $ 679 737 266 $1,682 $ 864 653 273 $1,790 *Weighted average, in years, at December 31, 1989. Patents obtained in a business acquisition are re corded at the present value ofestimated future cash flows resulting from patent ownership. The cost ofpatents is amortized over their legal lives. Goodwill is the cost of acquired businesses in excess ofthe fair value of their identifiable net assets and is amortized over the esti mated periods ofbenefit (5 to 40 years). The cost of other intangible assets (principally product rights and trademarks) is amortized over their estimated useful lives. Monsanto Company and Subsidiaries 39 DSW 021866 STLCOPCB4007175 Notes to Financial Statements (continued) Inventory Valuation Inventories are stated at cost or market, whichever is less. Actual cost is used to value raw materials and sup plies; standard cost, which approximates actual cost, is used to value finished goods and goods in process. Standard cost includes direct labor, raw material and manufacturing overhead based on practical capacity. The cost of58 percent ofall inventories is determined using the last-in, first-out (LIFO) method, generally reflecting the effects of inflation or deflation on cost of goods sold sooner than other inventory cost methods. The cost ofother inventories generally is determined using the first-in first-out (FIFO) method. The components of inventories were as follows: Finished goods Goods in process Raw materials and supplies Inventories, at FIFO cost Excess of FIFO over LIFO cost Total 1989 $ 723 314 506 1,543 (346) $1,197 1988 $ 662 333 545 1,540 (370) $1,170 Inventories at FIFO cost approximate current cost. Income Taxes The components of income before income taxes were: U.S. Ex-U.S. Total 1989 1988 1987 $ 570 $481 $422 445 412 251 $1,015 $893 $673 The components of income tax expense were: Current: Federal State Ex-U.S. Deferred: Federal State Ex-U.S. Total 1989 1988 1987 $138 18 142 298 $111 18 139 268 $ 82 14 72 168 26 31 39 319 9 2 21 38 34 69 $336 $302 $237 Deferred taxes result from timing differences in the recognition of revenue and expense for tax and financial statement purposes. The source of these timing differences and the tax effect of each were as follows: Depreciation and obsolescence Restructuring program Employee benefit plans Other Total 1989 $25 16 10 (13) $38 1988 $ 28 31 (12) (13) $ 34 1987 $ 46 43 15 (35) $ 69 Factors causing Monsanto's effective tax rate to differ from the United States federal statutory rate were: Federal statutory rate Lower ex-U.S. tax rates Capital gains benefits Benefits attributable to: United States export earnings Puerto Rico operations Other Effective Income tax rate 1989 34% -- -- (2) (2) 3 33% 1988 34% -- -- (2) (1) 3 34% 1987 409! (1) (2) (2) (2) 2 359 Income and remittance taxes have not been recorded on $552 million ofundistributed earnings ofsubsidiar ies, either because any taxes on dividends would be offset substantially by foreign tax credits or because Monsanto intends to indefinitely reinvest those earnings. Various ex-U.S. subsidiaries have tax loss carryforwards for which no tax benefits have been recorded. These carryforwards totaled $36 million at December 31,1989, a portion of which has an unlim ited carryforward period. The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 96 "Accounting for Income Taxes." This statement changes the method of calculating deferred income taxes and must be adopted in or before 1992. Monsanto has not yet adopted this standard which will have no effect on cash Sow and, under existing tax laws, is not expected to have a material effect on Monsanto's financial position, liquidity or future results of operations. SO Monsanto Company and Subsidiaries OSH 021867 STLCOPCB4007176 Notes to Financial Statements (continued) Short-Term Debt and Credit Arrangements Short-term debt was: Notes payable: Banks Commercial paper Bank overdrafts Current portion of long-term debt Total 1989 $145 182 134 44 $505 1988 $ 79 228 121 128 $556 Maximum amount of notes payable and bank overdrafts outstanding at any month-end Average notes payable and bank overdrafts outstanding Weighted average interest rate during the year Weighted average interest rate at December 31 $857 $588 623 411 9.9% 9.99 9.7% 7.99 Monsanto has aggregate short-term loan facilities of $404 million, under which loans totaling $145 mil lion were outstanding at December 