<PAGE> 1
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): DECEMBER 5, 1997
MONSANTO COMPANY
----------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
--------
(STATE OF INCORPORATION)
1-2516 43-0420020
------ ----------
(COMMISSION (IRS EMPLOYER
FILE NUMBER) IDENTIFICATION NUMBER)
800 NORTH LINDBERGH BOULEVARD, ST. LOUIS, MISSOURI 63167
-------------------------------------------------- -----
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(314) 694-1000
--------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
===============================================================================
<PAGE> 2
ITEM 5. OTHER EVENTS
In December 1996, the Board of Directors (the "Board") of Monsanto
Company (the "Registrant") approved in principle a plan to spin off the
Registrant's chemical operations to the holders of shares of common stock, par
value $2.00 per share ("Monsanto Stock"), of the Registrant, by means of the
distribution of all of the outstanding shares of common stock of a
newly-formed, wholly-owned subsidiary of the Registrant (the "Spinoff").
Pursuant to this plan, following the Spinoff, the Registrant would operate its
life sciences businesses, including agricultural products, nutrition and
consumer products, and pharmaceuticals; and a newly-formed corporation would
produce and market a range of high-performance chemical-based materials,
including nylon and acrylic fibers and fiber intermediates, Saflex(R) plastic
interlayer, phosphorus derivatives and specialty chemicals (the "chemicals
business") previously produced and marketed by the Registrant. On June 1,
1997, the Registrant and its subsidiaries began to transfer the operating
assets of the chemicals business to the newly-formed wholly-owned subsidiary,
incorporated in Delaware and later named Solutia Inc. ("Solutia"), or the
appropriate subsidiaries of Solutia.
By unanimous consent effective August 12, 1997, the Board declared the
distribution on September 1, 1997, to the holders of record on August 20, 1997
of Monsanto Stock, of one share of common stock of Solutia and one preferred
share purchase right of Solutia for every five shares of Monsanto Stock,
subject to the satisfaction of certain conditions, including approval by the
stockholders of the Registrant. The Registrant's stockholders approved the
Spinoff and certain related matters at a special meeting held on August 18,
1997 and the Spinoff became effective on September 1, 1997. As a result of the
Spinoff, Solutia is now an independent publicly-owned company.
As a result of shareowner approval of the Spinoff, Monsanto's financial
statements have been restated to present the results of operations, cash flows
and financial position of the chemicals business as discontinued operations.
Discontinued operations also include certain other operations of the
Registrant's chemicals business which have been sold, primarily the styrenics
plastics business. Following is restated financial information for the year
ended December 31, 1996, the quarterly period ended March 31, 1997, and
the quarterly period ended June 30, 1997 for the Company.
1
<PAGE> 3
<TABLE>
TABLE OF CONTENTS
<CAPTION>
PAGE
----
<C> <S>
3 Restated Financial Information for the Year Ended December 31, 1996
42 Restated Financial Information for the Quarterly Period Ended March 31, 1997
50 Restated Financial Information for the Quarterly Period Ended June 30, 1997
</TABLE>
2
<PAGE> 4
Restated Financial Information for the Year Ended December 31, 1996
3
<PAGE> 5
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 December 31, 1996 and 1995,
and the related statements of consolidated income, shareowners' equity and cash
flow for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement 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 December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
-----------------------------
Deloitte & Touche LLP
St. Louis, Missouri
February 28, 1997
(September 1, 1997 as to the effects of the spinoff
described in the note on pages 24 and 25.)
4
<PAGE> 6
YEAR ENDED DECEMBER 31, 1996
FINANCIAL STATEMENTS
MONSANTO COMPANY AND SUBSIDIARIES
<TABLE>
STATEMENT OF CONSOLIDATED INCOME
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net Sales................................................... $6,348 $5,410 $4,679
Costs and expenses:
Cost of goods sold.......................................... 2,684 2,357 2,006
Selling, general and administrative......................... 1,860 1,521 1,385
Technological............................................... 702 601 559
Amortization of intangible assets........................... 151 119 80
Restructuring expenses--net................................. 356 114 6
------ ------ ------
Operating Income............................................ 595 698 643
Interest expense............................................ (119) (132) (100)
Interest income............................................. 51 57 81
Other income (expense)--net................................. 26 22 12
------ ------ ------
Income from Continuing Operations Before Income Taxes....... 553 645 636
Income taxes................................................ 140 184 182
------ ------ ------
Income from Continuing Operations........................... 413 461 454
Discontinued Operations:
Income (Loss) from Discontinued Operations.................. (28) 162 168
Gain on sale of styrenics plastics business................. 116
------ ------ ------
Income (Loss) from Discontinued Operations.................. (28) 278 168
------ ------ ------
Net Income.................................................. $ 385 $ 739 $ 622
====== ====== ======
Earnings (Loss) per Share:
Continuing Operations................................... $ 0.69 $ 0.79 $ 0.78
Discontinued Operations................................. (0.05) 0.48 0.28
------ ------ ------
Net Income.................................................. $ 0.64 $ 1.27 $ 1.06
------ ------ ------
</TABLE>
The above statement should be read in conjunction with pages 23-40.
5
<PAGE> 7
REVIEW OF CONSOLIDATED RESULTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
MONSANTO ANNOUNCES THE FORMATION OF TWO SEPARATE COMPANIES;
1996 RESULTS ARE RECORD, EXCLUDING UNUSUAL CHARGES
The year 1996 was one of transition for Monsanto Company, as the company's
board of directors approved a plan to spin off the chemicals business.
Following shareowner approval on August 18, 1997, the spinoff became effective
September 1, 1997. As a result, two separate, publicly-traded companies were
formed--a life sciences company that serves the agriculture, food and health
care markets, and a chemical company that makes and markets an array of
high-performance chemical-based products. This strategic decision was driven by
the recognition that these businesses have different markets, products,
research needs, investment needs, and plans for growth. Separating them into
two independent companies will enhance their ability to focus on strategic
initiatives and new business opportunities. It will also permit improved cost
structures and operating efficiencies.
As a result of shareowner approval of the spinoff, Monsanto's financial
statements have been restated to present the results of operations, cash flows
and financial position of the chemicals business as discontinued operations.
Discontinued operations also include certain other operations of the company's
chemicals business which have been sold, primarily the styrenics plastics
business. See pages 24 and 25 in Notes to Financial Statements for further
information about discontinued operations. The accompanying review relates to
the continuing operations of Monsanto, unless otherwise indicated.
Net income for 1996 totaled $385 million, or $0.64 per share, down 48
percent and 50 percent from last year's net income and earnings per share,
respectively. Income from continuing operations totaled $413 million, or $0.69
per share, versus $461 million, or $0.79 per share, in 1995. 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).
If the one-time charges were excluded, income from continuing operations for
1996 would have been $670 million, or $1.12 per share--both records.
In 1996, the company continued its superior performance. Net sales for 1996
were $6.3 billion, up $938 million, or 17 percent from last year's record of
$5.4 billion. The Agricultural Products and Pharmaceutical segments contributed
significantly to the net sales increase. Increased sales for Agricultural
Products were driven by higher worldwide sales volumes for the family of
Roundup(R) herbicides. Higher Pharmaceutical sales were primarily attributed to
continued strong sales performances of Ambien(R), a short-term treatment for
insomnia, and Daypro(R) and Arthrotec(R) arthritis treatments. Sales from the
women's health care product lines acquired in the third quarter of 1995 also
contributed to the sales growth. The Nutrition and Consumer segment also
contributed to the sales increase, principally because of higher sales volumes
of NutraSweet(R) brand sweetener, the company's trademark aspartame product,
lawn-and-garden products, tabletop sweeteners and biogum products.
EVENTS AFFECTING COMPARABILITY
In December 1996, the board of directors approved the recording of pretax
restructuring charges totaling $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 1,600 positions are
expected to be eliminated by these actions. These actions are expected to have
a favorable effect on future net earnings and aftertax cash flows in the range
of $75 million to $90 million annually.
As part of the company's overall strategy to reduce costs and eliminate
redundant functions, the board of directors approved a restructuring plan in
December 1995. The pretax charge of $114 million ($78 million aftertax, or
$0.13 per share) associated with this action was used to cover the costs of
work force reductions, business consolidations, facility closures and the exit
from nonstrategic businesses and facilities. The plan, which was substantially
completed by the end of 1996, reduced worldwide employment by approximately 370
people.
Other items that affected results in 1995 included the receipt in the first
and third quarters of settlement payments from various insurers related to
insurance litigation. Combined, these settlements totaled $4 million pretax ($2
million aftertax, or less than $0.01 per share). The company also recorded
approximately $20 million in favorable
6
<PAGE> 8
pretax adjustments ($13 million aftertax, or $0.02 per share) under certain
sales rebate programs in the United States for product sales made in prior
years.
Without the unusual events in 1996 and 1995, 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 in 1996 would have been $1.12, a 24 percent increase from
1995 earnings per share.
NET SALES SET RECORD
Net sales in 1996 were approximately $6.3 billion, 17 percent higher than
sales in 1995. The Agricultural Products, Nutrition and Consumer, 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 a record $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 have driven the increased demand.
Higher sales of Posilac(R) bovine somatotropin also contributed to the sales
increase. Net sales for the Nutrition and Consumer segment increased,
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 Pharmaceuticals' net sales can be attributed to sales of key
products, principally Ambien(R) a short-term treatment for insomnia, 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 sales growth. Lower sales for the family of Calan(R)
calcium channel blockers partially offset the increase in net sales.
