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Annual Report 1987 Monsanto PLAINTIFF'S EXHIBIT MON-448 Our success depends upon meeting customer needs through a steady stream of new products. Table of Contents 1987: A Good Year for Our Stake Holders -- Chairman and CEO Richard J. Mo/ione\ reviews a year with much to he proud of. A Steady Stream of New Products, by Earle H. Harbison, Jr. Monsanto uses many approaches to generate new and renewed products. New Markets Today, New Worlds Tomorrow, by Nicholas L. Reding The Agricultural Company introduces new herbicide products while ready ing biotechnology products for world markets. Monsanto Chemical Company Responds to Customer Needs, by Robert G. Potter The Chemical Company emphasizes new products, customer support and regeneration of established products. Global Product, Marketing Innovations at Searle, by Sheldon G. Gilgore, M.D. Aggressive licensing, stepped-up R&.D and innovative marketing lead to Searle successes. Fisher Moves Toward Plant of the '90s, by Robert E. Flynn Fisher Controls aims at the computer-integrated plant of the future. NutraSweet Expands Markets, Announces New Products, by Robert B. Shapiro The NutraSweet Company expands current markets, enters new ones and announces a totally new food technology. Electronics Unit Rated Tops by Customers, by James E. Springgate Emphasis on quality moves Monsanto Electronic Materials Company to top rankings by customers. Research Strategy Ensures Flow of New Products, by Howard A. Schneiderman. Ph. D. Monsanto R&.D is managed to turn outstanding science into commercial success. Investing in Our Communities and the Environment, by Harold ). Corbett Monsanto refines its contributions strategy and focuses on disclosure of information to strengthen community relations. Financial Section Board of Directors Officers Shareowner Information 3 5 6 b 12 14 14 16 42 inside back cover inside back cover -""2535595 J Monsanto's Commitments Monsanto Company makes and markets high-value chemical and agricultural products, pharma ceuticals, low-calorie sweeteners, industrial process equipment, man-made fibers, plastics and electronic materials. In doing so, we are committed to serving the interests of all our stake holders around the world by: MAR 001864 Aiming for a consistent and superior return on equity tor 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 envi ronment where each has an equal opportunity to succeed, and Striving for a lasting and rewarding partnership with neighbors. On the cover Monsanto depends upon a steadv flow of products, represented by established leaders like carpet fibers, plastics, hydraulic fluids, low-calorie sweeteners and elec tronic materials; bv new herbicides, process controls and pharmaceuticals; and by future products emerging from research. CMon,ant,i G'mpam 19SS Tr^kmjrks of Mmuunio dnJ in subudwus JTV mJiLdifJ fn iid/icj i/mmgfoui i/m pub/ioiium LAM017982 Operational Highlights (Dollars in milltnns. except per share) Net Sales Net Income (Loss) Per Share: Net Income (Loss) 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 Monsanto Company and Subsidiaries 1987 $7,639 $ 436 1986 $6,879 $ 433 1985 $6,747 $ (98) $ 5.63 2.75 52.65 $ 679 $ 902 $ 557 11% 35% $ 5.55 2.575 48.69 $ 780 $ 960 $ 523 12% 35% $(1.27) 2.45 44.38 $ 599 $ 535 $ 470 (3)' 45 Strategic Changes Since i98o Monsanto moves away from commodities ... (Percent of assets in commodity petrochemical production) :s% 0% 1980 1987 into knowledge-intensive areas ... MAR 001865 and new businesses strengthen our market mix. (Percent ot total sales) 1980 1987 18% Agriculture Construction and 13% Home Furnishings 13% Capital Equipment 12% Motor Vehicles 11% Food 11% Pharmaceuticals LAM017983 10% Personal Products Chemicals 12% and Other I 2535596 J RiAirJ ) Mjnotu'N C.hjmnan jnJ Chief Euvntiu' I right I. unj E.nli' H H<irhi\nn. ,h . PretiM'iu ii.i I 'Wf l J^vnirme l urn mu.u Munsantu C"mpjtn aiu/ us yuh\iJutne< MAR 001866 LAM017984 ^535597 J 1987: A GOOD YEAR FOR OUR STAKE HOLDERS It was a good year for Monsanto, with much to be proud of -- a year clearly moving us in the directions we've set. This letter serves as a progress report on our overall goal to place Monsanto among the handful of great industrial enterprises in the world -- the best in what we choose to do -- measured by consistent returns for our many stake holders. In the 1985 and 1986 annual report letters, I discussed promises made to our stake holders -- the share owners, customers, employees and neighbors. The interests of these stake holders are properly linked. We can serve our shareowners well only when we have served our customers well, when our people are highly innovative and productive and, in our mix of chemi cal-related businesses, when our neighbors and those who act for them grant us the right to operate. For our shareowners, we have promised to aim for a return on equity in the 20 percent range. That extraordinary earnings level has historically brought shareowners superior market returns. Our restructured business mix can get us there by the mid-1990s, and we intend to make it happen. The Agricultural and Chemical Companies, which represent about two-thirds of our sales and half of our assets, met that standard in 1987. But overall, the corporation's return on equity was only a little more than halfway to the goal at 11 percent. Fisher, our sil icon business, Searle and NutraSweet were below the longer-term target, although our accounting for the NutraSweet acquisition resulted in higher cash flow but lower aftertax earnings, and we are deliberately putting heavy up-front research money into Searle to accelerate its development. Setting that aside, however, we have said on a num ber of occasions that the target of 20 percent return on equity will be met when the Searle pharmaceuti cals asset moves toward earnings at its industry standard while the other major Monsanto units per form at the top of their respective industries. Sales of the family of Caian calcium-blocker products passed $130 million in the year. This strong perfor mance was a landmark achievement for Searle. In order to deliver its contribution to Monsanto's goats, Searle needs to duplicate that effort with other prod ucts. Two promising products now nearing com mercialization in major markets are Cytotec peptic ulcer drug, for which clearance to sell is expected in the United States, United Kingdom and Japan, and Kerlone, a beta blocker. Searle must also have timely launches from among candidate products such as lomefloxacin, a promising anti-infective; carbetimer, an anticancer agent; and other products in or nearing clinical evaluation. Overall, the total corporation is in very good financial shape. Our debt to total capitalization remains at a very healthy 35 percent. With leadership from our agricultural and chemicals units, earnings for Monsanto increased by 20 percent over 1986, if we eliminate one-time gains from sales of assets and other nonrecurring items. Three-fourths of the yearto-year gain came from improved operations and onefourth from translation gains due to the weaker U.S. dollar. Altogether a fine result, considering that the world economy grew by only 2 to 3 percent. Although business unit income is the driving force to the longer-term goals, we are also addressing the equity part of the retum-on-equity calculation. We can and will supplement business unit performance by the prudent use of cash to buy in shares. Overall we purchased approximately four million shares during 1987 and have authority for another four million in 1988. In addition to share repurchases, we will con tinue to address any underperforming assets as we have in the past. For the business units, then, 1987 was a fine year. We generally achieved good results and good progress. The elements to reach our 20 percent retum-onequity goal are clear -- but it's also clear that their full accomplishment remains in the "yet-to-come" cate gory. We are confident that we'll attain this goal with demonstrated improvement year to year. Later in this annual report, we have outlined the tasks ahead and specific progress against targets. As with all companies, two basics -- product quality and cost reduction -- get a heavy call. A third essential to a corporate strategy weighted as ours is towards R&.D is the success of new products. There is a great deal to report on products nearing commercialization. Among these are the Searle pharmaceutical candi dates mentioned above; in the Agricultural Company, new herbicide products and innovative applicator systems, as well as BST and PST for dairy and pork productivity improvement; a variety of new Chemical Company products being developed with customers for mar 001867 7 _2535598*7 LAM017985 early commercialization; new flowmeter and processinstrumentation products at Fisher; and Simplesse nat ural fat substitute recently announced by NutraSweet for an entirely new class of low-fat, reduced-calorie foods. You'll be hearing more about these soon. For our customer stake holders, 1987 was a year of renewed emphasis on giving them what they want, when they want it, and at competitive pricing. As evidence of this, several Monsanto units were cited by customers for high-quality products and services and product innovation. For example, the Chemical Com pany has received awards from General Motors, Ford Motor Company, GE Appliances, Lever Brothers, General Tire and others for excellence in products and performance. Searle received a flood of praise for its unique Patient Promise and Calan For Patients in Need programs. Customers of Roundup herbicide were rewarded with reduced prices and new, useful product forms, which brought over 25 percent more volume -- a profitable gain for both of us. And agricultural dis tributors rated our customer service at the top of the industry for the eighth year in a row. We've always considered ourselves customer oriented, but lessons from international competition and our own intensive efforts these past couple of years have shown that we have only begun to tap the potential in our product and customer base. For our employees, 1987 saw us finally able to direct our full attention to building on their capabilities and personal goals after several years of necessary, but painful, restructuring. We have promised to provide safe, meaningful and rewarding work in an environ ment in which each person has an equal opportunity to succeed. We intend to ensure that Monsanto is a great place for our people to invest in their careers. New incentive systems aimed more directly at business and individual performance are being put into place and are coupled far more closely to shareowner rewards. Significant steps have been taken to let our people get their jobs done with their full capability and with minimum interference. A true spirit of "can do" is becoming obvious throughout the Company. Our employee safety record is good, but not yet at the level we aspire to as a great corporation. The chemi cal industry traditionally is among the safest of all industries, and Monsanto is near the top, but not yet the leader. This is receiving top priority from manage ment and operating units. For our neighbors and the general public, we per formed well throughout 1987. We operated without any significant incidents in our 100-plus plants and facilities worldwide. This is a never-ending goal for a company that necessarily deals with hazardous mate rials. Our environmental efforts continued at a high level -- more than 1,000 people at a cost of nearly $250 million -- a necessary cost if we are to enjoy the trust of the communities in which we operate. Other efforts around the world included supporting a 4-H project that provides leadership skills to 350,000 farm youth, helping an Australian hospital improve the quality of health care in a Monsanto community, and a three-decade commitment to fostering scientific understanding and careers in science for students. This letter has summarized the year -- and our goals. There is much to be proud of. There are more new things happening now than we've seen in many years. We're delivering on our promises. In April 1988, Dr. Jean Mayer will retire after 17 years as a member of the Board of Directors, having reached the mandatory retirement age. His sound technical advice, good counsel and active personal interest in all aspects of the Company's new direction will be missed. Dr. Mayer has been honored throughout the world for his contributions to humanity. He has honored us by his years of service to Monsanto. mar 001868 LAM017986 2535599 1 4 A Steady Stream of New Products MAR 001869 by Earle H. Harbison, Jr., President and Chief Operating Officer, Monsanto Company Monsanto is becoming increasingly knowledgeintensive rather than capital-intensive as we seek to introduce a steady stream of new products to the mar ket. We use that knowledge to develop products that satisfy basic human needs, among them health, food and shelter. The Company generates a flow of new and renewed products using many approaches. A new use can give new life to an established product. For example, Saflex interlayer, used in automobile safety glass for 50 years, today increasingly adds secu rity and safety in architectural uses. Product renewal can come from value added through quality improvements, and so we continue to increase emphasis on quality in each operating company. New formulations and properties can also create renewed products. For instance, by tailoring formula tions and mixes to meet specific market needs, Monsanto Agricultural Company has greatly expanded the uses of its herbicides from traditional row crops to forestry management, plantation crops, lawn and garden care and more. Licensing is a growing source of new products. G.D. Searle &. Co. has one of the most aggressive licensing programs in the pharmaceutical industry, and many of our herbicide lines are being filled out with licensed products. But most important for the future, fundamental research at Monsanto is generating whole new families of products. Recently, The NutraSweet Company introduced Simplesse natural fat substitute. When commercialized, it will go into new types of lowcholesterol and low-calorie but great-tasting products like ice cream, mayonnaise, spreads and dips. And our heavy investments in biotechnology research are already beginning to generate promising and unprece dented new pharmaceutical and agricultural products. Exciting things are happening at Monsanto as we strive to better serve our stake holders. Read the next few pages and see what's new. I 2535600 | LAM017987 New Markets Today, New worlds Tomorrow by Nicholas L. Reding, President, Monsanto Agriculturcd Company During 1987, Monsanto Agricul tural Company strengthened its customer focus in response to changing markets. We now listen even better to our customers' needs. During the agricultural revolu tion of the '60s and '70s, we became a world leader with a series of major proprietary prod ucts -- Ramrod, Machete, Avadex, Lasso and Roundup herbicides. Roundup, the world's leading herbicide, reached record sales in 1987. Lasso, which was reregistered last year by the U.S. Environmental Protection Agency, continued to be the premier herbicide in the United States. Alimet liquid animal-feed supplement also set sales records. But conditions are changing. Although Roundup is growing rapidly, agricultural markets in general are growing less than 3 percent a year. Success today means