31,1989. Interest on these loans is related to various bank rates. Monsanto's worldwide unused short-term loan facilities were $259 million at December 31,1989. Long-Term Debt Long-term debt (exclusive of current maturities) was: 1989 Industrial development bond obligations, weighted average interest rate of 7`/i%, due 1991 to 2021 9V% Eurodollar notes due 1991 10*/4% notes due 1992 9%% notes due 1996 8>A% sinking fund debentures due 2000 gy4% sinking fund debentures due 2008 8W% debentures due 2009 11 %% sinking fund debentures due 2015 Other $ 266 59 150 150 127 170 99 214 236 Total $1,471 1988 $ 256 101 150 150 127 169 214 241 $1,408 A $750 million intermediate-term credit facility expires ratably from 1991 to 1994. There were no bor rowings under this facility at December 31,1989. The credit facility is used to support the issuance of com mercial paper ($182 million outstanding at December 31,1989). Interest on amounts borrowed under this agreement would likely be at money market rates. Covenants under this credit facility restrict maxi mum borrowings. It is not anticipated that future borrowings will be limited by these restrictions. Pension Benefits Most Monsanto employees are covered by non contributory pension plans. The components of pension cost (income) were as follows: 1989 1988 1987 Service cost for benefits earned during the year Interest cost on projected benefit obligation Assumed return on plan assets* Amortization of unrecognized net gain $ 63 227 (251) (40) $ 65 223 (246) (38) $ 64 212 (237) (32) Total $ (1) $ 4 $ 7 * Actual return on plan assets was $858 million in 1989, $340 million in 1988 and $187 million in 1987. Pension benefits are determined based on the employee's years of service and compensation level. Pension plans are funded in accordance with Monsanto's long-range projections of the plans' finan cial conditions, considering benefits earned and expected to be earned in the future, anticipated future returns on pension plan assets and income tax and other regulations. The excess of the fair value of plan assets over the projected benefit obligation as of January 1, 1986 for each plan is being amortized over the average expected future service period of employees (ranging generally from 14 to 18 years). The fair value of plan assets was used to calculate the assumed return on plan assets. Maturities and sinking fund requirements on long-term debt are $44 million, $89 million, $193 million, $30 million and $63 million for 1990 1994, respectively. Monsanto Company and Subsidiaries 41 DSM 021868 STLCOPCB4007177 Notes to Financial Statements (continued) Assumptions used for the principal plans in 1989 87 were as follows: 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) 8`/2% 816 6>6 The funded status of Monsanto's pension plans at year-end was: 1989 Plan assets at fair value $3,647 Actuarial present value of plan benefits: Vested Nonvested $2,299 122 Accumulated benefit obligation 2,421 Effect of projected future salary increases 347 Projected benefit obligation $2,768 Excess of plan assets over projected benefit obligation $ 879 Less: Unrecognized net gain at January 1,1986 341 Subsequent unrecognized net gain 661 Accrued pension liability $ 123 1988 $3,169 $2302 110 2,312 328 $2,640 $ 529 386 302 $ 159 Projected benefit obligations and plan assets included in the above table for the principal United States plans were approximately $2,544 million and $3,273 million, respectively, at December 31,1989. Plan assets consist principally of common stocks and United States government and corporate obligations. Because the Company's pension plans are wellfunded, contributions to the Company's principal plans were neither required nor made in 1989-1987. For some employee savings plans, employee con tributions are matched in part by Monsanto. The 1989-1987 expense recorded for such plans was $32 million, $34 million and $33 million, respectively. Other Postretirement Benefits Monsanto provides certain health care and life insurance benefits for retired employees. Substan tially all of Monsanto's regular, full-time United States employees and certain employees in other countries may become eligible for these benefits if they reach retirement age while employed by Monsanto. At December 31,1989, approximately 26,200 active employees were eligible upon retirement to par ticipate in these programs. In