Monsanto's net sales in markets outside the United States represented 45
percent of 1996 net sales, compared with 46 percent in 1995.
OPERATING RESULTS ADVERSELY AFFECTED BY RESTRUCTURING CHARGES AND UNUSUAL ITEMS
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 and $90 million in 1996 and 1995, respectively, 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 can be attributed primarily to an improved sales mix.
Current-year operations reflect an increased percentage of higher-margin sales
in Agricultural Products and Pharmaceuticals. The gross profit improvement was
partially offset by higher selling, general and administrative expenses and
increased technological expenses.
If the aforementioned restructuring charges and unusual items in 1996 and
1995 were excluded, operating results in 1996 would have improved significantly
from the prior year for the Agricultural Products, Nutrition and Consumer and
Pharmaceuticals segments. In 1996, operating income for the Agricultural
Products segment benefited from significantly higher worldwide sales volumes
for Roundup(R) herbicide. In addition, higher sales of Posilac(R) bovine
somatotropin also contributed to the operating income improvement. Operating
income in 1996 improved for the Nutrition and Consumer segment, primarily
because of the effect of higher sales volumes, combined with lower manufacturing
costs. Excluding nonrecurring items, operating income for the Pharmaceuticals
segment increased primarily due to higher sales volumes of key products,
principally Ambien(R), a short-term treatment for insomnia, and Daypro(R) and
Arthrotec(R) arthritis treatments. Sales from the women's health care product
lines acquired from Syntex in the third quarter of last year also contributed to
the increase.
Selling, general and administrative expenses in 1996 increased due to
higher sales and new product launches for Agricultural Products and
Pharmaceuticals, higher costs associated with employee incentive programs, and
increased spending on growth initiatives and other programs. Technological
expenses were up because of higher research and development expenses in the
Agricultural Products and Pharmaceuticals segments. Cost sharing payments from
alliances partially offset this increase.
7
<PAGE> 9
If the effect of unusual charges is excluded, 1996 amortization of
intangible assets would have increased significantly versus 1995, primarily
because of the increase in intangible assets associated with current-year
investments and acquisitions
in biotechnology businesses. If one-time charges are excluded, "Other income
(expense)--net" would have decreased, principally because of lower income from
equity affiliates.
COST SAVINGS CONTINUE
In prior years, Monsanto has taken steps to make worldwide operations more
focused, productive and cost-effective. The effect of these actions benefited
operating income in excess of $300 million in 1996. These savings are in line
with original expectations, and are expected to continue. Business redesign and
other productivity efforts have yielded significant benefits as well. These
initiatives will continue as the company responds to increased global
competition and higher customer expectations.
COMMITMENT TO NEW PRODUCT DEVELOPMENT CONTINUES
New product development and commercialization continue to be strategic
priorities for Monsanto. Recent successes from these efforts include five
agricultural products that were launched in 1996. These products are Roundup(R)
Ultra herbicide, Roundup Ready(R) soybeans, Roundup Ready(R) canola, NewLeaf(R)
insect-protected potatoes and Bollgard(R) insect-protected cotton. Monsanto's
research and development (R&D) expenditures were $647 million in 1996, or 10
percent of net sales, a level that reflects management's strong long-term
commitment to R&D. The discovery and development of pharmaceutical and
agricultural products continue to be the goals of most of these expenditures.
Significant R&D efforts in existing product technologies and new product
applications also continue across all business groups. Additionally, Monsanto's
research program includes new technologies and proprietary information obtained
through licensing and strategic acquisitions. As a result, Monsanto has many
potential products in the R&D pipeline. Several of them should be
commercialized in the next few years.
PRIOR YEAR REVIEW
Monsanto's operating results in 1995 were substantially higher than those
in 1994. The Agricultural Products segment contributed significantly to the
company's strong operating performance, as worldwide sales volumes of
Roundup(R) herbicide continued to grow. Sales volumes and operating income for
acetanilides, such as Harness(R) herbicide, were stronger in 1995. Operating
income for the Nutrition and Consumer segment declined in 1995, primarily
because of restructuring charges. Excluding unusual items, operating results for
the Nutrition and Consumer segment, which included 10 months of operations from
the acquired Kelco business, decreased 10 percent due to declining U.S. sales of
aspartame and lower lawn-and-garden sales. The Pharmaceuticals segment's
operating performance more than doubled from operating income in 1994, primarily
because of higher sales volumes of key growth products and higher income from
alliances. Monsanto's net income for 1995 was $739 million, or $1.27 per share,
compared with income of $622 million, or $1.06 per share, in 1994. Income from
continuing operations in 1995 totaled $461 million, or $0.79 per share, versus
income from continuing operations of $454 million, or $0.78 per share, in the
prior year. Both years' results, however, were affected by unusual events.
In 1995, the company recognized an aftertax restructuring charge of $78
million, or $0.13 per share. Other items that affected results in 1995 included
the receipt of settlement payments from various insurers related to insurance
litigation. The combined effect of these settlements totaled $2 million
aftertax, or less than $0.01 per share. The company also recorded approximately
$13 million, or $0.02 per share, in favorable aftertax adjustments under
certain sales rebate programs in the United States for product sales made in
prior years.
In December 1994, Monsanto recognized a net restructuring charge of $1
million aftertax, or less than $0.01 per share. The company also settled
certain tax matters related to the 1985 acquisition of Searle with the Internal
Revenue Service and recognized an aftertax gain of $21 million, or $0.04 per
share, in interest on the settlement.
Net sales in 1995 were $5.4 billion, 16 percent higher than those in 1994.
The increase came primarily from the continued strong performances by the
Agricultural Products and Pharmaceuticals segments, and higher Nutrition and
Consumer net sales primarily due to the inclusion of 10 months of net sales
from the acquired Kelco business.
Net sales for Agricultural Products in 1995 increased 17 percent from those
in 1994, to $2.1 billion, primarily because of a significant increase in
worldwide sales volumes for Roundup(R) herbicide. Worldwide demand continued
8
<PAGE> 10
to be strong for this family of glyphosate-based herbicides because of continued
global expansion of conservation tillage techniques, effective pricing and new
end-use strategies. Sales of acetanilide products, such as Harness(R) herbicide,
also contributed to the increase in net sales. Net sales for the Nutrition and
Consumer segment, exclusive of the sales of the acquired Kelco business,
declined, primarily because of lower average selling prices for aspartame and
lower sales of lawn-and-garden products. The increase in Pharmaceuticals' net
sales can be attributed to sales of key growth products, principally Daypro(R)
and Arthrotec(R) arthritis treatments, and Ambien(R), a short-term treatment for
insomnia. Lower sales for the family of Calan(R) calcium channel blockers
partially offset the growth in net sales.
Operating income of $698 million in 1995 increased by $55 million from
operating income in 1994. If the net pretax restructuring and unusual items of
$90 million and $6 million in 1995 and 1994, respectively, were excluded,
operating income would have increased by approximately $139 million, or 21
percent, in 1995. This significant increase in operating income was principally
related to higher sales volumes and better pricing, partially offset by higher
marketing and technological expenses overall.
If the aforementioned restructuring charges and unusual items in 1995 and
1994 were excluded, operating results would have improved significantly for the
Agricultural Products and Pharmaceuticals segments. Operating income for the
Agricultural Products segment in 1995 benefited from significantly higher
worldwide sales volumes for Roundup(R) herbicide. Strong sales volumes of
acetanilide products also contributed to the increase in operating income. If
restructuring charges and unusual items in 1995 and 1994 were excluded, the
Pharmaceuticals segment would have more than tripled its operating income,
principally through the success of key growth products and higher income from
alliances. Net of restructuring and unusual items, operating income in 1995
declined for the Nutrition and Consumer segment, primarily because of lower
aspartame and lawn-and-garden sales and higher operating expenses partially
offset by the addition of Kelco income and the benefit of higher sales of
tabletop sweetener products.
Selling, general and administrative expenses and technological expenses
increased in 1995, principally because of higher marketing expenses used to
support higher sales, and inclusion of 10 months of operating expenses from the
acquired Kelco business. Amortization of intangible assets increased, primarily
because of the increase in intangible assets associated with the Kelco and
pharmaceutical product line acquisitions. Interest expense increased in 1995,
primarily because of higher short-term debt levels related to the acquisition
of Kelco. Interest income was higher in 1994, primarily because of the
inclusion of the aforementioned settlement with the Internal Revenue Service.
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
their historical costs presented in the financial statements. Accordingly, the
depreciation expense reported in the Statement of Consolidated Income would be
greater if the expense were stated on a current-cost basis.
