-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Jjl+fL0bYIE0NDgC7mcttf4ZohPfXO9oZmUHaUmGBHocTo2bhJmPQmrggKM0KHgf Nkm2YZYoljjRgEkbxMbCyQ== 0000950114-98-000100.txt : 19980318 0000950114-98-000100.hdr.sgml : 19980318 ACCESSION NUMBER: 0000950114-98-000100 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980317 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MONSANTO CO CENTRAL INDEX KEY: 0000067686 STANDARD INDUSTRIAL CLASSIFICATION: CHEMICALS & ALLIED PRODUCTS [2800] IRS NUMBER: 430420020 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-02516 FILM NUMBER: 98567495 BUSINESS ADDRESS: STREET 1: 800 N LINDBERGH BLVD CITY: ST LOUIS STATE: MO ZIP: 63167 BUSINESS PHONE: 3146941000 MAIL ADDRESS: STREET 1: 800 NORTH LINDBERGH BLVD CITY: ST LOUIS STATE: MO ZIP: 63167 FORMER COMPANY: FORMER CONFORMED NAME: MONSANTO CHEMICAL CO DATE OF NAME CHANGE: 19711003 10-K405 1 1997 FORM 10-K 1 1 9 9 7 =============================================================================== FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 ----------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-2516 ------ MONSANTO COMPANY ---------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 43-0420020 -------- ---------- (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 800 NORTH LINDBERGH BLVD., ST. LOUIS, MO. 63167 ----------------------------------------- ----- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (314) 694-1000 -------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- COMMON STOCK $2 PAR VALUE NEW YORK STOCK EXCHANGE PREFERRED STOCK PURCHASE RIGHTS NEW YORK STOCK EXCHANGE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO ----- ----- INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [X] STATE THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NONAFFILIATES OF THE REGISTRANT: APPROXIMATELY $29.9 BILLION AS OF THE CLOSE OF BUSINESS ON FEBRUARY 27, 1998. INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE: 595,560,990 SHARES OF COMMON STOCK, $2 PAR VALUE, OUTSTANDING AT FEBRUARY 27, 1998. DOCUMENTS INCORPORATED BY REFERENCE 1. PORTIONS OF MONSANTO COMPANY ANNUAL REPORT TO SECURITY HOLDERS FOR THE YEAR ENDED DECEMBER 31, 1997. (PARTS I AND II OF FORM 10-K.) 2. PORTIONS OF MONSANTO COMPANY NOTICE OF ANNUAL MEETING AND PROXY STATEMENT DATED MARCH 13, 1998. (PART III OF FORM 10-K.) =============================================================================== 2 PART I ITEM 1. BUSINESS. Monsanto Company and its subsidiaries are engaged in the worldwide manufacture and sale of a diversified line of agricultural products, nutrition and consumer products, pharmaceuticals, and other products. Monsanto Company was incorporated in 1933 under Delaware law and is the successor to a Missouri corporation, Monsanto Chemical Works, organized in 1901. Unless otherwise indicated by the context, "Monsanto" means Monsanto Company and consolidated subsidiaries, and the "Company" means Monsanto Company only. RECENT DEVELOPMENTS On February 18, 1998, the Company and G.D. Searle & Co. ("Searle"), a wholly-owned subsidiary of the Company, entered into agreements with Pfizer Inc. ("Pfizer") covering the promotion of Searle's celecoxib and its second generation compound in the United States. Both agents are novel Cox-2 (cyclooxygenase-2) inhibitors under development for the treatment of arthritis and pain. Pursuant to the agreements, Searle will receive $85 million as an upfront payment. In addition, the agreements provide for milestone payments upon the achievement of specified objectives, and for sharing of certain expenses and revenues. Additionally, Monsanto, Searle and Pfizer are negotiating an agreement to expand the collaboration to certain other world areas. INDUSTRY SEGMENTS; PRINCIPAL PRODUCTS For 1997, Monsanto reported its business under four industry segments: Agricultural Products, Nutrition and Consumer Products, Pharmaceuticals, and Corporate and Other. The tabular and narrative information appearing under "Segment Data" and "Geographic Data" on pages 35 and 42 of the Company's Annual Report to shareowners for the year ended December 31, 1997 (the "1997 Annual Report") is incorporated herein by reference. The following is a list of principal products categorized by major end-use markets, within the industry segments in which they were reported for 1997. AGRICULTURAL PRODUCTS
Major End-Use Manufacturing Major Raw Materials Major End-Use Markets Major Products Products & Applications Locations & Components --------------------- -------------- ----------------------- ------------- ------------------- Agricultural, industrial, Roundup herbicide and Nonselective agricultural Alvin, Texas; Antwerp, Chlorine; Diethanolamine; turf and ornamental other glyphosate-based and industrial Belgium; Fayetteville, Disodiumiminodiacetic acid; herbicides herbicides applications N.C.; Luling, La.; Hydrogen cyanide; Muscatine, Iowa; Sao Jose Phosphorus; Sodium dos Campos, Brazil; West hydroxide Footscray, Australia; Zarate, Argentina --------------------------------------------------------------------------------------------------------- Lasso and Harness Corn, soybean, peanut and Antwerp, Belgium; Chloroacetyl chloride; herbicides and other milo (sorghum) crops Muscatine, Iowa; Sao Jose Diethylaniline; acetanilide-based dos Campos, Brazil Methylethylaniline herbicides Corn only --------------------------------------------------------------------------------------------------------- Avadex BW herbicide, Wheat crops Antwerp, Belgium; Ammonium thiocyanate; Far-Go herbicide Melbourne, Australia; Diisopropylamine; Muscatine, Iowa Methylethylaniline; Trichloropropane --------------------------------------------------------------------------------------------------------- Machete herbicide Rice crops Antwerp, Belgium; Butanol; Chloroacetyl Canlubang, Philippines; chloride; Diethylaniline; Muscatine, Iowa; Sao Jose Formalin dos Campos, Brazil; Silvassa, India; Tangerang, Indonesia --------------------------------------------------------------------------------------------------------- 1 3 AGRICULTURAL PRODUCTS (CONT'D) Major End-Use Manufacturing Major Raw Materials Major End-Use Markets Major Products Products & Applications Locations & Components --------------------- -------------- ----------------------- ------------- ------------------- Permit, Manage and Postemergence control of Manufactured by third party Halosulfuron Sempra herbicides sedges and broadleaf weeds in corn and grain sorghum, turf and sugarcane crops - ----------------------------------------------------------------------------------------------------------------------------------- Agricultural seeds Roundup Ready canola, Crops tolerant of Roundup Seeds propagated by No major raw materials Roundup Ready cotton, herbicide contract farmers Roundup Ready soybeans --------------------------------------------------------------------------------------------------------- Bollgard Crops protected against Seeds propagated by No major raw materials insect-protected certain insect pests contract farmers cotton, NewLeaf insect-protected potatoes, YieldGard insect-protected corn --------------------------------------------------------------------------------------------------------- AgriPro, Agroceres, Corn hybrids, soybean Seeds propagated by No major raw materials Asgrow, Hartz, varieties, alfalfa, grain contract farmers Holden's, Hybritech, sorghum and forage Monsoy and Stoneville varieties, sunflowers, branded seeds cotton varieties and wheat hybrids - ------------------------------------------------------------------------------------------------------------------------------------ Animal agricultural Posilac bovine Increase efficiency of Manufactured by third party Glucose; Idoleacrylic applications somatotropin milk production in dairy acid; Methonine cows - ------------------------------------------------------------------------------------------------------------------------------------ PHARMACEUTICALS Pharmaceuticals Daypro (oxaprozin), Anti-inflammatory Augusta, Ga.; Caguas, Benzoin; Diclofenac; Arthrotec Puerto Rico; Morpeth, Misoprostol; Tramadol (misoprostol/ United Kingdom; Stolberg, hydrochloride diclofenac), Tramadol Germany; Sao Paolo, Brazil (tramadol hydrochloride) --------------------------------------------------------------------------------------------------------- Aldactone Cardiovascular Augusta, Ga.; Caguas, Androstenedione; (spironolactone), Puerto Rico; Evreux, Betazolol; Disopyramide Aldactazide France; Morpeth, United phosphate; (spironolactone/ Kingdom Hydrochlorothiazide; hydrochlorothiazide), Verapamil HCI Calan formulations and Covera-HS (verapamil hydrochloride), Norpace formulations (disopyramide phosphate) --------------------------------------------------------------------------------------------------------- Ambien (zolpidem Central nervous system Caguas, Puerto Rico Zolpidem tartrate) (sleep) --------------------------------------------------------------------------------------------------------- Cytotec (misoprostol), Gastrointestinal Caguas, Puerto Rico; Coapa, Norprostol; Diphenoxylate Lomotil (diphenoxylate Mexico; Fairfield, hydrochloride hydrochloride) Australia; Guarenas, Venezuela; Morpeth, United Kingdom; Oakville, Canada; Sao Paolo, Brazil --------------------------------------------------------------------------------------------------------- 2 4 PHARMACEUTICALS (CONT'D) Major End-Use Manufacturing Major Raw Materials Major End-Use Markets Major Products Products & Applications Locations & Components --------------------- -------------- ----------------------- ------------- ------------------- Demulen (ethynodiol Women's health Caguas, Puerto Rico; Ethinyl estradiol; diacetate), Flagyl Morpeth, United Kingdom Ethynodiol diacetate; formulations Metronidazole; Nafarelin (metronidazole), acetate; Norethindrone Synarel (nafarelin acetate), Tri-Norinyl (norethindrone and ethinyl estradiol) - ------------------------------------------------------------------------------------------------------------------------------------ NUTRITION AND CONSUMER PRODUCTS Food/Beverage ingredients NutraSweet brand High-intensity sweetener Augusta, Ga. Aspartic acid; sweetener used primarily in Phenylalanine beverages and food products --------------------------------------------------------------------------------------------------------- Keltone and Manugel Soups, sauces, gravies, Girvan, United Kingdom; Corn syrup; Seaweed sodium alginates, dressings, beverages, Knowsley, United Kingdom; Kelcoloid propylene snack foods, breadings, Okmulgee, Okla.; San Diego, glycol alginate, batters, bakery products, Calif. Keltrol xanthan gum, dairy products, pet foods Kelcogel gellan gum - ------------------------------------------------------------------------------------------------------------------------------------ Consumer foods Equal, Canderel, Tabletop sweeteners Coapa, Mexico; Evreux, Aspartame; Cyclamate; NutraSweet, SweetMate, France; Fairfield, Saccharin; Sugar Chuker, Misura and Australia; Manteno, Ill.; other tabletop Morpeth, United Kingdom; sweeteners Zarate, Argentina - ------------------------------------------------------------------------------------------------------------------------------------ Residential lawn and Roundup herbicide, and Herbicides, insecticides, Antwerp, Belgium; Fort Acephate; Chlorpyrifos; garden applications Ortho, Green Cross, fungicides, fertilizers, Madison, Iowa; Corwen, Diazinon; Glyphosate; Phostrogen, Defender, applicators, flower seeds, United Kingdom; Melbourne, Malathion Alternatives for this and White Swan brand garden decorative items Australia business are currently lawn-and-garden being considered. products; Ortho books - ------------------------------------------------------------------------------------------------------------------------------------ Industrial Manutex and Kelgin Cleaners, textile Girvan, United Kingdom; Corn syrup; Seaweed sodium alginates, printing, paper sizings Knowsley, United Kingdom; Kelzan AR xanthan gum and coatings, firefighting Okmulgee, Okla.; San Diego, foams Calif. --------------------------------------------------------------------------------------------------------- Kelzan XC, Kelzan XCD Oil and gas well drilling Knowsley, United Kingdom; Corn syrup and Xanvis xanthan applications Okmulgee, Okla.; San Diego, gums, Biozan welan gum Calif. - ------------------------------------------------------------------------------------------------------------------------------------ CORPORATE AND OTHER Capital equipment EnviroChem engineering Processing plants for Martinez, Calif.; On-site Various construction and construction fertilizer producers, construction components management services basic metals production, for processing plants oil refining using sulfuric acid; proprietary equipment and air pollution control systems - ------------------------------------------------------------------------------------------------------------------------------------
3 5 PRINCIPAL EQUITY AFFILIATES Monsanto participates in a number of joint ventures in which it shares management control with other companies. For example, aspartame is manufactured and sold in Europe by fifty percent-owned joint ventures; and Monsanto has a 60% ownership interest in a joint venture with Solutia Inc., from which it purchases elemental phosphorus. In addition, the Company has a significant equity position in DeKalb Genetics Corporation ("DeKalb"). SALE OF PRODUCTS Monsanto's products are sold directly to customers in various industries, to wholesalers and other distributors and jobbers, to retailers and to the ultimate consumer, principally by its own sales force, or, in some cases, through third parties. With respect to pharmaceuticals, such sales force concentrates on detailing to physicians and managed health care providers. As indicated on page 43 of the 1997 Annual Report, Monsanto's net income is historically higher during the first half of the year, primarily because of the concentration of generally more profitable sales of the Agricultural Products segment during that part of the year. Monsanto's marketing and distribution practices do not result in unusual working capital requirements on a consolidated basis, although the seasonality of sales of the Agricultural Products segment results in short-term borrowings to finance customer accounts receivable and inventories. Inventories of finished goods, goods in process and raw materials are maintained to meet customer requirements and Monsanto's scheduled production. In general, Monsanto does not manufacture its products against a backlog of firm orders; production is geared primarily to the level of incoming orders and to projections of future demand. Monsanto generally is not dependent upon one or a group of customers. The Nutrition and Consumer Products segment, however, makes significant sales to a few companies for use in carbonated soft drinks. Monsanto has no material contracts with the government of the United States or any state, local or foreign government. However, pursuant to contracts executed under U.S. federal and state laws, the Pharmaceuticals segment pays rebates to state governments for pharmaceuticals sold under state Medicaid programs and under state-funded programs for the indigent. The Pharmaceuticals segment also grants discounts to certain managed health care providers. Sales through managed health care providers constitute an increasing percentage of that segment's sales. Introduction of new products by the Agricultural Products and Pharmaceuticals segments typically is, and introduction of new products by other segments may be, subject to prior review and approval by the U.S. Food & Drug Administration ("FDA"), the U.S. Environmental Protection Agency and/or the U.S. Department of Agriculture (or comparable agencies of ex-U.S. governments) before they can be sold. Such reviews are often time-consuming and costly. These agencies also have continuing jurisdiction over many existing products of these segments. Governmental actions may also affect the pricing of certain products, particularly in the Pharmaceuticals segment. RAW MATERIALS AND ENERGY RESOURCES Monsanto is both a producer and significant purchaser of a wide spectrum of its basic and intermediate raw material requirements. Major requirements for key raw materials and fuels are typically purchased pursuant to long-term contracts. Monsanto is not dependent on any one supplier for a material amount of its raw materials or fuel requirements, but certain important raw materials are obtained from a few major suppliers. Monsanto purchases its North American supply, and has the option to purchase its ex-North American supplies, of elemental phosphorus, a key raw material for the production of Roundup(R) brand herbicides, from P4 Production, L.L.C., a joint venture between the Company and Solutia Inc. In general, where Monsanto has limited sources of raw materials, it has developed contingency plans to minimize the effect of any interruption or reduction in supply. Information with respect to specific raw materials is set forth in the table above under "Industry Segments; Principal Products." While temporary shortages of raw materials and fuels may occasionally occur, these items are generally sufficiently available to cover current and projected requirements. However, their continuing availability and price are subject to unscheduled plant interruptions occurring during periods of high demand, or due to domestic and world market and political conditions, as well as to the direct or indirect effect of U.S. and other countries' government regulations. The impact of any future raw material and energy shortages on Monsanto's 4 6 business as a whole or in specific world areas cannot be accurately predicted. Operations and products may, at times, be adversely affected by legislation, shortages or international or domestic events. PATENTS, TRADEMARKS, LICENSES, FRANCHISES AND CONCESSIONS Monsanto owns a large number of patents which relate to a wide variety of products and processes and has pending a substantial number of patent applications. In addition, Monsanto holds a number of licenses granted by other parties, some of which may be significant particularly to the Agricultural Products segment. Also, Monsanto owns a considerable number of established trademarks in many countries under which it markets its products. Monsanto's patents and trademarks in the aggregate are of material importance in the operation of its business, particularly in the Agricultural Products and Pharmaceuticals segments and with respect to NutraSweet(R) brand sweetener. Certain proprietary products such as Roundup(R) herbicide are covered by patents. Although patents protecting Roundup(R) herbicide have now expired in most countries, compound per se patent protection for the active ingredient in Roundup(R) herbicide continues in the United States into the year 2000. All patents covering the use of aspartame as a sweetener have expired. NutraSweet(R) brand sweetener is currently manufactured under several patents owned or licensed by The NutraSweet Company, a subsidiary of the Company. Calan(R) SR, an antihypertensive pharmaceutical, is licensed through the year 2004 to Searle by a third party, which has retained co-marketing rights. The product no longer has patent protection nor non-patent regulatory exclusivity conferred by the Waxman-Hatch amendments to the U.S. Food, Drug and Cosmetics Act. Cytotec(R) ulcer preventive drug is protected by a U.S. composition patent until July 29, 2000. Ambien(R) short-term treatment for insomnia is licensed to a joint venture, of which Searle is a general partner and holds a controlling interest, for the duration of the venture. Pursuant to the joint venture agreement, the other partner has the right to purchase Searle's interest and thereby terminate the venture beginning in December, 1999. Ambien(R) is protected by a U.S. patent to October 21, 2006. Daypro(R) once-a-day arthritis treatment is licensed to Searle until January 5, 2003 in the U.S. and varying dates in other countries. This product is protected by a U.S. process patent that expires on February 26, 2002, and by non-patent regulatory exclusivity extending to October 29, 1999. Monsanto's insect-resistant plant products (including NewLeaf(R) potato, YieldGard(R) corn and Bollgard(R) cotton) are protected by patents which extend until at least 2013. Monsanto's herbicide-resistant plant products, Roundup Ready(R) cotton, corn, canola and soybeans, are protected by patents which extend until at least 2014. (Certain of Monsanto's patents and licenses are currently the subject of litigation. See "Legal Proceedings" below.) Monsanto leases or subleases a number of kelp beds off the coast of California from the State of California and several private parties. Monsanto also has leases to harvest seaweed off the coasts of Scotland and (through a joint venture) Ireland. None of these leases taken individually is deemed by Monsanto to be material, although the leases to harvest seaweed in the aggregate are significant to the Nutrition and Consumer Products segment. The leases have varying terms. COMPETITION Monsanto encounters substantial competition in each of its industry segments. This competition, from other manufacturers of the same products and from manufacturers of different products designed for the same uses, is expected to continue in both U.S. and ex-U.S. markets. Depending on the product involved, various types of competition are encountered, including price, delivery, service, performance, product innovation, product recognition and quality. The number of Monsanto's principal competitors varies from product to product. It is not practical to discuss Monsanto's numerous competitors because of the large variety of Monsanto's products, the markets served and the worldwide business interests of Monsanto. Overall, however, Monsanto regards its principal product groups to be competitive with many other products of other producers and believes that it is an important producer of many of such product groups. 5 7 RESEARCH AND DEVELOPMENT Research and development constitute an important part of Monsanto's activities. See "Review of Consolidated Results of Operations," "Nutrition and Consumer Products," "Pharmaceuticals" and "Supplemental Data" on pages 33, 39, 40-41 and 61, respectively, of the 1997 Annual Report, incorporated herein by reference. ENVIRONMENTAL MATTERS Monsanto remains strongly committed to complying with various laws and government regulations concerning environmental matters and employee safety and health in the United States and other countries. Monsanto is dedicated to long-term environmental protection and compliance programs that reduce and monitor emissions of hazardous materials into the environment, as well as to the remediation of identified existing environmental concerns. While the costs of compliance with environmental laws and regulations cannot be predicted with certainty, Monsanto does not expect such costs to have a material adverse effect upon its capital expenditures, earnings, or competitive position. See information regarding remediation of waste disposal sites appearing under "Commitments and Contingencies" on page 61 of the 1997 Annual Report, incorporated herein by reference. EMPLOYEE RELATIONS As of December 31, 1997, Monsanto had approximately 21,900 employees worldwide. Satisfactory relations have prevailed between Monsanto and its employees. INTERNATIONAL OPERATIONS Monsanto and affiliated companies are engaged in manufacturing, sales and/or research and development in the United States, Europe, Canada, Latin America, Australia, Asia and Africa. A number of products are manufactured abroad. Ex-U.S. operations are potentially subject to a number of unique risks and limitations, including: fluctuations in currency values; exchange control regulations; import and trade restrictions, including embargoes; governmental instability; economic conditions in other countries; and other potentially detrimental domestic and foreign governmental practices or policies affecting U.S. companies doing business abroad. See "Geographic Data" on page 42 of the 1997 Annual Report, incorporated herein by reference. LEGAL PROCEEDINGS Because of the size and nature of its business, Monsanto is a party to numerous legal proceedings. Most of these proceedings have arisen in the ordinary course of business and involve claims for money damages, or seek to restrict the Company's business activities. While the results of litigation cannot be predicted with certainty, Monsanto does not believe these matters or their ultimate disposition will have a material adverse effect on Monsanto's financial position, profitability or liquidity in any one year, as applicable. In 1974, G. D. Searle & Co., a subsidiary of the Company ("Searle"), introduced in the United States an intrauterine contraceptive product, commonly referred to as an intrauterine device ("IUD"), under the name Cu-7(R). Following extensive testing by Searle and review by the FDA, the Cu-7(R) was approved for sale as a prescription drug. Searle has been named a defendant in a number of product liability lawsuits alleging that the Cu-7(R) caused personal injury resulting from pelvic inflammatory disease, perforation, pregnancy or ectopic pregnancy. As of March 9, 1998, there were approximately 5 cases pending in various U.S. state and federal courts and approximately 270 cases filed outside the United States (the vast majority in Australia). The lawsuits seek damages in varying amounts, including compensatory and punitive damages, with most suits seeking at least $50,000 in damages. Searle believes it has meritorious defenses and is vigorously defending each of these lawsuits. On January 31, 1986, Searle voluntarily discontinued the sale of the Cu-7(R) in the United States, citing the cost of defending such litigation. Searle has been named, together with numerous other prescription pharmaceutical manufacturers and in some cases wholesalers or distributors, as a defendant in a large number of related actions brought in federal and/or state court, based on the practice of providing discounts or rebates to managed care organizations and certain other large purchasers. The federal cases have been consolidated for pre-trial proceedings in the 6 8 Northern District of Illinois. The federal suits include a certified class action on behalf of retail pharmacies representing the majority of retail pharmacy sales in the United States. The class plaintiffs allege an industry- wide agreement in violation of the Sherman Act to deny favorable pricing on sales of brand-name prescription pharmaceuticals to certain retail pharmacies in the United States. The other federal suits, brought as individual claims by several thousand pharmacies, allege price discrimination in violation of the Robinson-Patman Act as well as Sherman Act claims. Several defendants, not including Searle, have settled the federal class action case. Searle has entered into an agreement that would significantly limit its liability (based generally on its share of the relevant market) should the federal class action result in an adverse judgment. Trial of the federal class action case is set for September 14, 1998. In addition, consumers and a number of retail pharmacies have filed suit in various state courts throughout the country alleging violations of state antitrust and pricing laws. Searle believes it has meritorious defenses and is vigorously defending each of these lawsuits. In 1996 the Company was the first to commercially introduce cotton containing a gene encoding for Bacillus thuringiensis ("Bt") endotoxin. Monsanto is a leader in this scientific field and has engaged in Bt research and biotechnology development over many years and owns a number of present and pending patents which relate to this technology. On October 22, 1996, Mycogen Corporation filed suit in U.S. District Court in Delaware seeking damages and injunctive relief against the Company, DeKalb and Delta & Pine Land alleging infringement of Bt related U.S. Patent Nos. 5,567,600 and 5,567,862 issued to Mycogen on that date. The Company has several meritorious defenses including non-infringement, lack of validity of Mycogen's patent and prior invention by the Company. Jury trial in this matter concluded on February 3, 1998 with a verdict in favor of all defendants. The patents of Mycogen were found invalid on the basis that Monsanto was a prior inventor. On February 20, 1998 Mycogen filed motions requesting that the Court set aside the jury's verdict. The Company will continue to vigorously defend against Mycogen's lawsuit. Several other lawsuits are pending between the Company and other parties involving Bt. On March 19, 1996, the Company was issued U.S. Patent No. 5,500,365 and filed suit in U.S. District Court in Delaware seeking damages and injunctive relief against Mycogen Plant Science, Inc., Agrigenetics, Inc. and Ciba-Geigy Corporation (Seed Division) (now Novartis Seeds, Inc.) for infringement of that patent. Trial of this matter is currently scheduled for June 15, 1998. On May 19, 1995, Mycogen initiated suit in U.S. District Court in California against the Company alleging infringement of U.S. Patent No. 5,380,831 involving synthetic Bt genes and seeking damages and injunctive relief. The District Court has granted motions dismissing virtually all of Mycogen's patent claims on the basis that products containing Bt genes made prior to January 1995 do not infringe the patent. The Company has various meritorious defenses to the claims of Mycogen including