addition, approximately 17,300 individuals retired from active service were eli gible to participate in these programs. These other postretirement benefits are not funded and are expensed as benefits are paid. The 1989-1987 expense recorded for other postretirement benefits was $39 million, $38 million and $37 million, respectively. Stock Option Plans Key officers and employees have been granted Monsanto stock options under the Company's 1974, 1984 and 1988 Management Incentive Plans and the Searle Monsanto Stock Option Plan (Searle Plan). Information about the status of such stock options is presented below. Shares Exercisable Outstanding per Share December 31,1987 1,203,305 2,525,057 $26.16-$94.19 1988: Granted Exercised Expired 1,226,582 75.88- 89.44 (370,451) 26.16- 79.31 (67,833) 45.63- 94.19 December 31,1988 1,319,795 3,313,355 26.16- 94.19 1989: Granted Exercised Expired 619,021 81.19- 122.88 (680,584) 26.16 - 94.19 (49,393) 31-38- 94.19 December 31,1989 1415,734 3,202,399 26.16- 122.88 Under the 1988 Management Incentive Plans and the Searle Plan, 3,269,251 shares remain available for grant. Stock appreciation rights (SARs) have been autho rized to be granted to certain Monsanto officers in tandem with stock options under the Plans, including retroactive grants for unexercised options. SARs may be exercised in lieu of stock options included in the table above. At December 31,1989, SARs related to stock options for 1,157,127 shares were outstanding, of which 368,286 options were exercisable. During 1989, SARs related to stock options for 192,758 shares were granted and for 164,349 shares were exercised. B 43 Monsanto Company and Subsidiaries DSW 021869 STLCOPCB4007178 Note* to Financial Statements (continued) Earnings per Share Earnings per share were computed using the weighted average number of common shares and common share equivalents outstanding each year (67,748,052: 71,501,322 and 77,498,752 in 1989-1987, respectively). Common share equivalents (536,777; 344,986 and 645,527 in 1989-1987, respectively) con sist 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. Capital Stock At December 31,1989, there were 6,471,650 com mon 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 outstanding share of the Company'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 each right will entide its holder 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, each right will entide its holder to purchase, for $450, common shares of the acquiring company having a market value of $900. In addition, if a person or group acquires beneficial ownership of 20 percent or more of the Companys outstanding common stock, each right will entitle its holder (other than such person or members of such group) to purchase, for $450, a number of shares of the Company's common stock having a market value of $900. Furthermore, at any time after a person or group acquires beneficial ownership of 20 percent or more (but less than 50 percent) of the Company's out standing 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 Companys common stock on a one-forone basis. At any time prior to the acquisition of such a 20 percent position, the Company can redeem each right for 1 cent. The Board of Directors is also autho rized to reduce the 20 percent thresholds referred to above to not less than 10 percent. The rights expire in the year 2000. In connection with this dividend declaration, the Board of Directors also authorized the redemption in February 1990 of the Companys existing Common Stock Purchase Rights at their redemption price of 5 cents per right. Commitments and Contingencies Commitments, principally in connection with uncompleted additions to property, were approxi mately $214 million at December 31,1989. Monsanto was contingently liable as guarantor of bank loans and for discounted customers' receivables totaling approximately $94 million at December 31,1989. Future minimum payments under noncancellable operating leases and unconditional inventory pur chases are $128 million; $146 million; $139 million; $123 million and $46 million for 1990-1994, respec tively, and $221 million thereafter. Monsanto is a party to a number of lawsuits, which it is vigorously defending, arising in the normal course of business. Certain of these actions seek damages in very large amounts. While the results of litigation cannot be predicted with certainty, manage ment