we must know our cus tomers even better. Customer Focus Yields New Products Nowhere has this customer focus had a greater impact than in the introduction of herbicides. For small grains and row crops, we introduced the following herbi cides in 1987: Landmaster II, Buckle, Ranger and Lariat in the United States, Sting in France, Rustler and Fortress in Canada and Tillmaster in Australia. For vine, tree and nut crops, new herbicides last year included Azural in France, Squadron in Australia and New Zealand and Fuego in Italy. Latigo herbicide in Central and South America and Spark herbicide in Thailand are used in plantation crops like bananas, rubber, palm oil and coffee. For industrial and residential uses, we brought out several new herbicide brands: Accord and Vision for forestry manage ment in the United States and Canada, Trooper for control of broadleaf weeds, and Roundup L&.G and Roundup ready-to-use for residential markets. For the near future, we have more promising candidates in our product-development pipe line than at any other time in the past 15 years. As a wealth of new herbicide and fungicide candi dates work their way through the R&D system, a new commercial development organization shep herds them to the marketplace in the shortest possible time. Biotech R&D Promises New Product Families R&.D must also look long term, and our investments in biotech nology promise whole new families of products. Bovine somatotropin (BST) should be approved for sale in 1989, and porcine somatotropin (PST) should follow in a year or so. Both proteins occur naturally in the animals themselves and can be reproduced through biotechnology. Supplementing a cow's normal supply of BST increases milk yield with proportionately less feed. Additional PST in hogs improves feed efficiency, increases growth rate and pro duces leaner pork. We're also closer to commercial izing genetically engineered plants. During 1987, we became the first company ever to carry a research field test of a genetically engineered food crop all the way to harvest. Monsanto researchers grew three types of tomato plants that had been given commer cially beneficial new traits. One group was made tolerant to Roundup herbicide, to make it possible to use that nonselective herbicide to kill weeds without damaging the tomato plants. Plants in the second group were engineered to produce a natural protein that is toxic to insects such as the tomato homworm. In the third group, plants were given tolerance to a common viral disease, with a resulting increase in yield of more than 20 percent. The same techniques could lead to other improved crops, such as oil-seed canola, vegetables, cotton and soybeans by the mid-1990s. In agrichemicals, animal nutri tion products and biotechnology research, Monsanto Agricultural Company intends to stay at the forefront of its industry. MAR 001870 6 LAM017988 MAR 001871 "It is exciting in create neu products for our international markets in Asia-Pacific. Spark, Squadron. Stine and Wallop herbicides are the fruits of successtul international research and cooperation with the busi ness sector 1.1 fit market needs and grouer expectations. I think the primary reason for their commercial success is a good balance of performance and quality versus cost T.itsuo ram, Th P . Formulation Research pufen nor kur-aohi. lupjn. Ro'C.irch Cen:o\ Momanro Aanajlrurai Compare J 2535602 i LAM017989 Monsanto Chemical Company Responds to Customer Needs by Robert G. Potter, President, Monsanto Chemical Company Since our inception in 1986, Monsanto Chemical Company has focused on delivering value to our customers. Our strategy and our success rest on meeting customers' needs worldwide. We do that by: developing new products that respond to the markets our cus tomers serve, providing technical and marketing support to help our customers succeed, and adding value to regenerate the products that established our leadership in fibers, plastics, resins and chemicals. * New Centers Support Customers An Applications Development Center for plastics was dedicated during 1987 in Springfield, Massachusetts. There we help customers optimize their designs and processing techniques. A new Automotive Support Center in Detroit will open in 1988 to enlarge our major presence in the important auto motive market. New Products One of our newest specialty plastics is Lustran Elite HH ABS resin, created specifically for applications requiring higherheat performance for automotive manufacturers worldwide. Other 8 identified needs are being met by development of additional highperformance Triax engineering thermoplastic alloys for autos as well as the power tool, appliance and business machine markets. Resimene crosslinkers enhance the performance, appearance and application characteristics of paints and other industrial coat ings. The latest innovative resins improve the high-solid coatings increasingly used in automotive finishes. New Plants for Santoprene and Rubber Chemicals Santoprene rubber and Geolast thermoplastic elastomer continue to grow in volume and the num ber of engineered applications they serve. A new plant in Japan encourages customers there to increase their use of Santoprene, which combines the performance of rubber with the processing ease of plastic. As the world leader in rubber processing chemicals, we main tain close ties with global customer markets. A modem manufacturing plant is under construction in Brazil, and a joint venture has been estab lished in South Korea. We are investing significant capital in our world-scale rubber chemi cal plants in the United States and Europe to improve quality and efficiency. Growth Continues A venerable, established product, Saflex plastic interlayer is still growing while celebrating its 50th anniversary in 1988. From longtime leadership in laminated windshields, Saflex has expanded rapidly in architectural and security glass. In 1987, it was installed to protect the U.S. Constitution on display in the National Archives. The world's most advanced stain protection is a major value-added improvement to nylon carpet fiber, our biggest-volume prod uct. Merchandising support also adds value, and Wear-Dated carpet with StainBlocker was featured during 1987 in its largest-ever television adver tising campaign. To build on our world leadership in maleic anhydride, capacity is being increased nearly 40 percent with projects in Pensacola, Flor ida, and Newport, Wales. Maleic is a widely used chemical building block that goes into fiberglass, farm chemicals and foods. As the premier supplier of detergent materials, we have expanded capabilities in linear alkylbenzene, a key cleaning agent. Our expertise with phos phate compounds extends beyond detergents into highervalue products for food and industry. Working closely with our customers, we continue to develop new products to meet their needs. The world s leading airlines rec ognize the value of Skydrol fireresistant hydraulic fluid and our support system for fluid sampling and analysis. Fluid analysis also adds value to Therminol heattransfer fluid. In all, Monsanto Chemical Company otters more than 1,000 products. Each represents a way to deliver performance for our customers' products. With performance, support and our commitment to be a Total Qual ity supplier, we hope to build a lasting partnership with each customer we serve. MAR 001872 LAM017990 ________ 7 2535603 I MAR 001873 t-A/W077997 "IV e nuike hnedr alkslbentene jor LiunJrs LlcUtTcyms \\"d usi' our rwu PROVOX control mitrumcncutii m. stdttsticdl process jomru/. jnJ the Totdl Qiuihts improi ement process -- inmi; mid the hes: product Jor 'Mir cuitiimtrrs dll the time \\ c id usued our customers so uid dll knou uk.it :he\ imm. Thes mint us [>> jjt<? them me best qiuilus ue .'.iti rr.dke \V L /i minis; mil ufui our system .. Jo and helping improc :: Funk H amiiu-n. Ptwc?' Opera:, r x.'h< i. .-late Bju'l H.in: M. `D'anu'Chemk ti e_\-rv.pin\ 2535604 | Global Product, Marketing Innovations at Searle by Sheldon G. Gilgore, M. D., Chairman, President and Chief Exec utive Officer, G.D. Searle & Co. In 1988, G.D. Searle & Co. celebrates its 100th birthday. During our first century, we have expanded our markets into 119 countries, with major business entities in more than 40. The United States and Canada account for about 40 percent of our revenues. The remaining 60 percent is divided among Europe, Asia and Latin America. We enter our 100th year after an outstanding 1987, when we were able to increase sales by 23 per cent. Supporting that strong gain was the highly successful intro duction of Ccdan SR, the first once-a-day calcium-blocker drug for hypertension in the United States. Meanwhile, we continued a series of introductions of Cytotec, a drug for treatment of peptic ulcers, in many other countries. We intend to accelerate this momentum in sales and product introductions through a threepart strategy: major investments in research, an intensified new licensing program and innovative marketing. * R&D Targets High-Growth Areas Our internal research and devel opment effort focuses on four high-growth areas: cardiovascular, immuno-inflammatory, gastroin testinal and central nervous system. MAR 001874 Last year, we spent nearly $200 million on R&D, which is 24 percent of sales -- one of the highest ratios in the pharma ceutical industry. Today, our capabilities for new discoveries are among the industry's most for midable, combining our own aggressive research with that of corporate Monsanto's biotechnol ogy R&D program and that of our university and business R&D partners. As a result, we now have more than a dozen new pharmaceutical candidates in clinical trials. Vigorous Licensing Program Established To expand our new-product effort further, we have vigorously stepped up our efforts to license compounds developed by others. To carry this out, we have cre ated a clinical development operation dedicated exclusively to licensed products. Staffed by highly experienced professionals, the organization is independent of internal R&D. As an independent licensing department, it is designed to move products through the eval uation and approval process very rapidly. Furthermore, the department is international in reach. This allows us to call on medical directors around the world to develop unique intercountry strategies. For example, the work done in one country to obtain approval and introduction of a new drug can often be used to facilitate approvals in others. Already, one licensed compound promises unusual effectiveness in fighting infections. Innovative Marketing Is Basic to Success Effective marketing is a requisite for success in the ethical phar maceutical business. Searle's marketing expertise must be unsurpassed in the 20 countries that account for about 90 percent of the overall pharmaceutical market. Thus, in 1988 we will be strengthening our marketing operations worldwide, especially in Italy, West Germany and Japan -- countries where the company is building the critical mass necessary for success. At the same time, we will continue to reinforce these marketing efforts through some innovative, socially responsible initiatives. An example is the Calan For Patients in Need pro gram, which we launched in February 1987. This program makes available $10 million worth of Calan SR to the indi gent. The program not only has won high marks for corporate social responsibility but also has made a positive impact m the marketplace. The Calan For Patients in Need program was followed in Septem ber by the Searle Patient Promise program. In this initiative, Searle will refund the full purchase price of the most recent prescription of any Searle product that fails to achieve the desired therapeutic outcome. Searle will continue these and other societal programs because they embody our twin commit ments: to develop lifesaving and life-enhancing new products and to become a visible, tangible and human part of local communities around the world. In short, in Searle's second century, we intend not only to realize a sig nificant return on our research investment but also to demon strate what a pharmaceutical company can and should be. L____ 535605~7 LA1V1017992 Lifesaving and life-enhancing pharmaceuticals reach people around the vjorld as a result of Searle's major commitment to research, licensing programs ami innovative marketing. MAR 001875 25 3560 6 [ "Our drug development concen trates on providing advantages m therapy, quality of life and cost effectiveness. An example is depression treatment that mini mizes both seiiatue effects and interference with cognitive processes. Another is memory improvement for patients with Alzheimer's disease. B> focusing on patients and then needs, ue're confident Searle uill provide a steady flow of uncjue ami important neu products Barbara Knee>mar,n. Senior LVector. Corporate Scrareeie PLinnins:. G.P. Searle C. Co. LAM017993 Fisher moves Toward Plant of the '90s by Robert E. Flynn, Chairman and Chief Executive Officer, Fisher Controls International, Inc. Product and strategy develop ment at Fisher Controls is focused on a vision of the advanced manufacturing plant of the 1990s. During 1987, we moved closer to that goal through further development and testing of Computer-Integrated Manufacturing (C1M) technology. PROVOX Makes CIM Possible Integrated with business informa tion systems, PROVOX process controls bring all elements of a plant into one system. CIM oper ators in a central control room get a comprehensive view of the entire plant. Benefits are improved communication with customers and suppliers, more efficient management of plant operations, higher product qual ity due to more precise control of processes, and reduced costs from optimal use of resources. CIM Proven in Monsanto Plants During 1987, we installed CIM technology with PROVOX con trols in five major Monsanto plants. The plants benefit from the sophisticated and efficient control systems, and we are able to use them as operating demon strations to show potential customers. By combining CIM with human-resource innovations and an emphasis on total quality, our "Plant of the '90s" concept has resulted in as much as a 50 percent improvement in productivity. UNIVOX Control Centers Introduced Also in 1987, we introduced the UNIVOX control center. A com pact, stand-alone unit that can be mounted right on the factory floor, UNIVOX offers the same precise and reliable control as PROVOX, with which it is com patible. Offering improved price/ performance for smaller systems, UNIVOX should open new mar kets in batch and continuous processing. We also acquired EXAC Corpora tion of California, a leading manufacturer of flowmeters for handling difficult fluids. Among new PROVOX products introduced in 1987 was the Con figuration Mate software package to help users cut engineering time and increase project profitability. In addition we introduced several new highly sophisticated rotary control valves and accessory products into key processing industries. In the first full year of commercialiration of Prism Alpha nitrogen systems, sales exceeded expectations. Developed by Fisher subsidiary Permea Inc., this technology for separating nitrogen from air was rapidly accepted as the most advanced available. MAR 001876 NutraSweet Expands Markets, announces by Robert B. Shapiro, Chairman and Chief Executive Officer, The NutraSweet Company Well over 100 million people around the world regularly enjoy NutraSweet brand sweetener in more than 1,200 products. Over 300 of these products were introduced in 1987, reflecting continued growth in consumer demand. To support future growth, we are following three strategies: first, increasing the use of NutraSweet in established markets; second, developing new applications for NutraSweet sweetener; and third, creating new food products. Sweetener Grows in Established Markets The first strategy was especially successful in 1987. Products sweetened with 100 percent NutraSweet brand sweetener are rapidly becoming the worldwide standard of taste in sugar-tree foods and beverages. In our largest end-use market, carbonated soft drinks, consump tion of products sweetened with 100 percent NutraSweet grew by 16 percent in the United States. The adoption of 100 percent NutraSweet formulations was even more rapid abroad, with major launches of Diet Pepsi in *4/170 7 7994 1 2535607~7 MAR 001877 "The owral! mission of The \:<miSueer Compam is to hrm$ hater fund choices (o eonsnmers. TolLiv Ui' are accomphshute that mission he uorkinc together uirh oim XnnuSueet customer's. Our jah m sales is to help <-ur eusromens identify neu opporrn- nines m meermn eonsumer needs, and then hi rails the ta<: resources uirhrn XniraSueet Tins; those pr^Jnets mjTe: n.tic I inn. rr.i. Arc.i r-.i 1c- M.iru^e:. . :u' \,,:mmicc! l,. hirun*. 