9
<PAGE> 11
<TABLE>
SEGMENT DATA
<CAPTION>
NET SALES
---------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Agricultural Products.............. $2,555 $2,134 $1,819
Nutrition & Consumer............... 1,581 1,371 1,188
Pharmaceuticals.................... 1,995 1,711 1,520
Corporate & Other.................. 217 194 152
------ ------ ------
Total.............................. $6,348 $5,410 $4,679
------ ------ ------
<CAPTION>
OPERATING DEPRECIATION
INCOME (LOSS)<F1> AND AMORTIZATION
----------------- ----------------
1996 1995 1994 1996 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Agricultural Products.............. $ 520 $ 478 $386 $153 $142 $135
Nutrition & Consumer............... 193 186 272 125 119 54
Pharmaceuticals.................... 79 132 58 130 127 110
Corporate & Other.................. (197) (98) (73) 15 17 13
----- ----- ---- ---- ---- ----
Total.............................. $ 595 $ 698 $643 $423 $405 $312
----- ----- ---- ---- ---- ----
<CAPTION>
CAPITAL
TOTAL ASSETS EXPENDITURES
------------ ------------
1996 1995 1994 1996 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Agricultural Products.............. $ 3,007 $ 2,329 $2,245 $280 $135 $ 98
Nutrition & Consumer............... 2,635 2,653 1,486 98 72 35
Pharmaceuticals.................... 2,391 2,619 2,144 89 78 60
Corporate & Other.................. 581 375 326 33 16 9
Discontinued Operations............ 2,623 2,755 2,902
------- ------- ------ ---- ---- ----
Total.............................. $11,237 $10,731 $9,103 $500 $301 $202
------- ------- ------ ---- ---- ----
<FN>
<F1> Operating income was affected by the 1996, 1995 and 1994 restructurings
and other unusual items as follows:
<CAPTION>
INCOME (EXPENSE)
SEGMENT
----------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Agricultural Products.............. $(106) $(17) $(16)
Nutrition & Consumer............... (103) (66) (7)
Pharmaceuticals.................... (125) 7 20
Corporate & Other.................. (73) (14) (3)
----- ---- ----
Total.............................. $(407) $(90) $ (6)
----- ---- ----
</TABLE>
In 1997, the Nutrition and Consumer segment replaced the Food Ingredients
segment; the lawn and garden business was transferred from Agricultural Products
to Nutrition and Consumer; several small businesses were transferred from
Nutrition and Consumer to Corporate and Other; and various businesses were
transferred to and from the Chemicals segment which was spun off September 1,
1997 (see pages 24 and 25 in Notes to Financial Statements for additional
information about the spinoff). Segment information for 1996, 1995 and 1994
has been reclassified to conform to the current presentation.
Sales between 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 1996
and 1995, along with the factors that are expected to affect operating results
in the near term, are described on the following pages.
10
<PAGE> 12
AGRICULTURAL PRODUCTS
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, industrial and turf 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 the Agricultural Products segment increased to a record $2.6
billion in 1996, 20 percent higher than sales in 1995. This increase is
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.
The increased demand can be 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 (BST). In
addition, successful introductions of new products such as Roundup(R) Ultra
herbicide, Roundup Ready(R) soybeans and Bollgard(R) insect-protected cotton
helped fuel sales growth.
Operating income increased from last year's level by 9 percent. However,
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 operating income for Agricultural Products
would have increased $131 million, or 26 percent.
In addition to the effect of sales volume increases, operating income in
1996 benefited from lower manufacturing costs. The effects of higher sales
volumes and lower manufacturing costs were partially offset by higher marketing
expenses that supported new product introductions and by higher research and
development spending for biotechnology projects.
PRIOR YEAR REVIEW
Net sales for Agricultural Products in 1995 were 17 percent higher than net
sales in 1994. Operating income increased 24 percent from 1994. The increase in
operating income was affected by unusual items in both 1995 and 1994. The
unusual items included in 1995 operating income were $17 million in
restructuring charges and other actions, principally related to facility
closures and the cost of work force reductions. Operating income in 1994
included $30 million in restructuring charges for employment reductions and
costs to terminate a program. The 1994 charges were partially offset by $14
million in reversals of prior-year restructuring reserves, primarily for
higher-than-anticipated proceeds from the sale of the pyridine research
program. If the unusual items in 1995 and 1994 were excluded, 1995 operating
income for Agricultural Products would have increased $93 million, or 23
percent.
The increase in net sales was driven by significantly higher sales volumes
of Roundup(R) herbicide. Demand for the family of Roundup(R) glyphosate-based
products continued to be strong worldwide. It was attributed to further
increases in the use of conservation tillage practices, effective pricing, and
new end-use strategies. Selling price reductions, principally in markets
outside the United States, made Roundup(R) cost effective for weed control in a
broader range of crop and industrial uses. The effect of generic competition,
principally in certain foreign markets, dampened selling prices modestly.
However, the effect of increased sales volumes on operating income exceeded the
effect of lower selling prices.
Net sales in 1995 also benefited from higher sales of Posilac(R) bovine
somatotropin and Harness(R) herbicide. Net sales of Harness(R) increased
significantly from those in 1994, primarily because of higher volumes.
Operating income in 1995 also benefited from lower manufacturing costs.
Higher marketing expenses used to support the base business and new-product
introductions partially offset the increase in operating income.
11
<PAGE> 13
AGRICULTURAL PRODUCTS OUTLOOK (AS OF DECEMBER 31, 1996)
Roundup(R) and other glyphosate-based herbicides face competition from
generic producers in certain markets outside the United States. Patents
protecting Roundup(R) in various countries expired in 1991, while compound per
se patent protection for the active ingredient in Roundup(R) herbicide
continues in the United States through the year 2000. Management expects the
recent technological breakthroughs in manufacturing processes and formulation
advancements, as well as rapidly expanding capacity to produce Roundup(R), to
improve Monsanto's cost position and to help maintain its leadership position.
New value-added formulations of Roundup(R), such as Roundup(R) Ultra and
Roundup(R) Pro in the United States, and Roundup(R) Bioforce and Roundup(R)
Geoforce in Europe and Australia, have been successfully introduced.
Significant growth potential for Roundup(R) remains in conservation tillage
applications worldwide, and the recent introduction of crops tolerant of
Roundup(R) opens up major new growth opportunities.
Four biotechnology-related plant sciences products--Roundup Ready(R)
soybeans and canola, and cotton and potatoes protected from certain
insects--were introduced on a limited basis in 1996. These products were
developed either by Monsanto or in partnership with biotechnology and seed
production companies. Market acceptance has been strong and volumes for each of
these products are expected to increase in 1997. Roundup Ready(R) cotton and
YieldGard(R) insect-protected corn products will be launched in 1997. It is
expected that a significant number of new herbicides and biotechnology-related
products currently in the research and development pipeline will be
commercialized worldwide in the next few years. Monsanto is addressing issues
of consumer acceptance for some of these products, particularly in Europe, and
is involved in patent disputes with several parties.
Posilac(R) bovine somatotropin (BST) experienced significant sales growth
in 1996. The year also marked the completion of a two-year, post-approval
monitoring program for Posilac(R), which resulted in a solid reaffirmation from
the U. S. Food and Drug Administration of the product's safety as a dairy
production enhancement tool.
As discussed in the Notes to Financial Statements on page 25, Monsanto
reached separate agreements to acquire Holden's Foundation Seeds Inc., Corn
States Hybrid Service Inc. and Corn States International S.a.r.l. These
acquisitions are expected to close in 1997. In addition, the company acquired
the Asgrow Agronomics seed business from Empresas La Moderna S. A. in February
1997. It is anticipated that one-time charges associated with acquired research
will be recorded in conjunction with these acquisitions.
NUTRITION AND CONSUMER
The Nutrition and Consumer 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 lawn-and-garden products.
In 1996, net sales for Nutrition and Consumer increased 15 percent from the
prior year's net sales. Results in 1996 include a full year of sales from the
Kelco business that was acquired in February 1995. The sales increase was
primarily the result of higher sales of NutraSweet(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. The majority 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 from the previous year's level by 4
percent primarily due to 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 was reduced by $66 million in restructuring charges, primarily to exit a
production facility and to effect work force reductions. If these unusual items
were excluded, operating results for Nutrition and Consumer would have
increased 17 percent.
PRIOR YEAR REVIEW
In 1995, Nutrition and Consumer net sales were up $183 million, or 15
percent, from sales in 1994. Results in 1995 included sales from the acquired
Kelco business. Without these sales, net sales for Nutrition and Consumer
12
<PAGE> 14
would have declined from those in 1994, primarily because of lower average
selling prices for aspartame and lower net sales of lawn-and-garden products.
The decline in lawn-and-garden sales was caused by unfavorable weather
conditions in the western United States, which is a large consumer market for
garden products. In addition, distribution changes designed to move product
sales closer to the time of consumer demand effectively moved sales from 1995 to
1996. Sales of tabletop sweeteners increased, primarily because of higher sales
volumes. A large portion of the increased sales volumes came from international
markets that the Nutrition and Consumer segment aggressively pursued. Lower
sales of NutraSweet(R) brand sweetener, the company's trademark aspartame
product, essentially offset this increase. Despite an increase in unit sales
volumes for aspartame, the effects of lower average pricing more than offset
the volume increases. Kelco sales benefited from strong sales of biogum
products.
Operating income declined significantly from 1994's results. Certain
unusual items affected earnings in both years. In 1995, operating income
included restructuring and other charges of $66 million, principally for costs
to exit a production facility and for work force reductions. Operating income
in 1994 was reduced by $7 million in restructuring charges for work force
reductions. If these unusual items were excluded, operating income for
Nutrition and Consumer would have decreased 10 percent from 1994. Operating
income in 1995 benefited from additional Kelco income, higher sales of tabletop
sweeteners, and manufacturing efficiencies. However, these positive effects
were more than offset by lower aspartame and lawn-and-garden sales and higher
operating expenses versus 1994.
NUTRITION AND CONSUMER OUTLOOK (AS OF DECEMBER 31, 1996)
Competition from generic aspartame producers has lowered selling prices for
NutraSweet(R) brand sweetener. However, the worldwide market share for this
product has been maintained because of several competitive advantages,
including a low cost position and superior quality and customer service.
Other new sweeteners also compete with NutraSweet(R) in markets outside the
United States. These sweeteners are now being reviewed by the U.S. Food and
Drug Administration (FDA), and their possible approval could negatively affect
future sales, operating income and cash flow.