non-infringement, lack of validity, prior invention and collateral estoppel as a result of the outcome in the jury trial in which Mycogen's related patents were found invalid. The Company is also a party in interference proceedings against Mycogen in the U.S. Patent and Trademark Office to determine the first party to invent certain inventions related to Bt technology. In all of the foregoing actions the Company is vigorously litigating its position. In 1997 the Company commercially introduced corn containing a gene providing glyphosate resistance. Monsanto is a leader in this scientific field and has engaged in such research and biotechnology development over many years and owns a number of present and pending patents which relate to this technology. On November 20, 1997, Rhone Poulenc Agrochimie S. A. ("Rhone Poulenc") filed suit in U. S. District Court in North Carolina (Charlotte) against the Company and DeKalb contending they did not have a right to license, make or sell products using Rhone Poulenc technology for glyphosate resistance. DeKalb has sublicensed to Monsanto certain technology previously licensed from Rhone Poulenc. The terms of Rhone Poulenc's license to DeKalb are now in dispute and have resulted in Rhone Poulenc's claim that the Company's sale of Roundup Ready(R) corn infringes on the Rhone Poulenc patent. Rhone Poulenc also contends that Monsanto is in violation of certain antitrust laws. The Company has meritorious defenses to the allegations and is vigorously defending the litigation. In 1997 the Company commercially introduced corn containing a gene encoding for Bt endotoxin. Monsanto is a leader in this scientific field and has engaged in Bt research and biotechnology development over many years and owns a number of present and pending patents which relate to this technology. On January 21, 1997, Novartis Seeds, Inc. ("Novartis") filed suit in U.S. District Court in Delaware seeking damages and injunctive relief against the Company, alleging infringement of Bt related U.S. Patent No. 5,595,733 issued to 7 9 Ciba-Geigy Corporation (Seed Division) and now held by Novartis. Trial in this matter is currently scheduled for October 1998. The Company has several meritorious defenses including non-infringement and lack of validity of Novartis' patent. The Company is vigorously defending against Novartis' lawsuit. On March 20, 1997, the Georgia Environmental Protection Division ("EPD") issued a Notice of Violation alleging violations by the Company of certain sections of the Resource Conservation and Recovery Act. The alleged violations related to the waste heat recovery units at the Company's NutraSweet(R) sweetener plant in Augusta, Georgia. On December 31, 1997, the Company and EPD executed a Consent Order whereby the Company agreed to pay $99,000 to settle the alleged violations, and agreed to complete a Supplemental Environmental Project to secure environmental improvements at the facility estimated at $120,000. RISK MANAGEMENT Monsanto continually evaluates risk retention and insurance levels for product liability, property damage and other potential areas of risk. Monsanto devotes significant effort to maintaining and improving safety and internal control programs, which reduce its exposure to certain risks. Management decides the amount of insurance coverage to purchase from unaffiliated companies and the appropriate amount of risk to retain, based on the cost and availability of insurance and the likelihood of a loss. Since 1986, Monsanto's liability insurance has been on the "claims made" policy form. Management believes that the current levels of risk retention are consistent with those of other companies in the various industries in which Monsanto operates. There can be no assurance that Monsanto will not incur losses beyond the limits of, or outside the coverage of, its insurance. Monsanto's liquidity, financial position and profitability are not expected to be affected materially by the levels of risk retention that the Company accepts. DISCLOSURE OF FORWARD-LOOKING STATEMENTS Under the Private Securities Litigation Reform Act of 1995, companies are provided a "safe harbor" for making forward-looking statements about the potential risks and rewards of their strategies. Monsanto believes it's in the best interests of our shareowners to use these provisions in discussing future events, as we do in this Form 10-K (including portions incorporated by reference from the 1997 Annual Report) and other communications. These forward-looking statements include our plans for growth; the potential for the development, regulatory approval and public acceptance of new products from our pipeline; and other factors that could affect Monsanto's future operations or financial position. Monsanto's ability to achieve its goals depends on many, known and unknown risks and uncertainties, as well as on changes in general economic and business conditions. These factors could cause the anticipated performance and results of the company to differ materially from those described or implied in forward-looking statements. Factors that could cause or contribute to such differences include, but aren't limited to Monsanto's ability to: generate cash flows or obtain financing to fund its growth, including research and development; identify new technologies and commercialize from that research innovative and competitive new products worldwide; obtain regulatory approvals and gain consumer acceptance of new products worldwide; secure and defend its intellectual property rights and, when appropriate, license required technology; manufacture its products competitively and cost effectively; manage its businesses in the face of adverse weather or other environmental conditions; respond to challenges in international markets, including changes in currency exchange rates, political or economic conditions, and trade and regulatory matters; complete and integrate appropriate acquisitions, strategic alliances and joint ventures; and manage other factors as may be discussed in Monsanto's reports filed with the U.S. Securities and Exchange Commission. ITEM 2. PROPERTIES. The General Offices of the Company are located on a 285-acre tract of land in St. Louis County, Missouri. The Company also owns a 210-acre tract in St. Louis County on which additional research facilities are located. Monsanto also has research laboratories and technical centers throughout the world. Information with respect to Monsanto's manufacturing locations worldwide and the industry segments which use such plants as of January 1, 1998, is set forth under "Business--Industry Segments; Principal Products" in Item 1 of this Report, which is incorporated herein by reference. 8 10 Monsanto's principal plants are suitable and adequate for their use. Utilization of these facilities may vary with seasonal, economic and other business conditions, but none of the principal plants is substantially idle. The facilities generally have sufficient capacity for existing needs and expected near-term growth. Most of these plants are owned in fee. However, the land at the Antwerp, Belgium plant, and major portions of the San Diego, California plant, are leased. In addition, a portion of a plant at Augusta, Georgia is currently leased with an option to purchase, pursuant to an industrial revenue bond financing. The Company also leases the land underlying facilities that it owns at Alvin, Texas. In certain instances, Monsanto has granted leases on portions of other plant sites not required for current operations. ITEM 3. LEGAL PROCEEDINGS. For information concerning certain legal proceedings involving Monsanto, see "Business--Environmental Matters," "Business--Legal Proceedings" and "Business-- Disclosure of Forward-Looking Statements" contained in Item 1 of this Report. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to the security holders during the fourth quarter of 1997. EXECUTIVE OFFICERS OF THE REGISTRANT. Information regarding executive officers is contained in Item 10 of Part III of this Report (General Instruction G) and is incorporated herein by reference. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The narrative or tabular information regarding the market for the Company's common equity and related stockholder matters appearing under "Review of Cash Flow" on page 48 and "Quarterly Data" (for the years 1996 and 1997) on page 43 of the 1997 Annual Report is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA. The tabular information under "Financial Summary--Operating Results, Earnings per Share and Year-End Financial Position" and the amounts of Dividends per Share, all for the years 1993 through 1997, appearing on page 62 of the 1997 Annual Report, is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. The tabular and narrative information appearing under "Review of Consolidated Results of Operations" on pages 31 through 34, "Segment Data" and information regarding segments on pages 35 through 41, "Review of Changes in Financial Position" on page 45, and "Review of Cash Flow" on pages 47 and 48, and the narrative information appearing under "Geographic Data" on page 42 of the 1997 Annual Report is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS. The tabular and narrative information appearing under "Financial Instruments" on pages 48 and 49 of the 1997 Annual Report is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The consolidated financial statements of Monsanto appearing on pages 30, 44, 46, 50 and 51 through 61; the Independent Auditors' Report appearing on page 29; and the tabular and narrative information appearing under "Quarterly Data" on page 43 of the 1997 Annual Report are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 9 11 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Information regarding directors and executive officers appearing under "Election of Directors" on pages 2 through 4 of the Monsanto Company Notice of Annual Meeting and Proxy Statement (the "1998 Proxy Statement") dated March 13, 1998, is incorporated herein by reference. The following information with respect to the Executive Officers of the Company on March 1, 1998, is included pursuant to Instruction 3 of Item 401(b) of Regulation S-K:
Year First Became an Present Position with Executive Name--Age Registrant Officer Other Business Experience since January 1, 1993 - -------------------------- ------------------------ --------- ------------------------------------------------------- Richard U. De Schutter, 57 Vice Chairman--Monsanto 1995 President, G.D. Searle & Co., 1991; President and Chief Company; Chairman, Chief Operating Officer, G.D. Searle & Co., 1993; Chairman, Executive Officer and Chief Executive Officer and President, G.D. Searle & President--G.D. Searle & Co.; Advisory Director--Monsanto Company, 1995; and Co. present position, 1997. Arnold W. Donald, 43 Senior Vice President-- 1998 Vice President and General Manager of the Crop Monsanto Company Protection Products Division--Monsanto Company, 1992; Group Vice President North America Division--Monsanto Company, 1993; Group Vice President and General Manager--Monsanto Company, 1994; President, Crop Protection--Monsanto Company, 1995; Co-President, Agricultural Sector--Monsanto Company, 1997; and present position, 1998. Steven L. Engelberg, 55 Senior Vice President-- 1995 Partner, Keck, Mahin & Cate, 1986; Partner-in-Charge, Monsanto Company Keck, Mahin & Cate, Washington, D.C. office, 1986; Chief of Staff of Office of the United States Trade Representative (on leave from Keck, Mahin & Cate until May 1993), 1993; Vice President, Worldwide Government Affairs--Monsanto Company, 1994; and present position, 1996. Patrick J. Fortune, 50 Vice President and Chief 1997 Corporate Vice President, Information Management-- Information Officer-- Bristol-Myers Squibb, 1991; President and Chief Monsanto Company Operation Officer--Coram Healthcare Corporation, 1994; Vice President, Information Technology--Monsanto Company, 1995; and present position, 1997. Pierre Hochuli, 50 Executive Vice President-- 1995 Vice President and General Manager, New Products Monsanto Company Division--The Agricultural Group, 1992; Group Vice President and General Manager, New Products Division--The Agricultural Group, 1993; Vice President, Corporate Planning--Monsanto Company, 1993; Vice President--Monsanto Company; President--Growth Enterprises, 1995; Vice President--Monsanto Company; President--Growth Enterprises Business Unit; Chairman, Monsanto Europe-Africa, 1996; and present position, 1997. Robert B. Hoffman, 61 Vice Chairman and Chief 1994 Vice President, FMC Corporation, 1990; Chief Financial Financial Officer and Advisory Director--Monsanto Company, 1994; Officer--Monsanto Company and present position, 1997. 10 12 Year First Became an Present Position with Executive Name--Age Registrant Officer Other Business Experience since January 1, 1993 - -------------------------- ------------------------ --------- ------------------------------------------------------- R. William Ide III, 57 Senior Vice President, 1996 Partner, Kutak Rock, 1989; President, American Bar General Counsel and Association, 1993-1994; Partner, Long, Aldridge & Secretary--Monsanto Norman, 1993; and present position, 1996. Company Donna A. Kindl, 40 Vice President, Human 1996 Director of Human Resources Planning and Development, Resources--Monsanto Clorox Corporation, 1990; Director of Human Resources, Company Staff of the Vice Chairman--Monsanto Company, 1993; Director, Human Resources, Crop Protection Business Unit--Monsanto Company, 1995; and present position, 1996. David L. Morley, 41 Senior Vice President-- 1998 Vice President, Finance and Planning--The Agricultural Monsanto Company Group, 1992; Group Vice President and General Manager, Global Strategies and Operations--The Agricultural Group, 1993; Group Vice President and General Manager, Americas Division, Crop Protection Business Unit--Monsanto Company, 1995; President, Nutrition and Consumer Products--Monsanto Company, 1997; and present position, 1998. Philip Needleman, 59 Senior Vice President, 1991 Vice President, Research and Development; Advisory Research and Development Director--Monsanto Company, 1991; Vice President, and Chief Scientist; Research and Development; Advisory Director-- Monsanto President, Research and Company; President, Research and Development, G.D. Development, G.D. Searle & Searle & Co., 1992; and present position, 1993. Co. Nicholas L. Reding, 63 Director; Vice Chairman of 1976 Executive Vice President, Environment, Safety, Health the Board--Monsanto and Manufacturing and Advisory Director--Monsanto Company Company, 1990; and present position, 1993. Robert W. Reynolds, 54 Vice Chairman--Monsanto 1994 Vice President and Managing Director, Latin America Company World Area--Monsanto Company, 1992; Vice President, International Operations and Development--Monsanto Company, 1994; and present position, 1997. Robert B. Shapiro, 59 Director; Chairman and 1987 Executive Vice President and Advisory Director-- Chief Executive Monsanto Company; President--The Agricultural Group, Officer--Monsanto Company 1990; Director; President and Chief Operating Officer--Monsanto Company, 1993; Director; Chairman, Chief Executive Officer and President--Monsanto Company, 1995; and present position, 1997. Hendrik A. Verfaillie, 52 President--Monsanto 1993 Vice President and General Manager, Roundup Company Division--The Agricultural Group, 1990; Vice President and Advisory Director--Monsanto Company; President--The Agricultural Group, 1993; Vice President and Advisory Director--Monsanto Company, 1995; Executive Vice President and Advisory Director--Monsanto Company, 1995; and present position, 1997.
Mr. Reding will retire May 1, 1998. Otherwise, the above-listed individuals are elected to the offices set opposite their names to hold office until their successors are duly elected and have qualified, or until their earlier death, resignation or removal. 11 13 ITEM 11. EXECUTIVE COMPENSATION. Information appearing under "Directors' Fees and Other Arrangements" on pages 8 through 10 and under "Executive Compensation" on page 16 through "Certain Agreements" on page 22 of the 1998 Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. Information appearing under "Stock Ownership of Management and Certain Beneficial Owners" on pages 5 and 6 of the 1998 Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Information appearing under "Other Information Regarding Management" on page 22 of the 1998 Proxy Statement is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) Documents filed as part of this Report: 1. The financial statements set forth at pages 30, 44, 46, 50 and 51 through 61 of the 1997 Annual Report (See Exhibit 13 under Paragraph (a)3 of this Item 14) 2. Financial Statement Schedules None required 3. Exhibits--See the Exhibit Index beginning at page 15 of this Report. For a listing of all management contracts and compensatory plans or arrangements required to be filed as exhibits to this Form 10-K, see the Exhibits listed under Exhibit Nos. 10.4 through 10.32 on pages 15 through 17 of the Exhibit Index. The following Exhibits listed in the Exhibit Index are filed with this Report: 13 The Company's 1997 Annual Report to shareowners 21 Subsidiaries of the registrant (See page 19) 23 1. Consent of Independent Auditors (See page 20) 2. Consent of Company Counsel (See page 20) 24 1. Powers of attorney submitted by Robert M. Heyssel, Michael Kantor, Gwendolyn S. King, Philip Leder, Jacobus F.M. Peters, Nicholas L. Reding, John S. Reed, John E. Robson, William D. Ruckelshaus, Robert B. Shapiro, Robert B. Hoffman, and Michael R. Hogan 2. Certified copy of Board resolution authorizing Form 10-K filing utilizing powers of attorney 27 Financial Data Schedule (part of electronic submission only) 99 Computation of the Ratio of Earnings to Fixed Charges for Monsanto Company and Subsidiaries (See page 21) (b) Reports on Form 8-K during the quarter ended December 31, 1997: A Form 8-K as of December 5, 1997, was filed by the Company, including financial information restated to present the results of operations, cash flows and financial position of Monsanto's former chemical businesses as discontinued operations. 12 14 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. MONSANTO COMPANY -------------------------------------- (Registrant) By /s/ Michael R. Hogan ----------------------------------- Michael R. Hogan Vice President and Controller (Principal Accounting Officer) Date: March 17, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- - --------------------------------------------- Chairman and Director (Principal March 17, 1998 (Robert B. Shapiro) Executive Officer) - --------------------------------------------- Vice Chairman of the Board March 17, 1998 (Nicholas L. Reding) and Director - --------------------------------------------- Vice Chairman (Principal March 17, 1998 (Robert B. Hoffman) Financial Officer) /s/ Michael R. Hogan - --------------------------------------------- Vice President and Controller March 17, 1998 (Michael R. Hogan) (Principal Accounting Officer) - --------------------------------------------- Director March 17, 1998 (Robert M. Heyssel) - --------------------------------------------- Director March 17, 1998 (Michael Kantor) - --------------------------------------------- Director March 17, 1998 (Gwendolyn S. King) - --------------------------------------------- Director March 17, 1998 (Philip Leder) - --------------------------------------------- Director March 17, 1998 (Jacobus F.M. Peters) 13 15 SIGNATURE TITLE DATE --------- ----- ---- - --------------------------------------------- Director March 17, 1998 (John S. Reed) - --------------------------------------------- Director March 17, 1998 (John E. Robson) - --------------------------------------------- Director March 17, 1998 (William D. Ruckelshaus) R. William Ide III, by signing his name hereto, does sign this document on behalf of the above noted individuals, pursuant to powers of attorney duly executed by such individuals which have been filed as an Exhibit to this Report. /s/ R. William Ide III -------------------------------------- R. William Ide III Attorney-in-Fact
14 16 EXHIBIT INDEX These Exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K.
Exhibit No. Description - ----------- ----------- 2 Omitted--Inapplicable 3 1. Restated Certificate of Incorporation of the Company as of October 28, 1997 (incorporated herein by reference to Exhibit 3(i) of the Company's Form 10-Q for the quarter ended September 30, 1997) 2. By-Laws of the Company, as amended effective September 26, 1997 (incorporated herein by reference to Exhibit 3(ii) of the Company's Form 10-Q for the quarter ended September 30, 1997) 4 1. Form of Rights Agreement, dated as of January 26, 1990 between the Company and First Chicago Trust Company as successor to The First National Bank of Boston (incorporated herein by reference to Form 8-A filed on January 31, 1990) 2. Registrant agrees to furnish to the Securities and Exchange Commission upon request copies of instruments defining the rights of holders of certain long-term debt not being registered of the registrant and all subsidiaries for which consolidated or unconsolidated financial statements are required to be filed. 9 Omitted--Inapplicable 10 1. Distribution Agreement by and between Monsanto Company and Solutia Inc., as of September 1, 1997, plus identification of contents of omitted schedules and exhibits and agreement to furnish supplementally a copy of any omitted schedule or exhibit to the Securities and Exchange Commission upon request (incorporated herein by reference to Exhibit 2.1 of the Company's Form 8-K filed September 16, 1997) 2. Employee Benefits and Compensation Allocation Agreement between Monsanto Company and Solutia Inc., dated as of September 1, 1997 (incorporated herein by reference to Exhibit 99.1 of the Company's Form 8-K filed September 16, 1997) 3. Tax Sharing and Indemnification Agreement dated as of September 1, 1997, by and between Monsanto Company and Solutia Inc. (incorporated herein by reference to Exhibit 99.2 of the Company's Form 8-K filed September 16, 1997) 4. Monsanto Company Non-Employee Director Deferred Compensation Plan (incorporated herein by reference to Exhibit 10.3 of the Company's Form 10-Q for the quarter ended September 30, 1997) 5. Monsanto Company Non-Employee Director Equity Incentive Compensation Plan (incorporated herein by reference to Exhibit 10.4 of the Company's Form 10-Q for the quarter ended September 30, 1997) 6. Non-Employee Directors Stock Plan, as amended in 1991 (incorporated herein by reference to Exhibit 19(ii)1 of the Company's Form 10-Q for the quarter ended June 30, 1991) 7. Amendment to Non-Employee Directors Stock Plan (incorporated herein by reference to Exhibit 10.8 of the Company's Form 10-Q for the quarter ended June 30, 1997) 15 17 EXHIBIT INDEX (CONT'D) Exhibit No. Description - ----------- ----------- 8. Charitable Contribution Program effective April 1, 1992 (incorporated herein by reference to Exhibit 19(i)1 of the Company's Form 10-K for the year ended December 31, 1991) 9. Deferred Compensation Plan for Non-Employee Directors, as amended in 1983 and 1991 (incorporated herein by reference to Exhibit 19(ii)1 of the Company's Form 10-K for the year ended December 31, 1991) 10. Excerpt of Resolutions of Monsanto Company Board of Directors Regarding Directors' Compensation, adopted by Unanimous Consent effective August 4, 1997 (incorporated herein by reference to Exhibit 10.5 of the Company's Form 10-Q for the quarter ended September 30, 1997) 11. Consulting Agreement between the Company and Philip Leder dated January 17, 1990 (incorporated herein by reference to Exhibit 19(i)3 of the Company's Form 10-K for the year ended December 31, 1989) 12. Monsanto Management Incentive Plan of 1984, as amended in 1987, 1988, 1989, April 1997 and July 1997 (incorporated herein by reference to Exhibit 10.1 of the Company's Form 10-Q for the quarter ended June 30, 1997) 13. Monsanto Management Incentive Plan of 1988/I, as amended in 1988, 1989, 1991, 1992, April 1997 and July 1997 (incorporated herein by reference to Exhibit 10.3 of the Company's Form 10-Q for the quarter ended June 30, 1997) 14. Monsanto Management Incentive Plan of 1988/II, as amended in 1989, 1991, 1992, April 1997 and July 1997 (incorporated herein by reference to Exhibit 10.4 of the Company's Form 10-Q for the quarter ended June 30, 1997) 15. Monsanto Management Incentive Plan of 1994, as amended in April 1997 and July 1997 (incorporated herein by reference to Exhibit 10.5 of the Company's Form 10-Q for the quarter ended June 30, 1997) 16. Monsanto Management Incentive Plan of 1996 as amended April 1997, July 1997 and August 1997 (incorporated herein by reference to Exhibit 10.6 of the Company's Form 10-Q for the quarter ended September 30, 1997) 17. Monsanto Executive Stock Purchase Incentive Plan (incorporated herein by reference to Appendix B of the Monsanto Company Notice of Annual Meeting and Proxy Statement dated March 14, 1996) 18. Annual Incentive Program for Executive Officers (incorporated herein by reference to the description on pages 12-13 of the Monsanto Company Notice of Annual Meeting and Proxy Statement dated March 13, 1998) 19. Long-Term Incentive Program and Premium Option Purchase Program for Executive Officers (incorporated herein by reference to the description on pages 13-15 of the Monsanto Company Notice of Annual Meeting and Proxy Statement dated March 13, 1998) 20. Split-dollar Life Insurance Plan (incorporated herein by reference to Exhibit 10(iii)19 of the Company's Form 10-K for the year ended December 31, 1987) 16 18 EXHIBIT INDEX (CONT'D) Exhibit No. Description - ----------- ----------- 21. Form of Employment Agreement for Executive Officers (incorporated herein by reference to Exhibit 10.7 of the Company's Form 10-Q for the quarter ended September 30, 1997) 22. Letter Agreement between the Company and Robert B. Shapiro entered into as of July 23, 1990 (incorporated herein by reference to Exhibit 19(i)3 of the Company's Form 10-Q for the quarter ended September 30, 1990) 23. Amendment to Letter Agreement between the Company and Robert B. Shapiro entered into as of July 23, 1990 (incorporated herein by reference to Exhibit 10.23 of the Company's Form 10-K for the year ended December 31, 1995) 24. Letter Agreement between the Company and Hendrik A. Verfaillie entered into as of June 27, 1988 (incorporated herein by reference to Exhibit 10.20 of the Company's Form 10-K for the year ended December 31, 1995) 25. Supplemental Retirement Plan regarding Richard U. De Schutter (incorporated herein by reference to Exhibit 10.26 of the Company's Form 10-K for the year ended December 31, 1996) 26. Searle Phantom Stock Option Plan of 1986, as amended in 1990, 1991, 1992 and 1995 (incorporated herein by reference in Exhibit 10.1 of the Company's Form 10-Q for the quarter ended March 31, 1995) 27. Minutes of Meeting of Executive Compensation and Development Committee regarding termination of Searle Phantom Stock Option Plan of 1986 (incorporated herein by reference to Exhibit 10.8 of the Company's Form 10-Q for the quarter ended March 31, 1997) 28. Searle Monsanto Stock Option Plan of 1986, as amended in 1988, 1989, 1990, 1991, 1995, April 1997 and July 1997 (incorporated herein by reference to Exhibit 10.2 of the Company's Form 10-Q for the quarter ended June 30, 1997) 29. Searle/Monsanto Stock Plan of 1994, as amended in 1995, April 1997 and July 1997 (incorporated herein by reference to Exhibit 10.6 of the Company's Form 10-Q for the quarter ended June 30, 1997) 30. G. D. Searle & Co. Split Dollar Life Insurance Plan, as amended in 1989 (incorporated herein by reference to Exhibit 19(ii)3 of the Company's Form 10-Q for the quarter ended June 30, 1989) 31. G. D. Searle & Co. Legal/Tax/Financial Counseling Plan (incorporated herein by reference to Exhibit 19(i)8 of the Company's Form 10-Q for the quarter ended June 30, 1988) 32. G. D. Searle & Co. Deferred Compensation Plan, as amended in 1994 (incorporated herein by reference to Exhibit 10.6 of the Company's Form 10-Q for the quarter ended June 30, 1994) 11 Omitted--Inapplicable; see "Earnings per Share" on page 60 of the 1997 Annual Report 12 Statement re Computation of the Ratio of Earnings to Fixed Charges--See Exhibit 99 below 17 19 Exhibit No. Description - ----------- ----------- 13 The Company's 1997 Annual Report to shareowners. (The electronic submission includes only the financial report section of the Annual Report, consisting of pages 28 through 62 of that Report.) Only those portions expressly incorporated by reference into this Form 10-K are deemed "filed"; other portions are furnished only for the information of the Commission. 18 Omitted--Inapplicable 21 Subsidiaries of the registrant (See page 19) 22 Omitted--Inapplicable 23 1. Consent of Independent Auditors (See page 20) 2. Consent of Company Counsel (See page 20) 24 1. Powers of attorney submitted by Robert M. Heyssel, Michael Kantor, Gwendolyn S. King, Philip Leder, Jacobus F.M. Peters, Nicholas L. Reding, John S. Reed, John E. Robson, William D. Ruckelshaus, Robert B. Shapiro, Robert B. Hoffman and Michael R. Hogan 2. Certified copy of Board resolution authorizing Form 10-K filing utilizing powers of attorney 27 Financial Data Schedule (part of electronic submission only) 99 Computation of the Ratio of Earnings to Fixed Charges for Monsanto Company and Subsidiaries (See page 21) - ------- Only Exhibits Nos. 13, 21, 23.1, 23.2 and 99 have been included in the printed copy of this Report.