1 _iJiJfoa"7 LAW'017"5 the United Kingdom and Diet Coke and Diet Sprite in Australia. We will soon expand into another large country market. In December 1987, the French gov ernment overturned an 86-yearold prohibition on the use of intense sweeteners in foods and beverages, opening this impor tant market for NutraSweet. Sweetener Finds New Applications Pursuing the second strategy, new applications for NutraSweet brand sweetener, scientists at our new R&.D facility in Mt. Prospect, Illinois, continued to make prog ress. One important technolog ical development was the encap sulation of NucraSum to allow its use in baking. A petition for this use was filed with the U.S. Food and Drug Administration (FDA) late in the year. Currently there are 14 applica tions for new uses of aspartame, the generic name for NutraSweet, in various stages of review by the FDA, representing new possibili ties for the future. Research Yields Fat Substitute We also reached a milestone for our third strategy. In January 1988, we announced Simplesse all-natural fat substitute. Consist ing of microparticulated protein from foods such as fresh eggs and milk. Simplesse will dramatically reduce calories and cholesterol in different types of products such as ice cream, cheese spreads and mayonnaise. The NutraSweet Company will be filing a petition with the FDA to affirm the GRAS, or "gener ally recognized as safe," status of products made with Simplesse. 14 Electronics Unit Rated Tops by Customers noNSAN-O Research Strategy Ensures Flow of New Products by James E. Springgate, President, Monsanto Electronic Materials Company During 1987, we at Monsanto Electronic Materials Company (MEMC) reached a simple but tough goal: attaining top ranking by major customers for product quality and service. We achieved this by taking several important steps. We implemented a worldwide prod uct quality improvement system, broadened the use of statistical process control and instituted a just-in-time delivery program for our products. As a result of these and other efforts, customers now list MEMC at the top of their rank ings for vendor product quality and service. Our strengthened revenues in 1987 were due in large part to increased orders from customers with whom we had demonstrated superior qual ity and service. Fast-changing semiconductor industry technology requires that silicon meet very precise product specifications. These specs get tighter every year, while service demands also increase. MEMC has devoted years to assembling a good mix of people, programs and equipment to meet customer needs and to surpass the perfor mance of our competitors. MAR 001878 by Howard A. Schneiderman, Ph. D., Senior Vice President, Research and Development We made extraordinary' strides in 1987 in discovering and develop ing new product and process opportunities in many areas of the Company's interests. These ranged from fundamental studies in biotechnology, to the intro duction of new herbicides that make obsolete many traditional products, to the development of new and unexpected uses for existing chemical products. We challenged our scientists and engineers to integrate out standing science with a deep understanding of the Company's business strategy. They have met this challenge, as we manage Monsanto technology' for com mercial success. What principles guide research at Monsanto? Some R&D Short-Term, Some Long-Term First, we are pursuing a produc tive mix of short-, medium- and long-term projects that match each operating company's objec tives. While Monsanto Chemical Company and The NutraSweet Company focus on a time frame of five years or less, G.D. Searle &. Co. and Monsanto Agricul tural Company focus on the next decade. Corporate Research and Development, which includes LAW1017996 < 2535609 J Monsanto has increased R&D spending and tightened its R&D focus. The goal is more new products in less time. MAR 001879 2535cl0 | 'AV'e are committed to assisting Monsanto scientists arui engi neers in producing the finest products u hose manufacture and use have a minimal impact on the environment, while also providing a significant benefit to our customers. As an example, we uorked with our diphenxl oxide group to identifs and reduce trace impurities in that product si i that roJas ue make the highest quality material on the market. " Fred HiU'rrun. Ph P. Monvinti' FcIIau. inJ En\ ir. -nmenul Hc.ilrh En\ir`nmenr.tl M-cnrc' LAM017997 Biotechnology Product Discovery, emphasizes both urgent near- and medium-term products and pro cesses and those that may be 10 or more years distant. Broad Product Families Are Goal of R&D Second, we are committed to fundamental research that can lead to wholly new product opportunities. Biotechnology is an example. In only a few years, Monsanto scientists have pro gressed from basic studies in genetics and molecular biology to the commercial development of whole families of new propri etary products. Fifteen new product candidates, including drugs, animal protein stimulants and genetically engineered crops, are targeted for commercializa tion in 1989 and beyond. Getting in on the ground floor with a powerful discovery team secured for Monsanto both leadtime and patents. These opportu nities would have been lost without the creation of new knowledge in our laboratories. University Collaborations Give Monsanto an Edge Third, we have become a leader in effective collaboration with great research universities. Access to the enormous scientific talent of research universities through out the world continues to help give Monsanto a competitive edge in fields with great commer cial potential. Monsanto has successfully incor porated these principles into the Company's research strategy, a strategy that helps ensure a continuous flow of new, socially significant and profitable propri etary products today and in the future. Investing in Our Communities and the Environment by Harold J. Corbett, Senior Vice President, Environment, Safety and Health In environmental policy and com munity relations, Monsanto has long been an outspoken leader. This leadership is essential; with out it, we will ultimately forfeit our right to do business. Monsanto Fund Strategy Refined In 1987, we further refined the strategy of Monsanto Fund. We now focus the Fund's dollars on areas where we can be a catalyst for change and directly help the Company and its communities. For example, our Port Plastics plant in Addyston, Ohio, has undertaken an innovative "Part nership in Education" program with local schools, gaining public recognition for its efforts in pro moting business/education relationships. This strategy is mirrored in programs of operating units. Monsanto Agricultural Company, for example, has sponsored a scholarship program for young wheat growers, enabling them to attend national wheat association MAR 001880 meetings and participate in policy debates and training seminars. This program has gained a wide spread reputation in wheatgrower communities. Environmental Focus Shifts We also shifted the focus of our leadership in environmental issues in 1987 as a result of fed eral legislation enacted in 1986. The Superfund Amendments and Reauthorization Act passed by the U.S. Congress began to be implemented last year. One part of the law, commonly called Title III, requires companies to report large amounts of informa tion on hundreds of hazardous materials. These data will include how much of these materials is stored at each plant site and how much is emitted. Monsanto long ago took the lead in supplying much of this infor mation, but some of the Title III requirements are new even for us. Therein lies both a test of our leadership and a significant opportunity. The test: There could be confu sion and strong public reaction if this information lacks a proper perspective. To help provide that perspective, we have ahead', undertaken local communit\ meetings, special communica tions efforts and reviews of plant operations with key local officials. We are also fully par ticipating in local emergency planning committees. And in these efforts lies the opportunity: to use Title III to forge even stronger partnerships with our plant communities and our customers. LAM017998 I 25356ll"7 Financial Section v MAR 001881 LAM017999 I 2535612 T Monsanto Company and Subsidiaries 17 Financial Section Contents Management Report Audit Committee Report Independent Auditors' Opinion Statement of Consolidated Income Review of Consolidated Results of Operations Operating Unit Segment Data Geographic Data Quarterly Data Statement of Consolidated Financial Position Review of Liquidity and Capital Resources Statement of Consolidated Cash Flow Review of Cash Flow Statement of Consolidated Shareowners' Equity Notes to Financial Statements Significant Accounting Policies Basis of Consolidation Currency Translation Principal Acquisitions 18 19 19 20 21 23 27 29 30 31 32 33 34 35 35 35 35 35 Restructuring Depreciation and Amortization Inventory Valuation Income Taxes Sfiort-Term Debt and Credit Arrangements Long-Term Debt Pension Benefits Other Postretirement Benefits Stock Option Plans Earnings per Share Capital Stock Commitments and Contingencies Supplemental Data Segment Information Financial Summary 35 36 36 36 37 37 38 38 39 39 39 39 40 40 41 Unless otherwise indicated irv the context. "Monsanto" means Monsanto Company and consolidated subsidiaries, and ' `the Company" means Monsanto Company only All dollars are m millions. except per share data. Management Report Monsanto Company management is responsible for the fair presentation and consistency of all financial data included in this Annual Report. Where necessary, the data reflect management'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 is effective and adequate to accomplish the above described objectives. Richard J. Mahoney Chairman and Chief Executive Officer February 26, 1988 Francis A. Stroble Senior Vice President and Chief Financial Officer mar 001882 lAW018000 18 .Motvsjtuo Company and Subsidiaries 2535613 ^ audit Committee Report The Audit Committee is composed of five non-employee members of the Board of Directors and met four times in 1987. It reviews and monitors the Company'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 the Company's principal independent auditors and approves in advance all audit and non-audit services provided by such auditors. As ratified by shareowner vote at the 1987 Annual Meeting, 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 appears below. The Audit Committee discusses audit and financial reporting matters with representatives of the Company's financial management, its internal auditors and Deloitte Haskins &. Sells. The internal auditors and Deloitte Haskins &. Sells meet with the Committee, with or 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 Haskins &. Sells to communicate directly with the Committee. The Audit Committee has reviewed and approved the financial section of this Annual Report. Pursuant to the recommendation of the Audit Committee, the Board of Directors has also approved the financial section. Jean Mayer, Ph.D., D.Sc. Chairman, Audit Committee February 26, 1988 INDEPENDENT AUDITORS' OPINION To the Shareowners of Monsanto Company: We have examined the statement of consolidated financial position of Monsanto Company and Subsidiaries as of December 31, 1987 and 1986, and the related statements of consolidated income, shareowners' equity and cash flow for each of the three years in the period ended December 31, 1987. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. In our opinion, such consolidated financial statements present fairly the financial position of Monsanto Company and Subsidiaries at December 31, 1987 and 1986, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1987, in conformity with generally accepted accounting principles. These principles were consistently applied during the period except for the change, with which we concur, in 1986 in the method of determining pension expense as described in the Pension Benefits note to the financial statements. [UaU+LjL* I&JIL Deloitte Haskins &. Sells Saint Louis, Missouri February 26, 1988 MAR 001883 LAM018001 I if3561^7 Momanto Company and Subsidumes 19 Statement of Consolidated Income (Dollars in millions, except per share) Net Sales Cost of goods sold Gross Profit Marketing and administrative expenses Technological expenses Amortization of intangible assets Restructuring expense (income) -- net Operating Income (Loss) Interest expense Interest income Gain from sale of oil and gas operations Other income -- net Income (Loss) Before Income Taxes and Extraordinary Gain Income taxes Income (Loss) Before Extraordinary Gain Extraordinary gain from debt repayment Net Income (Loss) Earnings per Share: Before extraordinary gain Extraordinary gain After extraordinary gain The above statement should be read in conjunction unth pages 35 through 40 of tfus report. 