International markets offer the greatest growth potential, particularly for
tabletop sweeteners. The company is developing next-generation, high-intensity
sweeteners and expects to file a food additive petition with the FDA near the
end of this decade.
The Kelco lines of alginates and biogums hold strong positions in their
Nutrition and Consumer markets. While there has been some increased competition
for biogums in certain industrial applications, the effect has not been
significant. Seaweed is the raw material for alginates, and, because the
worldwide supply is tight, its sourcing continues to be an area of focus.
PHARMACEUTICALS
The Pharmaceuticals segment reflects the operations of Searle. Searle
develops, produces and markets prescription pharmaceuticals. Its products
include medications to relieve the symptoms of arthritis, to control high blood
pressure, to relieve insomnia, to prevent the formation of ulcers, to treat
certain infections, and to provide better women's health care.
Net sales for the Pharmaceuticals segment in 1996 increased 17 percent over
1995 to a record $2 billion. The sales growth was fueled by higher sales
volumes, led by strong performances from Daypro(R) and Arthrotec(R) arthritis
treatments and 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 product 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 includes $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
13
<PAGE> 15
adjustments. If the effect of these unusual items was 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.
Searle's investment in research and development (R&D) continues to be
significant. R&D expenditures, before cost-sharing payments from alliances,
were 22 percent and 21 percent of the segment's net sales in 1996 and 1995,
respectively. Future R&D spending is also expected to be significant. Searle
will continue to seek R&D collaborations. Such agreements should allow Searle
to share development costs, accelerate product development and enhance market
penetration. This investment reflects the segment's commitment to securing a
continuing stream of new products.
PRIOR YEAR REVIEW
Net sales for the Pharmaceuticals segment in 1995 were $1.7 billion, or 13
percent higher than net sales in 1994. This strong increase was driven by
higher sales volumes, principally from key products, such as Daypro(R) and
Arthrotec(R) arthritis treatments, and Ambien(R), a short-term treatment for
insomnia. Each of these products had double-digit increases in net sales vs.
those in 1994. In total, these key products contributed approximately $500
million to 1995 net sales. Sales and earnings growth also benefited from the
women's health care product line acquired from Syntex. In addition, the 1995
sales increase reflects the effect of approximately $20 million in favorable
adjustments under certain sales rebate programs in the United States for
product sales made in prior years. The 1995 net sales increase for
Pharmaceuticals was partially offset by lower sales for the family of Calan(R)
calcium channel blockers.
Operating income in 1995 for Pharmaceuticals more than doubled from the
1994 amounts. Operating results in 1995 and 1994 were affected by unusual
items. Operating income in 1995 included a $13 million charge for
restructuring, principally related to work force reductions, and other actions.
Operating results in 1995 also reflected the aforementioned $20 million in
favorable sales adjustments. Pharmaceuticals' operating income in 1994 included
$15 million in restructuring charges, primarily for work force reductions, and
a $35 million gain from the reversal of prior year restructuring reserves. The
reversal of the reserves was primarily caused by higher-than-anticipated
proceeds and lower-than-expected exit costs related to certain divested
facilities. If the effect of these unusual items was excluded, operating income
would have been $125 million in 1995 and $38 million in 1994. The significant
improvement in operating income came primarily from higher sales of key growth
products. Higher income from cost-sharing alliances also benefited operating
results in 1995. The increase in operating income was partially offset by
higher marketing expenditures incurred to support the sales growth in key
products.
PHARMACEUTICALS OUTLOOK (AS OF DECEMBER 31, 1996)
Ambien(R), a short-term treatment for insomnia, continues as the leader in
the hypnotic market. Direct-to-patient promotion should continue to build
growth in this high potential market. Ambien(R) is licensed to a joint venture
of which Searle is a general partner. The joint venture partner has the right
to purchase all or part of Searle's interest in the venture beginning in
December 1999.
Sales of Daypro(R), Searle's leading treatment for arthritis, should also
continue to grow. In addition, the exclusivity of Daypro(R) was extended for
two years, through late 1999. Arthrotec(R) arthritis treatment was launched in
Italy and several other markets in Europe and Asia during 1996. A new drug
application for Arthrotec(R) is also pending with the U.S. Food and Drug
Administration (FDA).
Covera-HS(R), Searle's new verapamil product, was introduced in the United
States in 1996. This product is designed to provide peak protection from
hypertension and angina at the time of day when patients are most vulnerable to
rises in blood pressure and heart rate, which differentiates it from other
calcium channel blockers and anti-hypertensive drugs. Canadian approval is
expected for Covera-HS(R) in 1997, and registration submissions in 25 other
countries are under way.
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 sales of all calcium channel blockers,
including Searle's Calan(R) and Covera-HS(R).
14
<PAGE> 16
Searle has a number of compounds in various stages of development. Drugs
being developed for the treatment of cardiovascular conditions include
xemilofiban and orbofiban, anti-platelet agents to inhibit the clotting of
blood vessels; tissue factor pathway inhibitor (TFPI) to treat sepsis; and
eplerenone to treat congestive heart failure, hypertension and the
complications of kidney disease. Searle's participation in the arthritis market
potentially could increase with the development of Xopane(R), a fast-acting
formulation of Daypro(R); Condrotec(R), which combines an ulcer preventive drug
with an anti-inflammatory drug; and celecoxib inhibitors, products that
selectively treat arthritis and pain without gastrointestinal side effects.
Also in development are three adjunctive therapies for the oncology market.
These compounds--daniplestim, myelopoietin and promegapoietin--are being
developed to stimulate the replenishment of white blood cells and platelets in
chemotherapy patients.
CORPORATE AND OTHER
The Corporate and Other segment is comprised of various smaller businesses,
primarily the Sustainability and High Performance Materials sectors, and certain
corporate items which are not allocated to the segments. The operating loss
for the Corporate and Other segment increased $99 million from 1995 to 1996, and
increased $25 million from 1994 to 1995 primarily due to increased spending on
growth initiatives and higher restructuring charges. Excluding restructuring
charges, corporate unallocated expenses rose slightly in 1996 versus 1995,
and declined slightly in 1995 compared to 1994.
<TABLE>
GEOGRAPHIC DATA
<CAPTION>
NET SALES TO UNAFFILIATED OPERATING INCOME
CUSTOMERS (LOSS)<F1>
------------------------- ----------------
1996 1995 1994 1996 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
United States...................... $3,648 $3,127 $2,841 $ 420 $485 $317
Europe-Africa...................... 1,345 1,210 978 156 173 261
Asia-Pacific....................... 569 507 390 59 63 40
Canada............................. 271 219 176 20 15 30
Latin America...................... 515 347 294 60 57 58
Interarea Eliminations............. (27) (32) 5
Corporate.......................... (93) (63) (68)
------ ------ ------ ----- ---- ----
Total.............................. $6,348 $5,410 $4,679 $ 595 $698 $643
------ ------ ------ ----- ---- ----
<CAPTION>
TOTAL ASSETS
------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
United States...................... $ 6,537 $ 5,810 $4,330
Europe-Africa...................... 1,562 1,523 1,255
Asia-Pacific....................... 606 662 481
Canada............................. 121 115 80
Latin America...................... 598 294 206
Interarea Eliminations............. (1,127) (648) (349)
Corporate.......................... 317 219 198
Discontinued Operations............ 2,623 2,756 2,902
------- ------- ------
Total.............................. $11,237 $10,731 $9,103
------- ------- ------
</TABLE>
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.
15
<PAGE> 17
Interarea sales have been excluded from the above table and were:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
World area shipped from:
United States.................. $ 764 $ 660 $ 474
Europe-Africa.................. 225 236 149
Asia-Pacific................... 23 15
Canada......................... 13 10 4
Interarea Eliminations......... (1,025) (921) (627)
------- ----- -----
Total.............................. $ -- $ -- $ --
------- ----- -----
</TABLE>
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 from the United States. Direct export sales
from the United States to third-party customers outside the United States were
$177 million for 1996, $185 million for 1995, and $97 million for 1994.
[FN]
<F1> Geographic area operating income was affected by the 1996, 1995 and 1994
restructurings and other unusual items as follows:
<TABLE>
<CAPTION>
INCOME (EXPENSE)
----------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
United States...................... $(251) $(54) $(55)
Europe-Africa...................... (94) (4) 54
Asia-Pacific....................... (19) (16) (9)
Canada............................. (10) (13) 2
Latin America...................... (9) 6
Corporate.......................... (24) (3) (4)
----- ---- ----
Total.............................. $(407) $(90) $ (6)
----- ---- ----
</TABLE>
16
<PAGE> 18
MONSANTO COMPANY AND SUBSIDIARIES
<TABLE>
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
<CAPTION>
AS OF DECEMBER 31,
----------------------
1996 1995
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................................... $ 166 $ 297
Trade receivables, net of allowances of $47 in 1996 and $51 in 1995......... 1,515 1,161
Miscellaneous receivables and prepaid expenses.............................. 286 465
Deferred income tax benefit................................................. 282 321
Inventories................................................................. 1,183 1,064
Chemicals Discontinued Operations........................................... 908 997
------- -------
Total Current Assets.................................................... 4,340 4,305
------- -------
Property, Plant and Equipment:
Land........................................................................ 118 103
Buildings................................................................... 848 861
Machinery and equipment..................................................... 3,162 2,896
Construction in progress.................................................... 300 251
------- -------
Total property, plant and equipment......................................... 4,428 4,111
Less accumulated depreciation............................................... 2,333 2,218
------- -------
Net Property, Plant and Equipment....................................... 2,095 1,893
------- -------
Investments in Affiliates....................................................... 257 98
Intangible Assets, net of accumulated amortization of
$808 in 1996 and $638 in 1995................................................. 2,166 1,965
Other Assets.................................................................... 664 711
Non-current Assets--Chemicals Discontinued Operations........................... 1,715 1,759
------- -------
Total Assets.................................................................... $11,237 $10,731
------- -------
</TABLE>
The above statement should be read in conjunction with pages 23-40.