18 EX-13 2 PORTIONS OF ANNUAL REPORT 1 Financial Section Contents Management Report Page 28 Finance Committee Report, Independent Auditors' Report Page 29 Statement of Consolidated Income Page 30 Statement of Consolidated Financial Position Page 44 Statement of Consolidated Cash Flow Page 46 Statement of Consolidated Shareowners' Equity Page 50 Notes to Financial Statements Page 51 Financial Summary Page 62 Unless otherwise indicated by the context, "Monsanto" means Monsanto Company and consolidated subsidiaries, and "the company" means Monsanto Company only. Unless otherwise indicated, "earnings per share" means diluted earnings per share. In tables, all dollars are in millions, except per share data. =============================================================================== MANAGEMENT REPORT =============================================================================== Monsanto Company's management is responsible for the fair presentation and consistency, in accordance with generally accepted accounting principles, of all the financial information included in this annual report. Where necessary, the information reflects management's best estimates and judgments. Management is also 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 information. Cost/benefit judgments are an important consideration in this regard. The effectiveness of internal controls is maintained by personnel selection and training, division of responsibilities, establishment and communication of policies, and ongoing internal review programs and audits. Management believes that Monsanto's system of internal accounting controls as of Dec. 31, 1997, was effective and adequate to accomplish the objectives described above. /s/ Robert B. Shapiro Robert B. Shapiro Chairman and Chief Executive Officer /s/ Robert B. Hoffman Robert B. Hoffman Vice Chairman and Chief Financial Officer Feb. 27, 1998 28 1997 Monsanto Annual Report 2 =============================================================================== FINANCE COMMITTEE REPORT =============================================================================== The finance committee assumed the responsibilities of the audit committee as the board of directors was reorganized following the spinoff of the company's chemical businesses in 1997. After its formation in September, the committee met three times in 1997. The committee is composed of four nonemployee members of the board. As part of its duties, the committee reviews and monitors Monsanto's internal accounting controls, financial reports, accounting practices, and the scope and effectiveness of the audits performed by the independent auditors and internal auditors. The committee also recommends to the full board of directors the appointment of Monsanto's principal independent auditors, and it approves in advance all significant audit and nonaudit services provided by such auditors. As ratified by shareowner vote at the 1997 annual meeting, Deloitte & Touche LLP was appointed independent auditor to examine, and to express an opinion as to the fair presentation of, the consolidated financial statements. This report follows. The finance committee discusses audit and financial reporting matters with representatives of the company's financial management, its internal auditors, and Deloitte & Touche. The internal auditors and Deloitte & Touche meet with the committee, with and without management representatives present, to discuss the results of their examinations, the adequacy of Monsanto's internal accounting controls, and the quality of its financial reporting. The committee encourages the internal auditors and Deloitte & Touche to communicate directly with the committee. The finance committee has reviewed the financial section of this annual report. Pursuant to the recommendation of the committee, the board of directors has approved the financial section. /s/ John S. Reed John S. Reed Chair, Finance Committee Feb. 27, 1998 =============================================================================== INDEPENDENT AUDITORS' REPORT =============================================================================== To the shareowners of Monsanto Company: We have audited the accompanying statement of consolidated financial position of Monsanto Company and subsidiaries as of Dec. 31, 1997 and 1996, and the related statements of consolidated income, shareowners' equity and cash flow for each of the three years in the period ended Dec. 31, 1997. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Monsanto Company and subsidiaries as of Dec. 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended Dec. 31, 1997, in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP Deloitte & Touche LLP St. Louis, Missouri Feb. 27, 1998 29 1997 Monsanto Annual Report 3 ================================================================================================= STATEMENT OF CONSOLIDATED INCOME =================================================================================================
(Dollars in millions, except per share) 1997 1996 1995 - ------------------------------------------------------------------------------------------------- NET SALES $7,514 $6,348 $5,410 Costs and expenses: Cost of goods sold 3,091 2,684 2,357 Selling, general and administrative expenses 2,023 1,860 1,521 Technological expenses 1,044 702 601 Acquired in-process research and development 684 Amortization of intangible assets 173 151 119 Restructuring expenses 356 114 - ------------------------------------------------------------------------------------------------- OPERATING INCOME 499 595 698 Interest expense (170) (119) (132) Interest income 45 51 57 Other income (expense) -- net (8) 26 22 - ------------------------------------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 366 553 645 Income taxes 72 140 184 - ------------------------------------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS 294 413 461 - ------------------------------------------------------------------------------------------------- DISCONTINUED OPERATIONS: Income (Loss) from discontinued operations 176 (28) 162 Gain on sale of styrenics plastics business 116 - ------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM DISCONTINUED OPERATIONS 176 (28) 278 - ------------------------------------------------------------------------------------------------- NET INCOME $ 470 $ 385 $ 739 ================================================================================================= BASIC EARNINGS (LOSS) PER SHARE: Continuing operations $ 0.50 $ 0.71 $ 0.81 Discontinued operations 0.30 (0.05) 0.49 - ------------------------------------------------------------------------------------------------- NET INCOME $ 0.80 $ 0.66 $ 1.30 ================================================================================================= DILUTED EARNINGS (LOSS) PER SHARE: Continuing operations $ 0.48 $ 0.69 $ 0.79 Discontinued operations 0.29 (0.05) 0.48 - ------------------------------------------------------------------------------------------------- NET INCOME $ 0.77 $ 0.64 $ 1.27 ================================================================================================= The above statement should be read in conjunction with pages 51-61 of this report.
----------------------------------- KEY FINANCIAL STATISTICS (Unaudited) 1997 1996 1995 - ------------------------------------------------------------------------------------------------- AS A PERCENT OF NET SALES: Selling, General and Administrative Expenses 27% 29% 28% Technological Expenses 14 11 11 Research and Development Expenses 12 10 10 Operating Income 7 9 13 Income from Continuing Operations 4 7 9 EFFECTIVE INCOME TAX RATE -- CONTINUING OPERATIONS 20 25 29 ================================================================================================= Research and development expenses are included in total technological expenses.
30 1997 Monsanto Annual Report 4 =============================================================================== REVIEW OF CONSOLIDATED RESULTS OF OPERATIONS =============================================================================== Monsanto Achieves Record Results, Excluding Unusual Charges In 1997, Monsanto Company achieved record results, if unusual items were excluded, and sharpened its focus on life sciences following the spinoff of its chemical businesses on Sept. 1, 1997. As a life sciences company, Monsanto has focused its efforts in three areas -- agriculture, nutrition and health. Income from continuing operations totaled $294 million, or $0.48 per share, in 1997. Results included aftertax charges of $455 million, or $0.75 per share, for write-offs of in-process research and development (R&D) related to strategic acquisitions. If these unusual write-offs were excluded, income from continuing operations would have totaled a record $749 million, or a record $1.23 per share. The company's core businesses delivered strong results in 1997, as sales of key products continued to grow. Monsanto also made several strategic acquisitions, investments and alliances in 1997 to strengthen the core capabilities necessary to be the first to invent important new life sciences products and bring them to customers worldwide. Net Sales Set Record Net sales were a record $7.5 billion in 1997, topping last year's net sales of $6.3 billion by 18 percent. The increase came primarily from continued strong performances by the Agricultural Products and Pharmaceuticals segments. Net sales for Agricultural Products set another record in 1997, led by significant sales volume increases for the family of Roundup(R) herbicides. Increases in the use of conservation tillage; increases in over-the-top applications of Roundup(R) on Roundup Ready(R) soybeans, cotton and canola; and an increase in the acres of major row crops planted worldwide drove sales of Roundup(R) herbicide to a new high. The increase in 1997 net sales for the Agricultural Products segment also reflected the inclusion of sales from Asgrow Agronomics, a seed company Monsanto acquired in 1997. Higher sales volumes of Posilac(R) bovine somatotropin and Harness(R) herbicide also contributed to the sales growth. In addition, net sales benefited from increased demand for crops developed through biotechnology, including Roundup Ready(R) soybeans, cotton and canola, Bollgard(R) insect-protected cotton and YieldGard(R) insect-protected corn. Net sales for the Pharmaceuticals segment also reached record levels, increasing $412 million, or 21 percent, from 1996 net sales. The increase is attributable primarily to higher sales volumes of Ambien(R) short-term treatment for insomnia and Daypro(R) and Arthrotec(R) arthritis treatments. Sales of these key growth products grew 26 percent from sales in the prior year. Sales also benefited from licensing revenues of $75 million related to a collaborative partnership, and from sales of product rights, which totaled $117 million. Lower sales of verapamil calcium channel blockers partially offset these increases. Sales for the family of Calan(R) calcium channel blockers continued to decline, but that decrease was partially offset by growing sales of Covera-HS(R), Searle's newest verapamil product. Sales for the Corporate and Other segment in 1997 increased significantly compared with year-ago sales, primarily because of the inclusion in 1997 of sales from the produce business of Calgene Inc. Monsanto acquired a controlling interest in Calgene in November 1996. Prior to that time, Calgene was accounted for as an equity affiliate, and its results were not consolidated. Lower net sales for the Nutrition and Consumer Products segment partially offset the sales increases in the other segments. Nutrition and Consumer Products' sales declined 3 percent in 1997 vs. sales in 1996 primarily because of lower sales volumes of Equal(R) and Canderel(R) tabletop sweeteners. These decreases were partially offset by higher sales volumes of biogums and Roundup(R) herbicide for lawn-and-garden use. Sales of NutraSweet(R), the company's trademark aspartame product, were essentially flat compared with sales in the prior year. Monsanto's net sales in markets outside the United States represented 44 percent of 1997 net sales, compared with 45 percent in 1996. An analysis of the company's sales change, along with comparative data, follows:
- ------------------------------------------------------------------ SALES ANALYSIS 1997 1996 - ------------------------------------------------------------------ Selling prices (3)% (2)% Sales volumes and mix 9 17 Acquisitions and pharmaceutical product rights sales and licensing revenues 12 2 - ------------------------------------------------------------------ TOTAL CHANGE 18% 17% ==================================================================
Events Affecting Operating Comparability During 1997, Monsanto acquired several seed companies specializing in various stages of seed production. These acquisitions included Asgrow, a global leader in soybean research and seeds; Holden's Foundation Seeds Inc., a global leader in the development and growth of corn germplasm and a supplier of parent seed to retail seed companies; Corn States Hybrid Service Inc., the exclusive marketer and distributor for Holden's products; and Sementes Agroceres S.A., the leading seed corn company in Brazil. Monsanto also acquired the remaining interest in Calgene, which has done significant biotechnology research in oils, cotton and produce. The company recorded pretax charges of $684 million ($455 million aftertax, or $0.75 per share) for the write-off of acquired in-process R&D related to these acquisitions. This is an accounting treatment that values and 31 1997 Monsanto Annual Report 5 =============================================================================== REVIEW OF CONSOLIDATED RESULTS OF OPERATIONS (continued) =============================================================================== immediately writes off research that is under way at the time of an acquisition but that has not resulted in commercial products and has no alternative future use. In December 1996, the board of directors approved pretax restructuring charges and other unusual items of $376 million ($257 million aftertax, or $0.43 per share) for the closure or rationalization of certain facilities, asset write-offs, and work force reductions. Approximately 940 of the 1,520 positions expected to be eliminated by the restructuring had been eliminated by the end of 1997. Without the unusual events in 1997 and 1996, income from continuing operations would have been $749 million for 1997, an increase of 12 percent from $670 million for the prior year. Earnings per share from continuing operations in 1997 would have been $1.23 vs. $1.12 for 1996, an increase of 10 percent. Operating Results Increase, If Unusual Items Are Excluded Operating income totaled $499 million in 1997, $96 million, or 16 percent, lower than operating income of $595 million in 1996. If the net pretax unusual charges of $684 million in 1997 and $407 million in 1996 were excluded, operating income would have increased $181 million, or 18 percent, in 1997. The increase primarily resulted from higher sales volumes, licensing revenues and sales of product rights. These increases were partially offset by increased selling, general and administrative (SG&A) expenses and higher technological spending. If unusual charges in 1997 and 1996 were excluded from segment results, operating income would have increased in 1997 for both the Agricultural Products and Pharmaceuticals segments. The increase in operating income for Agricultural Products was driven by record sales, partially offset by increased SG&A expenses and technological spending. Selling expenses for Agricultural Products rose primarily because of higher selling expenses from seed companies Monsanto acquired in 1997. The segment's technological expenses rose principally because of higher spending on crop biotechnology initiatives and the inclusion of expenses from the acquired seed companies. The increase in operating income for the Pharmaceuticals segment resulted from higher sales volumes of key products, licensing revenues, and sales of product rights, partially offset by increased selling and technological expenses. SG&A expenses for Pharmaceuticals were higher because of an expansion in the sales force and because of preparations for new product launches in 1998. The segment's technological expenses increased markedly as new product candidates advanced to later, more expensive phases of development. If unusual items were excluded, operating income for the Nutrition and Consumer Products segment would have declined in 1997, primarily because of lower sales volumes of tabletop sweeteners and increased technological spending. Technological expenses for Nutrition and Consumer Products rose principally because of the continuing development of a new no-calorie sweetener called neotame. Total SG&A expenses increased $163 million, or 9 percent, in 1997 compared with expenses in 1996, principally because of the spending increases in the Agricultural Products and Pharmaceuticals segments. Total technological expenses increased $342 million, or 49 percent, compared with those in 1996. Technological expenses rose for all segments, as Monsanto's focus on developing new products continued. Amortization of intangible assets increased in 1997 compared with amortization in the prior year, principally because of the increase in intangible assets related to current-year seed company acquisitions. The increase in interest expense in year-to-year comparisons was caused by a greater amount of debt outstanding during 1997. If $31 million of unusual income in 1996 were excluded, "Other income (expense) -- net" would have shown a small decline in 1997. This decrease was caused by significantly higher exchange losses partially offset by increased income from equity affiliates, primarily from European aspartame joint ventures and DEKALB Genetics Corp. The currency exchange losses stemmed primarily from southeast Asia, particularly Indonesia and Malaysia. The 1997 effective tax rate of 20 percent was lower than the 1996 effective tax rate of 25 percent, primarily because of the decrease in pretax income, which gave tax benefits a greater relative effect in 1997. If the unusual items in 1997 and 1996 were excluded, the effective tax rate would have been 29 percent in 1997 vs. 28 percent in 1996. Cost Savings Continue In prior years, Monsanto took steps to make worldwide operations more focused, productive and cost-effective. The effect of these actions benefited operating income by more than $400 million in 1997. The company invests the savings in its core businesses, new product development, and strategic acquisitions and investments to enhance its long-term profitability. These savings are in line with original expectations, and they are expected to continue. Business redesign and other productivity efforts have yielded significant benefits as well. These initiatives will continue as the company responds to increased global competition and higher customer expectations. 32 1997 Monsanto Annual Report 6 =============================================================================== REVIEW OF CONSOLIDATED RESULTS OF OPERATIONS (continued) =============================================================================== Development and Commercialization of New Products Are Priorities New product development and commercialization continue to be strategic priorities for Monsanto. Recent efforts include insect-protected and herbicide-tolerant crops, a novel arthritis treatment, and a new sweetener. Monsanto's R&D expenditures were $939 million in 1997, or 12 percent of net sales, a level that reflects management's strong, long-term commitment to R&D. The discovery and development of pharmaceutical, agricultural and science-based nutritional products continue to be the focus of most of these expenditures. Significant R&D efforts in existing product technologies and new product applications also continue across all business sectors. Additionally, Monsanto's research program includes new technologies and proprietary information obtained through licensing and strategic acquisitions. As a result, Monsanto has numerous products in the R&D pipeline. Many of them are expected to be commercialized in the next few years. Prior Year Review Income from continuing operations in 1996 totaled $413 million, or $0.69 per share, vs. $461 million, or $0.79 per share, in 1995. Both years' results, however, were affected by unusual events. In December 1996, the company recorded pretax restructuring charges associated with the closure or rationalization of certain facilities, asset write-offs, and work force reductions totaling $376 million ($257 million aftertax, or $0.43 per share). In December 1995, the company recorded a pretax restructuring charge of $114 million ($78 million aftertax, or $0.13 per share) to cover the costs of work force reductions, business consolidations, facility closures, and the exit from nonstrategic businesses and facilities. The company also recorded approximately $20 million in favorable pretax adjustments ($13 million aftertax, or $0.02 per share) under certain sales rebate programs for product sales made in prior years, and approximately $4 million ($2 million aftertax, or less than $0.01 per share) in insurance settlements. Without the unusual events in 1996 and 1995, income from continuing operations would have been $670 million for 1996, compared with $524 million for the prior year, an increase of 28 percent. Earnings per share from continuing operations would have been $1.12 in 1996, a 24 percent increase from comparable 1995 results of $0.90 per share. Net sales for 1996 were $6.3 billion, up $938 million, or 17 percent, from sales in 1995 of $5.4 billion. The Agricultural Products, Nutrition and Consumer Products, and Pharmaceuticals segments all contributed to the increase, primarily because of higher sales volumes. The effects of lower average selling prices, particularly for the Agricultural Products segment, partially offset the increase in net sales. Net sales for Agricultural Products in 1996 increased 20 percent from those in 1995 to $2.6 billion. This increase was primarily the result of higher worldwide sales volumes for the family of Roundup(R) herbicides. Most world areas posted solid sales volume gains in 1996. Continued increases in conservation tillage practices, favorable weather conditions in certain key markets, and an increase in planted acreage drove the increased demand. Higher sales of Posilac(R) bovine somatotropin also contributed to the sales increase. Net sales for the Nutrition and Consumer Products segment increased in 1996, principally on the strength of higher sales volumes of NutraSweet(R) brand sweetener, tabletop sweeteners, biogum products, and lawn-and-garden products. The increase in net sales for Pharmaceuticals can be attributed to sales of key products, principally Ambien(R) short-term insomnia treatment and Daypro(R) and Arthrotec(R) arthritis treatments. In addition, sales from the women's health care product lines acquired from Syntex in the third quarter of 1995 contributed to the growth. Lower sales for the family of Calan(R) calcium channel blockers partially offset the sales increase. Operating income in 1996 was $595 million, $103 million lower than operating income in 1995. If the net pretax restructuring charges and unusual items of $407 million in 1996 and $90 million in 1995 were excluded, operating income would have increased approximately $214 million, or 27 percent, in 1996. This significant increase in operating income was related principally to higher sales volumes and an improved gross profit. The increase in gross profit was primarily because of an improved sales mix from an increased percentage of higher margin Agricultural Products and Pharmaceuticals sales. SG&A expenses in 1996 increased, primarily because of higher sales and new product launches for Agricultural Products and Pharmaceuticals, higher costs associated with employee incentive programs, and increased spending on growth initiatives. Technological expenses rose because of higher R&D expenses in the Agricultural Products and Pharmaceuticals segments. Cost sharing payments from pharmaceutical alliances partially offset this increase. If the effect of unusual charges were excluded, 1996 amortization of intangible assets would have increased from amortization in 1995, primarily because of the increase in intangible assets associated with current-year investments and acquisitions in biotechnology businesses. If one-time charges were excluded, "Other income (expense) -- net" would have decreased, principally because of lower income from equity affiliates. 33 1997 Monsanto Annual Report 7 =============================================================================== REVIEW OF CONSOLIDATED RESULTS OF OPERATIONS (continued) =============================================================================== Analysis of Change in Earnings per Share from Continuing Operations
BETTER (WORSE) --------------------------- 1997 VS. 1996 VS. 1996 1995 - ------------------------------------------------------------------------ SALES-RELATED FACTORS: Selling prices $(0.23) $(0.16) Sales volumes and mix 0.66 0.74 Pharmaceutical product rights sales and licensing revenues 0.14 - ------------------------------------------------------------------------ TOTAL SALES-RELATED FACTORS 0.57 0.58 ======================================================================== COST-RELATED FACTORS: Raw material and manufacturing costs (0.07) 0.18 Selling, general and administrative expenses (0.03) (0.38) Technological expenses (0.33) (0.18) Amortization of intangible assets -- (0.01) - ------------------------------------------------------------------------ TOTAL COST-RELATED FACTORS (0.43) (0.39) ======================================================================== OTHER FACTORS: Change in shares outstanding (0.03) (0.02) Acquisitions and divestitures -- 0.09 Other expenses -- net -- (0.04) - ------------------------------------------------------------------------ TOTAL OTHER FACTORS (0.03) 0.03 ======================================================================== Change in earnings per share before unusual factors 0.11 0.22 Unusual factors (0.32) (0.32) - ------------------------------------------------------------------------ CHANGE IN EARNINGS PER SHARE FROM CONTINUING OPERATIONS $(0.21) $(0.10) ========================================================================
34 1997 Monsanto Annual Report 8 ====================================================================================================================== SEGMENT DATA ======================================================================================================================
OPERATING OPERATING NET SALES CONTRIBUTION INCOME (LOSS) -------------------------- ---------------------------- ------------------------- 1997 1996 1995 1997 1996 1995 1997 1996 1995 - ------------------------------------------------------------ ---------------------------- ------------------------- Agricultural Products $3,126 $2,555 $2,134 $ 762 $ 639 $508 $ 112 $ 520 $478 Nutrition and Consumer Products 1,535 1,581 1,371 304 338 294 211 193 186 Pharmaceuticals 2,407 1,995 1,711 340 223 144 318 79 132 Corporate and Other 446 217 194 (142) (124) (84) (142) (197) (98) - ------------------------------------------------------------ ---------------------------- ------------------------- TOTAL $7,514 $6,348 $5,410 $1,264 $1,076 $862 $ 499 $ 595 $698 ============================================================ ============================ ========================= DEPRECIATION TOTAL ASSETS CAPITAL EXPENDITURES AND AMORTIZATION -------------------------- --------------------------- ------------------------- 1997 1996 1995 1997 1996 1995 1997 1996 1995 - ------------------------------------------------------------ --------------------------- ------------------------- Agricultural Products $ 4,520 $ 3,007 $ 2,329 $341 $280 $135 $208 $153 $142 Nutrition and Consumer Products 2,646 2,635 2,653 82 98 72 118 125 119 Pharmaceuticals 2,856 2,391 2,619 190 89 78 136 130 127 Corporate and Other 752 581 375 31 33 16 25 15 17 Discontinued Operations 2,623 2,755 - ------------------------------------------------------------ ---------------------------- ------------------------- TOTAL $10,774 $11,237 $10,731 $644 $500 $301 $487 $423 $405 ============================================================ ============================ ========================= Operating contribution is operating income excluding goodwill amortization and the effect of restructuring and other unusual items. Operating income was affected by research and development write-offs in 1997 and by restructuring and other unusual items in 1996 and 1995 as follows: INCOME (EXPENSE) --------------------------------------------- SEGMENT 1997 1996 1995 - ------------------------------------------------------------------------------------ Agricultural Products $(633) $(106) $(17) Nutrition and Consumer Products (51) (103) (66) Pharmaceuticals (125) 7 Corporate and Other (73) (14) - ------------------------------------------------------------------------------------ TOTAL $(684) $(407) $(90) ====================================================================================
In 1997, Monsanto redefined its segments. Segment information for 1996 and 1995 has been restated to conform to the current presentation. Although inflation is relatively low in most of Monsanto's major markets, it continues to affect operating results. To mitigate the effect of inflation, Monsanto has implemented measures to control costs, to improve productivity, to manage new fixed and working capital, and to raise selling prices when government regulations and competitive conditions permit. In addition, the current costs of replacing certain assets are estimated to be greater than the historical costs presented in the financial statements. Accordingly, the depreciation expense reported in the Statement of Consolidated Income would be greater if it were stated on a current-cost basis. 1997 Net Sales [GRAPH] Sales among segments were not significant. Certain corporate expenses, primarily those related to the overall management of Monsanto, were not allocated to the segments or geographic areas. Corporate assets are primarily investments in affiliates and a portion of the cash balance. The principal factors that accounted for the segments' performances in 1997 and 1996, along with the factors that are expected to affect operating results in the near term, are described on the following pages. 35 1997 Monsanto Annual Report 9 ================================================================================= AGRICULTURAL PRODUCTS =================================================================================
---------------------------------------- 1997 1996 1995 - --------------------------------------------------------------------------------- Net Sales $3,126 $2,555 $2,134 Operating Contribution 762 639 508 Operating Income 112 520 478 Total Assets 4,520 3,007 2,329 Capital Expenditures 341 280 135 Depreciation and Amortization 208 153 142 - --------------------------------------------------------------------------------- Operating contribution is operating income excluding goodwill amortization and the effect of restructuring and other unusual items.