1987 $7,639 4,755 2,884 1,342 615 225 (32) 734 (172) 42 69 673 237 436 $ 436 $ 5.63 $ 5.63 1986 $6,879 4,344 2,535 1,244 596 218 (158) 635 (201) 41 161 636 203 433 $ 433 $ 5.55 $ 5.55 1985 $6,747 4,841 1,906 919 548 88 949 (598) (178) 63 392 23 (298) (170) (128) 30 $ (98) $(1.67) 0.40 $(1.27) Key Financial Statistics As a Percent of Net Sales: Gross Profit Marketing and Administrative Expenses Research and Development Expenses Operating Income (Loss) Net Income (Loss) Effective Income Tax Rate Return on Average Shareowners' Equity 1987 38% 18 7 10 6 35 11 1986 37% 18 8 9 6 32 12 1985 285 14 7 (9) (1) (57) (3) MAR 001884 20 Monsanto Company and Subsidiaries LAM018002 J " 2535615__1 of Consolidated Results of Operations Operating Income (Loss) (dollar in millions) 1985 1986 1987 Operating Income Reaches Record Level Monsanto achieved record operating income in 1987, due to successful marketing strategies, aggressive costreduction actions taken in prior years and the weaker (J.S. dollar. Operating income increased 16 percent to $734 million in 1987 from $635 million in 1986. Net income was $436 million compared with 5433 million in 1986. Earnings per share for 1987 were $5.63 versus 1986 earnings per share of $5.55. Included in 1986 net income, however, was 585 million of net gains associated with unusual items resulting from the sale, closure, or impairment of facil ities and businesses as well as other unusual income and expenses. Included in 1987 was an $18 million gain from unusual items. Excluding the 1986 and 1987 unusual items, net income in 1987 increased 20 percent. Monsanto Benefits From Successful Marketing Strategies, Cost'Reduction Actions and the Weaker U.S. Dollar The Agricultural Products business had solid gains in 1987 sales and operating income, led by outstand ing worldwide sales growth of Roundup herbicide. Additionally, Alimei animal feed supplement had a record year. The Chemicals business maintained a strong financial performance despite significantly higher costs for raw materials compared with 1986, demonstrating the effect of a strong portfolio of higher value-added prod ucts and strong demand outside the United States. The NutraSweet Company had strong growth in unit sales and consumer usage in 1987. Revenues were up only slightly from the prior year due to lower interna tional prices and inventory adjustment by some of its major customers. Pharmaceuticals registered a sales increase of 23 percent in 1987, reflecting the successful introduc tion of Calan SR, a sustained release calcium channel blocker for the treatment of hypertension. Sales of the family of Calan products were more than $130 million in 1987. Operating losses in 1987 were unchanged from the 1986 level. The profitability generated by increased sales was offset by higher marketing expenses associated with the launch of Calan SR and MAR 001885 other products, coupled with continued planned investments in research for the future. Fisher Controls demonstrated a remarkable turn around in 1987 in the face of continued weakness in its end-use markets. Higher sales, along with cost reductions made in late 1986, allowed Fisher Controls to produce operating income of $26 million in 1987 compared with a $66 million loss in 1986. The Electronic Materials business remained weak in 1987. However, that business was close to break-even during most of the year -- a significant improvement from the large operating loss in 1986. Sales Increase Largest Since 1979 Sales were $7,639 million in 1987, an 11 percent increase over 1986 -- the largest annual increase since 1979. Sales over the past several years have been rela tively level, as Monsanto divested itself of many largevolume but historically low-return businesses. Worldwide sales volume in 1987 increased 8 percent. Worldwide selling prices increased 3 percent, due pri marily to the effect of ex-U.S. currency translation. United States export sales to third party customers were $887 million in 1987, a 25 percent increase over 1986. This export sales increase was due in part to the increased competitiveness of United States produced products in ex-U.S. markets resulting from the weaker U.S. dollar. The gross profit margin increased to 38 percent in 1987 versus 37 percent in the prior year. Excluding the Electronic Materials asset impairment write-down in 1986, however, gross profit margins would have been level year-to-year. This was due to increased sales of products with higher margins (Pharmaceuticals and Crop Chemicals), offset by lower Chemicals mar gins resulting from a selling price/raw material cost squeeze. Overall, Monsanto's raw material costs increased approximately 13 percent during 1987. Marketing and administrative expenses increased 8 percent in 1987, due mainly to the effect of translat ing stronger ex-U.S. currencies into weaker U.S. dollars. Excluding the currency translation impact, marketing and administrative expenses increased 3 percent in 1987. Technological expenses rose 3 percent in 1987. Research and development expenses, a component of technological expenses, were 7 percent higher in 1987, as Monsanto's commitment to research and development of new products continued. Approxi mately two-thirds of the current R&.D effort is directed toward the life sciences -- pharmaceuticals and agriculture. The higher 1987 sales level resulted in R&.D being 7 percent of sales in 1987 versus 8 percent in 1986. ________ T 2535616"7 Monsanto Compam> and Subsidiaries 21 LAM018003 Review of Consolidated Results of Operations (continued) Operating income improved 16 percent in 1987. Operating income in 1987 included $32 million of restructuring income as divestment actions proceeded bet:;r than originally expected. Operating income in 1986 included $158 million of restructuring income, principally from the sale of certain product lines asso ciated with the Texas City, Texas, petrochemicals plant, which was targeted for divestiture under the 1985 restructuring program. Operating income in 1986 was also affected by the $90 million Electronic Materials asset impairment write-down. Interest expense declined in 1987 due to lower average interest rates and lower monthly average debt outstanding. In addition to the unusual gains included in 1986 operating income, there were $88 million of gains included in other income in 1986 from the sale of product lines, principally acetic acid. The effective income tax rate in 1987 was 35 percent, as compared with 32 percent in 1986. The higher 1987 effective tax rate was due primarily to the tax law changes that eliminated investment tax credits in the United States and lower capital gains benefits in 1987, partially offset by lower statutory rates. Return on average shareowners' equity was 11 percent in 1987, as compared with 12 percent in 1986. How ever. 1986 included unusual net gains, principally the gain from the sale of the Texas City plant ($114 mil lion after tax, or $1.46 per share), partially offset by the loss from the Electronic Materials asset impair ment ($46 million after tax, or $0.59 per share). Excluding the unusual items in both years, return on average shareowners' equity in 1987 was 11 percent, versus 10 percent in 1986. The impact of prior years' inflation is not completely reflected in historical cost financial statements because the cost of an asset today (current cost) is generally higher than its original (historical) cost. As a result, historical cost depreciation expense included in the income statement is lower than depre ciation expense using the current cost approach. For Monsanto, the use of current cost depreciation in 1987 instead of the historical cost depreciation expense would have reduced net income approxi mately $70 million. Net sales increased to $6,879 million in 1986, a 2 percent increase over 1985. However, the com parison of sales is affected by the inclusion in 1985 of net sales of products ($931 million) that were subse quently divested as part of the restructuring program. Also, the acquired Searle and NutraSweet businesses were included for only the last five months of 1985, versus a full twelve months in 1986. On a comparable basis, sales volume increased 3 percent in 1986. World wide selling prices increased 1 percent, attributable largely to the impact of ex-U.S. currency translation. The gross profit margin improved significantly in 1986 due to the full-year effect of the higher margins associ ated with the Searle and NutraSweet products, lower raw material costs and the subsequent cost benefits resulting from the 1985 restructuring program. The gross profit margin was adversely affected in 1986 by the $90 million obsolescence charge for the Electronic Materials property write-down. Net income in 1986 was also affected by higher marketing and administrative expenses resulting from the full-year inclusion of Searle's and NutraSweet's heavier marketing expenses, increased amortization of intangible assets relating to the acquired Searle and NutraSweet businesses, the effect of the restructuring program on 1986 income and increased interest expense resulting from increased debt. Net income in 1985 included a gain on the sale of Monsanto's oil and gas operations, amounting to $201 million after tax, or $2.61 per share. Analysis of Change in Earnings per Share -- Better (Worse) Sales Related Factors: Selling prices Sales volume and mix Total Sales Related Factors Cost Related Factors: Raw material costs Other manufacturing costs Marketing, administrative and technological expenses Nonrecurring costs (including Electronic Materials property write-down) Total Cost Related Factors Other Factors: Restructuring -- net Acquisitions Divestitures Total Other Factors Operating Income Interest expense Interest income Gam from sale of oil and gas operations Other income -- net Change in income taxes Change in shares outstanding Income Before Extraordinary' Gain Extraordinary gain Change in Earnings per Share 1987 vs. 1986 vs. 1986 1985 $ 1.21 2.12 3.33 S 0.28 0.69 0.97 (1.70) (0.07) (0.93) 1.28 0.09 (0.49) 0.98 (1.72) (0.98) (0.10) (1.01) (0.13) (1.14) 0.47 0.19 0.01 (0.87) 0.25 0.03 0.08 $ 0.08 8.29 0.44 (0.4S) 8.25 9.12 (0.14) (0.15) (2.611 0.92 0.15 (0.07) 7.22 (0.40) 5 6.82 22 .Monsanto Company and Subsidiarys MW 001886 2535617 I LAM018004 OpIrating Unit Segment Data 1987 Net Sales 1986 1985 1987 Operating Income (Loss) 1986 1985 1987 Research and Development 1986 1935 Agricultural Products: Crop Chemicals Animal Sciences Chemicals Electronic Materials Fisher Conrrols SutraSweet Fharmaceuttcals Oil and Gas Biotechnology Product Disc sivenCorporate Total consolidated $1,178 127 3,858 185 749 722 820 $1,067 86 3.548 154 645 711 665 $1,073 79 4.051 137 652 317 262 172 $7,639 3 $6,879 4 $6,747 $ 359 (43) 450 (5) 26 145 (119) (43) (36) $ 734 $ 318 (35) 613 (139) (66) 142 (119) (41) (38) $ 635 $ 177 (92) (480) (84) 34 58 (139) 16 (31) (57) $(598) $ 94 47 108 8 18 31 199 $ 94 41 105 15 21 25 177 $110 32 128 16 20 11 98 43 9* $557 39 6' $523 31 26 $470 'Corporate R&D expenses are allocated on a weighted average basts of investment to operating units m determining operating income (loss). Depreciation Total Assets Capital Expenditures and Amortization 1987 1986 1985 1987 1986 1985 1987 1986 1985 Agricultural Products: Crop Chemicals Animal Sciences Chemicals Electronic Materials Fisher Conrrols NunaSweet Pharmaceuticals Oil and Gas Biotechnology Product Discovery Corporate Total consolidated $ 918 221 2,856 234 654 1,724 1,484 $ 939 217 2.704 228 61-2 1,883 1,394 $1,061 174 2,982 302 636 1,862 1,438 78 286 $8,455 50 242 $8,269 33 389 $8,877 $ 71 21 287 11 22 31 50 6 6 $ 505 $ 55 33 244 51 38 39 53 6 1 $ 520 $ 84 31 291 55 53 4 33 85 3 6 $ 645 Tte above dam should be read rn conjunction with the Segment Information note to the financial statements on page 40. $ 82 22 231 17 34 206 75 8 4 $679 $ 84 21 236 122 36 205 67 7 7 $780 S 89 21 248 37 2S 73 39 59 7 3 $599 Operating income has been affected by the 1985 restruc turing program and the 1986 Electronic Materials asset impairment costs, the effects of which were: Agricultural Products: Crop Chemicals Animal Sciences Chemicals Electronic Materials Fisher Conrrols Pharmaceuticals Corporate Increase (decrease) in operating income Income (Expense) 1987 1986 1985 $3 30 1 (2) $32 $ (4) 8 149 (89) 4 $ 68 $(121) (37) (714) (17) (2) (55) (3) $(949) Net Sales (1987, percent of total) 15% Crop Chemicals 2% Animal Sciences 51% Chemicals 2% Electronic Materials 10% Fisher Controls 9% NutraSweet 11% Pharmaceuticals MAR 001887 I 2535618 1 LAM018005 Monsanto Company arui Suisuiianes 23 Operating Unit Segment Data (continued) Crop Chemicals Net Sales Herbicides and other agricultural chemicals 1987 1986 1985 $1,178 $1,067 $1,073 The Crop Chemicals operating unit is a leading world wide producer and marketer of agricultural herbicides, including Roundup, Lasso, Avadex and Machete herbi cides. More than half of Crop Chemicals sales came from ex-U.S. markets in 1987. Crop Chemicals Net Sales (dollars in millions) 0 1985 1986 1987 Innovative marketing programs helped Crop Chemicals post healthy 1987 increases in sales, up 10 percent, and operating income, up 13 percent. Sales volume of Roundup herbicide increased signifi cantly worldwide, as use of that herbicide to control perennial and annual weeds continued to expand. This growth was stimulated in part by reduced prices under a marketing strategy, begun in 1985, which opened up new markets. Approximately two-thirds of Roundup herbicide sales are in ex-U.S. markets. Sales volume of Avadex herbicide also increased signifi cantly, sparked by heavy demand in North America and a large sale to the Soviet Union. The positive effects of translating ex-U.S. operations into U.S. dollars also benefited Crop Chemicals sales and oper ating income. Sales and operating income of Lasso herbicide, sold primarily in the United States to control grassy weeds in com and soybean crops, were lower in 1987. Lower planted com acreage, erosion of market share and increased competitive pressure on selling prices were key factors. In December 1987, the United States patent for alachlor, the active ingredient of Lasso her bicide, expired. Innovative marketing programs and continuing enhancements of the product and its method ot application are expected to maintain the position of Lasso herbicide as a leader in the agricul tural chemicals market. In 1987, the United States Environmental Protection Agency (EPA) concluded the Special Review of the benefits and potential risks of alachlor. The EPA decision allows continued use of alachlor under cer tain conditions. Lasso herbicide will be classified "restricted use," which means its use is restricted to certified applicators, or persons under their supervi sion. The majority of current users of Lasso herbicide 24 Monsanto Company and Subsidiaries MAR 001888 are already certified. Monsanto's tests confirm that Lasso herbicide poses no unreasonable adverse effects to humans or the environment when used according to the label. Crop Chemicals research programs are primarily directed at discovery and development of pesticides and genetically engineered plants (that are resistant to viruses, insects and herbicides), as well as continuing research on new herbicides. In 1986, the Crop Chemicals business overcame an extremely weak United States agricultural environ ment and posted a solid performance. Net sales were at virtually the same level in 1986 as compared with 1985, and operating income increased as sales volume growth of Roundup herbicide more than offset declin ing sales volume of Lasso herbicide. Operating income in 1985 was reduced by $121 million of restructuring expense. Research and development expenses declined in 1986 as a result of the refocusing of research efforts under the 1985 restructuring program. Animal Sciences Net Sales Animal products 1987 $127 1986 $86 1985 $79 The Animal Sciences business focuses on animal nutrition and growth products, including Alimet animal feed supplement and bovine somatotropin (BST), a naturally occurring protein produced through biotechnology, that research demonstrates enhances the efficiency of milk production. Monsanto also is developing a porcine somatotropin that research demonstrates improves the feed efficiency and growth rate of hogs and results in leaner pork. A 34 percent increase in sales volume of Alimet ani mal feed supplement, coupled with more favorable pricing, led to a 48 percent increase in sales for the Animal Sciences business. The operating loss for 1987 was about the same as in 1986, after excluding the restructuring income. The increase in 1987 research and development expenses, coupled with BST manu facturing start-up costs, offset the effect of the higher profits resulting from the increased sales of Alimet ani mal feed supplement. In 1987, the United States Department of Agriculture completed its economic impact study on BST with results favorable to commercialization. A manufactur ing facility in Europe began production in late 1987. Sales for 1986 increased 9 percent over 1985, as sales volume of Alimet animal feed supplement increased significantly. The year-to-year comparison is affected by sales of discontinued products, which were included in 1985 results. The operating loss in 1986 was lower than 1985 due to increased sales of Alimet animal feed supplement in 1986 and the effect of the 1985 restructuring program. ___ ___ ______ --- ------- - 2535619 1 LAM018006 Operating Unit Segment Data (continued) Chemicals Net Sales __________ ____ Qetergents and phosphates Engineered products Man-made fibers Plastics Resin products Rubber chemicals and instruments Cperialrv chemicals_______ Total_______________ 1987 $ 494 200 950 804 645 366 399 $3,858 1986 $ 536 205 856 639 584 319 409 $3,548 1985 $ 550 251 1.080 804 637 283 446 $4,051 Monsanto's worldwide Chemicals unit produces a wide range of chemicals, plastics, fibers and other products listed in the table above. The Chemicals unit's principal strengths are nylon carpet fiber, highperformance plastics, Saflex plastic interlayer, deteroents and phosphates, rubber chemicals and instruments, and maleic anhydride. Chemicals Net Sales (U.S., U.S. export and ex-U.S.) (dollars in millions) .