17
<PAGE> 19
MONSANTO COMPANY AND SUBSIDIARIES
<TABLE>
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
<CAPTION>
AS OF DECEMBER 31,
----------------------
1996 1995
---- ----
<S> <C> <C>
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities:
Accounts payable............................................................ $ 479 $ 379
Wages and benefits.......................................................... 456 120
Restructuring reserves...................................................... 247 232
Miscellaneous accruals...................................................... 728 912
Short-term debt............................................................. 654 365
Chemicals Discontinued Operations........................................... 837 804
------- -------
Total Current Liabilities............................................... 3,401 2,812
------- -------
Long-Term Debt.................................................................. 1,608 1,667
Deferred Income Taxes........................................................... 102 200
Postretirement Liabilities...................................................... 594 538
Other Liabilities............................................................... 509 480
Non-current Liabilities--Chemicals Discontinued Operations...................... 1,333 1,302
Shareowners' Equity:
Common stock (authorized: 850,000,000 shares, par value $2)
Issued: 821,970,970 shares in 1996 and 164,394,194 in 1995.............. 1,644 329
Additional contributed capital.......................................... 65 902
Treasury stock, at cost (237,594,831 shares in 1996
and 48,923,899 shares in 1995)........................................ (2,661) (2,550)
Reserve for ESOP debt retirement<F1>........................................ (174) (181)
Unrealized investment holding gain.......................................... 11 34
Accumulated currency adjustment............................................. 10 101
Reinvested earnings......................................................... 4,795 5,097
------- -------
Total Shareowners' Equity........................................... 3,690 3,732
------- -------
Total Liabilities and Shareowners' Equity....................................... $11,237 $10,731
------- -------
The above statement should be read in conjunction with pages 23-40.
<FN>
<F1> ESOP stands for Employee Stock Ownership Plan.
</TABLE>
18
<PAGE> 20
REVIEW OF CHANGES IN FINANCIAL POSITION
FINANCIAL POSITION REMAINS STRONG
Monsanto's financial position remained strong in 1996, 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 1996, working capital (including discontinued operations) was
$554 million lower than working capital at the end of 1995. Trade receivables
at year-end 1996 increased compared with those at the prior year-end, primarily
because of higher sales levels for the Agricultural Products and the
Pharmaceuticals segments. In addition, the increase in receivables can be
attributed to sales and marketing program changes in these segments.
Inventories at year-end 1996 increased, primarily because of higher inventories
in the Agricultural Products segment. These increases were more than offset by
lower cash and cash equivalent balances, higher accrued liabilities, and higher
short-term debt levels.
The amount of net property, plant and equipment was higher than the amount
at the end of 1995, as $500 million in capital additions and the effects of
acquisitions exceeded 1996 depreciation expense and divestitures.
Total deferred tax benefits, both current and noncurrent, of $312 million
at year-end 1996 are primarily related to U.S. operations, which generally have
a strong earnings history.
As discussed in the Notes to Financial Statements, the increase in
"Investments in Affiliates" was principally the result of the equity position
taken in DeKalb Genetics Corp. and the increase in "Intangible Assets" was
primarily attributable to the acquisition of the plant-biotechnology assets of
Agracetus.
As further discussed in the Notes to Financial Statements, in January 1997
the company announced agreements to acquire Holden's Foundation Seeds Inc.,
Corn States Hybrid Service Inc. and Corn States International S.a.r.l. The
total cost of these acquisitions will be up to $1.02 billion, and they are
expected to close in 1997. The company also acquired the Asgrow Agronomics seed
business from Empresas La Moderna S.A., for $240 million in February 1997.
These acquisitions will be financed initially with the proceeds of commercial
paper borrowings. These investments are expected to have a dilutive effect on
net income in 1997.
Monsanto uses financial markets worldwide for its financing needs. It has
available various short- and medium-term bank credit facilities, which are
discussed in the Notes to Financial Statements on pages 30-31. These credit
facilities give Monsanto the financing flexibility to take advantage of
investment opportunities that may arise and to satisfy future funding
requirements. To maintain adequate financial flexibility and access to debt
markets worldwide, Monsanto management intends to maintain an "A" debt
rating.
Monsanto's commitments and contingencies are described in the Notes to
Financial Statements beginning on page 38.
19
<PAGE> 21
MONSANTO COMPANY AND SUBSIDIARIES
<TABLE>
STATEMENT OF CONSOLIDATED CASH FLOW
(DOLLARS IN MILLIONS)
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Operating Activities:
Income from continuing operations............................................... $ 413 $ 461 $ 454
Add income taxes--continuing operations......................................... 140 184 182
------- ------- ------
Income from continuing operations before income taxes........................... 553 645 636
Adjustments to reconcile to Cash Provided by Continuing Operations:
Income tax payments......................................................... (308) (335) (196)
Items that did not use cash:
Depreciation and amortization........................................... 423 405 312
Restructuring expenses--net............................................. 356 114 6
Other................................................................... 70 10 57
Working capital changes that provided (used) cash:
Accounts receivable..................................................... (330) (94) (55)
Inventories............................................................. (86) (107) (20)
Accounts payable and accrued liabilities................................ 198 13 54
Other................................................................... 12 (51) 65
Other items................................................................. 52 (69) 92
------- ------- ------
Cash Provided by Continuing Operations.......................................... 940 531 951
Cash Provided by Discontinued Operations........................................ 263 292 349
------- ------- ------
Total Cash Provided by Operations............................................... 1,203 823 1,300
------- ------- ------
Investing Activities:
Property, plant and equipment purchases..................................... (500) (301) (202)
Acquisition of Kelco and pharmaceutical product line........................ (1,296)
Other acquisition and investment payments................................... (720) (139) (173)
Investment and property disposal proceeds................................... 165 77 129
Discontinued operations--proceeds from sale of styrenics plastics
business.................................................................. 580
Discontinued operations--other.............................................. (200) (206) (146)
------- ------- ------
Cash Used in Investing Activities............................................... (1,255) (1,285) (392)
------- ------- ------
Financing Activities:
Net change in short-term financing.......................................... 297 53 89
Long-term debt proceeds..................................................... 122 658 49
Long-term debt reductions................................................... (177) (403) (152)
Treasury stock purchases.................................................... (253) (478)
Dividend payments........................................................... (343) (306) (289)
Common stock issued under employee stock plans.............................. 142 194 82
Other financing activities.................................................. 133 56 25
------- ------- ------
Cash Provided by (Used in) Financing Activities................................. (79) 252 (674)
------- ------- ------
Increase (Decrease) in Cash and Cash Equivalents................................ (131) (210) 234
Cash and Cash Equivalents:
Beginning of year........................................................... 297 507 273
------- ------- ------
End of year................................................................. $ 166 $ 297 $ 507
------- ------- ------
</TABLE>
The above statement should be read in conjunction with pages 23-40.
The effect of exchange rate changes on cash and cash equivalents was not
material.
Cash payments for interest (net of amounts capitalized) were $195 million,
$195 million and $135 million in 1996, 1995 and 1994, respectively.
20
<PAGE> 22
REVIEW OF CASH FLOW
CASH FLOW REMAINS STRONG
Cash provided by continuing operations of $940 million was strong in 1996,
increasing from the previous year's level of $531 million. The change was
primarily due to higher net income before restructuring charges and lower
working capital levels. Working capital as a percent of net sales was 15
percent compared with 28 percent in 1995.
Monsanto's operations have historically generated sufficient cash to fund
existing businesses and growth-related research and investments.
Investment and property disposal proceeds in 1996, 1995 and 1994 primarily
related to nonstrategic investments and asset sales associated with
restructuring actions.
Major uses of cash in 1996, 1995 and 1994 included dividends and capital
expenditures. Treasury stock purchases were made in 1996 and 1994. The equity
investment in DeKalb Genetics Corp., the investment in Calgene, Inc. and the
acquisition of the plant-biotechnology assets of Agracetus were also major uses
of cash in 1996. Major investments in 1995 included the acquisition of the
Kelco business and the Syntex pharmaceutical product line. Monsanto's capital
expenditures, which focused on improved technology and capacity expansions,
totaled $500 million in 1996. Business redesign efforts and productivity
enhancements were successful in increasing effective capacity at many
facilities, thereby reducing the need for additional capital expenditures.
Monsanto continually evaluates risk retention and insurance levels for
product liability, property damage and other potential areas 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.
TREASURY STOCK PURCHASED IN 1996
Monsanto's board of directors authorized in October 1992 the purchase of 60
million shares of Monsanto common stock, of which 17 million shares had been
purchased by the end of 1996. This is in addition to the authority granted to
purchase shares for compensation and benefit programs. In the first half of
1996, Monsanto purchased a total of 8.2 million shares at a cost of $253
million.
Monsanto's common stock is traded principally on the New York Stock
Exchange. The number of shareowners of record as of February 28, 1997, was
57,479. The high and low common stock prices on that date were $36 7/8 and
$35 7/8.