THE AGRICULTURAL PRODUCTS SEGMENT IS A LEADING WORLDWIDE DEVELOPER, PRODUCER AND MARKETER OF CROP PROTECTION PRODUCTS. THIS GROUP ALSO DEVELOPS AND MARKETS PRODUCTS ENHANCED BY BIOTECHNOLOGY. THESE PRODUCTS IMPROVE THE EFFICIENCY OF FOOD PRODUCTION AND PRESERVE ENVIRONMENTAL QUALITY FOR AGRICULTURAL AND INDUSTRIAL USES. MORE THAN HALF OF THE UNIT'S HERBICIDE NET SALES ARE MADE OUTSIDE THE UNITED STATES. WEATHER CONDITIONS IN AGRICULTURAL MARKETS WORLDWIDE AFFECT SALES VOLUMES. Net sales for Agricultural Products totaled a record $3.1 billion in 1997, surpassing the 1996 record by $571 million, or 22 percent. The increase in net sales was fueled by higher worldwide sales volumes for the family of Roundup(R) herbicides, led by strong sales in Brazil, Argentina and the United States. Sales volumes of Roundup(R) herbicide were driven to a new high by increases in the use of conservation tillage, an increase in the acres of major row crops planted worldwide, and applications of Roundup(R) on Roundup Ready(R) soybeans, cotton and canola. Selling price reductions, principally in markets outside the United States, made Roundup(R) more cost effective for weed control in a broader range of crop and industrial uses. The effect of generic competition, especially in certain foreign markets, dampened selling prices modestly. However, the effect of increased sales volumes more than offset the effect of lower selling prices. Agricultural Products Net Sales [GRAPH] Sales from seed companies Monsanto acquired in 1997, particularly Asgrow Agronomics, also added to sales. Net sales for the Agricultural Products segment also benefited from record sales of Posilac(R) bovine somatotropin, which increased 25 percent from sales in the prior year; increased demand for crops developed through biotechnology, including Roundup Ready(R) soybeans, cotton and canola, Bollgard(R) insect-protected cotton and YieldGard(R) insect-protected corn; and higher sales volumes of acetanilide-based herbicides, particularly Harness(R) herbicide. Operating income for Agricultural Products in 1997 decreased $408 million from operating income in 1996, while operating contribution increased $123 million, or 19 percent. Operating income was affected by unusual items in both years. In 1997, operating income included $633 million of pretax charges for the write-off of in-process research and development (R&D), primarily associated with the acquisitions of Asgrow, Calgene Inc.'s cotton business, Holden's Foundation Seeds Inc. and Sementes Agroceres S.A. In 1996, the unusual items included $106 million in charges for restructuring and other actions, principally related to the cost of work force reductions. If these unusual items in 1997 and 1996 were excluded, operating income for Agricultural Products would have increased $119 million, or 19 percent, in year-to-year comparisons. Higher sales volumes and increased licensing fees from biotechnology products contributed to the increase. These positive effects were partially offset by increased operating expenses. Selling, general and administrative (SG&A) expenses increased primarily because of higher selling expenses from the seed companies Monsanto acquired in 1997. Technological expenses grew primarily because of higher spending on crop biotechnology initiatives and the inclusion of seed company expenses. Amortization of intangible assets rose principally because of the acquisition of Holden's. Agricultural Products Operating Measures [GRAPH] Prior Year Review Net sales for Agricultural Products in 1996 were 20 percent higher than 1995 net sales. Operating income increased 9 percent from that in 1995. The increase in operating income was affected by unusual items in both 1996 and 1995. In 1996, the unusual items included $106 million in charges for restructuring and other actions, principally related to the cost of work force reductions. In 1995, unusual items included $17 million in restructuring charges and other actions for facility closures and the cost of work force reductions. If unusual items in 1996 and 1995 were excluded, 1996 Agricultural Products' operating income would have increased $131 million, or 26 percent. 36 1997 Monsanto Annual Report 10 =============================================================================== AGRICULTURAL PRODUCTS (continued) =============================================================================== The increase in net sales was primarily because of higher worldwide sales volumes for the family of Roundup(R) herbicides. Most world areas posted solid sales volume gains in 1996. The increased demand was attributed to continued increases in conservation tillage practices, favorable weather conditions in key markets, and an increase in planted acreage. Selling price reductions, principally in markets outside the United States, made Roundup(R) cost effective for weed control in a broader range of crop and industrial uses. The effect of generic competition, especially in certain foreign markets, dampened selling prices modestly. However, the effect of increased sales volumes on operating income exceeded the effect of lower selling prices. Higher sales volumes of Harness(R) herbicide also contributed to the 1996 sales increase. Net sales in 1996 benefited from higher sales of Posilac(R) bovine somatotropin. In addition, successful introductions of new products, such as Roundup Ultra(R) herbicide, Roundup Ready(R) soybeans and Bollgard(R) insect-protected cotton, helped fuel sales growth. In addition to the effect of sales volume increases, 1996 operating contribution and operating income benefited from lower manufacturing costs. The effects of higher sales volumes and lower manufacturing costs were partially offset by higher selling expenses for new product introductions and by higher R&D spending for biotechnology projects. OUTLOOK Agricultural Products Monsanto's family of Roundup(R) herbicides continues to face competition from generic producers in certain markets outside the United States. Patents protecting Roundup(R) in various countries expired in 1991. Compound per se patent protection for the active ingredient in Roundup(R) herbicide continues in the United States through the year 2000. Management expects technological breakthroughs in manufacturing processes and formulation advancements, as well as rapidly expanding production capacity, to continue to improve Monsanto's cost position and to help maintain its leadership position. Significant growth potential remains for Roundup(R) in conservation tillage applications worldwide, and in the introduction of crops that tolerate Roundup(R). Seven biotechnology-related plant sciences products were marketed during 1997: Roundup Ready(R) canola, cotton and soybeans; corn, cotton and potatoes protected from certain insects; and cotton that is both insect-protected and Roundup Ready(R). These products were developed by Monsanto either alone or in partnership with biotechnology and seed production companies. Market acceptance has been strong; volumes for each of these products are expected to increase in 1998. Management also expects that a significant number of new herbicides and biotechnology-related products currently in the R&D pipeline will be commercialized worldwide in the next few years. As a result, increased technological and product-launch expenses are expected in the next few years. Monsanto continues its efforts to address concerns of government regulators, public interest groups and consumers, particularly in Europe. Such concerns are not uncommon as new technologies are commercialized. The company also is involved in intellectual property disputes with several parties. Management expects that such disputes will continue to occur as the agricultural biotechnology industry evolves. As discussed in the Notes to Financial Statements beginning on page 51, Monsanto made several strategic acquisitions of agricultural seed companies in 1997. The company completed the acquisition of Asgrow in February. In September, Monsanto completed the acquisitions of Holden's and Corn States Hybrid Service Inc. In December, the company acquired a controlling interest in Agroceres. It's anticipated that Monsanto will make additional alliances and collaborations with, and acquisitions of, other seed companies to enhance its ability to bring new products to market and to gain worldwide distribution of its numerous agricultural products currently being marketed or in the product pipeline. 37 1997 Monsanto Annual Report 11 =============================================================================== NUTRITION AND CONSUMER PRODUCTS ===============================================================================
----------------------------------------- 1997 1996 1995 - --------------------------------------------------------------------------------- Net Sales $1,535 $1,581 $1,371 Operating Contribution 304 338 294 Operating Income 211 193 186 Total Assets 2,646 2,635 2,653 Capital Expenditures 82 98 72 Depreciation and Amortization 118 125 119 - --------------------------------------------------------------------------------- Operating contribution is operating income excluding goodwill amortization and the effect of restructuring and other unusual items.
THE NUTRITION AND CONSUMER PRODUCTS SEGMENT MANUFACTURES AND MARKETS SWEETENERS (INCLUDING NUTRASWEET(R) BRAND SWEETENER AND EQUAL(R) AND CANDEREL(R) TABLETOP SWEETENERS), ALGINATES, BIOGUMS AND OTHER FOOD INGREDIENTS. IT ALSO DEVELOPS, PRODUCES AND MARKETS ORTHO(R) BRAND LAWN-AND-GARDEN PRODUCTS, AND ROUNDUP(R) HERBICIDE FOR RESIDENTIAL USE. Net sales for the Nutrition and Consumer Products segment declined 3 percent in 1997 from sales in 1996 primarily because of lower sales volumes of tabletop sweeteners. The sales decrease was caused by a continued decline in market share in the United States and Europe because of lower-priced generic competition, as well as a decline in the overall U.S. grocery market for tabletop sweeteners. Sales of NutraSweet(R), the company's trademark aspartame product, were essentially flat compared with sales in the prior year. Higher sales volumes of biogums and lawn-and-garden products partially offset the tabletop sweetener sales decreases. Biogum sales grew 14 percent because of record customer demand. The increase in lawn-and-garden sales resulted from higher sales of Roundup(R) for residential use, partially offset by lower sales of the Ortho(R) line of products. A global initiative implemented at the end of 1996 boosted sales of Roundup(R) for residential use in 1997, despite poor weather in several key markets. Nutrition and Consumer Products Operating Measures [GRAPH] Operating income for the Nutrition and Consumer Products segment in 1997 increased 9 percent from 1996 operating income, while operating contribution declined 10 percent. Unusual items affected operating income in both years. Operating income in 1997 included $51 million in pretax charges for in-process research and development related to the acquisition of Calgene Inc.'s oils business. In 1996, operating income included restructuring charges of $103 million, principally for the cost of work force reductions and facility rationalizations. If these unusual items were excluded, 1997 operating income for the Nutrition and Consumer Products segment would have totaled $262 million, an 11 percent decline from 1996 operating income of $296 million. The decrease was caused primarily by lower sales volumes of tabletop sweeteners and increased technological spending related to the development of a new no-calorie sweetener, called neotame, and other nutrition products. These effects were partially offset by lower selling expenses. Prior Year Review In 1996, net sales for the Nutrition and Consumer Products segment increased 15 percent from 1995 net sales. Results in 1996 included a full year of sales from the Kelco business acquired in February 1995. In addition, the sales increase resulted from higher sales of NutraSweet(R) brand sweetener, the company's trademark aspartame product, and higher sales volumes of tabletop sweeteners. Higher sales of tabletop sweeteners were driven by increased spending on advertising and promotion. Most of the volume increment for tabletop sweeteners came from international markets. Higher sales volumes of biogum products and increased sales of lawn-and-garden products also contributed to the sales increase. Operating income for 1996 increased 4 percent from the previous year's level primarily because of higher sales and lower manufacturing costs. The effect of higher sales and lower manufacturing costs was partially offset by higher advertising and promotion costs for tabletop sweeteners, higher administrative expenses associated with growth initiatives, and other costs. In addition, certain unusual items affected earnings in both years. In 1996, operating income included restructuring charges of $103 million, principally for the cost of work force reductions and facility rationalizations. Operating income in 1995 included $66 million in restructuring charges, primarily to exit a production facility and to effect work force reductions. If these unusual items were excluded, 1996 operating results for the Nutrition and Consumer Products segment would have increased 17 percent compared with 1995 results. 38 1997 Monsanto Annual Report 12 =============================================================================== NUTRITION AND CONSUMER PRODUCTS (continued) =============================================================================== OUTLOOK Nutrition and Consumer Products In January 1998, Monsanto announced that it was considering alternatives -- including partnerships, restructurings, divestitures or joint ventures -- for several of its businesses, as part of its effort to focus on growth opportunities in life sciences. Alternatives for the lawn-and-garden business currently are being considered. Worldwide demand for aspartame continues to increase. Monsanto is maintaining its leading market share of aspartame sales while pursuing growth opportunities. Monsanto's NutraSweet(R) brand aspartame has several competitive advantages, including a low-cost position and superior quality. Monsanto successfully implemented a price increase for its aspartame in the fourth quarter of 1997. Other sweeteners also compete with Monsanto's NutraSweet(R) brand sweetener in markets outside the United States. These sweeteners are currently being reviewed by the U.S. Food and Drug Administration (FDA). FDA approval of these competitive products could affect Monsanto's future sales of NutraSweet(R). Increased competition from lower-priced generic producers of tabletop sweeteners, a declining U.S. grocery market for tabletop sweeteners, and increased competition in Europe may adversely affect future sales and profits from tabletop sweeteners. However, Monsanto introduced two lower priced sweetener products in 1997 in the United States that could enhance its market share. In December 1997, Monsanto filed a limited-use food additive petition with the FDA for approval of a new no-calorie sweetener called neotame. By the end of 1998, the company plans to file a petition with the FDA to approve neotame as a general-purpose sweetener for use in any food or beverage product. Neotame is approximately 8,000 times sweeter than sugar, and Monsanto has exclusive rights to patents covering the product, its manufacturing processes and its uses in food and beverages. The company's alginates and biogums hold strong positions in their food ingredients markets. Although biogums face increased competition in certain industrial applications, the effect has not been significant. =============================================================================== PHARMACEUTICALS ===============================================================================
-------------------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------------------ Net Sales $2,407 $1,995 $1,711 Operating Contribution 340 223 144 Operating Income 318 79 132 Total Assets 2,856 2,391 2,619 Capital Expenditures 190 89 78 Depreciation and Amortization 136 130 127 - ------------------------------------------------------------------------------------ Operating contribution is operating income excluding goodwill amortization and the effect of restructuring and other unusual items.