___________________________________________ 0 BUS- 1985 U.S. export 1986 1987 ex-U.S. Higher sales volumes and selling prices resulted in Chemicals sales increasing 9 percent. Sales of United States exported products increased 33 percent. Selling prices were favorably affected by the positive translation effects of ex-U.S. currency denominated sales, which offset lower domestic selling prices. Operating income was $450 million, as compared with $613 million in 1986. Operating income in 1986 included $149 million of restructuring income, principally from the sale of the Texas City, Texas, petrochemicals plant. Restructuring income was $30 million in 1987. Excluding these unusual items, 1987 operating income declined 9 percent, caused by significantly higher raw material costs during 1987. Plant capacity utilization increased to 80 percent in 1987 versus 77 percent in 1986. Fibers sales were up 11 percent over 1986, but profit ability lagged somewhat due to higher raw material costs. Sales volume of the higher margin nylon prod ucts increased in 1987. Wear-Dated Silver and Gold Label stain-resistant carpet fibers generated strong consumer demand in their first year in the market place. In addition, fibers experienced excellent customer demand and higher selling prices for nylon intermediates, such as adipic acid and nylon polymer chips. MAR 001889 Plastics sales were 26 percent ahead of 1986 due prin cipally to strong household durable demand, partial pass through of higher raw material costs and growing Santoprene thermoplastic rubber sales. Plastics operat ing income, however, was down year-to-year, due to the selling price/raw material cost squeeze. LustTan ABS thermoplastics, used for refrigerator linings, drainpipe, automotive and other applications, had a strong performance in 1987. Resin products sales increased 10 percent due primar ily to higher selling prices. Saflex plastic interlayer, used in automobile windshields, was successfully intro duced for new customer uses, particularly in architectural applications. Rubber chemicals and instruments sales were 15 per cent ahead of 1986 due to strong worldwide customer demand. Specialty chemicals sales were down slightly reflecting the 1986 divestiture of acetic acid. This decrease was partially offset in 1987 by higher maleic anhydride sales volume. Detergents and phosphates sales lagged 1986 by 8 percent due to lower sales vol umes of detergent phosphates, offset somewhat by increased volumes of surfactants. Engineered products sales were lower, due to the August 1987 divestiture of the polyethylene bottle business, which had 1987 sales of approximately $60 million. Research continues on many products, with the single largest effort on improved carpet fibers. Sales in 1986 declined as compared with 1985, due to divested product lines. Sales related to the divested product lines were $645 million in 1985. For continu ing product lines, sales volumes increased 4 percent in 1986, while selling prices were level. Operating income improved significantly in 1986 from an operating loss in 1985, which resulted from the costs associated with the restructuring program. All major businesses, led by fibers, achieved higher year-to-year profitability. The weaker U.S. dollar also positively contributed to the Chemicals performance in 1986. Electronic Materials Net Sales Electronic-grade silicon materials 1987 $185 1986 $154 1985 $137 The Electronic Materials business produces electronicgrade silicon wafers for the semiconductor industry and has production facilities in Japan, Malaysia, South Korea, the United Kingdom and the United States. Sales in 1987 increased 20 percent, benefiting from growth in worldwide semiconductor demand and greater penetration in ex-U.S. markets. Operating performance improved substantially, moving from an operating loss of $139 million in 1986 to nearly break even performance in 1987. The operating loss in 1986 T 2535620~T LAM018007 Momanto Company and Subsidiaries 2 $ Operating Unit Segment Data (continued) included a $90 million asset impairment write-down. Excluding this nonrecurring charge, 1987 profitability improved $44 million, due principally to higher sales volumes and reduced operating costs. Sales in 1986 were higher than 1985, but still weak due to the prolonged downturn of the United States electronics end-user equipment markets, primarily the computer and office equipment segments. Operating losses increased substantially as a result of the asset impairment write-down. Fisher Controls Net Sales Valves, regulators, electronic process instrumentation. and gas separation systems 1987 1986 1985 $749 $645 $652 Fisher Controls is a leading worldwide producer of industrial valves and regulators, as well as state-of-theart PROVOX electronic process instrumentation, and gas separation systems. In addition, UNIVOX control center equipment was introduced in 1987. Fisher Controls Operating Income (Loss) (ii liars in millions) S6e (66) 1985 1986 1987 Fisher Controls turned in a much improved operating performance in 1987, due to higher sales volume in 1987 and cost reductions implemented in 1986. Sales increased 16 percent due to sales volume and selling price improvements. After a long absence, capital spending by customers (especially by the oil and gas, pulp and paper, and chemical industries) resulted in higher demand for Fisher Controls valves in 1987 -- a key factor in the higher sales volume. In addition, the installation and services businesses, along with the gas separations business, continued to grow. Operating income was $26 million in 1987 versus a $66 million operating loss in 1986. The 1986 loss resulted princi pally from depressed sales to the chemical and oil and gas industries and from actions taken late in 1986 to reduce future operating costs. Sales in 1986 declined 1 percent versus 1985 as a result of poor economic conditions in the oil and gas industry, and lower capital spending by customers in the chemical industry. MAR 001890 26 Monsanto Company ar\d Subsidiaries NutraSweet Net Sales NutraSweet low-calorie sweetener products 1987 $722 ` For the fwe-month period August-December 1985. 1986 $711 1985 $317 The NutraSweet Company manufactures and markets NurraSiveet brand low-calorie sweetener, which is sold worldwide. The company also markets Equal low-calo rie tabletop sweetener throughout the United States. The NutraSweet Company sales and operating income were up slightly from the prior year. Sales volume of NutraSweet sweetener increased 9 percent in 1987 over 1986. Benefiting NutraSweet's performance were the positive effects of continued strong growth in the United States of diet carbonated soft drinks, NutraSweet's largest market, and further manufactur ing cost reductions. These positive factors were offset by the effects of lower worldwide average selling prices, some customer inventory reductions and higher admin istrative and technological expenses. Operating income in 1987 also benefited from improved manufacturing performance. The installa tion of new process technology at the Augusta, Georgia, manufacturing facility was completed in 1987. This technology will further reduce manufactur ing costs. NutraSweet's operating income was significantly affected by the amortization of intangible assets, primarily related to the aspartame patent. Sales of $711 million in 1986 reflected strong market performance of retail products containing NutraSweet and changes in inventory levels throughout the distri bution chain. Operating income was $142 million, benefiting from lower raw material costs and manufac turing efficiencies. Sales and operating income in 1985 were for the August-December period only, following acquisition of this business by Monsanto. Pharmaceuticals Net Sales Pharmaceutical products 1987 $820 1986 $665 1985 $262 ' Includes Searle for the /tve-monch penod Augusi-DecembeT 1985. G.D. Searle &. Co. is a research-based, worldwide pharmaceuticals business concentrating on drugs for treatment of cardiovascular, gastrointestinal, immuno inflammatory and central nervous system diseases. In 1987, approximately 50 percent of Searle's sales were from products for the treatment of cardiovascular dis ease. Searle does business throughout the world, including a significant presence in nine of the world's 2535621~7 LAM018008 Operating Unit Segment Data (continued) TOP 12 pharmaceuticals markets. Nearly two-thirds of Searle's sales are in ex-U.S. markets. Pharmaceuticals sales increased significantly, climbing ?3 percent in 1987. The key factor in the increased "ales was the launch of Calan SR, the first once-a-day calcium channel blocker drug marketed in the United States for use in controlling high blood pres sure- The new formulation and a three-year period of United States marketing exclusivity had a major impact on growth of Calan. Sales of the family of Calan products exceeded $130 million in 1987. The operating loss in 1987 was the same as in 1986. Operating income improvements, including the suc cessful launch of Calan SR, were offset by higher planned research and development expenses and increased marketing expenses to promote Calan SR, along with costs associated with the launching of Cvtotec, a synthetic prostaglandin drug for the treat ment of peptic ulcers, in ex-U.S. markets. Cytotec is now approved for marketing in 40 countries. Applications are pending in 18 countries, including the major markets of the United States, Japan and the United Kingdom. Pharmaceuticals R&D Expenses (dollars in millions) `Including period prior to acquisition of Searle. Research and development expenses in 1987 increased 12 percent. At the end of 1987 there were more than a dozen new pharmaceutical candidates in clinical trials. Kerlone, a once-a-day cardioselective betablocker, is expected to be approved for treatment of hypertension in 1988. An atrial peptide, designed to treat kidney failure, is in clinical trials. Searle is also developing products obtained through licensing oppor tunities. A licensed quinolone-class compound shows promise of being a strong anti-infective product. Sales in 1986 were 10 percent higher than the full year 1985, including the period prior to acquisition. Sales in 1986 benefited from more favorable ex-U.S. currency translation and increased sales of Calan and Demulen oral contraceptive. The operating losses in 1986 and 1985 resulted from aggressive research efforts in human health care and, in 1985, the costs of the restructuring program. Biotechnology Product Discovery In addition to research and development relating spe cifically to Monsanto's operating units, the Company conducts basic and applied biotechnological research aimed at discovering new biotechnology-based prod uct opportunities. The focus of this research continues to be the life sciences businesses -- Pharmaceuticals, Crop Chemicals and Animal Sciences. It is coordi nated with the strategic direction of the life sciences businesses, and the research results are further devel oped and commercialized by those businesses. The cost of the current biotechnology product develop ment effort directly related to Pharmaceuticals, Crop Chemicals and Animal Sciences activities is included as an expense in those segments. Geographic Data United States Europe-Affica Canada Latin America Asia-Pacific lnter-area Eliminations Corporate Total consolidated Net Sales to Unaffiliated Customers 1987 1986 1985 $4,883 1,537 329 293 597 $4,638 1,231 290 283 437 $4,794 1,076 298 220 359 $7,639 $6,879 $6,747 Operating _______________Income (Loss) 1987 1986 1985 $501 181 31 2 49 6 (36) $734 $506 117 26 6 16 2 (38) $635 $(784) 191 34 (3) 9 12 (57) $(598) ___________ Total Assets 1987 1986 1985 $6,431 1,256 116 235 513 (382) 286 $8,455 $6,608 1,013 116 243 385 (338) 242 $8,269 $7,077 1,019 120 232 299 (259) 389 $8,877 The data above are prepared on an "entity basis," which means that 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, but are shown in the Segment Information note to the financial statements on page 40. 