21
<PAGE> 23
MONSANTO COMPANY AND SUBSIDIARIES
<TABLE>
STATEMENT OF CONSOLIDATED SHAREOWNERS' EQUITY
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Common Stock:
Balance, January 1............................ $ 329 $ 329 $ 329
Par value of stock issued in five-for-one
stock split................................. 1,315
------- ------- -------
Balance, December 31...................... $ 1,644 $ 329 $ 329
------- ------- -------
Additional Contributed Capital:
Balance, January 1............................ $ 902 $ 849 $ 826
Employee stock plans and ESOP<F1>............. 133 53 23
Par value of stock issued in five-for-one
stock split................................. (970)
------- ------- -------
Balance, December 31...................... $ 65 $ 902 $ 849
------- ------- -------
Treasury Stock:
Balance, January 1............................ $(2,550) $(2,744) $(2,348)
Shares purchased<F2> (8,244,500 shares in 1996
and 30,850,080 shares in 1994).............. (253) (478)
Net shares issued under employee stock
plans<F2>
(15,269,164 shares in 1996; 19,675,660
shares in 1995; and 8,647,650 shares in
1994)....................................... 142 194 82
------- ------- -------
Balance, December 31...................... $(2,661) $(2,550) $(2,744)
------- ------- -------
Reserve for ESOP Debt Retirement:
Balance, January 1............................ $ (181) $ (199) $ (218)
Allocation of ESOP shares..................... 7 18 19
------- ------- -------
Balance, December 31...................... $ (174) $ (181) $ (199)
Unrealized Investment Holding Gain:
Balance, January 1............................ $ 34 $ 19 $ 15
Net change in market value.................... (23) 15 4
------- ------- -------
Balance, December 31.............................. $ 11 $ 34 $ 19
------- ------- -------
Accumulated Currency Adjustment:
Balance, January 1............................ $ 101 $ 33 $ (59)
Translation adjustments....................... (91) 68 92
------- ------- -------
Balance, December 31...................... $ 10 $ 101 $ 33
------- ------- -------
Reinvested Earnings:
Balance, January 1............................ $ 5,097 $ 4,661 $ 4,325
Net income.................................... 385 739 622
Dividends (net of ESOP tax benefits).......... (342) (303) (286)
Par value of stock issued in five-for-one
stock split................................. (345)
------- ------- -------
Balance, December 31...................... $ 4,795 $ 5,097 $ 4,661
------- ------- -------
<FN>
The above statement should be read in conjunction with pages 23-40.
<F1> ESOP stands for Employee Stock Ownership Plan.
<F2> Adjusted for the 1996 five-for-one common stock split.
<CAPTION>
KEY FINANCIAL STATISTICS<F2> 1996 1995 1994
- -------------------------------------------------- ---- ---- ----
<S> <C> <C> <C> <C>
Stock Price<F3>................................... High $ 43 1/4 $ 25 $ 17 3/8
Low 23 13 3/4 13 3/8
Year-End 38 7/8 24 1/2 14 1/8
--------- ---------- ---------- ----------
Dividends Per Share............................... .588 .540 .494
---------- ---------- ----------
Average Daily Share Trading Volume (thousands of
shares)......................................... 1,052 1,710 1,880
---------- ---------- ----------
<FN>
<F3> Based on daily reported high and low stock prices.
</TABLE>
22
<PAGE> 24
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Where applicable, per share amounts and the number of shares have been
restated to reflect the May 1996 five-for-one common stock split effected in
the form of a stock dividend. The following notes relate to the continuing
operations of Monsanto, unless otherwise indicated.
SIGNIFICANT ACCOUNTING POLICIES
Monsanto's significant accounting policies are italicized in the following
Notes to Financial Statements. The financial statements have been restated to
present the results of the company's chemicals business as discontinued
operations. Previously reported amounts have been reclassified to make them
consistent with the 1996 presentation.
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
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 when necessary to reflect actual experience. Significant
estimates are used when accounting 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
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, principally Brazil, are translated at
either current or historical exchange rates, as appropriate. These currency
adjustments are included in net income.
Major currencies are the U.S. dollar, British pound sterling, Belgian franc
and Japanese yen. Other important currencies include the Brazilian real,
Canadian dollar, French franc, German mark and Italian lira. Currency
restrictions are not expected to have a significant effect on Monsanto's cash
flow, liquidity or capital resources.
Currency option contracts are purchased to manage currency exposure for
anticipated transactions (for example, expected export sales in the following
year denominated in foreign currencies). Currency option and forward contracts
are used to manage other currency exposures, primarily for receivables and
payables denominated in currencies other than the entity's currency. This
hedging activity is intended to protect the company from adverse fluctuations
in foreign currencies vs. the U.S. dollar.
As of December 31, 1996, Monsanto had currency forward contracts to
purchase $102 million and to sell $226 million and purchased currency option
contracts to sell $87 million of other currencies, principally the Belgian
franc, Japanese yen, German mark, Brazilian real and British pound sterling.
Gains and losses on contracts that are designated and effective as hedges are
deferred and are included in the recorded value of the transaction being
hedged. Net deferred hedging losses as of December 31, 1996, were not material.
Gains and losses on other currency forward and option contracts are included in
net income immediately. Monsanto is subject to loss if the counterparties to
these contracts do not perform.
23
<PAGE> 25
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DISCONTINUED OPERATIONS
In December 1996, the board of directors approved a plan to spin off the
company's chemicals business to shareowners by means of the distribution of
shares of a newly-formed, wholly-owned subsidiary, later named Solutia Inc.
("Solutia"). On June 1, 1997, Monsanto began to transfer the operating assets
of the chemicals business to Solutia. Effective August 12, 1997, the board
declared a dividend on September 1, 1997, to shareowners of record on August
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 shareholder approval. Shareowners approved the
spinoff at a special meeting held August 18, 1997, and the spinoff became
effective September 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 chemicals business as discontinued operations.
Discontinued operations also include certain other operations of the company's
chemicals business which have been sold, primarily the styrenics plastics
business. Operating results for discontinued operations were:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales....................................................................... $2,914 $3,552 $3,593
------ ------ ------
Income (loss) before income taxes............................................... $ (13) $ 253 $ 259
Pretax gain on sale of business................................................. 189
Income taxes.................................................................... 15 164 91
------ ------ ------
Net income (loss)............................................................... $ (28) $ 278 $ 168
------ ------ ------
</TABLE>
Pretax restructuring and other unusual charges related to discontinued
operations were $340 million, $55 million and $34 million in 1996, 1995 and
1994, respectively. These costs were associated with work force reductions, the
rationalization or closure of certain facilities, asset write-offs and exit
costs to separate the chemicals business. Other pretax items affecting
discontinued operations in 1995 were receipt of settlement payments from
various insurers for environmental and other insurance litigation of $88
million, offset by a lawsuit settlement of $41 million and joint venture
integration 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 chemicals business, offset,
in part, by the effect of lower ex-U.S. tax rates. The effective tax rates for
discontinued operations for 1995 and 1994 exceeded the U.S. federal statutory
rate primarily because of the effect of state income taxes.
Interest expense of $52 million, $58 million, and $31 million in 1996,
1995, and 1994, respectively, has been allocated to the operating results of
Solutia based on the debt assumed by Solutia. On an historical basis, the
company did not allocate any debt to the chemicals business 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 will receive related assets (the majority of which were transferred
September 1, 1997), for its active employees and for certain former employees
of the chemicals business who left the company in earlier years. Solutia also
assumed the postretirement benefit liabilities for its active employees and
former employees who last worked in a chemicals business. The footnotes related
to postretirement benefits--pensions and postretirement benefits--health care
and other further disclose the assets, liabilities, and the effect of these
benefits on continuing operations.
To consummate the spinoff, Monsanto contributed certain assets to Solutia
and Solutia assumed certain liabilities of Monsanto. In addition to the assets
and liabilities reported in the consolidated statement of financial position as
discontinued operations, the assets contributed to Solutia and liabilities
assumed by Solutia include a joint venture interest in Monsanto's elemental
phosphorus business, cash of $75 million and short-term debt of $1,000 million.
Also in connection with the spinoff, Solutia's ESOP received 2.4 million shares
of unallocated company common stock held by the ESOP, and also assumed $29
million of ESOP borrowings. The excess of the liabilities assumed by Solutia
and
24
<PAGE> 26
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Solutia's ESOP over the assets contributed to Solutia in connection with the
spinoff of approximately $120 million increased Monsanto's shareowners' equity.
The amount may be adjusted based upon the final determination of the net
liabilities assumed.
In connection with the spinoff, various agreements entered into by the
Company and Solutia allocated responsibility between them for various debts,
liabilities and obligations. These agreements provide that Solutia will
indemnify the Company for the liabilities assumed by Solutia pursuant to such
agreements.
PRINCIPAL ACQUISITIONS AND DIVESTITURES
In February 1997, the company acquired the Asgrow Agronomics seed business
from Empresas La Moderna S.A. for $240 million. In January 1997, Monsanto
announced that it had reached separate agreements to acquire Holden's
Foundation Seeds Inc., the world's leading foundation seed corn company, and
Corn States Hybrid Service Inc. and Corn States International S.a.r.l., the
exclusive worldwide marketing and sales representatives for Holden's products.
The total costs of these acquisitions will be up to $1.02 billion. It is
anticipated that one-time charges associated with acquired research will be
recorded in conjunction with these acquisitions.
In March 1996, Monsanto acquired significant equity positions in Calgene
Inc. and DeKalb Genetics Corp. In November 1996, Monsanto acquired a
controlling interest in Calgene. This gave Monsanto the right to nominate five
of the nine authorized directors on Calgene's board. The combined investment in
these plant-science businesses totaled approximately $340 million. In May 1996,
Monsanto acquired the plant-science assets of Agracetus from W. R. Grace & Co.