THE PHARMACEUTICALS SEGMENT REFLECTS THE OPERATIONS OF SEARLE. SEARLE DEVELOPS, PRODUCES AND MARKETS PRESCRIPTION PHARMACEUTICALS. ITS MAJOR PRODUCTS INCLUDE MEDICATIONS TO RELIEVE THE SYMPTOMS OF ARTHRITIS, TO CONTROL HIGH BLOOD PRESSURE, TO RELIEVE INSOMNIA, TO PREVENT THE FORMATION OF ULCERS, AND TO PROVIDE BETTER HEALTH CARE FOR WOMEN. In 1997, net sales for Pharmaceuticals grew to a record $2.4 billion, $412 million, or 21 percent, higher than 1996 net sales. Higher sales volumes of Ambien(R) short-term treatment for insomnia, and Daypro(R) and Arthrotec(R) arthritis treatments contributed nearly $170 million to the sales increase. Ambien(R) continued to be the leader in the U.S. sleep-aid market. Its sales rose 31 percent in 1997, and its market share increased to 50 percent. Daypro(R) and Arthrotec(R) also gained market share, with increased sales of 20 percent and 25 percent, respectively. Segment net sales also benefited from licensing revenues of $75 million related to a collaborative partnership and from sales of product rights totaling $117 million. Lower sales of verapamil calcium channel blockers partially offset these increases. Sales for the family of Calan(R) calcium channel blockers continued to decline, but the decrease was partially offset by growing sales of Covera-HS(R), introduced in 1996 as the first calcium channel blocker with a unique delivery system that provides 24 hours of blood pressure control. Pharmaceuticals Net Sales [GRAPH] 39 1997 Monsanto Annual Report 13 ================================================================================ PHARMACEUTICALS (continued) ================================================================================ Operating income for the Pharmaceuticals segment totaled $318 million in 1997, compared with $79 million in 1996. However, 1996 operating results included $125 million in restructuring and other unusual charges. Operating income would have increased $114 million, or 56 percent, in 1997, if the unusual items were excluded from 1996 operating income. The improvements in operating income and operating contribution primarily resulted from higher sales volumes of key products, licensing revenues and sales of product rights. Increased technological and selling expenses partially offset the strong sales growth. Technological spending rose in 1997, as new product candidates advanced to later, more expensive phases of development. At the end of 1997, the following five new product candidates were in Phase III clinical trials, the final stage before submission for regulatory approval: Celebra(TM), Searle's proposed trademark for celecoxib, an arthritis treatment that is designed to treat arthritis and pain selectively without gastrointestinal side effects; xemilofiban and orbofiban, drugs for the treatment of cardiovascular conditions; daniplestim, a compound that stimulates the replenishment of white blood cells and platelets in chemotherapy patients; and HRT patches, hormone replacement therapy for menopausal symptoms. Technological expenses increased in year-to-year comparisons also because of an absence of cost-sharing payments from alliances and licensing agreements in 1997 compared with the level of such payments in 1996. Selling expenses rose in 1997 because of an expansion in Searle's sales force and new product launch preparations. The product launch preparations primarily were related to oxaprozin potassium and Arthrotec(R) arthritis treatments, both of which will be introduced in the United States in 1998. Pharmaceuticals Operating Measures [GRAPH] Searle's investment in research and development (R&D) continues to be significant. R&D expenditures were 24 percent of the segment's net sales in 1997 and 22 percent in 1996, if cost-sharing payments from alliances in 1996 were excluded. Future R&D spending also is expected to be significant. This investment reflects the segment's commitment to the continuing discovery and development of innovative new products. Prior Year Review Net sales for the Pharmaceuticals segment in 1996 were $2 billion, or 17 percent, higher than net sales in 1995. The sales growth was fueled by higher sales volumes, led by strong performances from Daypro(R) and Arthrotec(R) arthritis treatments and from Ambien(R), a short-term treatment for insomnia. In 1996, sales of these products increased 39 percent from sales in the prior year. In total, these key products contributed approximately $660 million to 1996 net sales. Sales and earnings growth also benefited from the women's health care product lines acquired from Syntex in September 1995. The 1996 net sales increase for Pharmaceuticals was partially offset by lower sales for the family of Calan(R) calcium channel blockers. Sales in 1995 included the effect of approximately $20 million in favorable adjustments under certain sales rebate programs in the United States for products sold in prior years. Operating income for Pharmaceuticals decreased from the 1995 results by 40 percent. However, operating results in 1996 and 1995 were affected by unusual items. Operating income in 1996 included $125 million in restructuring and other actions, principally related to the cost of work force reductions and facility rationalizations. Operating income in 1995 included a $13 million charge for restructuring, principally related to work force reductions and other actions. Operating results in 1995 also reflected the aforementioned $20 million in favorable sales adjustments. If the effect of these unusual items were excluded, operating income would have been $204 million in 1996 and $125 million in 1995. The significant improvement in operating income in 1996 was primarily the result of higher sales volumes. Increased expenditures for marketing and product development costs were offset, in part, by higher cost-sharing payments from alliances and licensing agreements. 40 1997 Monsanto Annual Report 14 =============================================================================== PHARMACEUTICALS =============================================================================== OUTLOOK Pharmaceuticals Ambien(R), a short-term treatment for insomnia, continues as the leader in the hypnotic market with a 50 percent share of total prescriptions. Ambien(R) is licensed to a joint venture in which Searle is a general partner. Under the joint venture agreement, Searle's share of profits will be reduced from 90 percent to 51 percent in November 1999. In addition, the other joint venture partner has the right to purchase all or part of Searle's interest beginning in December 1999. In December 1997, Searle received clearance from the U.S. Food and Drug Administration (FDA) to market Arthrotec(R), the first arthritis therapy that combines a non-steroidal anti-inflammatory drug (NSAID) and an ulcer preventive drug to protect the stomach lining against gastrointestinal ulcers. The company's presence in the arthritis market will be strengthened by the continued growth of Daypro(R), Searle's leading treatment for arthritis, and the anticipated 1998 U.S. introductions of Arthrotec(R) and oxaprozin potassium -- a formulation that acts to relieve pain and inflammation. Condrotec(R), a combination NSAID and ulcer preventive drug to treat arthritis, will be introduced in 1998 in the United Kingdom. In addition, Celebra(TM), a product that is designed to treat arthritis and pain selectively without gastrointestinal side effects, is scheduled to complete Phase III clinical trials in 1998. Searle also expects to file a registration application for Celebra(TM) with the FDA in 1998. Covera-HS(R), Searle's newest verapamil product, was introduced in Brazil and Mexico during 1997 and in Canada in January 1998. Registration applications are being submitted in various European and Asia-Pacific markets as well. In the United States, generic competition and continuing controversy following the results of a study about the use of calcium channel blockers may continue to negatively affect the sale of all calcium channel blockers, including Searle's Calan(R) and Covera-HS(R). Drugs being developed for the treatment of cardiovascular conditions include xemilofiban and orbofiban, two anti-platelet aggregation product candidates in Phase III clinical trials that act as agents to inhibit blood clotting; tifacogin (formerly tissue factor pathway inhibitor, or TFPI), for sepsis; and eplerenone for congestive heart failure, high blood pressure and the complications of kidney disease. Also in development are four adjunctive therapies for the oncology market: daniplestim, leridistim (previously called myelopoietin), promegapoietin and progenipoietin. These compounds are being developed to stimulate the replenishment of white blood cells and platelets in chemotherapy patients. Daniplestim is currently in Phase III clinical trials. The other three therapies are in earlier stages of development. Management expects technological expenses and selling expenses to increase in the next few years as Searle continues its commitment to discovering and developing new products and as it commercializes products now in the R&D pipeline. In December 1997, Searle formed an alliance with Yamanouchi Pharmaceutical Co. Ltd. to develop and commercialize key pipeline products in Japan. Searle also forged a collaboration with Pfizer Inc. in early 1998 to co-promote celecoxib. Management expects that other pharmaceutical alliances will be formed to offset some of the costs associated with developing and marketing pharmaceuticals, to accelerate product development, and to broaden the geographic reach of many Searle products as they are commercialized during the next several years. These alliances could result in increased licensing revenues. Corporate and Other The Corporate and Other segment comprises various smaller businesses, as well as certain corporate items that are not allocated to the segments. Segment sales increased significantly in 1997 compared with sales in 1996, primarily because of the inclusion in 1997 of sales from Calgene Inc.'s produce business. Monsanto acquired a controlling interest in Calgene in November 1996. Before that time, Calgene was accounted for as an equity affiliate, and its results were not consolidated. If unusual items of $73 million in 1996 were excluded, the 1997 operating loss for the Corporate and Other segment would have increased $18 million, primarily because of increased technological spending related to genomics. Genomics, which is the study of all the genes in an organism and their organization into chromosomes, is an important enabling technology. This technology will allow Monsanto to develop, at a faster pace, more and better life sciences products in the areas of agriculture, health and nutrition. The segment's operating loss increased from 1995 to 1996 because of greater spending on growth initiatives and higher restructuring charges. As part of Monsanto's efforts to focus on life sciences businesses, alternatives for the Orcolite(R) and Diamonex(R) optical products and Diamonex(R) performance products divisions -- including a partnership, restructuring, divestiture or joint venture -- are currently being considered. 41 1997 Monsanto Annual Report 15 ============================================================================== GEOGRAPHIC DATA ==============================================================================
NET SALES TO OPERATING UNAFFILIATED CUSTOMERS INCOME (LOSS) TOTAL ASSETS ---------------------------- -------------------------- ---------------------------- 1997 1996 1995 1997 1996 1995 1997 1996 1995 - ------------------------------------------------------------ -------------------------- ---------------------------- United States $4,384 $3,648 $3,127 $ 60 $420 $485 $ 7,808 $ 6,537 $ 5,810 Europe-Africa 1,425 1,345 1,210 353 156 173 1,826 1,562 1,523 Asia-Pacific 655 569 507 115 59 63 455 606 662 Canada 285 271 219 47 20 15 153 121 115 Latin America 765 515 347 12 60 57 1,054 598 294 Interarea Eliminations (15) (27) (32) (956) (1,127) (648) Corporate (73) (93) (63) 434 317 219 Discontinued Operations 2,623 2,756 - ------------------------------------------------------------ -------------------------- ---------------------------- TOTAL $7,514 $6,348 $5,410 $499 $595 $698 $10,774 $11,237 $10,731 ============================================================ ========================== ============================ Geographic area operating income was affected by the 1997 research and development write-offs and the 1996 and 1995 restructurings and other unusual items as follows: INCOME (EXPENSE) ------------------------------- 1997 1996 1995 - ------------------------------------------------------------ United States $(604) $(251) $(54) Europe-Africa (94) (4) Asia-Pacific (19) (16) Canada (10) (13) Latin America (80) (9) -- Corporate (24) (3) - ------------------------------------------------------------ TOTAL $(684) $(407) $(90) ============================================================
The data above are prepared on an "entity basis," which means that net sales, operating income and assets of each legal entity are assigned to the geographic area where that legal entity is located. For example, a sale from the United States to Latin America is reported as a U.S. export sale. Interarea sales, which are sales between Monsanto locations in different world areas, were made on a market price basis. Interarea sales have been excluded from the above table. They were:
--------------------------------- 1997 1996 1995 - ------------------------------------------------------------------ World area shipped from: United States $ 960 $ 764 $ 660 Europe-Africa 224 225 236 Asia-Pacific 69 23 15 Canada 20 13 10 Latin America -- -- -- Interarea Eliminations (1,273) (1,025) (921) - ------------------------------------------------------------------ TOTAL $ -- $ -- $ -- ==================================================================
The operating income reported for the individual geographic areas does not include the full profitability generated by sales of Monsanto products imported from other locations, principally the United States. Direct export sales from the United States to third-party customers outside the United States were $200 million for 1997, $177 million for 1996, and $185 million for 1995. During 1997, the Brazilian economy was designated by Monsanto as hyperinflationary for accounting purposes. However, because the Brazilian economy continued to experience lower inflation rates during the year, as of Jan. 1, 1998, Monsanto designated the Brazilian economy as nonhyperinflationary. The functional currency for Monsanto's Brazilian operations was determined to be the U.S. dollar. These changes are not expected to have a material effect on Monsanto's financial position or operating results. A continuing decline in value of the southeast Asia currencies may adversely affect future income. Monsanto could experience additional foreign currency transactional losses from the area. Also, future sales may decrease because the decline in the southeast Asia economies could cause customers to purchase fewer goods in general, and also because Monsanto products may become more expensive for customers in that region to purchase in their local currency. 42 1997 Monsanto Annual Report 16 ============================================================================== QUARTERLY DATA (unaudited) ==============================================================================
FIRST SECOND THIRD FOURTH TOTAL QUARTER QUARTER QUARTER QUARTER YEAR - ------------------------------------------------------------------------------------------------------------- NET SALES - ------------------------------------------------------------------------------------------------------------- 1997 $1,875 $2,095 $1,724 $1,820 $7,514 1996 1,612 1,847 1,442 1,447 6,348 1995 1,339 1,541 1,186 1,344 5,410 - ------------------------------------------------------------------------------------------------------------- OPERATING INCOME (LOSS) - ------------------------------------------------------------------------------------------------------------- 1997 298 363 (216) 54 499 1996 341 434 176 (356) 595 1995 265 351 149 (67) 698 - ------------------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM CONTINUING OPERATIONS - ------------------------------------------------------------------------------------------------------------- 1997 206 250 (167) 5 294 1996 222 316 107 (232) 413 1995 164 229 94 (26) 461 - ------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) - ------------------------------------------------------------------------------------------------------------- 1997 274 324 (133) 5 470 1996 260 365 170 (410) 385 1995 229 290 140 80 739 - ------------------------------------------------------------------------------------------------------------- DILUTED EARNINGS (LOSS) PER SHARE - CONTINUING OPERATIONS - ------------------------------------------------------------------------------------------------------------- 1997 0.34 0.41 (0.28) 0.01 0.48 1996 0.37 0.53 0.18 (0.39) 0.69 1995 0.28 0.39 0.16 (0.04) 0.79 - ------------------------------------------------------------------------------------------------------------- DILUTED EARNINGS (LOSS) PER SHARE - ------------------------------------------------------------------------------------------------------------- 1997 0.45 0.54 (0.23) 0.01 0.77 1996 0.43 0.62 0.28 (0.69) 0.64 1995 0.40 0.51 0.23 0.13 1.27 - ------------------------------------------------------------------------------------------------------------- DIVIDENDS PER SHARE - ------------------------------------------------------------------------------------------------------------- 1997 0.150 0.160 0.160 0.030 0.500 1996 0.138 0.150 0.150 0.150 0.588 1995 0.126 0.138 0.138 0.138 0.540 - ------------------------------------------------------------------------------------------------------------- COMMON STOCK PRICE - ------------------------------------------------------------------------------------------------------------- 1997 - ------------------------------------------------------------------------------------------------------------- HIGH 42 1/4 46 1/2 52 5/16 45 3/4 52 5/16 LOW 34 3/4 37 36 3/8 38 34 3/4 - ------------------------------------------------------------------------------------------------------------- 1996 - ------------------------------------------------------------------------------------------------------------- HIGH 31 3/4 34 1/2 37 7/8 43 1/4 43 1/4 LOW 23 28 1/8 26 1/8 36 1/2 23 - ------------------------------------------------------------------------------------------------------------- 1995 - ------------------------------------------------------------------------------------------------------------- HIGH 16 1/8 18 1/4 20 7/8 25 25 LOW 13 5/8 15 7/8 18 19 1/2 13 5/8 - ------------------------------------------------------------------------------------------------------------- Stock prices were restated to reflect the May 1996 five-for-one stock split, but were not restated to reflect the spinoff of the chemical businesses on Sept. 1, 1997.
Historically, Monsanto's income from continuing operations has been higher during the first half of the year, primarily because of the concentration of generally more profitable sales of the Agricultural Products segment during that part of the year. Income from continuing operations for each quarter in 1997 was affected by the write-off of in-process research and development from acquisitions. First-quarter 1997 included an aftertax charge of $63 million, or $0.11 per share, principally for the Asgrow Agronomics acquisition. Second-quarter 1997 included an aftertax charge of $72 million, or $0.11 per share, for the Calgene Inc. acquisition. Third-quarter 1997 included an aftertax charge of $270 million, or $0.45 per share, for the Holden's Foundation Seeds Inc. acquisition. Fourth-quarter 1997 included $50 million, or $0.08 per share, for the Sementes Agroceres S.A. acquisition. Net income for the fourth quarter of 1996 included an aftertax charge of $500 million, or $0.84 per share, associated with the company's exit from the chemical businesses, the proposed spinoff, and other unusual items. The aftertax expense related to continuing operations for these actions was $257 million, or $0.43 per share. Net income in the first quarter of 1995 included an aftertax gain of $25 million, or $0.04 per share, for insurance-related settlement payments primarily associated with discontinued operations, and an aftertax charge of $25 million, or $0.04 per share, which is reflected in discontinued operations, for integration costs related to the formation of a joint venture. In the third quarter of 1995, net income included an aftertax gain of $32 million, or $0.06 per share, for environmental insurance litigation settlement payments related primarily to discontinued operations, and an aftertax charge of $25 million, or $0.04 per share, which is reflected in discontinued operations, for the settlement of a lawsuit related to a Superfund site. Third-quarter net income and income from continuing operations included favorable adjustments of approximately $13 million aftertax, or $0.02 per share, related to certain sales rebate programs in the United States for product sales made in prior years. Net income for the fourth quarter of 1995 included an aftertax charge of $125 million, or $0.22 per share, for restructuring actions. The aftertax expense related to continuing operations for these actions was $78 million, or $0.13 per share. Fourth-quarter 1995 net income also included an aftertax gain of $116 million, or $0.20 per share, which is reflected in discontinued operations, resulting from the sale of the styrenics plastics business. 43 1997 Monsanto Annual Report 17 ============================================================================== STATEMENT OF CONSOLIDATED FINANCIAL POSITION ==============================================================================
(Dollars in millions, except per share) AS OF DEC. 31, - ------------------------------------------------------------------------------------------------------------------------- ASSETS 1997 1996 - ------------------------------------------------------------------------------------------------------------------------- CURRENT ASSETS: Cash and cash equivalents $ 134 $ 166 Trade receivables, net of allowances of $63 in 1997 and $47 in 1996 1,823 1,515 Miscellaneous receivables and prepaid expenses 692 286 Deferred income tax benefit 243 282 Inventories 1,374 1,183 Discontinued operations 908 - ------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 4,266 4,340 - ------------------------------------------------------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT: Land 99 118 Buildings 914 848 Machinery and equipment 3,359 3,162 Construction in progress 329 300 - ------------------------------------------------------------------------------------------------------------------------- Total property, plant and equipment 4,701 4,428 Less accumulated depreciation 2,301 2,333 - ------------------------------------------------------------------------------------------------------------------------- NET PROPERTY, PLANT AND EQUIPMENT 2,400 2,095 - ------------------------------------------------------------------------------------------------------------------------- INVESTMENTS IN AFFILIATES 329 257 INTANGIBLE ASSETS, net of accumulated amortization of $853 in 1997 and $769 in 1996 2,837 2,166 OTHER ASSETS 942 664 NONCURRENT ASSETS -- DISCONTINUED OPERATIONS 1,715 - ------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $10,774 $11,237 ========================================================================================================================= LIABILITIES AND SHAREOWNERS' EQUITY - ------------------------------------------------------------------------------------------------------------------------- CURRENT LIABILITIES: Accounts payable $ 480 $ 479 Wages and benefits 251 456 Restructuring reserves 176 247 Miscellaneous accruals 906 728 Short-term debt 1,726 654 Discontinued operations 837 - ------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 3,539 3,401 - ------------------------------------------------------------------------------------------------------------------------- LONG-TERM DEBT 1,979 1,608 DEFERRED INCOME TAXES 97 102 POSTRETIREMENT LIABILITIES 735 594 OTHER LIABILITIES 320 509 NONCURRENT LIABILITIES -- DISCONTINUED OPERATIONS 1,333 SHAREOWNERS' EQUITY: Common stock (authorized: 1,000,000,000 shares, par value $2) Issued: 821,970,970 shares in 1997 and 1996 1,644 1,644 Additional contributed capital 321 65 Treasury stock, at cost (226,686,302 shares in 1997 and 237,594,831 shares in 1996) (2,570) (2,661) Reinvested earnings 4,973 4,795 Reserve for ESOP debt retirement (123) (174) Accumulated currency adjustment (128) 10 Other (13) 11 - ------------------------------------------------------------------------------------------------------------------------- TOTAL SHAREOWNERS' EQUITY 4,104 3,690 - ------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREOWNERS' EQUITY $10,774 $11,237 ========================================================================================================================= The above statement should be read in conjunction with pages 51-61 of this report. ESOP stands for Employee Stock Ownership Plan.
44 1997 Monsanto Annual Report 18 ============================================================================== REVIEW OF CHANGES IN FINANCIAL POSITION ============================================================================== Financial Position Remains Strong Monsanto's financial position remained strong in 1997, as evidenced by the company's "A" debt rating. Financial resources were adequate to support existing businesses and to fund new business opportunities. At the end of 1997, working capital was $212 million lower than at the end of 1996, primarily because of higher short-term debt levels at year-end 1997. The effect of higher short-term debt was partially offset by increases in receivables and inventories and a decrease in accrued wages and benefits. Miscellaneous receivables increased because of 1997 fourth-quarter Pharmaceuticals segment sales of product rights and licensing arrangements. Trade receivables at year-end 1997 increased compared with those at the prior year-end, primarily because of higher sales levels for the Agricultural Products and the Pharmaceuticals segments. Inventories at year-end 1997 increased, primarily because of higher inventories in the Agricultural Products segment. Accrued wages and benefits declined in 1997 because of a large incentive payout, related to the third year of a three-year plan, made in 1997. Working capital at year-end 1996 included $71 million of working capital related to discontinued operations. New business opportunities and other needs in 1997 were financed with increased short- and long-term debt, which resulted in a ratio of total debt to total capitalization of 47 percent at year-end 1997, compared with 38 percent at year-end 1996. The company is considering various alternatives for several of its nonstrategic businesses that may result in cash proceeds to reduce the company's debt or finance future opportunities. The amount of net property, plant and equipment at year-end 1997 was higher than the comparable 1996 amount, as $644 million in capital additions and the effects of acquisitions exceeded 1997 depreciation expense and divestitures. The increase in intangible assets was attributable primarily to the acquisition of Holden's Foundation Seeds Inc. Total deferred tax benefits, both current and noncurrent, of $495 million at year-end 1997 were related primarily to U.S. operations, which generally have a strong earnings history. Monsanto uses financial markets worldwide for its financing needs. It has available various short- and medium-term bank credit facilities, which are discussed in the Notes to Financial Statements on pages 51-61. These credit facilities give Monsanto the financing flexibility it needs to take advantage of investment opportunities that may arise and to satisfy future funding requirements. To maintain adequate financial flexibility and access to debt markets worldwide, Monsanto management intends to maintain an "A" debt rating. Monsanto's commitments and contingencies are described in the Notes to Financial Statements on page 61.
----------------------------------------- KEY FINANCIAL STATISTICS 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------- CURRENT RATIO (Current assets divided by current liabilities) 1.2 1.3 1.5 TRADE RECEIVABLES -- DAYS SALES OUTSTANDING 95 99 80 (Fourth-quarter trade receivables divided by fourth-quarter net sales times 30 days) INVENTORY TURNOVER RATIO (Cost of goods sold divided by inventory) 2.2 2.3 2.2 INTEREST COVERAGE 2.9 5.3 5.7 (Income from continuing operations before interest expense and income taxes divided by total interest cost) CASH PROVIDED BY CONTINUING OPERATIONS/TOTAL DEBT 10% 42% 26% TOTAL DEBT/TOTAL CAPITALIZATION 47% 38% 35% - -------------------------------------------------------------------------------------------------------------- If the effects of the in-process research and development write-offs were excluded in 1997, the interest coverage ratio would have been 6.6. If the effects of the restructuring and other unusual charges were excluded in 1996, the interest coverage ratio would have been 8.2. Total capitalization is the sum of short-term debt, long-term debt and shareowners' equity.
45 1997 Monsanto Annual Report 19 ============================================================================== STATEMENT OF CONSOLIDATED CASH FLOW ==============================================================================
(Dollars in millions) 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS - ----------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Income from continuing operations $ 294 $ 413 $ 461 Add income taxes -- continuing operations 72 140 184 - ----------------------------------------------------------------------------------------------------------------------- Income from continuing operations before income taxes 366 553 645 Adjustments to reconcile to Cash Provided by Continuing Operations: Income tax payments (134) (308) (335) Items that did not use cash: Depreciation and amortization 487 423 405 Acquired in-process research and development expense 684 Restructuring expenses 356 114 Other (16) 70 10 Working capital changes that provided (used) cash: Accounts receivable (268) (330) (94) Inventories (113) (86) (107) Accounts payable and accrued liabilities (288) 198 13 Other (81) 12 (51) Pretax gains from asset sales and licensing arrangements (232) (9) (9) Other items (51) 61 (60) - ----------------------------------------------------------------------------------------------------------------------- CASH PROVIDED BY CONTINUING OPERATIONS 354 940 531 CASH PROVIDED BY (USED IN) DISCONTINUED OPERATIONS (138) 263 292 - ----------------------------------------------------------------------------------------------------------------------- TOTAL CASH PROVIDED BY OPERATIONS 216 1,203 823 - ----------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Property, plant and equipment purchases (644) (500) (301) Seed company acquisitions and investments (1,325) (470) Acquisition of Kelco and pharmaceutical product lines (1,296) Other acquisitions and investments (618) (250) (139) Investment and property disposal proceeds 88 165 77 Discontinued operations -- proceeds from sale of styrenics plastics business 580 Discontinued operations -- other (44) (200) (206) - ----------------------------------------------------------------------------------------------------------------------- CASH USED IN INVESTING ACTIVITIES (2,543) (1,255) (1,285) - ----------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Net change in short-term financing 2,372 297 53 Long-term debt proceeds 208 122 658 Long-term debt reductions (142) (177) (403) Treasury stock purchases (253) Dividend payments (294) (343) (306) Common stock issued under employee stock plans 91 142 194 Cash transferred to Solutia Inc. (75) Other financing activities 135 133 56 - ----------------------------------------------------------------------------------------------------------------------- CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 2,295 (79) 252 - ----------------------------------------------------------------------------------------------------------------------- DECREASE IN CASH AND CASH EQUIVALENTS (32) (131) (210) CASH AND CASH EQUIVALENTS: Beginning of year 166 297 507 - ----------------------------------------------------------------------------------------------------------------------- END OF YEAR $ 134 $ 166 $ 297 ======================================================================================================================= The above statement should be read in conjunction with pages 51-61 of this report. The effect of exchange rate changes on cash and cash equivalents was not material. Cash payments for interest (net of amounts capitalized) were $210 million in 1997, $195 million in 1996, and $195 million in 1995.