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. T 2535622 1 MAR 001891 Monsanto Company and Subsidiaries 2~} LAM018009 Geographic Data (continued) United States Sales Up, Quality of Income Improves Sales by entities in the United States in 1987 increased 5 percent over 1986. Roundup herbicide, Ahmet animal feed supplement, Wear-Dated carpet fibers, Lustran ABS thermoplastics and Calan SR calcium channel blocker were particularly strong performers in 1987. Direct sales from the United States to ex-U.S. third party customers were $408 million, $279 million and $379 million for 1987, 1986 and 1985, respectively. Operating income in 1987 was positively affected by the sales growth of Roundup herbicide and the improved profitability of Fisher Controls and Electronic Materials, partially offset by lower profit margins in the Chemicals unit. Sales and profitability of Lasso herbicide were lower in 1987 due to lower planted com acreage, erosion of market share and increased competitive pressure on selling prices. Oper ating income in 1986 included $155 million of restructuring income, partially offset by $90 million of expense related to the Electronic Materials asset write down. Operating income in 1987 included $32 mil lion of restructuring income. Excluding these unusual items, operating income increased 6 percent in 1987. Sales in 1986 declined slightly from 1985, but the comparison is affected by divestitures and the acquisi tion of Searle and NutraSweet. Sales of continuing businesses increased 2 percent in 1986, on the strength of Chemicals, NutraSweet and Roundup her bicide sales. Operating income was positively affected by the improved profitability of the Chemicals busi nesses, growth of Roundup herbicide, the inclusion of NutraSweet operating results for the full year and the effects of cost reduction measures and lower raw mate rial costs. Sales of Lasso herbicide were depressed because of extreme weakness in its end-use markets. Operating income in 1985 included $963 million net expense related to the 1985 restructuring program. Europe-Africa Benefits From Higher Volume and Weaker U.S. Dollar Sales by entities in Europe-Africa improved 25 per cent over 1986, while operating income increased 55 percent. Sales and operating income benefited in 1987 from the effect of ex-U.S. currency translation, resulting from the continued weakening of the U.S. dollar, and increased sales volumes of United States produced products sold in Europe-Africa. The operating income improvement in 1987 was led by a turnaround in Fisher Controls and higher Pharmaceuticals sales. Roundup and Avadex herbi cides, Saflex plastic interlayer, Lustran ABS thermoplastic and rubber chemicals also contributed jyfAR 001892 Monsanto Company ani SuiMufianes to the excellent sales and operating income. Operat ing income in 1986 included cost reduction program expenses of Fisher Controls. Sales in 1986 increased 14 percent over 1985. The comparison is affected by divested product lines and by the inclusion of Searle results for the full year 1986. Sales volume gains in Roundup herbicide and certain chemical products benefited the 1986 perfor mance. Operating income in 1985 included profits generated by the chemical intermediates plant at Seal Sands, United Kingdom, which was sold in late 1985. In addition, 1985 operating income included $26 million of net restructuring income. Canadian Herbicide Sales Increase Canadian sales and operating income increased 13 percent and 19 percent, respectively, over 1986. The effect of translating stronger Canadian dollardenominated operating results into U.S. dollars helped 1987 sales and operating income. Most busi ness segments improved over 1986, led by strong sales volumes of Roundup and Avadex BW herbicides and chemicals. Sales in 1986 were 3 percent lower than in 1985, due to lower sales of Avadex BW herbicide and discontin ued product lines, partially offset by NutraSweet sales and the inclusion of Searle sales for the full year 1986. Operating income declined 24 percent from 1985, due to the lower sales of Avadex BW and the divested oil and gas operations. These factors were somewhat offset by the inclusion of Searle's full year opera ting income. Latin American Results Mixed Latin American sales in 1987 increased 4 percent, but operating income declined. Sales volumes of Roundup herbicide, Lustrex polystyrene and rubber chemicals improved in 1987 despite the uncertain economic conditions in major Latin American countries. An unfavorable change in sales mix coupled with the impact of currency devaluation in Argentina resulted in a year-to-year decline in operating income. The Pharmaceuticals business was hampered by import restrictions in Brazil. Latin American operating income does not include the equity income from Monsanto's joint venture companies in Latin America. Such equity income is reflected in "Other income--net'' in Monsanto s Statement of Consolidated Income. Sales increased 29 percent in 1986 as compared with 1985, due primarily to the inclusion of Searle sales for the full year 1986, and strong performances by Crop Chemicals, Lustrex polystyrene, rubber chemicals and phosphates. Shipments of Roundup herbicide were par ticularly strong in 1986. LAM018010 \ I Geographic Data (continued) Asia-Pacific Benefits From Strong Performance of Several Products Asia-Pacific sales and operating income improved 37 percent and 206 percent, respectively, over 1986. Sales and profitability of styrene, phenol and Lustrex polystyrene were particularly strong in Australia. Fisher Controls and Pharmaceuticals also had signifi cant sales and operating income improvements. In addition, sales volume of Roundup herbicide was higher in all major Asia-Pacific countries. Sales and operating income increased in 1986 partially due to the inclusion of Searle operating results for the full year. Sales and operating income also benefited from higher sales volume of Roundup herbicide and the positive effect of translating ex-U.S. currencydenominated sales into U.S. dollars. Quarterly Data Net Sales Gross Profit Net Income Earnings per Share Dividends per Share Common Stock Price 1967 1986 Net income for each quarter, except the third quarter, was higher in 1987 than the comparable 1986 quarter. Net income in the third quarter of 1986 included sev eral unusual items, principally restructuring income and gains from asset sales, partially offset by the Electronic Materials property write-down. Monsanto's net income is historically higher during the first half 1987 Restructuring income -- net 1986 Restructuring income -- net Gains from other asset sales Electronic Materials property write-down Change in annual effective tax rate Other nonrecumng expenses 1987 1986 1987 1986 1987 1986 1987 1986 1987 1986 First Second Third Fourth Quarter Quarter Quarter Quarter $1,866 1.745 765 678 138 118 1.76 1.52 0.65 0.625 $2,025 1,869 801 778 154 148 1.95 1.90 0.70 0.65 $1,902 1,695 684 527 100 144 1.30 1.85 0.70 0.65 $1,846 1.570 634 552 44 23 0.62 0.28 0.70 0.65 Total Year $7,639 6.879 2,884 2.535 436 433 5.63 5.55 2.75 2.57: High Low High Low 87VS 73 65'4 4414 8914 77V, 74% 5614 9944 83 77 63% 100'4 57 81% 61'A 100'4 57 81% 44'4 of the year. This is due to the concentration of the generally more profitable Crop Chemicals sales in the first half of the year. The unusual items increasing (decreasing) earnings per share (after related taxes) in 1987 and 1986 were as follows: First Second Third Fourth Quarter Quarter Quarter Quarter Total Year $0.02 $0.09 $0.13 $0.24 1.04 0.21 1.25 0.75 0.08 0.83 (0.59) (0.59) $(0.04) (0.08) (0.06) 0.18 (0.39) (0.39) MAR 001893 LAM018011 1 2535624 | Monsanto Company and Subsidumes 2 9 Statement of Consolidated Financial Position (Dollars m 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 $38 in 1987 and $36 in 1986 Miscellaneous receivables and prepaid expenses Deferred income tax benefit Inventories Total Current Assets Intangible Assets, net of accumulated amortization of $566 in 1987 and $337 in 1986 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 At December 31, 1987 1986 $ 180 43 1,209 325 165 1,081 3,003 $ 206 68 1,037 221 207 1,069 2,808 1,953 240 183 2,144 198 206 112 1,097 5,242 279 6,730 3,654 3,076 $8,455 102 1,002 4,964 258 6,326 3,413 2,913 $8,269 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 1987 and 1986 Additional contributed capital Accumulated currency adjustment Reinvested earnings Treasury stock, at cost (8,099,580 shares in 1987 and 4,538,008 shares in 1986) Total Shareowners' Equity Total Liabilities and Shareowners' Equity Tfo uKnv swiemem should be read m conyumrnon with pages 35 through 40 of this report. 30 Monsanto Compan> arid Subsidiaries 001894 mar ^1^1018012 $ 527 145 101 488 539 1,800 1,564 584 606 $ 460 133 157 577 389 1,716 1,630 548 594 164 872 100 3,282 (517) 3,901 $8,455 164 861 (98) 3,058 (204) 3,781 $8,269 2535625 l review of Liquidity and Capital Resources Monsanto's financial position further strengthened in 1987, with improvements in the interest coverage ratio and the book value per share, and a continued strong debt to capitalization ratio. Financial Ratios Improve Management desires to maintain Monsanto's "A" or equivalent debt rating, which management believes assures adequate financial flexibility and access to the full range of worldwide debt markets. Management believes that a total debt to total capitalization ratio of approximately 35 percent is appropriate. Manage ment also intends to manage the interest coverage ratio at levels consistent with Monsanto's bond rating objective. The total debt to total capitalization ratio was 35 per cent at year-end 1987, the same as the prior year. The interest coverage ratio improved to 4.3 in 1987, compared with 3.2 in 1986 (excluding restructur ing income). Monsanto has available various short- and mediumterm bank credit facilities, which are discussed in the "Short-Term Debt and Credit Arrangements" and "Long-Term Debt" notes to financial statements (page 37). These bank credit facilities provide financ ing flexibility for future funding requirements and permit the Company to take advantage of investment opportunities that may arise. When beneficial, Monsanto utilizes both the United States and ex-U.S. financial markets for its financing needs. Monsanto's assets generally are free from lien and not used to collateralize debt. Sales Growth Results in Increased Working Capital Working capital was $1,203 million at year-end 1987, a $111 million increase over year-end 1986, as a result of the year-to-year sales growth. The current ratio was 1.7 at year-end 1987, compared with 1.6 at year-end 1986. Trade receivables increased due to higher sales volumes during late 1987. Inventories were level at year-end 1987 versus 1986, with the year-end 1987 in ventory turnover ratio approximating 4 times per year. Intangible assets declined due to amortization, principally of the NutraSweet aspartame patent. Net property, plant and equipment increased in 1987, as capital expenditures and the translation effect of ex-U.S. currencies exceeded depreciation, retirements and divestitures. In December 1987, the Financial Accounting Standards Board issued Statement No.96, "Account ing for Income Taxes." This new accounting standard, which is effective beginning in 1989, requires that deferred tax assets and liabilities shown on the balance sheet be adjusted to reflect the current estimate of the actual tax asset or liability that ultimately will be received or paid. If the new accounting rule had been adopted in 1987, the net deferred tax liability would have been reduced by approximately $90 million and the impact on 1987 income tax expense would have been immaterial. 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 exposure to certain risks. Based on the cost and availability of insurance and the likelihood of a loss occurring, man agement decides the amount of insurance coverage to purchase from unaffiliated companies and the appro priate amount of risk to retain. To achieve the optimal balance of risk and cost, Monsanto is retaining a greater portion of its total risk than it had prior to 1986. This risk includes being insured in the liability area on the "claims made" policy basis. Management 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. Key Financial Statistics Working Capital (Current assets less current liabilities) Current Ratio (Current assets divided by current liabilities) Percent of Total Debt to Total Capitalization* "Total capitalization is the sum of short-term debt, long-term debt and shareowners' equity. OOl895 LAM018013 ~ 1987 $1,203 1.7 35% 1986 $1,092 1.6 35% 535626 i Monsanto Company and Subsidianei } I Statement of Consolidated Cash Flow (Dollars m millions) Increase (Decrease) in Cash and Cash Equivalents Operating Activities: Net income (loss) Add income tax expense (benefit) Deduct extraordinary gain Income (loss) before income taxes and extraordinary gain Income tax payments Items which did not use (provide) cash: Depreciation and amortization Restructuring expense (income) Other Working capital changes that provided (used) cash: Accounts receivable Inventories Accounts payable and accrued liabilities Other Nonoperating gains from asset disposals (before tax) Cash Provided by Operations Investing Activities: Property, plant and equipment purchases Acquisition payments for Searle, net of cash acquired of $216 Acquisition and investment payments (other than Searle) Investment and property disposal proceeds Cash Used in Investing Activities Financing Activities: Net change in short-term financing Long-term debt proceeds Long-term debt repayments Searle acquisition financing proceeds Short-term debt repayments (Searle acquisition) Treasury stock purchases Dividend payments Other financing activities Cash (Used in) Provided by Financing Activities Decrease in Cash and Cash Equivalents* The aixne statement should be read m con/unaion with pages 35 through 40 of this report ' Jncbuks cash. iittic' deposits, certificates of deposit and short-term securities Monsanto Company* and Subsidiaries 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) 1986 $ 433 203 636 (221) 780 (158) (9) 117 (2) (173) 80 (90) 960 (520) (29) 503 (46) 33 675 (1,139) (348) (199) 45 (933) $ (19) 1985 $ (98) (170) (30) (298) (273) 599 949 (39) 2 (54) _ 41 (392) 535 (645) (2,538) (78) 1,469 (1.792) (108) 415 (555) 2,754 (1,154) (91) (188) 18 1,091 S (166) MAR 001896 LAM018014 ---------- ^35627~J L review of Cash Flow Monsanto's cash flow for the three-year period 19871985 is shown in the Statement of Consolidated Cash Flow on the preceding page. The format of this state ment has been changed from prior years to comply with the recently issued Statement of Financial Accounting Standards No. 95, "Statement of Cash Flows." Cash Provided by Operations (dollars In millions) 0 1985 1986 1987 Operations Provide Significant Cash Inflows Historically, one of Monsanto's strong points has been the ability to provide significant cash flow from opera tions. The current businesses with the strongest cash generating capabilities are Chemicals, Crop Chemicals and NutraSweet. Although operating income improved significantly in 1987, cash provided by operations in 1987 declined due primarily to the increased working capital requirements related to the higher operating levels. Cash provided by operations was $902 million in 1987, as compared with $960 million in 1986. A principal investing activity was the cash used for capital expenditures, which were $505 million in 1987, down slightly from 1986. Monsanto's movement in recent years from capital-intensive businesses to research-based businesses has reduced the required level of new investment in property, plant and equip ment. There were no individually significant capital expenditures in 1987. Non-operating cash was pro vided by the sale of businesses and other assets in 1987 and prior years. The principal business divesti tures were the polyethylene bottle business in 1987; the Texas City, Texas, petrochemicals plant in 1986; and the oil and gas operations, the Seal Sands, United Kingdom, chemical intermediates plant, Searle's nonprescription pharmaceuticals business and the investment in Pearle Health Services, Inc. in 1985. Comparisons of annual cash provided by operations with investment levels are affected by inflation. Other than the 1985 acquisition of Searle and NutraSweet, Monsanto's operations have generated sufficient cash to fund investments required to maintain the existing earnings base, research programs and growth-related investments. Management expects that Monsanto's growth in the future will be financed with cash pro vided by operations. Major Stock Purchase Program Initiated During 1987, under two separate actions, the Company's Board of Directors authorized the Company to purchase up to 8 million shares of Monsanto common stock. As of year-end 1987, the Company had purchased 4.1 million shares for $339 million. Dividends Increase for the 15th Consecutive Year The Company has paid dividends on its common shares without interruption or reduction since 1928 and has increased the dividend in each of the past 15 years. Dividend payout for 1987 was 24 percent of cash provided by operations and 49 percent of net in come. The Company's dividend policy reflects a desired long-term payout percentage based on Monsanto's expectation of future growth and profitability levels. In any individual year, additional consideration is given to expected financial position and results, work ing and fixed capital needs, scheduled debt repayments and economic conditions, including inflation. Monsanto's common stock is traded principally on the New York Stock Exchange. The number of shareown ers of record as of February 26, 1988, was 67,882 and the high and low common stock prices on that date were $87% and $86'/2. R&.D vs. Capital Expenditures (dollars in millions) 0 1985 1986 R&D Capital Expenditures 1987 MAR 001897 LAM018015 I 2535628 ] Monsanto Company and Subsidiaries 3 3 Statement of Consolidated Shareowners' Equity (Do/Iots m millions. except per share) Common Stock: Balance, January 1 and December 31 Additional Contributed Capital: Balance, January 1 Employee stock plans Balance, December 31 Accumulated Currency Adjustment: Balance, January 1 Translation adjustments Income taxes Balance, December 31 Reinvested Earnings: Balance, January 1 Net income (loss) Dividends Balance, December 31 Common Stock in Treasury: Balance, January 1 Shares purchased (4,120,100 and 2,052,300 shares in 1987 and 1985, respectively) Issuances under employee stock plans (558,528; 906,536 and 523,827 shares in 1987-1985, respectively) Balance, December 31 Thf above statement should be read m conjunction with pages 35 through 40 of t/iu report. 