believes, based upon the advice of Company counsel, that the final outcome of such litigation will not have a material adverse effect on Monsanto's consolidated financial position. Monsanto Company and Subsidiaries 43 DSW 021870 STLCOPCB4007179 Notes to Financial Statements (continued) Supplemental Data Supplemental income statement data were as follows: 1989 1988 1987 Raw material and energy costs '52,659 Employee compensation and benefits 2,045 Current income and other taxes 562 Rent expense 119 $2,587 2,022 527 115 $2,383 1,955 398 108 Technological expenses: Research and development Engineering, commercial development and patent 598 575 557 74 73 58 Total technological expenses 672 648 615 Interest expense: Total interest cost Less capitalized interest Net interest expense 204 193 188 (22) (19) (16) 182 174 172 Equity in affiliates' income (loss) 1 (5) 7 Currency gains (losses) including equity in affiliates' currency gains and losses (31) (20) (11) Segment Information Certain operating unit segment data and geo graphic data for 1989-1987 appear on pages 25 and 31 and are integral parts of the accompanying financial statements. The principal product lines included in each operating unit are shown in the operating unit segment data. Sales between operating units were not signifi cant. Inter-area sales, which are sales between Monsanto locations in different world areas, were made on a market price basis. Certain corporate expenses, primarily those related to the overall management of Monsanto, were not allocated to the operating units or geographic areas. Corporate assets principally include certain miscellaneous receivables and investments. Inter-area sales by entities in each geographic area were: World area shipped from: United States Europe-Africa Canada Latin America Asia-Pacific Inter-area Eliminations Total Inter-area Sales (Between Monsanto Entities) 1989 1988 1987 $ 817 $ 855 180 167 11 13 35 22 11 39 (1,054) (1,096) $ 624 103 8 12 35 (782) $ -$ - $ - Following is a reconciliation of ex-U.S. operating income and total assets to the net income and net assets of consolidated ex-U.S. subsidiaries. Operating income Interest expense Interest income Other income - net Income taxes Net income of consolidated ex-U.S. subsidiaries Total operating assets Total liabilities Net assets of consolidated ex-U.S. subsidiaries 1989 5 415 (50) 57 23 (151) 1988 $ 383 (54) 45 38 (141) 1987 $ 263 (52) 38 2 (93) 5 294 $2,449 983 $ 271 $2,316 1,040 $ 158 $2,120 801 $1,466 $1,276 $1,319 B 44 Monsanto Company and Subsidiaries DSW 021371 STLCOPCB4007180 Financial Summary (Dollars in millions, except per share) 1989U) Operating Results Net Sales $8,681 Operating Income (Loss) 1,078 As a Percent of Net Sales 12% Income (Loss) Before Extraordinary Gain 679 Net Income (Loss) 679 As a Percent of Net Sales 8% Return on Shareowners' Equity 17.6% Earnings per Share Before Extraordinary Gain Net Income (Loss) $10.03 10.03 1988 $8,293 955 12% 591 591 7% 15.4% $ 8.27 8.27 1987<2> $7,639 734 10% 436 436 6% 11.4% $ 5.63 5.63 1986' $6,879 635 9% 433 433 6% 12.0% $ 5.55 5.55 1985'*' $6,747 (598) (9)% (128) (98) (1)% (2.8)% $(1.67) (1.27) Year-end Financial Position Total Assets Working Capital $8,604 1,326 $8,461 1,117 $8,455 1,203 $8,269 1,092 $8,877 899 Property, Plant and Equipment: Gross Net $6,937 3,173 $6,926 3,146 $6,730 3,076 $6,326 2,913 $6,840 3,034 Long-Term Debt Shareowners' Equity $1,471 3,941 $1,408 3,800 $1,564 3,901 $1,630 3,781 $2,087 3,407 Current Ratio 1.7 Percent of Total Debt to Total Capitalization 33% 1.6 34% 1.7 35% 1.6 35% 1.4 45% Other Data Property, Plant and Equipment Purchases $ 607 Depreciation and Amortization 690 Interest Expense 182 Research and Development Expenses 598 Income Taxes 336 Cash Provided by Operations . 1,037 $ 590 703 174 575 302 1,304 $ 505 679 172 557 237 902 $ 520 780 201 523 203 960 $ 645 599 178 470 (170) 535 Stock Price: High Low Year-end Price/Eamings Ratio on Year-end Stock Price $124V 80ft 113ft 12 $ 92ft 73 ft 81 ft 10 $100`A 57 83 15 $ 81ft 44ft 76 ft 14 $ 55ft 40ft 47ft -- Per Share: Dividends Shareowners' Equity $ 3.30 59.58 Shareowners (year-end) 61,942 Shares Outstanding (year-end, in millions) 66 Employees (year-end) 42,179 $ 2.95 55-21 66,066 69 45,635 $ 2.75 52.65 68,032 74 49,734 $2,575 48.69 70,367 78 51,703 $ 2.45 44.38 72,081 77 56,103 Net income for 1989 includes a $36 milHon ($0.53 per share) gain on the sale ofthe analgesics business. 