46 1997 Monsanto Annual Report 20 ============================================================================== REVIEW OF CASH FLOW ============================================================================== Cash Flow Declines Cash provided by continuing operations totaled $354 million in 1997, down significantly from the previous year's level of $940 million. The decrease was caused primarily by significantly higher employee incentive payouts in 1997 for the final payment of certain deferred amounts related to a three-year incentive plan; severance and other payments during 1997 related to restructuring reserves and spinoff transaction costs; and $150 million of like-kind exchange proceeds from a 1995 business sale, which were earmarked to prefund 1996 capital expenditures. Working capital as a percent of net sales was 10 percent in 1997 compared with 15 percent in 1996. Monsanto's operations have historically generated sufficient cash to fund both its existing businesses and its research and development expenses. In 1997, investment and property disposal proceeds related primarily to sales of nonstrategic properties and maturing investments. In 1996 and 1995, investment and property disposal proceeds related primarily to nonstrategic investments. Major uses of cash in 1997, 1996 and 1995 included investments, capital expenditures, dividends and treasury stock purchases. Major investments in 1997 were the acquisitions of Asgrow Agronomics, Holden's Foundation Seeds Inc., Corn States Hybrid Service Inc., and Sementes Agroceres S.A. seed companies, and the remaining interest in Calgene Inc. Major investments in 1996 were the equity investment in DEKALB Genetics Corp., an investment in Calgene, and the acquisition of the plant biotechnology assets of Agracetus. Major investments in 1995 included the acquisition of the Kelco business and the Syntex pharmaceutical product lines. Monsanto's capital expenditures, which focused on improved technology and capacity expansions, totaled $644 million in 1997. Business redesign efforts and productivity enhancements were successful in increasing effective capacity at many facilities, thereby reducing the need for additional capital expenditures. To the extent the company's cash provided by operations was not sufficient to fund its cash needs during the period, short- and long-term debt was issued to finance these requirements. In December 1997, the company issued $200 million of 30-year debentures at an interest rate of 6.75 percent. The majority of the debt needs in 1996 and 1997 were financed with short-term commercial paper because of its relatively low interest rates and the generally favorable debt market environment. [GRAPH] CASH PROVIDED BY CONTINUING OPERATIONS Risk Management Monsanto continually evaluates risk retention and insurance levels for product liability, property damage and other potential areas of risk. Monsanto devotes significant effort to maintaining and improving safety and internal control programs, which reduce its exposure to certain risks. Management decides the amount of insurance coverage to purchase from unaffiliated companies and the appropriate amount of risk to retain based on the cost and availability of insurance and the likelihood of a loss. Since 1986, Monsanto's liability insurance has been a "claims made" policy form. Management believes that the current levels of risk retention are consistent with those of comparable companies in the various industries in which Monsanto operates. There can be no assurance that Monsanto will not incur losses beyond the limits of, or outside the coverage of, its insurance. Monsanto's liquidity, financial position and profitability are not expected to be affected materially by the levels of risk retention that the company accepts. Company Prepares for Year 2000 Beginning in late 1996, Monsanto initiated the Global Year 2000 program to ensure that its infrastructure and information systems comply with the systems requirements for the year 2000. The program includes the following phases: identifying systems that need to be replaced or fixed, assessing the extent of the work required, prioritizing the work and developing an action plan, and implementing the action plan. In higher risk areas, the company also has developed contingency action plans. Monsanto had essentially completed the first three phases of the program as of Dec. 31, 1997, and is now primarily in the implementation phase. The majority of systems, including all business critical systems, are expected to comply with year 2000 requirements by the first quarter of 1999. Monsanto also has contacted its major suppliers to assess their preparations for the year 2000. Similar contacts also are planned for major customers. The company continues to evaluate the estimated costs associated with year 2000 compliance based on actual experience. While the year 2000 efforts involve additional costs, Monsanto believes, based on available information, that it will be able to manage its year 2000 transition without any material adverse effect on its business operations, financial position, profitability or liquidity. 47 1997 Monsanto Annual Report 21 ============================================================================== REVIEW OF CASH FLOW (continued) ============================================================================== Dividend Policy Re-Evaluated Monsanto has paid quarterly dividends on its common shares without interruption since 1928. In 1997, following the spinoff of its chemical businesses, the company's board of directors re-evaluated the dividend policy and reduced the quarterly dividend on its common stock. The lower dividend payout was chosen to reflect the desire to fund the company's growth opportunities appropriately to create long-term economic value for shareowners. Monsanto's dividend policy reflects the company's expectations of future growth, profitability, financial position, acquisitions, working and fixed capital needs, scheduled debt repayments, and economic conditions, including inflation. The quarterly dividend paid in December 1997 was $0.03 per share vs. $0.16 per share paid in September 1997. Monsanto's common stock is traded principally on the New York Stock Exchange. The number of share-owners of record as of Feb. 27, 1998, was 61,008. The high and low common stock prices on that date were $51 9/16 and $50 3/8, respectively. ============================================================================== FINANCIAL INSTRUMENTS ============================================================================== Market Risk Management Monsanto is exposed to market risk, including changes in interest rates, currency exchange rates and commodity prices. To manage the volatility relating to these exposures, the company enters into various derivative transactions. Monsanto does not hold or issue derivative financial instruments for trading purposes. For more information about how Monsanto manages specific risk exposures, see the currency translation note on page 51, the inventory valuation note beginning on page 54, and the long-term debt note on page 56, in Notes to Financial Statements. The tables below and on the next page provide information about the company's derivative instruments and other financial instruments that are sensitive to changes in interest rates, currency exchange rates and commodity prices. The financial instruments are grouped by market risk exposure category. Instrument denominations are indicated in parentheses. For instruments denominated in currencies other than the U.S. dollar, the information is presented in U.S. dollar equivalents, which is the company's reporting currency. Significant interest rate risk sensitive instruments as of Dec. 31, 1997, were:
EXPECTED MATURITY DATE - ----------------------------------------------------------------------------------------------------------------------- (Dollars in millions, except average interest rate) 1998 1999 2000 2001 2002 THEREAFTER TOTAL FAIR VALUE - ----------------------------------------------------------------------------------------------------------------------- LONG-TERM DEBT: Fixed rate ($US) Principal amount $50 $179 $ 33 $19 $818 $1,099 $1,171 Average interest rate 8.4% 6.1% 8.6% 8.3% 7.6% 7.4% Variable rate ($US) Principal amount $ 1 $ 8 $634 $16 $190 $ 849 $ 849 Average interest rate 2.9% 3.2% 5.6% 3.1% 5.2% 5.4% SHORT-TERM DEBT: Fixed rate (Brazilian real) Principal amount $ 244 $ 244 $ 244 Average interest rate 8.0% 8.0% Variable rate ($US) Principal amount $1,208 $1,208 $1,208 Average interest rate 5.8% 5.8% - ----------------------------------------------------------------------------------------------------------------------- Includes $625 million of commercial paper that is assumed to be renewed through 2001, when the company's credit facility expires. Average variable rates are based on 1997 year-end variable rates. Actual rates may be higher or lower.
48 1997 Monsanto Annual Report 22 ============================================================================== FINANCIAL INSTRUMENTS (continued) ============================================================================== Significant currency exchange rate risk sensitive instruments as of Dec. 31, 1997 (dollars in millions, except average exchange rate):
AVERAGE NOTIONAL EXCHANGE FAIR EXPECTED MATURITY 1998 AMOUNT RATE VALUE - ------------------------------------------------------------------------------- FORWARD CONTRACTS: Purchase of Belgian franc $103 36.09 $101 Purchase of British pound 87 0.589 85 Sale of Brazilian real 50 1.152 50 Sale of Canadian dollar 27 1.402 26 Sale of Australian dollar 19 1.460 18 Sale of South African rand 15 4.966 15 Sale of Indonesian rupiah 9 4377 7 Sale of Philippine peso 7 39.07 7 Sale of Malaysian ringgit 5 3.43 4 - ------------------------------------------------------------------------------- Average contract exchange rates are stated in currency units per U.S. dollar.
Significant commodity price risk sensitive instruments as of Dec. 31, 1997:
----------------------------------------- EXPECTED MATURITY FAIR 1998 VALUE - ------------------------------------------------------------------------------- CORN FUTURES CONTRACTS: Contract volumes (million bushels) 2.1 Weighted average price (per bushel) $2.90 Contract amount ($US in millions) $6 $6 SOYBEAN FUTURES CONTRACTS: Contract volumes (million bushels) 8.9 Weighted average price (per bushel) $6.96 Contract amount ($US in millions) $62 $61 - ------------------------------------------------------------------------------- Contract amounts are used to calculate the contractual payments and quantity of the commodity to be exchanged.
============================================================================== DISCLOSURE OF FORWARD-LOOKING STATEMENTS ============================================================================== Under the Private Securities Litigation Reform Act of 1995, companies are provided a "safe harbor" for making forward-looking statements about the potential risks and rewards of their strategies. Monsanto believes it's in the best interests of our shareowners to use these provisions in discussing future events, as we do in this annual report and other communications. These forward-looking statements include our plans for growth; the potential for the development, regulatory approval and public acceptance of new products from our pipeline; and other factors that could affect Monsanto's future operations or financial position. Monsanto's ability to achieve its goals depends on many known and unknown risks and uncertainties, as well as on changes in general economic and business conditions. These factors could cause the anticipated performance and results of the company to differ materially from those described or implied in forward-looking statements. Factors that could cause or contribute to such differences include, but aren't limited to Monsanto's ability to: generate cash flows or obtain financing to fund its growth, including research and development; identify new technologies and commercialize from that research innovative and competitive new products worldwide; obtain regulatory approvals and gain consumer acceptance of new products worldwide; secure and defend its intellectual property rights and, when appropriate, license required technology; manufacture its products competitively and cost effectively; manage its businesses in the face of adverse weather or other environmental conditions; respond to challenges in international markets, including changes in currency exchange rates, political or economic conditions, and trade and regulatory matters; complete and integrate appropriate acquisitions, strategic alliances and joint ventures; and manage other factors as may be discussed in Monsanto's reports filed with the U.S. Securities and Exchange Commission. 49 1997 Monsanto Annual Report 23 ============================================================================== STATEMENT OF CONSOLIDATED SHAREOWNERS' EQUITY ==============================================================================
(Dollars in millions, except per share) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------- COMMON STOCK: Balance, Jan. 1 $ 1,644 $ 329 $ 329 Par value of stock issued in five-for-one stock split 1,315 - ------------------------------------------------------------------------------------------------------------------------- BALANCE, DEC. 31 $ 1,644 $ 1,644 $ 329 - ------------------------------------------------------------------------------------------------------------------------- ADDITIONAL CONTRIBUTED CAPITAL: Balance, Jan. 1 $ 65 $ 902 $ 849 Employee stock plans and ESOP 135 133 53 Par value of stock issued in five-for-one stock split (970) Spinoff of chemical businesses 121 - ------------------------------------------------------------------------------------------------------------------------- BALANCE, DEC. 31 $ 321 $ 65 $ 902 - ------------------------------------------------------------------------------------------------------------------------- TREASURY STOCK: Balance, Jan. 1 $(2,661) $(2,550) $(2,744) Shares purchased (8,244,500 shares in 1996) (253) Net shares issued under employee stock plans (10,900,529 shares in 1997; 15,269,164 shares in 1996; and 19,675,660 shares in 1995) 91 142 194 - ------------------------------------------------------------------------------------------------------------------------- BALANCE, DEC. 31 $(2,570) $(2,661) $(2,550) - ------------------------------------------------------------------------------------------------------------------------- REINVESTED EARNINGS: Balance, Jan. 1 $ 4,795 $ 5,097 $ 4,661 Net income 470 385 739 Dividends (net of ESOP tax benefits) (292) (342) (303) Par value of stock issued in five-for-one stock split (345) - ------------------------------------------------------------------------------------------------------------------------- BALANCE, DEC. 31 $ 4,973 $ 4,795 $ 5,097 - ------------------------------------------------------------------------------------------------------------------------- RESERVE FOR ESOP DEBT RETIREMENT: Balance, Jan. 1 $ (174) $ (181) $ (199) Allocation of ESOP shares 20 7 18 Spinoff of chemical businesses 31 - ------------------------------------------------------------------------------------------------------------------------- BALANCE, DEC. 31 $ (123) $ (174) $ (181) - ------------------------------------------------------------------------------------------------------------------------- ACCUMULATED CURRENCY ADJUSTMENT: Balance, Jan. 1 $ 10 $ 101 $ 33 Translation adjustments (127) (91) 68 Spinoff of chemical businesses (11) - ------------------------------------------------------------------------------------------------------------------------- BALANCE, DEC. 31 $ (128) $ 10 $ 101 - ------------------------------------------------------------------------------------------------------------------------- OTHER: Balance, Jan. 1 $ 11 $ 34 $ 19 Net change in market value of investments (8) (23) 15 Minimum pension liability (16) - ------------------------------------------------------------------------------------------------------------------------- BALANCE, DEC. 31 $ (13) $ 11 $ 34 ========================================================================================================================= The above statement should be read in conjunction with pages 51-61 of this report. ESOP stands for Employee Stock Ownership Plan. Adjusted for the 1996 five-for-one common stock split. 50 1997 Monsanto Annual Report 24 ============================================================================== NOTES TO FINANCIAL STATEMENTS ============================================================================== Significant Accounting Policies Monsanto's significant accounting policies are italicized in the following Notes to Financial Statements. Basis of Presentation Where applicable, per share amounts and the number of shares have been restated to reflect the May 1996 five-for-one common stock split effected in the form of a stock dividend. The financial statements have been restated to present the results of the company's former chemical businesses as discontinued operations. Earnings per share have been restated to reflect the company's adoption of Statement of Financial Accounting Standard No. 128, "Earnings per Share." Previously reported amounts have been reclassified to make them consistent with the current presentation. The following notes relate to the continuing operations of Monsanto, unless otherwise indicated. Basis of Consolidation The consolidated financial statements include the company and its majority-owned subsidiaries. Intercompany transactions have been eliminated in consolidation. Other companies in which Monsanto has a significant ownership interest (generally greater than 20 percent) are included in "Investments in Affiliates" in the Statement of Consolidated Financial Position. Monsanto's share of these companies' net earnings or losses is included in "Other income (expense) -- net" in the Statement of Consolidated Income. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and that affect revenues and expenses during the period reported. Estimates are adjusted to reflect actual experience when necessary. Significant estimates are used to account for restructuring reserves, self-insurance reserves, employee benefit plans, asset impairments and contingencies. Currency Translation The financial statements for most of Monsanto's ex-U.S. entities are translated into U.S. dollars at current exchange rates. Unrealized currency translation 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 are translated at either current or historical exchange rates, as appropriate. These currency adjustments are included in net income. Major currencies are the U.S. dollar, British pound sterling, Belgian franc and Japanese yen. Other important currencies include the Brazilian real, Canadian dollar, French franc, German mark and Italian lira. Currency restrictions are not expected to have a significant effect on Monsanto's cash flow, liquidity or capital resources. Currency option contracts are purchased to manage currency exposure for anticipated transactions (for example, expected export sales in the following year denominated in foreign currencies). Currency option and forward contracts are used to manage other currency exposures, primarily for receivables and payables denominated in currencies other than the entities' functional currencies. This hedging activity is intended to protect the company from adverse fluctuations in foreign currencies vs. the entities' functional currencies. As of Dec. 31, 1997, Monsanto had currency forward contracts to purchase $189 million and to sell $131 million, and purchased currency option contracts to sell $38 million, of other currencies. Gains and losses on contracts that are designated and effective as hedges are deferred and are included in the recorded value of the transaction being hedged. Net deferred hedging losses as of Dec. 31, 1997, were not material. Gains and losses on other currency forward and option contracts are included in net income immediately. Monsanto is subject to loss if the counterparties to these contracts do not perform. Principal Acquisitions and Divestitures In 1997, the company made several strategic acquisitions of agricultural seed companies. In February 1997, Monsanto completed its acquisition of the Asgrow Agronomics seed business. In September 1997, Monsanto completed the acquisitions of Holden's Foundation Seeds Inc. and Corn States Hybrid Service Inc. In December 1997, the company acquired controlling interest in Sementes Agroceres S.A., a Brazilian seed company. The combined purchase price of these acquisitions was approximately $1.4 billion. The purchase price allocations for Agroceres are based on preliminary assumptions and are subject to revision. In 1997, Monsanto recorded aftertax charges of $383 million, or $0.64 per share, for the write-off of in-process research and development (R&D) related to the seed company acquisitions. The amounts of purchased in-process R&D were determined by independent valuations. Management believes that the technological feasibility of the acquired in-process research has not been established and that it has no alternative future use. Accordingly, the amounts allocated to in-process R&D are required to be expensed immediately under generally accepted accounting principles. The following unaudited pro forma information combines the consolidated results of operations of Monsanto with those of Asgrow, Holden's, Corn States and Agroceres as if these acquisitions had occurred at 51 1997 Monsanto Annual Report 25 ============================================================================== NOTES TO FINANCIAL STATEMENTS (continued) ============================================================================== the beginning of 1996. The pro forma results give effect to certain purchase accounting adjustments, including additional amortization expense from goodwill and other identified intangible assets, and increased interest expense from acquisition debt. Pro forma income from continuing operations for 1997 excludes unusual charges of $455 million, or $0.75 per share, related to in-process R&D. Pro forma income from continuing operations for 1996 excludes restructuring and other unusual charges of $257 million, or $0.43 per share.
-------------------------- 1997 1996 - ------------------------------------------------------------------ Sales $7,642 $6,661 Income from continuing operations 683 587 Earnings per share -- continuing operations 1.12 0.98 - ------------------------------------------------------------------
This pro forma financial information is presented for comparative purposes only and is not necessarily indicative of the operating results that actually would have occurred had the acquisitions occurred on the earliest day of the periods presented. In addition, these results are not intended to be a projection of future results. In May 1997, Monsanto completed its acquisition of the remaining shares of Calgene Inc. that Monsanto did not already own for $8.00 per share, in cash, or approximately $267 million. In conjunction with this acquisition, Monsanto recorded a $72 million aftertax charge ($72 million pretax), or $0.11 per share, for acquired in-process R&D. This charge was not tax effected because the transaction was a stock acquisition rather than an asset purchase. The purchase price allocations are based upon preliminary assumptions and are subject to revision. The amount of this write-off was determined by an independent valuation. Management believes that the technological feasibility of the acquired in-process research has not been established and that it has no alternative future use. Accordingly, the amounts allocated to in-process R&D are required to be expensed immediately under generally accepted accounting principles. Also in 1997, Monsanto completed several smaller acquisitions. The combined purchase price of these acquisitions was approximately $200 million. The purchase price allocations for these acquisitions are based on preliminary assumptions and are subject to revision. The above acquisitions were accounted for as purchases, and, accordingly, the results of operations for these companies were included in the Statement of Consolidated Income from the dates of acquisition. The excess of the purchase price over the estimated fair value of net assets acquired was recorded as goodwill and is being amortized over not more than 20 years. In March 1996, Monsanto acquired significant equity positions in Calgene and DEKALB Genetics Corp. In November 1996, Monsanto acquired a controlling interest in Calgene. The combined investment in these businesses was approximately $340 million. In May 1996, Monsanto acquired the plant biotechnology assets of Agracetus for approximately $150 million. In September 1995, Searle acquired the women's health care assets, primarily product rights, of the former Syntex Corp., a subsidiary of Roche Holding Ltd., for approximately $240 million. In February 1995, Monsanto completed its acquisition of the worldwide business of Kelco, the specialty chemicals division of Merck & Co. Inc., for $1.062 billion. Discontinued Operations In December 1996, the board of directors approved a plan to spin off the company's chemical businesses to shareowners by means of the distribution of shares of a newly formed, wholly owned subsidiary, later named Solutia Inc. Effective Aug. 12, 1997, the board declared the distribution on Sept. 1, 1997, to shareowners of record on Aug. 20, 1997, of one share of Solutia common stock and one preferred share purchase right of Solutia for every five shares of Monsanto common stock, subject to certain conditions, including shareowner approval. At a special meeting held Aug. 18, 1997, shareowners approved the spinoff. It became effective Sept. 1, 1997. As a result of shareowner approval of the spinoff, Monsanto's financial statements have been restated to present the results of operations, cash flow and financial position of the chemical businesses as discontinued operations. Discontinued operations also include certain other operations of the company's chemical businesses that have been sold, primarily the styrenics plastics business. Operating results for discontinued operations were:
--------------------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------------------ NET SALES $1,943 $2,914 $3,552 ==================================================================================== Income (loss) before income taxes $ 266 $ (13) $ 253 Pretax gain on sale of business 189 Income taxes 90 15 164 - ------------------------------------------------------------------------------------ NET INCOME (LOSS) $ 176 $ (28) $ 278 ====================================================================================
Pretax restructuring and other unusual charges related to discontinued operations were $340 million in 1996 and $55 million in 1995. These costs were associated with work force reductions, the rationalization or closure of certain facilities, asset write-offs, and exit costs to separate the chemical businesses. Other pretax items affecting discontinued operations in 1995 were receipt of settlement payments of $88 million from various insurers for environmental and other insurance litigation, offset by a lawsuit settlement of $41 million and joint venture integration 52 1997 Monsanto Annual Report 26 ============================================================================== NOTES TO FINANCIAL STATEMENTS (continued) ============================================================================== costs of $40 million. Also in 1995, the styrenics plastics business and an interest in a related joint venture were sold for a pretax gain of $189 million. The effective tax rate for discontinued operations for 1996 exceeded the 35 percent U.S. federal statutory rate, primarily because of the effect of nondeductible exit costs incurred to separate the chemical businesses. This, in turn, was partly offset by the effect of lower ex-U.S. tax rates. The effective tax rates for discontinued operations in 1995 and 1994 exceeded the U.S. federal statutory rate, primarily because of the effect of state income taxes. Interest expense of $39 million in 1997, $52 million in 1996, and $58 million in 1995 has been allocated to the operating results of Solutia based on the debt assumed by Solutia. Historically, the company did not allocate any debt to the chemical businesses because the company uses a centralized approach to cash management and the financing of its operations. In connection with the spinoff, Solutia assumed the pension liabilities and received related assets for its active employees and for certain former employees of the chemical businesses. Solutia also assumed the postretirement benefit liabilities for its active employees and former employees who last worked in a chemical business. To complete the spinoff, Monsanto contributed certain assets to Solutia, and Solutia assumed certain liabilities of Monsanto. In addition to the assets and liabilities reported as discontinued operations in the Consolidated Statement of Financial Position, the assets contributed to Solutia and liabilities assumed by Solutia included a joint venture interest in Monsanto's elemental phosphorus business, $75 million of cash and $1.0 billion of short-term debt. Also in connection with the spinoff, Solutia's employee stock ownership plan (ESOP) received 2.4 million shares of unallocated company common stock held by Monsanto's ESOP, and assumed $29 million of ESOP borrowings. The excess of the liabilities assumed by Solutia and Solutia's ESOP over the assets contributed to Solutia in connection with the spinoff (approximately $141 million) increased Monsanto's shareowners' equity. In connection with the spinoff, several agreements entered into by Monsanto and Solutia allocated responsibility between them for various debts, liabilities and obligations. These agreements provide that Solutia will indemnify Monsanto for the liabilities assumed by Solutia pursuant to such agreements. Restructuring and Other Actions -- Continuing Operations In December 1996, the company recorded pretax restructuring charges and other unusual items related to continuing operations of $376 million ($257 million aftertax) to cover the closure or rationalization of certain facilities, asset write-offs, and work force reductions. Approximately 940 of the 1,520 positions expected to be eliminated by these actions had been eliminated by the end of 1997. Included in these charges were aftertax amounts for asset impairments totaling $39 million. These write-offs were related to intangible assets for products no longer marketed and excess production capacity. Assets were written down to their discounted cash values, using appropriate discount rates. In December 1995, the company recorded pretax restructuring charges associated with continuing operations of $114 million ($78 million aftertax) that covered the costs of work force reductions, business consolidations, facility closures, and the exit from nonstrategic businesses and facilities. This plan was substantially completed by the end of 1996 and reduced employment by approximately 370 people. Other unusual items in 1995 included approximately $20 million in favorable pretax adjustments ($13 million aftertax) under certain sales rebate programs in the United States for product sales made in prior years, and approximately $4 million ($2 million aftertax) in insurance settlements. The components of the pretax expense (income) related to income from continuing operations before income taxes for the restructuring programs and the other actions were:
------------------------- 1996 1995 - ------------------------------------------------------------------- Cost of employee reductions $255 $ 41 Shutdown and consolidation of various facilities and departments 57 73 Asset impairments 51 Insurance-related settlement (income) (4) Other costs (income) 13 (20) - ------------------------------------------------------------------- TOTAL $376 $ 90 ===================================================================
The restructuring expenses recorded were based on estimates prepared at the time the restructuring actions were approved by the board of directors. The balance in restructuring reserves as of Dec. 31, 1997, was $235 million. It is earmarked primarily for remaining work force reduction costs and the costs associated with the shutdown and consolidation of various facilities and departments. Management believes that the balance of these reserves as of Dec. 31, 1997, is adequate for completion of those activities. Restructuring actions during the last three years have reduced these liabilities by approximately $330 million. Approximately one-half of these reductions were related to the cost of work force reduction programs. The remaining reductions were primarily related to write-offs and expenditures related to the termination or sale of nonstrategic products and facilities. The pretax expenses (income) related to the restructuring programs and the other unusual items were 53 1997 Monsanto Annual Report 27 ============================================================================== NOTES TO FINANCIAL STATEMENTS (continued) ============================================================================== recorded in the Statement of Consolidated Income in the following categories:
-------------------------- 1996 1995 - ------------------------------------------------------------------ Net sales $ (20) Cost of goods sold $ 28 (4) Amortization of intangible assets 23 Restructuring expenses 356 114 - ------------------------------------------------------------------ Decrease in operating income 407 90 Other (income) expense -- net (31) - ------------------------------------------------------------------ TOTAL DECREASE IN INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES $376 $ 90 ==================================================================
In 1996, other expense was reduced by reversals of restructuring reserves that were no longer required, and by a minority interest associated with restructuring and other unusual items recorded by Calgene. Income from continuing operations decreased $257 million, or $0.43 per share, in 1996, and decreased $63 million, or $0.11 per share, in 1995 because of these restructurings and other unusual items. Depreciation and Amortization
------------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------------ Depreciation $299 $276 $272 Amortization of intangible assets 173 128 119 Obsolescence 15 19 14 - ------------------------------------------------------------------------------ TOTAL $487 $423 $405 ==============================================================================
Property, plant and equipment is recorded at cost. The cost of plant and equipment is depreciated over weighted average periods of 18 years for buildings and 10 years for machinery and equipment, by the straight-line method. In 1996, total amortization of intangible assets reflected in the Statement of Consolidated Income includes $23 million of charges for asset impairments. Intangible assets are recorded at cost less accumulated amortization. The components of intangible assets and their estimated remaining useful lives were:
----------------------------------------------------------- ESTIMATED REMAINING LIFE 1997 1996 1995 - ------------------------------------------------------------------------------------------ Goodwill 21 $1,835 $1,519 $1,372 Patents and other intangible assets 10 1,002 647 593 - ------------------------------------------------------------------------------------------ TOTAL $2,837 $2,166 $1,965 ========================================================================================== Weighted average, in years, as of Dec. 31, 1997.