1987 $ 164 $ 861 11 $ 872 $ (98) 197 1 $ 100 $3,058 436 (212) $3,282 $ (204) (339) 26 $ (517) 1986 $ 164 $ 854 7 $ 861 $ (191) 103 (10) $ (98) $2,824 433 (199) $3,058 $ (244) 40 $ (204) 1985 $ 164 $ 855 (1) $ 854 $ (319) 131 (3) $ (191) $3,110 (98) (188) $2,824 $ (176) (91) 23 $ (244) Key Financial Statistics Stock Price* Per Share Average Daily Share Trading Volume (thousands of shares) High Low Year-end Dividends Shareowners' Equitv ' Based on daily reported high and lou siocfc prices. 1987 $ 10014 57 83 2.75 52.65 372 1986 $ 81'/: 44'A 76'/: 2.575 48.69 269 1985 $ 55 40' 47! 2.45 44.38 290 MAR 001898 LAM018076 34 Moruonto Company and Subsidiaries I 2535629 1 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. Intercom pany transactions have been eliminated in consolidation. Other companies in which Monsanto has a significant ownership interest (generally greater than 20 percent) are included in "Investments in Affiliates" in the Statement 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. Currency Translation Most of Monsanto's ex-U.S. entities' financial statements are translated into U. S. dollars using current exchange rates. Unrealized currency adjustments in the Statement of Consolidated Financial Position are accumulated in shareowners' equity. The financial statements of ex-U.S. entities that operate in hyperinflationary economies, including Brazil, Mexico and Argentina, are translated at either current or historical exchange races, 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 Australian dollar, Brazilian cruzado, Canadian dollar, French franc, Japanese yen, Mexican peso and West German mark. Currency restrictions are not expected to have a significant effect on Monsanto's cash flow, liquidity or capital resources. Principal Acquisitions In August 1985, Monsanto acquired G.D. Searle St Co. for $2,754 million. The pharmaceutical business of Searle and the former health care division of Monsanto operate as G.D. Searle &. Co., a Monsanto subsidiary. The low-calorie sweetener business, for merly a part of Searle, operates as another Monsanto subsidiary, The NutraSweet Company. The acquisition was accounted for using the purchase method. The acquisition included total assets with a fair market value of $4,204 million and liabilities of $1,450 mil lion. The $604 million excess of the purchase price over the fair value of the identifiable net assets acquired is being amortized on a straight-line basis over 40 years. The financial results of the acquired operations have been included in the Statement of Consolidated Income from August 1985. If the acquisition had occurred on January 1, 1985, the pro forma results for 1985 would have reflected net sales of $7,150 million and a net loss of $136 million ($1.77 per share). These pro forma results include the acquired operations for the full year 1985, and also include increased amortization of intangible assets, increased interest expense on the acquisition debt and related income tax effects. The pro forma results reflect lower interest expense that would have resulted from using the net proceeds from certain sales of assets to reduce debt, as if those transactions had occurred on January 1, 1985. The gains or losses on those asset sales, principally Monsanto's oil and gas business, have been excluded from the pro forma results. The pro forma operating results do not purport to present Monsanto's actual operating results had the acquisition and the major asset sales referred to ah've occurred on January 1, 1985. Restructuring In October 1985, the Company implemented a restructuring and reorganization program. The actions included the withdrawal from selected low-return busi nesses and production facilities, the sale of certain assets that no longer had strategic importance and reductions in the number of employees. In 1985 Monsanto provided a $949 million charge to "Restructuring expense (income) -- net" in the Statement of Consolidated Income. This charge prin cipally comprised asset write-downs and the cost of employee reductions, partially offset by asset sale gains. The principal 1985 sale was the Seal Sands, United Kingdom, chemical intermediates plant at a net after-tax gain of $82 million, or $1.06 per share. The impact on 1985 net income from the restructur ing and reorganization program was $542 million (net of estimated tax benefits of $407 million), or $7.04 per share. ^27 001899 LAM018017 7 2535630 I Monsanto Company and Subsidiaries 3 5 Notes to Financial Statements (continued) Also in 1985, Monsanto sold its oil and gas operations at a net gain of $201 million ($392 million before tax), or $2.61 per share. The gain is shown separately in the Statement of Consolidated Income. The 1986 gain included in "Restructuring expense (income) -- net" resulted from the sales of product lines that were planned for divestiture under the 1985 restructuring program. The principal sale was those product lines of the Texas City, Texas, petrochemicals plant that were part of the restructuring program. The impact on 1986 net income from the restructuring gain was $97 million (after related taxes), or $1.25 per share. The restructuring program was substantially completed by the end of 1986. Net sales in 1985 of the subse quently divested product lines, principally in the Chemicals segment, were $931 million. Depreciation and Amortization Depreciation Amortization of intangible assets Obsolescence^ Total 1987 $421 225 33 $679 1986 $423 218 139 $780 1985 $477 88 34 $599 Property is recorded at cost. The cost of plant and equipment is depreciated over weighted average periods of 23 years for buildings and 12 years for machinery and equipment, using the straight-line method. Obsolescence in 1986 included a $90 million charge ($46 million after tax, or $0.59 per share) to write down property, plant and equipment values of the Electronic Materials segment to amounts expected to be recovered from future cash flows. Intangible assets are recorded at cost less amortization. The components of intangible assets, and their esti mated remaining useful lives, were as follows: Estimated Remaining Life" 1987 Patents Goodwill Other intangible assets 6 $1,057 35 639 25 257 Total $1,953 average, m >ear5. ai December 31, 1987. 1986 $1,234 653 257 $2,144 The cost of patents obtained in a business acquisition is initially recorded at the present value of estimated future cash flows resulting from patent ownership. The cost of patents is amortized over their legal lives. Goodwill is the cost of acquired businesses in excess of the fair value of their identifiable net assets, and is amortized over periods of 5 to 40 years. The cost of other intangible assets (principally product rights and trademarks) is amortized over their estimated useful lives. mar 001900I 36 Monsanto Company and Subsidiaries Inventory Valuation Inventories are stated at cost or market, whichever is less. Actual cost is used to value raw materials and supplies; standard cost, which approximates actual cost, is used to value finished goods and goods in process. Standard costs include direct labor, raw material and manufacturing over head based on practical capacity. The cost of 52 percent of all 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 inven tory cost methods. The cost of other inventories generally is determined using the first-in, first-out (FIFO) method. The components of inventories were as follows: 1987 1986 Finished goods Goods in process Raw materials and supplies $ 689 261 461 $ 707 225 426 Inventories, at FIFO cost Excess of FIFO over LIFO cost 1,411 (330) 1,358 (289) Inventories, at LIFO cost $1,081 $1,069 Inventories at FIFO cost approximate current cost. Income Taxes The components of income before income taxes were: Total U.S. Ex-U.S. 1987 $422 251 $673 1986 $462 174 $636 1985 $(590) 292 $(298) The components of income tax expense were: Current: Deferred: Total Federal State Ex-U.S. Federal State Ex-U.S. 1987 $ 82 14 72 168 39 9 21 69 $237 1986 $ 20 12 88 120 74 13 (4) 83 $203 1985 $ 44 13 154 211 (338) (21) (22) (381) $(170) 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 Intangible drilling and development costs Other Total 1987 $ 46 43 15 (35) $ 69 1986 $(61) 161 (10) (7) $ 83 1985 $ 70 (307) (32) (98) (14) $(381) I____ 2535631 7 X Notes to Financial Statements (continued) Factors causing Monsanto's effective tax rate to differ from the United States federal statutory rate were: Federal statutory rate Higher (lower) ex-U.S. tax rates Investment and othet tax credits Capital gains benefits Benefits attributable to: United States export earnings Puerto Rico operations Dividends from ex-U.S. subsidiaries Reversal of prior years' foreign tax credits Other Effective income tax rate 1987 40% (1) (1) (2) (2) (2) 1 2 35% 1986 46% 1 (4) (8) (3) (3) I 2 32% 1985 (46)% (12) (9) (3) (2) 9 8 (2) (57)% Investment tax credits were available in 1986 and earlier years as a reduction of the United States federal income tax liability. Such credits were recorded as a reduc tion of income tax expense in the year they reduced the United States federal income tax liability. Investment tax credits, net of recapture, were $15 million for 1986 and $10 million for 1985. Income and remittance taxes have not been recorded on $510 million of undistributed earnings of subsidiaries, either because any taxes on dividends would be offset substantially by foreign tax credits or because Monsanto intends to indefinitely reinvest those earnings. Income and remittance taxes on these earnings would be approxi mately $50 million at December 31, 1987. Short-Term Debt and Credit Arrangements Short-term debt was: Notes payable: Banks Commercial paper Bank overdrafts Current portion of long-term debt Total 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 1987 1986 $127 157 136 119 $539 $438 335 8% 7'/i% $107 14 130 138 $389 $611 372 8>/:% l'h% Certain ex-U.S. subsidiaries have aggregate short-term loan facilities of $355 million, under which loans totaling $127 million were outstanding at December 31, 1987. Interest on these loans is related to various ex-U.S. bank rates. Monsanto's worldwide unused short-term loan facilities were $228 million at December 31, 1987. Long-Term Debt Long-term debt (exclusive of current maturities) was: 1987 1986 Industrial development bond obligations, weighted average interest rate of 7'/>%, due 1989 to 2021 Medium-iertn notes, weighted average interest rate of 7l/:%, due 1989 to 1990 9V% Eurodollar notes due 1991 10'/e% notes due 1992 9,/s% notes due 1996 8'/>% sinking fund debentures due 2000 8*/% sinking fund debentures due 2008 11 Vs% sinking fund debentures due 2015 Other $ 262 44 101 150 150 127 169 225 336 5 264 131 101 150 150 127 169 225 31) Total $1,564 $1,630 Maturities and sinking fund requirements on long term debt are $119 million, $141 million, $51 million, $137 million and $185 million for 1988-1992, respectively. A $750 million intermediate-term credit facility expires ratably from 1991 to 1994. There were no borrowings under this facility at December 31, 1987. The credit facility is used to support the issuance of commercial paper ($157 million outstanding at December 31, 1987). Interest on amounts borrowed under this agreement would likely be at money market rates determined by competitive bidding. Alterna tively, interest may also be at, or at a margin above, the Citibank, N.A. base interest rate, or at a margin above either the rates paid on certificates of deposit or the London Interbank Offered Rate (LIBOR). Covenants under this credit facility restrict maximum borrowings. It is not anticipated that future borrow ings will be limited by these restrictions. In November 1985, the Company repaid $168 million principal amount of debentures and notes prior to their scheduled maturity from 1993 to 2008. Because these debentures and notes were repaid at less than face value, the Company recorded an extraordinary net gain of $30 million ($59 million before tax), or $0.40 per share. MAR 001901 L/XW1018019 2535632 T Monsanto Company and Subsidiaries } 7 notes to Financial Statements (continued) Pension Benefits Most Monsanto employees are covered by noncontributory pension plans. In 1986 Monsanto adopted Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions" (SFAS No. 87). Information for 1985 has not been restated. The components of pension cost for 1987 and 1986 were as follows: 1987 1986 Service cost for benefits earned during the vear Interest cost on projected benefit obligation Assumed return on plan assets' Amortization of unrecognized net gain $ 64 212 (237) (32) $ 60 202 (208) (21) Total $7 $ 33 'Actual return on plan assets was $187 million in 1987 and $458 million in 1986 Pension cost for all plans was $85 million in 1985. Pension benefits are determined based on the employ ee's years of service and compensation level. Pension plans are funded in accordance with Monsanto's longrange projections of the plans' financial 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. In accordance with SFAS No. 87, the excess of the fair value of plan assets over the projected benefit obligation at the date of adoption is being amortized over the average expected future service periods of employees (ranging generally from 14 to 18 years). Also in accordance with SFAS No. 87, the fair value of plan assets was used to calculate the assumed return on plan assets for 1987 and 1986. These two changes from prior practice were the primary cause for the $52 million decrease in pension expense in 1986 as compared to 1985. In 1986, the lower pension expense principally benefited the Crop Chemicals segment (approximately $7 million) and the Chemicals seg ment (approximately $25 million). Pension expense was lower in 1987 due principally to the effect of favorable investment performance of plan assets in 1986. MAR 001902 }8 Monsanto Cumpjrn and Suhsidunes Assumptions used for the principal plans 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) 1987 8/z% 8Vi 1986 8'/.% 8'/! 