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. The results of operations for the
acquired product rights were included in the Statement of Consolidated Income
from the date of acquisition. The product rights are being amortized over 10
years.
In February 1995, Monsanto completed its acquisition of the worldwide
business of Kelco, the specialty chemicals division of Merck & Co. Inc., for
approximately $1.062 billion. The acquisition included total assets with a fair
value of $1.172 billion and liabilities of $110 million. The excess of the
purchase price over the estimated fair value of net assets acquired is being
amortized over 30 years. The financial results of the Kelco business were
included in the Statement of Consolidated Income from the date of acquisition.
On a pro forma basis, results of operations for the year ended December 31,
1994, would not have been significantly different if the acquisition had
occurred at the beginning of that year.
RESTRUCTURING AND OTHER ACTIONS--CONTINUING OPERATIONS
In December 1996, the company recorded pretax restructuring charges related
to continuing operations totaling $376 million ($257 million aftertax) to cover
the closure or rationalization of certain facilities, asset write-offs, and work
force reductions. Approximately 1,600 positions are expected to be eliminated by
these actions. 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. Asset
values were written down to their discounted cash values, using appropriate
discount rates.
In December 1995, the board of directors approved a restructuring plan. The
pretax charge associated with continuing operations was $114 million ($78
million aftertax) and covered the costs of work force reductions, business
consolidations, facility closures, and the exit from nonstrategic businesses
and facilities. This plan was substantially completed by the end of 1996 and
reduced employment by approximately 370 people.
Other items that affected results of operations in 1995 included the
receipt in the first and third quarters of settlement payments from various
insurers related to insurance litigation. The combined effect of these
settlements
25
<PAGE> 27
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
related to continuing operations totaled $4 million pretax ($2 million
aftertax). The company also recorded 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.
In December 1994, the board of directors approved a plan to eliminate
redundant staff activities across the company and to consolidate certain staff
and administrative business functions. The plan, which was substantially
completed by the end of 1995, reduced worldwide employment by approximately 300
people. In addition, the company closed certain facilities and terminated
certain programs. The pretax expense related to continuing operations for these
actions was $55 million ($34 million aftertax). In the fourth quarter of 1994,
the board approved the reversal of $49 million pretax of excess restructuring
reserves from prior years. The excess was due primarily to higher-than-expected
proceeds and lower-than-expected exit costs from the sale and shutdown of
nonstrategic businesses and facilities included in the 1993 and 1992
restructuring actions.
In September 1994, Monsanto received $67 million from the U.S. Internal
Revenue Service in settlement of certain tax matters related to the 1985
acquisition of Searle. This settlement included interest of $33 million pretax
($21 million aftertax), recorded as a one-time gain. Most of the remainder of
the proceeds reduced the balance of unamortized goodwill related to the Searle
acquisition.
The components of the pretax expense (income) related to income from
continuing operations before income taxes for the restructuring programs and
the other actions were:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cost of employee reductions..................................................... $ 255 $ 41 $ 41
Shutdown and consolidation of various facilities and departments................ 57 73 (32)
Asset impairments............................................................... 51
Insurance-related settlement (income)........................................... (4)
Other costs (income)............................................................ 13 (20) (22)
Gains on business sales......................................................... (14)
----- ---- ----
Total........................................................................... $ 376 $ 90 $(27)
----- ---- ----
</TABLE>
Restructuring expenses are recorded based on estimates prepared at the time
the restructuring actions are approved by the board of directors. The balance
in restructuring reserves as of December 31, 1996, was $460 million. It is
earmarked primarily for work force reduction costs, asset impairments, and the
costs associated with the shutdown and consolidation of various facilities and
departments. Management believes that the balance of these reserves as of
December 31, 1996, is adequate for completion of those activities.
Restructuring actions during the last three years have reduced these
liabilities by approximately $300 million. Approximately two-thirds of these
reductions were recorded for write-offs and expenditures related to the
termination or sale of nonstrategic products and facilities. The remaining
reductions were primarily related to the cost of work force reduction programs,
most of which have been completed.
26
<PAGE> 28
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The pretax expenses (income) related to the restructuring programs and the
other unusual items were recorded in the Statement of Consolidated Income in
the following categories:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales....................................................................... $(20)
Cost of goods sold.............................................................. $ 28 (4)
Amortization of intangible assets............................................... 23
Restructuring expenses--net..................................................... 356 114 $ 6
---- ---- ----
Decrease in operating income.................................................... 407 90 6
Interest income................................................................. (33)
Other (income) expense--net <F1>................................................ (31)
---- ---- ----
Total decrease (increase) in income from continuing operations before income
taxes......................................................................... $376 $ 90 $(27)
---- ---- ----
<FN>
<F1> In 1996, other expense included reversals of restructuring reserves that
were no longer required, and minority interest associated with
restructuring and other unusual items recorded by Calgene Inc.
</TABLE>
Income from continuing operations decreased $257 million, or $0.43 per
share, in 1996; decreased $63 million, or $0.11 per share, in 1995; and
increased $20 million, or $0.03 per share, in 1994 because of these
restructurings and unusual items.
DEPRECIATION AND AMORTIZATION
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Depreciation.................................................................... $ 276 $272 $207
Amortization of intangible assets............................................... 128 119 80
Obsolescence.................................................................... 19 14 25
----- ---- ----
Total........................................................................... $ 423 $405 $312
----- ---- ----
</TABLE>
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:
<TABLE>
<CAPTION>
ESTIMATED
REMAINING
LIFE<F1> 1996 1995
--------- ---- ----
<S> <C> <C> <C>
Goodwill........................................................................ 24 $1,519 $1,372
Patents......................................................................... 7 70 81
Other intangible assets......................................................... 12 577 512
------ ------
Total........................................................................... $2,166 $1,965
------ ------
<FN>
<F1> Weighted average, in years, as of December 31, 1996.
</TABLE>
Goodwill and other intangible assets increased in 1996, primarily because
of the Calgene and Agracetus acquisitions.
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 (5 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 product rights and trademarks) is
amortized over their estimated useful lives.
27
<PAGE> 29
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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, primarily equity securities, 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 December 31, these equity
securities were detailed as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Aggregate fair value............................................................ $79 $162
Gross unrealized holding:
Gains....................................................................... 31 63
Losses...................................................................... 11 7
</TABLE>
In 1996, proceeds and realized gains from sales of available-for-sale
securities were $80 million and $33 million, respectively.
Debt securities held are recorded at amortized cost, because the company
has the ability and intent to hold these securities to their maturity date.
Most of these securities mature in less than five years. As of December 31,
1996 and 1995, the total amortized cost of these securities was $147 million
and $269 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 (64 percent as of
December 31, 1996) 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 cost methods. The cost of other inventories
generally is determined by using the first-in, first-out (FIFO) method.
The components of inventories were:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Finished goods.................................................................. $ 630 $ 608
Goods in process................................................................ 287 252
Raw materials and supplies...................................................... 333 288
------ ------
Inventories, at FIFO cost....................................................... 1,250 1,148
Excess of FIFO over LIFO cost................................................... (67) (84)
------ ------
Total........................................................................... $1,183 $1,064
------ ------
</TABLE>
Inventories at FIFO approximate current cost.
INCOME TAXES
The components of income from continuing operations before income taxes
were:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
United States..................................... $313 $339 $287
Outside United States............................. 240 306 349
---- ---- ----
Total............................................. $553 $645 $636
---- ---- ----
</TABLE>
28
<PAGE> 30
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The components of income tax expense charged to operations were:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current:
U.S. federal.................................. $ 42 $180 $ 38
U.S. state.................................... 14 6 11
Outside United States......................... 91 108 69
---- ---- ----
147 294 118
---- ---- ----
Deferred:
U.S. federal.................................. 10 (108) 30
U.S. state.................................... (6) 6 2
Outside United States......................... (11) (8) 32
---- ---- ----
(7) (110) 64
---- ---- ----
Total............................................. $140 $184 $182
---- ---- ----
</TABLE>
Factors causing Monsanto's effective tax rate to differ from the U.S.
federal statutory rate were:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
U.S. federal statutory rate....................... 35% 35% 35%
Benefits attributable to:
U.S. export earnings.......................... (6) (2) (1)
Puerto Rican operations....................... (4) (4) (3)
Higher (lower) ex-U.S. rates...................... (1) -- (2)
Nondeductible goodwill............................ 2 1 1
Other............................................. (1) (1) (1)
--- --- ---
Effective income tax rate......................... 25% 29% 29%
--- --- ---
</TABLE>
Deferred income taxes were related to:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Property...................... $(243) $(246)
Postretirement benefits....... 171 146
Restructuring reserves........ 181 115
Inventory..................... 40 33
Net operating tax loss and tax
credit carryforwards........ 163 64
Other......................... 66 108
Valuation allowances.......... (168) (90)
----- -----
Net deferred tax assets....... $ 210 $ 130
----- -----
</TABLE>
Deferred tax balances were:
<TABLE>
<S> <C> <C>
Deferred tax assets........... $ 312 $ 330
Deferred tax liabilities...... 102 200
----- -----
Net deferred tax assets....... $ 210 $ 130
----- -----
</TABLE>
The balance in valuation allowances includes $107 million for Calgene as of
December 31, 1996, primarily related to net operating tax loss carryforwards.