Goodwill and other intangible assets increased in 1997, primarily because of the acquisitions of Asgrow, Calgene and Holden's. Goodwill is the cost of acquired businesses in excess of the fair value of their identifiable net assets and is amortized over the estimated periods of benefit (five to 40 years). Patents obtained in a business acquisition are recorded at the present value of estimated future cash flows resulting from patent ownership. The cost of patents is amortized over their legal lives. The cost of other intangible assets (principally seed germplasm, product rights and trademarks) is amortized over their estimated useful lives. Impairment tests of long-lived assets are made when conditions indicate a possible loss. Such impairment tests are based on a comparison of undiscounted cash flows to the recorded value of the asset. If an impairment is indicated, the asset value is written down to its discounted cash value, using an appropriate discount rate. Investments Certain investments in equity securities, other than investments in equity affiliates, are classified as available-for-sale securities, and are recorded at their market values. When a decline in market value is deemed other than temporary, the reduction to the investment in a security is charged to expense. As of Dec. 31, these equity securities were detailed as follows:
----------------------- 1997 1996 - ------------------------------------------------------------ Aggregate fair value $72 $79 Gross unrealized holding: Gains -- 31 Losses 12 11 - ------------------------------------------------------------
In 1996, proceeds and realized gains from sales of available-for-sale securities were $80 million and $33 million, respectively. Debt securities held are recorded at amortized cost, because the company has the ability and intent to hold these securities to their maturity date. These securities mature in less than five years. As of Dec. 31, 1997 and 1996, the total amortized cost of these securities was $116 million and $147 million, respectively. Inventory Valuation Inventories are stated at cost or market, whichever is less. Actual cost is used to value raw materials and supplies. Standard cost, which approximates actual cost, is used to value finished goods and goods in process. Standard cost includes direct labor and raw materials, and manufacturing overhead based on practical capacity. The cost of certain inventories (49 percent as of Dec. 31, 1997) is determined by using the last-in, first-out (LIFO) method, which generally reflects the effects of inflation or deflation on cost of goods sold sooner than other inventory 54 1997 Monsanto Annual Report 28 ============================================================================== NOTES TO FINANCIAL STATEMENTS (continued) ============================================================================== cost methods do. The cost of other inventories generally is determined by the first-in, first-out (FIFO) method. Inventories at FIFO approximate current cost. The components of inventories were:
---------------------------- 1997 1996 - ------------------------------------------------------------------- Finished goods $ 762 $ 630 Goods in process 265 287 Raw materials and supplies 390 333 - ------------------------------------------------------------------- Inventories, at FIFO cost 1,417 1,250 Excess of FIFO over LIFO cost (43) (67) - ------------------------------------------------------------------- TOTAL $1,374 $1,183 ===================================================================
Commodity futures and options contracts are used to hedge the price volatility of certain commodities, primarily soybeans and corn. This hedging activity is intended to manage the cost of soybean and corn seeds that Monsanto's seed companies purchase from seed growers and to reduce the risk of incurring higher seed costs in periods of rising commodity prices. Gains and losses on contracts that are designated and effective as hedges are deferred in inventory and are included in cost of goods sold when the underlying seeds are sold. As of Dec. 31, 1997, Monsanto had futures contracts to purchase $68 million of corn and soybeans. Income Taxes The components of income from continuing operations before income taxes were:
------------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------------ United States $(55) $313 $339 Outside United States 421 240 306 - ------------------------------------------------------------------------------ TOTAL $366 $553 $645 ==============================================================================
The components of income tax expense charged to operations were:
--------------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------------- Current: U.S. federal $ 138 $ 42 $ 180 U.S. state 20 14 6 Outside United States 124 91 108 - ------------------------------------------------------------------------------- 282 147 294 - ------------------------------------------------------------------------------- Deferred: U.S. federal (194) 10 (108) U.S. state (17) (6) 6 Outside United States 1 (11) (8) - ------------------------------------------------------------------------------- (210) (7) (110) - ------------------------------------------------------------------------------- TOTAL $ 72 $140 $ 184 ===============================================================================
Factors causing Monsanto's effective tax rate to differ from the U.S. federal statutory rate were:
------------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------------ U.S. federal statutory rate 35% 35% 35% U.S. export earnings (7) (6) (2) Puerto Rican operations (5) (4) (4) U.S. R&D tax credit (7) (1) -- Lower ex-U.S. rates (2) (1) -- Nondeductible goodwill 3 2 1 Valuation allowances (4) -- (2) Acquired in-process R&D 7 Other -- -- 1 - ------------------------------------------------------------------------------ EFFECTIVE INCOME TAX RATE 20% 25% 29% ==============================================================================
Deferred income tax balances were related to:
----------------------- 1997 1996 - ------------------------------------------------------------------------------- Property $(180) $(243) Postretirement benefits 231 171 Restructuring reserves 71 181 Inventory 6 40 Net operating tax loss and tax credit carryforwards 138 163 Acquired in-process R&D 207 Other (53) 66 Valuation allowances (22) (168) - ------------------------------------------------------------------------------- NET DEFERRED TAX ASSETS $ 398 $ 210 ===============================================================================
Deferred tax balances were:
----------------------- 1997 1996 - ------------------------------------------------------------------------------ Deferred tax assets $495 $312 Deferred tax liabilities 97 102 - ------------------------------------------------------------------------------ NET DEFERRED TAX ASSETS $398 $210 ==============================================================================
The balance in valuation allowances as of Dec. 31, 1996, included $107 million for Calgene, primarily related to U.S. net operating loss carryforwards. In 1997, Monsanto acquired the remaining 46 percent interest in Calgene and, as part of the acquisition accounting, recognized the majority of the deferred tax assets related to these carryforwards. These carryforwards expire from 1999 through 2011. In 1997, Monsanto recognized $24 million in benefits from certain ex-U.S. net operating loss carryforwards. As of Dec. 31, 1997, Monsanto had available approximately $50 million in remaining ex-U.S. net operating loss carryforwards, which expire from 1998 through 2001. Income taxes and remittance taxes have not been recorded on $1.4 billion in undistributed earnings of subsidiaries, either because any taxes on dividends would be offset substantially by foreign tax credits or because Monsanto intends to reinvest those 55 1997 Monsanto Annual Report 29 ============================================================================== NOTES TO FINANCIAL STATEMENTS (continued) ============================================================================== earnings indefinitely. It is not practicable to estimate the income tax liability that might be incurred if such earnings were remitted to the United States. Short-Term Debt and Credit Arrangements Short-term debt was:
-------------------------- 1997 1996 - ------------------------------------------------------------------------------- Notes payable to banks $ 312 $129 Commercial paper 1,200 332 Bank overdrafts 126 112 Current portion of long-term debt 88 81 - ------------------------------------------------------------------------------- TOTAL $1,726 $654 =============================================================================== Weighted average interest rates of notes payable as of Dec. 31: Banks 8.5% 7.7% Commercial paper 5.9% 5.5% - ------------------------------------------------------------------------------- Includes the effect of notes in certain countries where local inflation results in high interest rates.
Monsanto had aggregate short-term loan facilities of $746 million, under which loans totaling $312 million were outstanding as of Dec. 31, 1997. Interest on these loans is related to various bank rates. Monsanto has a $1.0 billion credit facility, expiring in 2001, which allows the company to request that lenders increase their commitments up to an aggregate of $1.6 billion. There were no borrowings under this credit facility as of Dec. 31, 1997. This facility is used to support the issuance of commercial paper. Interest on amounts borrowed under this agreement is expected to be at money market rates. Covenants under this credit facility restrict maximum borrowings. The company does not anticipate that future borrowings will be limited by the terms of this agreement. Historically, Monsanto did not allocate any short-term debt to the chemical businesses, because the company uses a centralized approach to cash management and the financing of its operations. Effective Sept. 1, 1997, in connection with the spinoff, Solutia assumed $1.0 billion of the company's short-term debt, primarily commercial paper, outstanding on that date. Long-Term Debt Long-term debt (exclusive of current maturities) was:
------------------------ 1997 1996 - ------------------------------------------------------------------------------ Industrial revenue bond obligations, average rate in 1997 of 4.96%, due 1999 to 2028 $ 338 $ 338 Medium-term notes, rates in 1997 ranging from 8.55% to 9%, due 1999 to 2005 90 145 Commercial paper 625 325 6% notes due 2000 150 150 7.09% and 8.13% amortizing ESOP notes and debentures due 2000 and 2006, guaranteed by the company 101 138 8 7/8% debentures due 2009 99 99 5.6% yen note due 2016 77 88 8.7% debentures due 2021 100 100 8.2% debentures due 2025 150 150 6.75% debentures due 2027 198 Other 51 75 - ------------------------------------------------------------------------------ TOTAL $1,979 $1,608 ============================================================================== ESOP stands for employee stock ownership plan.
Maturities and sinking-fund requirements on long-term debt, excluding commercial paper, are $88 million in 1998, $84 million in 1999, $226 million in 2000, $43 million in 2001, and $35 million in 2002. Commercial paper balances of $625 million and $325 million as of Dec. 31, 1997 and 1996, respectively, have been classified as long-term debt. Monsanto has the ability and intent to renew these obligations beyond 1998. Interest-rate swap agreements are used to reduce interest rate risks and to manage interest expense. By entering into these agreements, the company changes the fixed/variable interest-rate mix of its debt portfolio. As of Dec. 31, 1997, Monsanto was party to interest-rate swap agreements with an aggregate notional principal amount of $90 million related to existing debt. The agreements effectively convert floating-rate debt into fixed-rate debt. This reduces the company's risk of incurring higher interest costs in periods of rising interest rates. Monsanto is subject to loss if the counterparties to these agreements do not perform. Interest differentials to be paid or received because of swap agreements are reflected as an adjustment to interest expense over the related debt period. Historically, Monsanto did not allocate any long-term debt to the chemical businesses, because the company uses a centralized approach to cash management and the financing of its operations. Effective Sept. 1, 1997, in connection with the spinoff, Solutia's ESOP assumed $29 million of ESOP borrowings. 56 1997 Monsanto Annual Report 30 ============================================================================== NOTES TO FINANCIAL STATEMENTS (continued) ============================================================================== Fair Values of Financial Instruments The estimated fair values of Monsanto's financial instruments were:
---------------------------------------------------------- 1997 1996 ---------------------------------------------------------- RECORDED FAIR RECORDED FAIR AMOUNT VALUE AMOUNT VALUE - ------------------------------------------------------------------------------------------ Long-term debt $1,979 $2,053 $1,608 $1,681 - ------------------------------------------------------------------------------------------
The recorded amounts of cash, trade receivables, investments in securities, discounted receivables, third-party guarantees, commodity futures contracts, currency forward contracts and swaps, accounts payable, interest-rate swaps, and short-term debt approximate their fair values. Fair values are estimated by the use of quoted market prices, estimates obtained from brokers, and other appropriate valuation techniques based on information available as of Dec. 31, 1997. The fair-value estimates do not necessarily reflect the values Monsanto could realize in the current market. Postretirement Benefits -- Pensions Most Monsanto employees are covered by noncontributory pension plans. The components of pension cost were:
-------------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------------- Service cost for benefits earned during the year $ 61 $ 83 $ 70 Interest cost on benefit obligation 148 287 291 Assumed return on plan assets (167) (322) (326) Amortization of unrecog- nized net (gain) loss 13 9 (25) - ------------------------------------------------------------------------------- TOTAL $ 55 $ 57 $ 10 =============================================================================== Continuing operations $ 55 $ 54 $ 29 Discontinued operations 3 (19) - ------------------------------------------------------------------------------- TOTAL $ 55 $ 57 $ 10 =============================================================================== In connection with the spinoff, Solutia assumed the pension liabilities and received related assets for its active employees and for certain former employees of the chemical businesses. The components of pension cost for 1996 and 1995 have not been restated for amounts related to continuing and discontinued operations as no detailed information was available. Actual returns on plan assets were $350 million in 1997, $558 million in 1996, and $671 million in 1995.
Pension benefits are based on an employee's years of service and/or compensation level. Pension plans are funded in accordance with Monsanto's long-range projections of the plans' financial conditions. These projections take into account benefits earned and expected to be earned, anticipated returns on pension plan assets, and income tax and other regulations. Pension costs were determined through the use of the preceding year-end rate assumptions. Assumptions used as of Dec. 31 for the principal plans were:
------------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------------ Discount rate 7.00% 7.50% 7.25% Assumed long-term rate of return on plan assets 9.50% 9.50% 9.50% Annual rates of salary increase (for plans that base benefits on final compensation level) 4.00% 4.50% 4.50% - ------------------------------------------------------------------------------
The funded status of Monsanto's pension plans at year-end was:
--------------------------------------- 1997 1996 - ------------------------------------------------------------------------------- ASSETS ABO EXCEED EXCEEDS ABO ASSETS - ------------------------------------------------------------------------------- Actuarial present value of plan benefits: Vested $428 $1,750 $3,495 Nonvested 1 77 154 - ------------------------------------------------------------------------------- Accumulated benefit obligation (ABO) 429 1,827 3,649 Effect of projected future salary increases 54 173 377 - ------------------------------------------------------------------------------- PROJECTED BENEFIT OBLIGATION 483 2,000 4,026 - ------------------------------------------------------------------------------- PLAN ASSETS AT FAIR VALUE 466 1,563 3,817 - ------------------------------------------------------------------------------- Excess of projected benefit obligation over plan assets 17 437 209 Unrecognized initial net gain 6 21 94 Unrecognized prior service costs (29) (77) (264) Unrecognized subsequent net gain (loss) (25) (45) 241 Minimum liability adjustment -- 33 - ------------------------------------------------------------------------------- ACCRUED NET PENSION LIABILITY (ASSET) $(31) $ 369 $ 280 =============================================================================== Continuing operations $(31) $ 369 $ 208 Discontinued operations 72 - ------------------------------------------------------------------------------- TOTAL ACCRUED NET PENSION LIABILITY (ASSET) $(31) $ 369 $ 280 =============================================================================== In connection with the spinoff, Solutia assumed the pension liabilities and received related assets for its active employees and for certain former employees of the chemical businesses. The projected benefit obligation, the fair value of plan assets and the components of accrued pension liability for 1996 have not been restated for amounts related to continuing and discontinued operations as no detailed information was available. Included $228 million in 1996 for unfunded plans. Included $138 million in 1996 for unfunded plans.
57 1997 Monsanto Annual Report 31 ============================================================================== NOTES TO FINANCIAL STATEMENTS (continued) ============================================================================== The accrued net pension liability related to continuing operations was included in:
--------------------------- 1997 1996 - ------------------------------------------------------------------- Postretirement liabilities $390 $264 Less other assets (52) (56) - ------------------------------------------------------------------- ACCRUED NET PENSION LIABILITY $338 $208 ===================================================================
As a result of employment reductions from the 1996 restructuring program, $36 million of restructuring reserves was transferred to accrued net pension liability during 1997. Included in the preceding table are plan assets and projected benefit obligations for the principal U.S. plans of approximately $1.55 billion and $1.96 billion, respectively, as of Dec. 31, 1997. Plan assets consist principally of common stocks and U.S. government and corporate obligations. Contributions to these plans were neither required nor made in 1997, 1996 and 1995 because the company's principal pension plans are adequately funded, using assumed returns. Postretirement Benefits -- Health Care and Other Monsanto provides certain health care and life insurance benefits for retired employees. Substantially all of Monsanto's regular, full-time U.S. employees and certain employees in other countries may become eligible for these benefits if they reach retirement age while employed by Monsanto. These postretirement benefits are unfunded and are generally based on the employee's years of service and/or compensation level. The costs of postretirement benefits are accrued by the date the employees become eligible for the benefits. The components of the cost of these postretirement benefits, principally health care and life insurance, were:
-------------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------------ Service cost for benefits earned during the year $10 $ 25 $ 21 Interest cost on benefit obligation 27 88 94 Amortization of unrecognized net (gain) loss (3) 2 (2) - ------------------------------------------------------------------------------ TOTAL $34 $115 $113 ============================================================================== Continuing operations $34 $ 33 $ 32 Discontinued operations 82 81 - ------------------------------------------------------------------------------ TOTAL $34 $115 $113 ============================================================================== In connection with the spinoff, Solutia assumed the postretirement benefit liabilities for its active employees and for former employees who last worked at a chemical facility. The components of the cost of postretirement benefits for 1996 and 1995 have not been restated for amounts related to continuing and discontinued operations as no detailed information was available.
Postretirement costs were determined by using the preceding year-end rate assumptions. Assumptions used as of Dec. 31 for the principal plans were:
-------------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------------ Discount rate 7.00% 7.50% 7.25% Initial trend rate for health care costs 7.00% 8.00% 9.00% Ultimate trend rate for health care costs 5.00% 5.00% 5.00% - ------------------------------------------------------------------------------ The initial trend rate for health care costs declines by 1 percent per year, to 5 percent for years after the year 1999.
A 1 percent increase in the assumed trend rate for health care costs would have increased the cost of 1997 postretirement health care benefits by $1 million and the accumulated benefit obligation by $15 million as of Dec. 31, 1997. As of Dec. 31, the status of Monsanto's postretirement health care and life insurance benefit plans, and employee disability benefit plans was:
----------------------------- 1997 1996 - ------------------------------------------------------------------- ACCUMULATED BENEFIT OBLIGATION: Retirees $314 $ 938 Eligible active employees 17 60 Other active employees 52 251 - ------------------------------------------------------------------- TOTAL 383 1,249 - ------------------------------------------------------------------- Unrecognized benefits from prior service 12 27 Unrecognized subsequent net loss (26) (28) - ------------------------------------------------------------------- ACCRUED LIABILITY $369 $1,248 =================================================================== Continuing operations $369 $ 356 Discontinued operations 892 - ------------------------------------------------------------------- ACCRUED LIABILITY $369 $1,248 =================================================================== In connection with the spinoff, Solutia assumed the postretirement benefit liabilities for its active employees and for former employees who last worked at a chemical facility. The accumulated benefit obligation and the components of the accrued liability for 1996 have not been restated for amounts related to continuing and discontinued operations as no detailed information was available.
The accrued liability related to continuing operations was included in:
--------------------------- 1997 1996 - ------------------------------------------------------------------ Miscellaneous accruals $ 24 $ 26 Postretirement liabilities 345 330 - ------------------------------------------------------------------ ACCRUED LIABILITY $369 $356 ==================================================================
The assumptions used to compute the accumulated benefit obligation of the principal plans were changed as of Dec. 31, 1997. That resulted in a decrease of approximately $26 million in the obligation. 58 1997 Monsanto Annual Report 32 ============================================================================== NOTES TO FINANCIAL STATEMENTS (continued) ============================================================================== Employee Savings Plans For some company employee savings plans, employee contributions are matched in part by Monsanto. The value of these contributions for such plans was $39 million in 1997, and $30 million in both 1996 and 1995. Monsanto has established an Employee Stock Ownership Plan (ESOP), which held 14.7 million shares of Monsanto common stock as of Dec. 31, 1997. The ESOP acquired shares by using proceeds from the issuance of long-term notes and debentures guaranteed by Monsanto. The ESOP also borrowed $50 million from Monsanto. A portion of the ESOP shares is allocated each year to employee savings accounts as matching contributions. In 1997, 954,778 shares were allocated to participants under the plan, leaving 10,150,488 unallocated shares as of Dec. 31, 1997. Unallocated shares held by the ESOP are considered outstanding for earnings-per-share calculations. Compensation expense is equal to the cost of the shares allocated to participants, less cash dividends paid on the shares held by the ESOP. Dividends on the common stock owned by the ESOP are used to repay the ESOP borrowings, which were $139 million as of Dec. 31, 1997. In September 1997, the ESOP received Solutia shares from the spinoff. These shares were exchanged for Monsanto shares. Also in connection with the spinoff, Solutia's ESOP received 2.4 million unallocated shares of Monsanto common shares held by the ESOP, and also assumed $29 million of ESOP borrowings.