1985 81/:' 8'/z 6'/z 6'/: 6'/: The funded status of Monsanto's pension plans at year-end was: Actuarial present value of plan benefits: Vested Nonvested Accumulated benefit obligation Effect of projected future salary increases Projected benefit obligation Plan assets at fair value Excess of plan assets over projected benefit obligation Less: Unrecognized ner gain at adoption of SFAS No. 87 Subsequent unrecognized net gain Accrued pension liability 1987 $2,124 154 2,278 337 $2,615 $3,118 $ 503 422 257 $ 176 1986 $2,124 187 2,311 303 $2,614 $3,014 $ 400 412 178 $ 190 Projected benefit obligations and plan assets included in the above table for the principal United States plans were approximately $2,407 million and $2,767 million, respectively, at December 31, 1987. Plan assets consist principally of common stocks and United States government and corporate obligations. Because the Company's pension plans are well-funded, contributions to the Company's principal plans were neither required nor made in 1987 and 1986. For some employee savings plans, employee contribu tions are matched in part by Monsanto. The 19871985 expense recorded for such plans was $33 million, $35 million and $36 million, respectively. Other Postretirement Benefits Monsanto provides certain health care and life insur ance benefits for retired employees. Substantially 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, 1987, approximately 31,200 active employees were eligible upon retirement to participate in these programs. In addition, approximately 17,500 individuals retired from active service were eligible to participate in these programs. These ocher postretire men benefits are not funded and are expensed as benefits are paid. The 1987-1985 expense recorded for other postretirement benefits was $37 million, $26 million and $18 million, respectively. J_ 2535633"7 LAM018020 Notes to Financial Statements (continued) Stock Option Plans As an incentive to increase shareowner value, key officers and employees are granted Monsanto stock options under the Company's 1974 and 1984 Manage ment Incentive Plans and the Searle Monsanto Stock Option Plan (Searle Plan). Information about the status of such stock options is presented below. December 31,1985 1986: Granted Exercised Expired December 31,1986 1987: Granted Exercised Expired December 31, 1987 Shares Price Exercisable Outstanding______per Share 1.703,124 2,871,626 $26.16- $57.59 583,650 46.06- 79.31 (872,808) 26.16- 57.59 (98,301) 38.66 - 69.00 1,295,094 2,484,167 26.16- 79.31 620,200 66.56- 94.19 (550,559) 26.16- 69.00 (28,751) 41.75- 94.19 1,203,305 2,525,057 26.16- 94.19 Under the 1984 Management Incentive Plan and the Searle Plan, 1,947,092 shares remain available for grant. Stock appreciation rights (SARs) are authorized to be granted to Monsanto officers in tandem with stock options under both the Company's 1974 and 1984 Plans, including retroactive grants for unexercised options. SARs may be exercised in lieu of stock options included in the table above. At December 31, 1987, SARs related to stock options for 714,402 shares were outstanding, of which 270,800 options were exercisable. During 1987, SARs related to stock options for 114,200 shares were granted and for 105,370 shares were exercised. Earnings per Share Earnings per share were computed using the weighted average number of common shares and common share equivalents outstanding each year (77,498,752; 77,957,975 and 76,995,625 in 1987-1985, respec tively). Common share equivalents (645,527; 616,178 and 116,247 in 1987-1985, respectively) consist pri marily of common stock issuable upon exercise of outstanding stock options. Earnings per share assum ing full dilution were not significantly different from the primary amounts. Capital Stock At December 31, 1987, there were 4,472,149 common shares reserved for employee stock options. In January 1986, the Company's Board of Directors declared a dividend to shareowners consisting of one Common Stock Purchase Right on each outstanding share of the Company's common stock. A right will also be issued with each share of the Company's com mon stock that becomes outstanding prior to the time the rights become exercisable or expire. 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 30 percent or more, of the Company's outstanding common stock, the rights become exercisable and each right will entitle its holder to purchase one share of the Company's com mon stock for $150. If Monsanto is acquired in a business combination transaction, each right will entitle its holder to purchase, for $150, common shares of the acquiring company having a market value of $300. Alternatively, if a 20 percent holder were to acquire Monsanto by means of a reverse merger in which Monsanto and its stock survive or were to engage in certain "self-dealing" transactions, each right not owned by the 20 percent holder would entitle its holder to purchase, for $150, common shares of the Company having a market value of $300. The Company can redeem each right for 5 cents at any time prior to its becoming exercisable. The rights expire in 1996. These rights may cause substantial ownership dilution to a person or group who attempts to acquire the Company without approval of the Company's Board of Directors. The rights should not interfere with a business combination transaction that has been approved by the Board of Directors. As of December 31, 1987, 74,097,517 rights were outstanding. Commitments and Contingencies Commitments, principally in connection with un completed additions to property, were approximately $137 million at December 31, 1987. Monsanto was contingently liable as guarantor of bank loans and for discounted customers' receivables totaling approxi mately $111 million at December 31, 1987. Future minimum payments under noncancellable operating leases and unconditional inventory purchases are $64 million; $62 million; $55 million; $50 million and $47 million for 1988-1992, respectively, and $148 mil lion 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, management 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. MAR 001903 I 2535634~T LAM018021 Monsanto Company and Subsidiaries 39 notes to Financial Statements (continued) Supplemental Data Supplemental income statement data were as follows: Raw material and energy costs Employee compensation and benefits Current income and other taxes Rent expense Technological expenses: Research and development Engineering, commercial development and patent Total technological expenses Interest expense: Total interest cost Less capitalized interest Net interest expense Equity in affiliates' income Currency gains (losses) including equity in affiliates' currency gains and losses 1987 1986 1985 $2,383 1,955 398 108 $2,023 1,937 356 99 $2,557 1,886 435 92 557 523 470 58 73 78 615 596 548 188 (16) 172 7 215 (14) 201 12 192 (14) 178 25 (ID 8 (13) Segment Information Certain operating unit segment data and geographic data for 1987-1985 appear on pages 23 and 27, 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 significant. Inter-area sales, which are sales from one Monsanto location to another Monsanto location in a different world area, were made on a market price basis. Net sales in 1985 of product lines divested that were included in the Chemicals segment were $645 million. 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 miscella neous 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 lnter-area Eliminations lotal consolidated Inter-area Sales (Between Monsanto Entities) 1987 1986 1985 $ 624 103 8 12 35 (782) $- $ 527 82 4 5 26 (644) $- $ 529 163 5 2 21 (720) $ Following is a reconciliation of ex-U.S. operating income and total assets to Monsanto's equity in 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 1987 $ 263 (52) 38 2 (93) 1986 $ 165 (42) 40 (16) (70) 1985 $ 231 (26) 38 (21) (70) $ 158 $2,120 801 $ 77 $1,757 855 $ 152 $1,670 847 $1,319 $ 902 $ 823 001904 40 Mcrujiw Company and Subsidiaries \_/M\A018022 | 2535635 | Financial Summary (Dollars m millions, except per share) Operating Results Net Sales Operating Income (Loss) Income (Loss) Before Extraordinary Gains Net Income (Loss) As a Percent of Net Sales As a Percent of Average Shareowners' Equity Earnings per Share Before Extraordinary Gains Net Income (Loss) Year-end Financial Position Total Assets Working Capital Property, Plant and Equipment Gross Net Long-Term Debt Shareowners' Equity Current Ratio Percent of Total Debt to Total Capitalization Other Data Property, Plant and Equipment Additions Depreciation and Amortization Interest Expense Research and Development Expense Income Taxes Cash Provided by Operations Stock Price High Low Year-end Price/Eamings Ratio on Year-end Stock Price Per Share Dividends Shareowners' Equity Shareowners (year-end) Shares Outstanding (year-end, in millions) Employees (year-end) 1987"' 1986"' 1985"' 1984 1983' $7,639 734 436 436 6% 11% $6,879 635 433 433 6% 12% $6,747 (598) (128) (98) (1)% (3)% $6,691 677 439 439 7% 12% $6,299 521 369 402 6' 11' $ 5.63 5.63 $ 5.55 5.55 $(1.67) (1.27) $ 5.42 5.42 $ 4.48 4.89 $8,455 1,203 $8,269 1,092 $8,877 899 $6,373 1,395 $6,427 1,535 $6,730 3,076 $1,564 3,901 1.7 35% $6,326 2,913 $1,630 3,781 1.6 35% $6,840 3,034 $2,087 3,407 1.4 45% $6,919 3,374 $ 824 3,634 2.2 23% $6,639 3,284 $ 937 3,667 2.3 24` $ 505 679 172 557 237 902 $100'4 57 83 15 $ 520 780 201 523 203 960 $ 81% 4414 76% 14 $ 645 599 178 470 (170) 535 $ 553/s 40% 47J4 - $ 614 503 100 370 268 915 $ 53% 40% 44 8 $ 560 523 96 290 201 1,040 $ 58% 37% 52% 11 $ 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 $ 2.25 46.43 71,343 78 50,754 $2,075 44.83 69,787 82 48,835 (I ) Net income far 1987 includes net restructuring tricorne of $18 million ($0.24 per share). (2)Sei income /or 1986 includes $85 million ($/. 10 per share) of net garni, principal/} from the sale of the Texas City, Texas, petrochemicals plant and related assets, partial/} offset by the Electronic Materials asset impairment umte-down. In addition, net income was increased $25 million ISO. 32 per share) from adopting the requirements of Statement of Financial Accounting Standards No. 87. "Employers' Accounting for Pensions. " i})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 $2Ql million ($2.6/ per share) and an extraordinary gam of $50 million ($0.40 per share/ from repayment of debt. l4)Net income for 1985 includes extraordinary tax benefits of $33 million ($0.41 per share/ from the unlijanon of ex-US. loss carryforwards. MAR 001905 LAM018023 T 2535636_T Monsanto Company and Subsidiaries 41 Board of Directors Richard J. Mahoney St. Louis Chairman and Chief Executive Officer, Monsanto Company Age: 54 Monsanto Director: 9 years Marguerite R. Barnett, Ph.D. St. Louis Chancellor, University of Missouri-St. Louis Age: 45 Monsanto Director: less than 1 year Joan T. Bok Westborough, Massachusetts Chairman, New England Electric System Age: 58 Monsanto Director: 1 year Donald C. Carroll, Ph.D. King of Prussia, Pennsylvania Chairman, Schulco, Inc. Retired Dean, The Wharton School, University of Pennsylvania Age: 57 Monsanto Director: 13 years C. Raymond Dahl San Francisco Retired Chairman and Chief Executive Officer, Crown Zellerbach Corporation Age: 66 Monsanto Director: 10 years Richard I. Fricke Montpelier, Vermont Chairman, Executive Committee, National Life Insurance Company Age: 65 Monsanto Director: 13 years John W. Hanley Palm City, Florida Chairman, Hanley Hazelden Center Retired-Chairman and Chief Executive Officer, Monsanto Company Age: 66 Monsanto Director: 15 years Earle H. Harbison, Jr. St. Louis President and Chief Operating Officer, Monsanto Company Age: 59 Monsanto Director: 2 years Advisory Directors Robert L. Berra St. Louis Senior Vice President, Administration; Monsanto Company Age: 63 Advisory Director: 6 years Harold J. Corbett St. Louis Senior Vice President, Environment, Safety & Health; Monsanto Company Age; 60 Advisory Director: 3 years Robert G. Potter St. Louis Group Vice President, Monsanto Company; President, Monsanto Chemical Company Age: 48 Advisory Director: 2 years MAR 001906 42 Monsanto Company and Subsidumes Howard M. Love Pittsburgh Chairman and Chief Executive Officer, National Intergroup, Inc. Age: 57 Monsanto Director: 10 years Jean Mayer, Ph.D., D.Sc. Medford, Massachusetts President, Tufts University Age: 68 Monsanto Director: 17 years Buck Mickel Greenville, South Carolina Chairman and Chief Executive Officer, R.S.l. Corporation Retired Vice Chairman, Fluor Corporation, and Chairman, Daniel International Corporation, a subsidiary of Fluor Corporation Age: 62 Monsanto Director: 13 years John S. Reed New York Chairman, Citicorp and Citibank, N. A. Age: 49 Monsanto Director: 3 years William D. Ruckelshaus Seattle Attorney, Perkins Coie Former Administrator, U.S. Environmental Protection Agency Age: 55 Monsanto Director: 3 years John B. Slaughter, Ph.D. College Park, Maryland Chancellor, University of Maryland at College Park Former Director, National Science Foundation Age: 53 Monsanto Director: 5 years Admiral Stansfield Turner (U.S. Navy, Retired) McLean, Virginia Lecturer and writer Former Director, U.S. Central Intelligence and Central Intelligence Agency Age: 64 Monsanto Director: 7 years Nicholas L. Reding St. Louis Executive Vice President, Monsanto Company; President, Monsanto Agricultural Company Age: 53 Advisory Director: 6 years Howard A. Schneiderman, Ph.D. St. Louis Senior Vice President, Research & Development; Monsanto Company- Age: 61 Advisory Director: 6 years Francis A. Stroble St. Louis Senior Vice President and Chief Financial Officer; Monsanto Company Age: 57 Advisory Director: 6 years 7 2535637 Jl LAMO18024 Committees of The Board Audit Committee_______________ ______________________ Jean Maver, Ph.D.. D.Sc., C/uirmun Juan T. Bok Buck Mickel William D. Ruckelshaus John B. Slaughter. Ph.D. Corporate Social Responsibility Committee Admiral Stanstield Turner, C/uumuin Jean Mayer, Ph.D.. D.Sc. William D. Ruckelshaus John B. Slaughter. Ph.D. Executive Committee John W. Hanley, Chairman Earle H. Harbison. Jr. Richard J. Mahoney Executive Compensation and Development Committee Howard M. Love. Chairman Richard 1. Fricke John W. Hanley Buck Mickel Finance Committee Donald C. Carroll, Ph.D., Chairman C. Raymond Dahl John W. Hanlev 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. C/iairman Donald C. Carroll. Ph.D. Earle H. Harbison. Jr. Admiral Stanstield Turner 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 Robert L. Berra 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 Earl N. Brasfield Leonard A. Cohn Stewart D. Daniels S. Allen Heininger, Ph.D. Martin J. Kallen Thomas H. Lafferre Richard A. Overton James H. Senger David L. Sliney Vice President, Finance Lawrence B. Skatoff Vice President and Controller B. Clare Harris Treasurer Juanita H. Hinshaw Shareowner Information Annual Meeting The next annual meeting ot the shareowners of Monsanto Company will be held at 1:45 p.m., Friday. April 22, 1988, in K Building at the Company's World Headquarters, SOON. Lindbergh Blvd., St. Louis, Missouri. A formal nonce 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 ot Monsanto Companv's 1987 Form 10-K Report tiled with the Securities and Exchange Commission; 1987 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 United States: New York Chicago (options) Europe; Amsterdam Brussels Frankfurt Geneva London Paris Zurich Transfer Agent and Registrar The First National Bank of Boston Box 644 Boston, Massachusetts 02102 mar 001907 LAM018025 J 2535638_J_ Monsanto Company 800 North Lindbergh Boulevard St. Louis, Missouri 63167 MAR 001908 UUNA018026 - 2535639_1