111 Net income for 1987 includes net restructuring income of $18 million ($0.24 per share). 1,1 Net income for 1986 includes $85 million ($1.10 per share) ofnet gains, principally from the sale of the Texas City, Texas, petrochemicals plant and related assets, partially offset by the Electronic Materials asset impairment write-down. In addition, net income was increased $25 million ($0.32 per share) from adopting the requirements ofStatement ofFinancial Accounting Standards No. 87, "Employers' Accounting for Pensions." Net loss for 1985 includes net restructuring expense of $542 million ($7.04 per share), the gain from the sale of the oil and gas operations of $201 million ($2.61 per share) and an extraordimry gain of $30 million ($0.40 per share) from repayment ofdebt. Monsanto Company and Subsidiaries 43 osw 021872 STLCOPCB4007181 Officers Chairman and Chief Executive Officer Richard J. Mahoney President and Chief Operating Officer Earle H. Harbison, Jr. Executive Vice President Nicholas L. Reding Senior Vice Presidents Harold J. Corbett Howard A. Schneiderman, Ph.D. Senior Vice President and Chief Financial Officer Francis A. Stroble Senior Vice President, Secretary and General Counsel Richard W. Duesenberg Group Vice President Robert G. Potter Vice Presidents Barry Blitstein Earl N. Brasfield Leonard A. Cohn A.Nicholas Filippello, Ph.D. S. Allen Heininger, Ph.D. Martin J. Kallen Thomas H. Lafferre Michael E. Miller Philip Needleman, Ph.D. Richard A. Overton James H. Senger David L. Sliney Virginia V. Weldon, M.D. Vice President, Finance Lawrence B. Skatoff Vice President and Controller B. Clare Harris Vice President and Treasurer Juanita H. Hinshaw Monsonto Advisory Directors Harold J. Corbett St. Louis Senior Vice President, Environment, Safety and Health, Monsanto Company Age: 62 Advisory Director 5 years Robert G. Potter St. Louis Group Vice President, Monsanto Company; President, Monsanto Chemical Company Age: 50 Advisory Director 4 years Nicholas L. Reding St. Louis Executive Vice President, Monsanto Company; President, Monsanto Agricultural Company Age: 55 Advisory Director 8 years Howard A. Schneiderman, PhJ). St. Louis Senior Vice President, Research and Development, Monsanto Company Age: 63 Advisory Director 8 years Frauds A. Stroble St Louis Senior Vice President and Chief Financial Officer, Monsanto Company Age: 59 Advisory Director: 8 years 8 44 Monsanto Company and Subsidiaries DSW 021873 STLCOPCB4007182 Board of Director* Richard J. Mahoney St. Louis Chairman and Chief Executive Officer, Monsanto Company Age: 56 Monsanto Director: 11 years Earle H. Harbison, Jr. St. Louis President and Chief Operating Officer, Monsanto Company Age: 61 Monsanto Director: 4 years Marguerite Ross Barnett, Ph.D. St. Louis Chancellor, University of Missouri-St. Louis Age: 47 Monsanto Director: 2 years Joan T. Bok Westborough, Massachusetts Chairman, New England Electric System Age: 60 Monsanto Director 3 years Donald C. Carroll, Ph.D. King of Prussia, Pennsylvania Chairman, Schulco, Inc.; Retired Dean, The Wharton School, University of Pennsylvania Age: 59 Monsanto Director 15 years C.Raymond Dahl San Francisco Retired Chairman and Chief Executive Officer, Crown Zellerbach Corporation Age: 68 Monsanto Director 12 years Richard I. Fricke Montpelier, Vermont Retired Chairman and Chief Executive Officer, National Life Insurance Company Age: 67 Monsanto Director IS years Robert M. Heyssel, MJ). Baltimore President and Chief Executive Officer, The Johns Hopkins Health System and The Johns Hopkins Hospital Age: 61 Monsanto Director: 1 year Philip Leder, MJJ. Boston Chairman, Department of Genetics, Harvard Medical School; Senior Investigator, Howard Hughes Institute Age: 55 Monsanto Director less than 1 year Howard M. Love Pittsburgh Chairman and Chief Executive Officer, National Intergroup, Inc. Age: 59 Monsanto Director 12 years Frank A. Metz, Jr. Armonk, New York Senior Vice President, Finance and Planning, and Chief Financial Officer, International Business Machines Corporation Age: 56 Monsanto Director less than 1 year John W. Hanky Palm City, Florida Chairman, Hanley Hazelden Center; Retired Chairman and Chief Executive Officer, Monsanto Company Age: 68 Monsanto Director: 17 years Buck Mickel Greenville, South Carolina Chairman and Chief Executive Officer, R.SJ. Corp.; Retired Vice Chairman, Fluor