-------------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------------ Total ESOP expense $18 $14 $21 Interest portion of total ESOP expense 12 12 13 Cash contribution 6 16 18 Dividends paid on ESOP shares held 8 11 10 - ------------------------------------------------------------------------------
Stock Option Plans The company grants stock options under two fixed plans. Under the company's Management Incentive Plan of 1996, the company may grant key officers and management employees stock-based awards, including stock options, of up to 71,605,350 shares of common stock. Under this plan, the exercise price of each option equals not less than the market price of the company's stock on the date of grant. An option's maximum term is 10 years. Options are granted at the discretion of the board of directors' people committee or its delegate. Options generally vest upon the achievement of business performance targets or the ninth anniversary of the option grant date, whichever comes first. Certain options granted to senior management vest upon the attainment of pre-established prices within specified time periods. Under the company's Shared Success Stock Option Plan, most regular full-time and regular part-time employees of the company were granted options on 200 shares of common stock in 1996 and 330 shares in 1997. The maximum number of shares for which stock options may be granted under this plan totals 14.8 million. Approximately 10.4 million options, which vest from April 1999 to February 2000, are outstanding under this plan. The exercise price of each option is determined by the committee and generally equals the market price of the company's stock on the date of grant. An option's maximum term is 10 years. As permitted by Statement of Financial Accounting Standard (SFAS) No. 123, "Accounting for Stock-Based Compensation," the company has elected to continue following the guidance of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," for measurement and recognition of stock-based transactions with employees. Accordingly, no compensation cost has been recognized for the company's option plans. Had the determination of compensation cost for these plans been based on the fair value at the grant dates for awards under these plans, consistent with the method of SFAS No. 123, the company's income from continuing operations and earnings per share from continuing operations would have been reduced to the pro forma amounts indicated below:
-------------------------- 1997 1996 - ------------------------------------------------------------------ INCOME FROM CONTINUING OPERATIONS: As reported $ 294 $ 413 Pro forma 206 331 EARNINGS PER SHARE -- CONTINUING OPERATIONS: As reported $0.48 $0.69 Pro forma 0.34 0.57 - ------------------------------------------------------------------
The pro forma compensation expense may not be representative of pro forma compensation expense that would be incurred in future years. In computing the pro forma compensation expense, the fair value of each option grant is estimated on the date of grant by using the Black-Scholes option-pricing model. The following weighted-average assumptions were used for grants:
--------------------------- 1997 1996 - ------------------------------------------------------------------ Expected dividend yield 0.29% 1.5% Expected volatility 27.0% 25.0% Risk-free interest rates 6.4% 6.0% Expected option lives (years) 4.3 4.0 - ------------------------------------------------------------------
59 1997 Monsanto Annual Report 33 ============================================================================== NOTES TO FINANCIAL STATEMENTS (continued) ============================================================================== A summary of the status of the company's stock option plans for the three-year period ended Dec. 31, 1997, follows:
OUTSTANDING ---------------------------------- EXERCISABLE WEIGHTED-AVERAGE SHARES SHARES EXERCISE PRICE - ---------------------------------------------------------------------------------------- DEC. 31, 1994 35,842,995 68,543,900 $11.75 - ---------------------------------------------------------------------------------------- 1995: Granted 7,278,725 16.01 Exercised (20,135,570) 10.83 Expired (417,745) 14.12 - ---------------------------------------------------------------------------------------- DEC. 31, 1995 45,383,790 55,269,310 $12.63 - ---------------------------------------------------------------------------------------- 1996: Granted 25,004,150 33.38 Exercised (16,327,617) 11.93 Expired (801,605) 22.59 - ---------------------------------------------------------------------------------------- DEC. 31, 1996 38,362,943 63,144,238 $20.90 - ---------------------------------------------------------------------------------------- 1997: GRANTED 27,740,275 37.98 EXERCISED (12,002,286) 13.64 EXPIRED (3,476,815) 34.71 - ---------------------------------------------------------------------------------------- DEC. 31, 1997 45,257,512 75,405,412 $25.22 ========================================================================================
The weighted-average fair values of options granted during 1997 and 1996 were $10.01 and $6.86, respectively. The following table summarizes information about stock options outstanding as of Dec. 31, 1997:
OPTIONS OUTSTANDING - ---------------------------------------------------------------------------------- WEIGHTED-AVERAGE WEIGHTED- RANGE OF REMAINING AVERAGE EXERCISE PRICES SHARES CONTRACTUAL LIFE EXERCISE PRICE - ---------------------------------------------------------------------------------- $ 7.00 to 9.99 8,890,440 4.5 years $ 9.11 10.00 to 14.99 18,433,740 5.3 13.13 15.00 to 19.99 451,112 7.6 16.95 20.00 to 29.99 10,283,175 8.2 26.20 30.00 to 39.99 34,997,093 8.9 34.19 40.00 to 55.00 2,349,852 6.8 44.72 - ---------------------------------------------------------------------------------- $ 7.00 to 55.00 75,405,412 8.2 $25.22 ================================================================================== OPTIONS EXERCISABLE - ---------------------------------------------------------------------------------- WEIGHTED- RANGE OF AVERAGE EXERCISE PRICES SHARES EXERCISE PRICE - ---------------------------------------------------------------------------------- $ 7.00 to 9.99 8,890,440 $ 9.11 10.00 to 14.99 18,410,240 13.13 15.00 to 19.99 394,528 16.73 20.00 to 29.99 5,533,204 24.97 30.00 to 39.99 12,029,100 34.42 - -------------------------------------------------------------------------------- $ 7.00 to 39.99 45,257,512 $19.48 ==================================================================================
As a result of the spinoff, options to purchase the company's common stock under the aforementioned plans were converted to options to purchase Solutia common stock or to adjusted options to purchase the company's common stock, or a combination of both. Recognition of compensation expense was not required as a result of these conversions. Earnings per Share Effective Dec. 31, 1997, Monsanto adopted Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings per Share." SFAS 128 establishes standards for computing and presenting earnings per share (EPS). The presentation of primary and fully diluted EPS required by old standards is replaced by basic and diluted EPS. Basic EPS measures operating performance assuming no dilution from securities or contracts to issue common stock. Diluted EPS measures operating performance giving effect to the dilution that would occur when securities or contracts to issue common stock are exercised or converted. Basic EPS from continuing operations were computed using the weighted average number of common shares outstanding each year (590.2 million in 1997, 581.2 million in 1996, and 567.2 million in 1995). Diluted EPS from continuing operations were computed taking into account the effect of dilutive potential common shares (20.3 million in 1997, 17.7 million in 1996, and 13.4 million in 1995). Dilutive potential common shares consist of outstanding stock options. As of Dec. 31, 1997, options to purchase approximately 3.6 million shares of common stock were outstanding, but they were not included in the computation of diluted EPS because the exercise prices of the options were greater than the average market price of the common shares. These options expire from 2006 through 2007. See the previous note for more information about Monsanto's stock options. Capital Stock As of Dec. 31, 1997, there were 119.8 million common shares reserved for employee stock options. In January 1990, the company's board of directors declared a dividend of one preferred stock purchase right on each then-outstanding share of the company's common stock. If a person or group acquires beneficial ownership of 20 percent or more, or announces a tender offer that would result in beneficial ownership of 20 percent or more, of the company's outstanding common stock, the rights become exercisable and, as a result of two subsequent stock splits, for every 10 rights held, the owner will be entitled to purchase one one-hundredth of a share of a new series of preferred stock for $450. If Monsanto is acquired in a business combination transaction while the rights are outstanding, for every 10 rights held, the holder will be entitled to purchase, for $450, common shares of the acquiring company 60 1997 Monsanto Annual Report 34 ============================================================================== NOTES TO FINANCIAL STATEMENTS (continued) ============================================================================== having a market value of $900. In addition, if a person or group acquires beneficial ownership of 20 percent or more of the company's outstanding common stock, for every 10 rights held, the holder (other than such person or members of such group) will be entitled to purchase, for $450, a number of shares of the company's common stock having a market value of $900. Furthermore, at any time after a person or group acquires beneficial ownership of 20 percent or more (but less than 50 percent) of the company's outstanding common stock, the board of directors may, at its option, exchange part or all of the rights (other than rights held by the acquiring person or group) for shares of the company's common stock on a one-share-for-every-10-rights basis. At any time prior to the acquisition of such a 20 percent position, the company can redeem each right for $0.001. The board of directors also is authorized to reduce the aforementioned 20 percent thresholds to not less than 10 percent. The rights expire in the year 2000. Commitments and Contingencies Commitments, principally in connection with uncompleted additions to property, were approximately $116 million as of Dec. 31, 1997. Excluding the ESOP notes and debentures, Monsanto was contingently liable as a guarantor for bank loans and for discounted customers' receivables totaling approximately $123 million as of Dec. 31, 1997, and $156 million as of Dec. 31, 1996. Future minimum payments under noncancelable operating leases, unconditional inventory purchases, and R&D alliances are $105 million for 1998, $83 million for 1999, $57 million for 2000, $47 million for 2001, $43 million for 2002, and $76 million thereafter. The more significant concentrations in Monsanto's trade receivables at year-end were:
-------------------- 1997 1996 - ------------------------------------------------------------------ U.S. agricultural product distributors $359 $361 European agricultural product distributors 203 156 Pharmaceutical distributors worldwide 435 399 Customers in the former Soviet Union 75 44 Customers in southeast Asia 31 50 - ------------------------------------------------------------------
Management does not anticipate losses on its trade receivables in excess of established allowances. Costs for remediation of waste disposal sites are accrued in the accounting period in which the responsibility is established and when the cost is estimable. Postclosure and remediation costs for hazardous and other waste facilities at operating locations are accrued over the estimated life of the facility as part of its anticipated closure cost. Monsanto's Statement of Consolidated Financial Position included accrued liabilities of $19 million as of Dec. 31, 1997, and $25 million as of Dec. 31, 1996, for the remediation of identified waste disposal sites. Monsanto's future remediation expenses for waste disposal sites are affected by a number of uncertainties. These uncertainties include, but are not limited to, the method and extent of remediation, the percentage of material attributable to Monsanto at the sites relative to that attributable to other parties, and the financial capabilities of the other potentially responsible parties (PRPs). The company does not expect the resolution of such uncertainties to have a material effect on profitability. Monsanto is a party to a number of lawsuits and claims, which it is vigorously defending. Such matters arise out of the normal course of business and relate to a variety of issues. Certain of the lawsuits and claims seek damages in very large amounts, or seek to restrict the company's business activities. Although the results of litigation cannot be predicted with certainty, management's belief, based upon the advice of company counsel, is that the final outcome of such litigation will not have a material adverse effect on Monsanto's consolidated financial position, profitability or liquidity in any one year, as applicable. Supplemental Data Supplemental income statement data were:
---------------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------------- Rent expense $ 130 $111 $102 =============================================================================== Technological expenses: Research and development $ 939 $647 $568 Engineering, commercial development and patent 105 55 33 - ------------------------------------------------------------------------------- Total technological expenses $1,044 $702 $601 =============================================================================== Interest expense: Total interest cost $ 184 $128 $137 Less capitalized interest (14) (9) (5) - ------------------------------------------------------------------------------- Net interest expense $ 170 $119 $132 =============================================================================== Currency losses including equity in affiliates' currency gains and losses $ 68 $ 6 $ 6 ===============================================================================
Segment Information Certain segment data and geographic data for 1997, 1996 and 1995 that appear on pages 35 and 42 are integral parts of the accompanying financial statements. The company's principal product lines are discussed in the segment data. 61 1997 Monsanto Annual Report 35 ============================================================================== FINANCIAL SUMMARY ==============================================================================
(Dollars in millions, except per share) 1997 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING RESULTS Net Sales $ 7,514 $ 6,348 $ 5,410 $ 4,679 $ 4,304 $ 4,119 Operating Income (Loss) 499 595 698 643 485 (16) As a Percent of Net Sales 7% 9% 13% 14% 11% -- Income (Loss) from Continuing Operations 294 413 461 454 298 (151) As a Percent of Net Sales 4% 7% 9% 10% 7% (4)% Income (Loss) from Discontinued Operations 176 (28) 278 168 196 603 Cumulative Effect of Accounting Changes (540) Net Income (Loss) 470 385 739 622 494 (88) - ------------------------------------------------------------------------------------------------------------------------------------ EARNINGS PER SHARE: Income (Loss) from Continuing Operations $ 0.48 $ 0.69 $ 0.79 $ 0.78 $ 0.50 $ (0.24) Net Income (Loss) 0.77 0.64 1.27 1.06 0.82 (0.14) - ------------------------------------------------------------------------------------------------------------------------------------ YEAR-END FINANCIAL POSITION Total Assets $10,774 $11,237 $10,731 $ 9,103 $ 8,788 $ 9,210 Working Capital 727 939 1,493 1,448 1,377 1,512 - ------------------------------------------------------------------------------------------------------------------------------------ Property, Plant and Equipment: Gross $ 4,701 $ 4,428 $ 4,111 $ 3,748 $ 3,687 $ 3,689 Net 2,400 2,095 1,893 1,673 1,669 1,737 - ------------------------------------------------------------------------------------------------------------------------------------ Long-Term Debt $ 1,979 $ 1,608 $ 1,667 $ 1,405 $ 1,502 $ 1,423 Shareowners' Equity 4,104 3,690 3,732 2,948 2,855 3,005 - ------------------------------------------------------------------------------------------------------------------------------------ Current Ratio 1.2 1.3 1.5 1.6 1.6 1.6 Percent of Total Debt to Total Capitalization 47% 38% 35% 37% 38% 36% - ------------------------------------------------------------------------------------------------------------------------------------ OTHER DATA Stock Price: High $ 52-15/16 $ 43-1/4 $ 25 $ 17-3/8 $ 15 $ 14-1/4 Low 34-3/4 23 13-3/4 13-3/8 9-7/8 9-7/8 Year-End 42 38-7/8 24-1/2 14-1/8 14-3/4 11-5/8 Price/Earnings Ratio on Year-End Stock Price 55 60 19 13 18 -- - ------------------------------------------------------------------------------------------------------------------------------------ Per Share: Dividends $ 0.500 $ 0.588 $ 0.540 $ 0.494 $ 0.460 $ 0.440 Shareowners' Equity 6.89 6.31 6.46 5.29 4.92 4.99 - ------------------------------------------------------------------------------------------------------------------------------------ Shareowners (year-end) 61,265 54,828 50,745 53,694 56,601 60,074 Shares Outstanding (year-end, in millions) 595 584 575 560 580 600 Employees (year-end) 21,900 28,000 28,500 29,400 30,000 33,800 - ------------------------------------------------------------------------------------------------------------------------------------ Income from continuing operations for 1997 included $455 million, or $0.75 per share, for the write-off of acquired in-process research and development. Income from continuing operations for 1996 included restructuring and other unusual charges of $257 million, or $0.43 per share, associated with the closure or rationalization of certain facilities, asset write- offs and work force reductions. Income from continuing operations for 1995 included net restructuring expenses and other unusual items of $63 million, or $0.11 per share. Income from continuing operations for 1994 included a net aftertax gain for restructuring and other unusual items of $20 million, or $0.03 per share. Income from continuing operations for 1993 included a net aftertax loss for restructuring and other unusual items of $11 million, or $0.02 per share. Loss from continuing operations for 1992 included a net aftertax loss for restructuring and other unusual items of $393 million, or $0.64 per share. Includes sale of styrenics plastics business in 1995 and sale of Fisher Controls in 1992. Stock prices, per share amounts and shares outstanding were restated to reflect the May 1996 five-for-one stock split. Amounts prior to 1997 were not restated to reflect the spinoff of the chemical businesses. The quarterly common stock dividend was reduced from $0.16 per share to $0.03 per share in the 1997 fourth quarter. 62 1997 Monsanto Annual Report 36 APPENDIX 1. In Exhibit 13 to the printed Form 10-K, the following bar graphs appear, all depicting data for 1995, 1996 and 1997: on page 36, "Agricultural Products Net Sales" and "Agricultural Products Operating Measures"; on page 38, "Nutrition and Consumer Products Operating Measures"; on page 39, "Pharmaceuticals Net Sales"; on page 40, "Pharmaceuticals Operating Measures"; and on page 47, "Cash Provided by Continuing Operations". On page 35, a pie-chart graph entitled "1997 Net Sales" appears, depicting a percentage breakdown of Monsanto's 1997 net sales by segment. 2. Throughout the electronic submission of Exhibit 13, trademarks are designated on each page by the letter "R" in parentheses or the letters "TM" in parentheses; whereas in the printed copy of the annual report, all trademarks are indicated by special type.
EX-21 3 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT The following is a list of the Company's subsidiaries and jurisdictions of incorporation as of December 31, 1997, except for unnamed subsidiaries which, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary. G. D. Searle & Co. (Delaware) Monsanto Europe, S.A. N.V. (Belgium) Monsanto Do Brasil Ltda. (Brazil) Monsanto International Sales Company, Inc. (Virgin Islands) Monsanto p.l.c. (United Kingdom) Calgene LLC (Delaware) EX-23.1 4 CONSENT OF INDEPENDENT AUDITORS 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS MONSANTO COMPANY: We consent to the incorporation by reference in Monsanto Company's Registration Statements on Form S-8 (Nos. 2-36636, 2-76696, 2-90152, 33-13197, 33-21030, 33-39704, 33-39705, 33-39706, 33-39707, 33-49717, 33-53363, 33-53365, 33-53367, 333-02783, 333-02961, 333-02963, 333-33531, 333-38599 and 333-45341) of our report dated February 27, 1998, incorporated by reference in this annual report on Form 10-K of Monsanto Company for the year ended December 31, 1997. /s/ DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP Saint Louis, Missouri March 16, 1998 ------------------------ EX-23.2 5 CONSENT OF COMPANY COUNSEL 1 EXHIBIT 23.2 CONSENT OF COMPANY COUNSEL I hereby consent to the reference to Company counsel in the "Commitments and Contingencies" note to the financial statements in the Company's 1997 Annual Report to shareowners and incorporated in the Company's Registration Statements on Form S-8 (Nos. 2-36636, 2-76696, 2-90152, 33-13197, 33-21030, 33-39704, 33-39705, 33-39706, 33-39707, 33-49717, 33-53363, 33-53365, 33-53367, 333-02783, 333-02961, 333-02963, 333-33531, 333-38599 and 333-45341). In giving this consent I do not thereby admit that I am within the category of persons whose consent is required under Section 7 of the Securities Act of 1933. /s/ R. WILLIAM IDE III R. WILLIAM IDE III General Counsel Monsanto Company Saint Louis, Missouri March 17, 1998 EX-24.1 6 POWER OF ATTORNEY 1 EXHIBIT 24.1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That each person whose signature appears below, as a Director or Officer of Monsanto Company (the "Company"), a Delaware corporation with its general offices in the County of St. Louis, Missouri, does hereby make, constitute and appoint R. WILLIAM IDE III, BARBARA L. BLACKFORD, SONYA M. DAVIS or ERIC R. FENCL, or any of them acting alone, his or her true and lawful attorneys, with full power of substitution and resubstitution, in his or her name, place and stead, in any and all capacities, to execute and sign the Annual Report on Form 10-K or registration statements including (i) registration statements on Form S-8 covering the registration of additional securities of the Company to be issued under the Monsanto Shared Success Stock Option Plan, the Monsanto Company ERISA Parity Savings and Investment Plan, and the Monsanto Savings and Investment Plan, (ii) any amendment to any registration statement previously filed by the Company, and (iii) any registration statement on Form S-8 covering the registration of securities to issued under new or existing stock-based incentive plans, and any and all Amendments thereto and documents in connection therewith to be filed with the Commission under the Securities Exchange Act of 1934, giving and granting unto said attorneys full power and authority to do and perform such actions as fully as they might have done or could do if personally present and executing any of said documents. Dated and effective as of the 27th day of February, 1998. - --------------------------------- --------------------------------- Robert B. Shapiro, Director and Nicholas L. Reding, Director Principal Executive Officer - --------------------------------- --------------------------------- Robert M. Heyssel, Director John S. Reed, Director - --------------------------------- --------------------------------- Michael Kantor, Director John E. Robson, Director - --------------------------------- --------------------------------- Gwendolyn S. King, Director William D. Ruckelshaus, Director 2 - --------------------------------- --------------------------------- Philip Leder, Director Robert B. Hoffman, Principal Financial Officer - --------------------------------- --------------------------------- Jacobus F. M. Peters, Director Michael R. Hogan, Principal Accounting Officer 3 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: That each person whose signature appears below, as a Director or Officer of Monsanto Company (the "Company"), a Delaware corporation with its general offices in the County of St. Louis, Missouri, does hereby make, constitute and appoint R. WILLIAM IDE III, BARBARA L. BLACKFORD, SONYA M. DAVIS or ERIC R. FENCL, or any of them acting alone, his or her true and lawful attorneys, with full power of substitution and resubstitution, in his or her name, place and stead, in any and all capacities, to execute and sign the Annual Report on Form 10-K or registration statements including (i) registration statements on Form S-8 covering the registration of additional securities of the Company to be issued under the Monsanto Shared Success Stock Option Plan, the Monsanto Company ERISA Parity Savings and Investment Plan, and the Monsanto Savings and Investment Plan, (ii) any amendment to any registration statement previously filed by the Company, and (iii) any registration statement on Form S-8 covering the registration of securities to issued under new or existing stock-based incentive plans, and any and all Amendments thereto and documents in connection therewith to be filed with the Commission under the Securities Exchange Act of 1934, giving and granting unto said attorneys full power and authority to do and perform such actions as fully as they might have done or could do if personally present and executing any of said documents. Dated and effective as of the 26th day of February, 1998. - --------------------------------- --------------------------------- Robert B. Shapiro, Director and Nicholas L. Reding, Director Principal Executive Officer - --------------------------------- --------------------------------- Robert M. Heyssel, Director John S. Reed, Director - --------------------------------- --------------------------------- Michael Kantor, Director John E. Robson, Director - --------------------------------- --------------------------------- Gwendolyn S. King, Director William D. Ruckelshaus, Director 4 - --------------------------------- --------------------------------- Philip Leder, Director Robert B. Hoffman, Principal Financial Officer - --------------------------------- --------------------------------- Jacobus F. M. Peters, Director Michael R. Hogan, Principal Accounting Officer EX-24.2 7 BOARD RESOLUTION AUTHORIZING POWERS OF ATTORNEY 1 EXHIBIT 24.2 MONSANTO COMPANY CERTIFICATE I, Eric R. Fencl, Assistant Secretary of Monsanto Company, hereby certify that the following is a full, true and correct copy of excerpts from resolutions adopted by the Board of Directors of Monsanto Company on February 27, 1998, at which meeting a quorum was present and acting throughout: This Board hereby RESOLVES that: 1. The Chairman of the Board, any Vice Chairman of the Board, the President, any Vice Chairman, any Vice President, the Secretary, the Treasurer or the Controller of the Company is hereby authorized to sign and execute, for and on behalf of the Company, Form 10-K for the year 1997 and any other report to be filed with the Securities and Exchange Commission (the "Commission") pursuant to the Securities Exchange Act of 1934, as amended. 2. Each officer and director who may be authorized or required to sign and execute Form 10-K or any document in connection therewith or any Registration Statement (whether for and on behalf of the Company, or as an officer or director of the Company, or otherwise), be and hereby is authorized to execute a power of attorney appointing R. William Ide III, Barbara L. Blackford, Sonya M. Davis or Eric R. Fencl, or any of them acting alone, his or her true and lawful attorney or attorneys, with full power of substitution and resubstitution to sign in his or her name, place and stead in any such capacity such Form 10-K or Registration Statement and any and all amendments thereto and documents in connection therewith, and to file the same with the Commission or any other governmental body, each of said attorneys to have power to act with or without the others, and to have full power and authority to do and perform, in the name and on behalf of each of said officers and directors, every act whatsoever which such attorneys, or any one of them, may deem necessary, appropriate or desirable to be done in connection therewith as fully and to all intents and purposes as such officers or directors might or could do in person. . . . IN WITNESS WHEREOF, I have hereunto set my hand in my official capacity and affixed the corporate seal of Monsanto Company this 17th day of March, 1998. ----------------------------------- Eric R. Fencl, Assistant Secretary SEAL EX-27 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENT OF CONSOLIDATED INCOME OF MONSANTO COMPANY AND SUBSIDIARIES FOR THE YEAR ENDED DECEMBER 31, 1997, AND THE STATEMENT OF CONSOLIDATED FINANCIAL POSITION AS OF DECEMBER 31, 1997. SUCH INFORMATION IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS. 1,000,000 12-MOS DEC-31-1997 DEC-31-1997 134 0 1,823 0 1,374 4,266 4,701 2,301 10,774 3,539 1,979 1,644 0 0 2,460 10,774 7,514 7,514 3,091 3,091 0 0 170 366 72 294 176 0 0 470 0.80 0.77 Reported net of allowances of $63
EX-99 9 COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES 1 EXHIBIT 99 MONSANTO COMPANY AND SUBSIDIARIES --------------------------------- COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES (Dollars in millions)
Year Ended December 31, ---------------------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Income from continuing operations before provision for income taxes.................................... $366 $553 $645 $636 $427 Add Fixed charges........................................... 236 172 178 140 141 Less capitalized interest............................... (14) (9) (5) (4) (7) Dividends from affiliated companies..................... 4 6 3 2 5 Less equity income (add equity loss) of affiliated companies................................................. (20) 42 (3) (4) (20) ---- ---- ---- ---- ---- Income as adjusted.................................. $572 $764 $818 $770 $546 ==== ==== ==== ==== ==== Fixed charges Interest expense............................................ $170 $119 $132 $100 $101 Capitalized interest........................................ 14 9 5 4 7 Portion of rents representative of interest factor.......... 52 44 41 36 33 ---- ---- ---- ---- ---- Fixed charges....................................... $236 $172 $178 $140 $141 ==== ==== ==== ==== ==== Ratio of earnings to fixed charges.............................. 2.42 4.44 4.60 5.50 3.87 ==== ==== ==== ==== ==== - --------- Includes charges for acquired in-process research and development of $684 million in 1997, and charges for restructuring and other unusual items of $376 million in 1996 and $90 million in 1995. Excluding these unusual items, the ratio of earnings to fixed charges would have been 5.32, 6.60 and 5.10 in 1997, 1996 and 1995, respectively. The ratio was not materially affected by the restructuring and other unusual items in 1994 and 1993.
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