Corp.; Retired Chairman, Daniel International Corp., a Fluor subsidiary Age: 64 Monsanto Director: 15 years JohnS. Reed New York Chairman, Citicorp and Citibank, N-A. Age: 51 Monsanto Director: 5 years William D. Rnckelshaus Houston Chairman and Chief Executive Officer, Browning-Ferris Industries, Inc.; Former Administrator, U.S. Environmental Protection Agency Age: 57 Monsanto Director: 5 years John B. Slaughter, PhJ). Los Angeles President, Occidental College; Former Director, National Science Foundation Age: 56 Monsanto Director 7 years Admiral Stanafleld Turner (U.S. Navy, Retired) West Point, New York Olin Professor of National Security, U.S. Military Academy at West Point; Lecturer and Writer, Former Director, U.S. Central Intelligence and Central Intelligence Agency Age: 66 Monsanto Director: 9 years Monsanto Company and Subsidiaries 47 DSW 021874 STLCOPCB4007183 Committals of tfM Board Audit Committee Buck Mickel, Chairman Joan T. Bok Robert M. Heyssel, M.D. William D. Ruckelshaus John B. Slaughter, Ph.D. Corporate Social Responsibility Committee Admiral Stansfield Turner, Chairman Joan T. Bok William D. Ruckelshaus John B. Slaughter, Ph.D. Executive Committee John W. Hanley, Chairman Marguerite Ross Barnett, Ph.D. Earle H. Harbison, Jr. Richard J. Mahoney Executive Compensation and Development Committee Howard M. Love, Chairman Richard I. Fricke John W. Hanley Buck Mickel Finance Committee Donald C. Carroll, Ph.D., Chairman Marguerite Ross Barnett, Ph.D. C. Raymond Dahl John W. Hanley Richard J. Mahoney John S. Reed Nominating Committee Buck Mickel, Chairman C. Raymond Dahl Howard M. Love Pension and Savings Funds Committee Richard I. Fricke, Chairman Donald C. Carroll, Ph.D. Earle H. Harbison, Jr. Admiral Stansfield Turner Shareowner Information Annual Meeting The next annual meeting of the shareowners of Monsanto Company will be held at 1:45 p.m., Friday, April 27,1990, in K Building at the Company's World Headquarters, 800 N. Lindbergh Blvd., St. Louis, Missouri. A formal notice of the meeting, together with a proxy statement, is being mailed to each shareowner. 10-K Report, Corporate Data Book and Investor News A copy of Monsanto Company's 1989 Form 10-K Report filed with the Securities and Exchange Commission; 1989 Corporate Data Book, which contains additional information relating to Monsanto; and Investor News can be obtained by writing to: Investor Relations Department Monsanto Company 800 N. Lindbergh Blvd. St. Louis, Missouri 63167 Stock Symbol -- MTC Stock Exchanges/Bourses Amsterdam Brussels Chicago (options) Frankfurt Geneva London New York Paris Tokyo Zurich Transfer Agent and Registrar The First National Bank of Boston Box 644 Boston, Massachusetts 02102 B 48 Monsanto Company and Subsidiaries DSW 021875 STLCOPCB4007184 A Tribute to John Hanley John W. Hanley will retire from Monsanto's Board of Directors on Apnl 27, 1990, after serving the company and its stake holders with distinction for more than 17 years. Hanley, elected president and chief executive officer m Novem ber 1972, led an era of dramatic change at Monsanto. Hanley expanded Monsanto's commitment to scientific research by establishing new relationships with leading academic institu tions, and he advanced the company's entry into the promis ing field of biotechnology. One of the world's premier biotechnology research laboratories was con structed near St. Louis under Hanley's leadership. In addition, Hanley set up major new internal management systems and implemented develop ment programs for managers to provide for the long-term leader ship of the company. When Hanley joined Monsanto, the company's annual net sales were $2.2 billion. By 1984, when he stepped down as chief executive officer, net sales had reached $6.3 billion. During his tenure, the market value of Monsanto's stock rose 119 percent. Hanley's dedication to profes sional management, product excellence and scientific innova tion, and his concern for corporate citizenship and industrial respon sibility are commitments Monsanto preserves to this day. Now, at the mandatory retire ment age of 68, he steps down. His many contributions helped put Monsanto on course to becoming one of the world's leading corpora tions. For this, we extend our deep-felt thanks to Jack Hanley. DSU 021876 Monsanto Company 800 North Lindbergh Boulevard St. Louis, Missouri 63167 DSW 021877 STLCOPCB4007186