These carryforwards expire from 1999 through 2011. Monsanto cannot utilize
these deferred tax assets as Calgene is not included in the company's
consolidated tax return in 1996.
Income taxes and remittance taxes have not been recorded on $1.1 billion in
undistributed earnings of subsidiaries, either because any taxes on dividends
would be offset substantially by foreign tax credits or because
29
<PAGE> 31
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Monsanto intends to reinvest those earnings indefinitely. If such earnings were
paid as dividends, the estimated U.S. income tax would be $139 million.
SHORT-TERM DEBT AND CREDIT ARRANGEMENTS
Short-term debt was:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Notes payable to banks.......................................................... $129 $ 61
Commercial paper................................................................ 332 93
Bank overdrafts................................................................. 112 113
Current portion of long-term debt............................................... 81 98
---- ----
Total........................................................................... $654 $365
---- ----
Weighted average interest rates of notes payable as of December 31:
Banks<F1>................................................................... 7.7% 7.0%
Commercial paper............................................................ 5.5% 5.8%
<FN>
<F1> Includes the effect of notes in certain countries where local inflation
results in high interest rates.
</TABLE>
Monsanto had aggregate short-term loan facilities of $450 million, under
which loans totaling $129 million were outstanding as of December 31, 1996.
Interest on these loans is related to various bank rates. Monsanto has a $1
billion credit facility, expiring in 2001, which allows the company to request
that lenders increase their commitments up to an aggregate of $1.6 billion.
There were no borrowings under this credit facility as of December 31, 1996.
This facility is used to support the issuance of commercial paper. Interest on
amounts borrowed under this agreement is expected to be at money market rates.
Covenants under this credit facility restrict maximum borrowings. The company
does not anticipate that future borrowings will be limited by the terms of this
agreement.
On an historical basis as reflected above, the company did not allocate any
short-term debt to the chemicals businesses, because the company uses a
centralized approach to cash management and the financing of its operations. In
connection with the spinoff effective September 1, 1997, 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:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Industrial revenue bond obligations, average rate in 1996 of 5.24%, due 1998 to
2028.......................................................................... $ 338 $ 335
Medium-term notes, rates in 1996 ranging from 8.55% to 9%, due 1998 to 2005..... 145 185
Commercial paper<F1>............................................................ 325 425
6% notes due 2000............................................................... 150 150
7.09% and 8.13% amortizing ESOP<F2> notes and debentures due 2000 and 2006,
guaranteed by the company..................................................... 138 150
8 7/8% debentures due 2009...................................................... 99 99
5.6% yen note due 2016.......................................................... 88
8.7% debentures due 2021........................................................ 100 100
8.2% debentures due 2025........................................................ 150 150
Other........................................................................... 75 73
------ ------
Total........................................................................... $1,608 $1,667
------ ------
<FN>
<F1> $150 million swapped to an effective rate of 8.6 percent through February
1996.
<F2> ESOP stands for employee stock ownership plan.
</TABLE>
30
<PAGE> 32
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Maturities and sinking-fund requirements on long-term debt are $81 million
in 1997, $81 million in 1998, $77 million in 1999, $207 million in 2000, and
$50 million in 2001.
Commercial paper balances of $325 million and $425 million as of December
31, 1996 and 1995, respectively, have been classified as long-term debt.
Monsanto has the ability and intent to renew these obligations beyond 1997.
Interest-rate swap agreements are used to reduce 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 December 31,
1996, Monsanto was party to interest-rate swap agreements with an aggregate
notional principal amount of $165 million related to existing debt. The
agreements effectively convert floating-rate debt into fixed-rate debt. This
reduces the company's risk of 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 accrued as interest rates change over the
related debt period.
On an historical basis as reflected above, the company did not allocate any
long-term debt to the chemicals businesses, because the company uses a
centralized approach to cash management and the financing of its operations. In
connection with the spinoff, Solutia's ESOP assumed $29 million of ESOP
borrowings.
FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair values of Monsanto's financial instruments were:
<TABLE>
<CAPTION>
1996 1995
------------------- -------------------
RECORDED FAIR RECORDED FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Assets:
Investments in securities and other assets........ $ 207 $ 226 $ 375 $ 430
Liabilities:
Currency swaps.................................... -- 1 1 4
Interest-rate swaps............................... 1 12 5 19
Long-term debt.................................... 1,608 1,681 1,667 1,781
</TABLE>
The recorded amounts of cash, trade receivables, discounted receivables,
third-party guarantees, foreign currency forward contracts, accounts payable,
and short-term debt approximate their fair values.
Fair values are estimated by the use of quoted market prices, estimates
obtained from brokers, and other appropriate valuation techniques based on
information available as of December 31, 1996. The fair-value estimates do not
necessarily reflect the values Monsanto could realize in the current market.
POSTRETIREMENT BENEFITS--PENSIONS
Most Monsanto employees are covered by noncontributory pension plans. In
connection with the spinoff, Solutia assumed the pension liabilities, and will
receive related assets (the majority of which were transferred September 1,
1997), for its active employees and for certain former employees of the
chemical businesses who left the company in earlier years. As a result,
Monsanto's historical annual pension cost (income) was allocated between
continuing and discontinued operations as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Continuing operations................................................. $54 $ 29 $ 25
Discontinued operations............................................... 3 (19) (10)
--- ---- ----
Total................................................................. $57 $ 10 $ 15
</TABLE>
31
<PAGE> 33
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The company's share of the components of total net periodic pension cost
shown below related to continuing operations has not yet been determined, and
therefore the following information relates to the Monsanto pension plan not
taking into account the spinoff. The components of pension costs were:
<TABLE>
<CAPTION>
1996 1995 1994
----- ---- ----
<S> <C> <C> <C>
Service cost for benefits earned during the year...................... $ 83 $ 70 $ 75
Interest cost on benefit obligation................................... 287 291 269
Assumed return on plan assets<F1>..................................... (322) (326) (317)
Amortization of unrecognized net (gain) loss.......................... 9 (25) (12)
----- ----- -----
Total................................................................. $ 57 $ 10 $ 15
----- ----- -----
<FN>
<F1> Actual returns (losses) on plan assets were $558 million, $671 million and
$(142) million in 1996, 1995 and 1994, respectively.
</TABLE>
Pension benefits are based on the employee's years of service and/or
compensation level. Pension plans are funded in accordance with Monsanto's
long-range projections of the plans' financial conditions. These 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 are determined through the use of the preceding year-end rate
assumptions. Assumptions used as of December 31 for the principal plans were:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Discount rate......................................................... 7.50% 7.25% 8.50%
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)................................................. 4.50% 4.50% 5.00%
</TABLE>
As a result of Solutia's assumption of the net pension liability related to
certain employees, Monsanto's historical accrued net pension liability was
allocated between continuing and discontinued operations as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Continuing operations................................................. $208 $166
Discontinued operations............................................... 72 53
---- ----
Total................................................................. $280 $219
</TABLE>
The accrued net pension liability related to continuing operations was
included in:
<TABLE>
<S> <C> <C>
Postretirement liabilities............................................ $264 $216
Less other assets..................................................... (56) (50)
---- ----
Accrued net pension liability......................................... $208 $166
---- ----
</TABLE>
32
<PAGE> 34
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The company's share of the amounts shown below related to continuing
operations, other than accrued pension liability, has not yet been determined,
and therefore the following information relates to the Monsanto pension plan
not taking into account the spinoff. The funded status of Monsanto's pension
plans at year-end was:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Plan assets at fair value............................................. $3,817 $3,690
------ ------
Actuarial present value of plan benefits:
Vested............................................................ $3,495 $3,457
Nonvested......................................................... 154 145
------ ------
Accumulated benefit obligation........................................ 3,649 3,602
Effect of projected future salary increases........................... 377 385
------ ------
Projected benefit obligation<F1>...................................... $4,026 $3,987
------ ------
Deficiency of plan assets over projected benefit obligation........... $ (209) $ (297)
Less:
Unrecognized initial net gain..................................... 94 119
Unrecognized prior service costs.................................. (264) (192)
Unrecognized subsequent net gain (loss)........................... 241 (5)
------ ------
Accrued net pension liability<F2>..................................... $ 280 $ 219
------ ------
<FN>
<F1> Included $228 million in 1996 and $204 million in 1995 for unfunded plans.
<F2> Included $138 million in 1996 and $152 million in 1995 for unfunded plans.
</TABLE>
Included in the preceding table are plan assets and projected benefit
obligations for the principal U.S. plans of approximately $3.327 billion and
$3.264 billion, respectively, as of December 31, 1996.
Plan assets consist principally of common stocks and U.S. government and
corporate obligations. Contributions to these plans were neither required nor
made in 1996, 1995 and 1994 because the company's principal pension plans are
adequately funded, using assumed returns.
For purposes of preparing these restated financial statements, estimates
were made of the pension plan assets and projected benefit obligation that
related to continuing operations. The actual amounts determined to relate to
continuing operations will likely be different from these estimates. The
estimated plan assets and projected benefit obligation related to continuing
operations were:
<TABLE>
<CAPTION>
1996
----
<S> <C>
Plan assets at fair value............................................. $ 2,282
Project benefit obligation............................................ 2,497
</TABLE>
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.
33
<PAGE> 35
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In connection with the spinoff, Solutia assumed the postretirement benefit
liabilities for its active employees and former employees who last worked at a
chemical facility. As a result, Monsanto's historical cost of these
postretirement benefits was allocated between continuing and discontinued
operations as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Continuing operations................................................. $ 33 $ 32 $ 33
Discontinued operations............................................... 82 81 84
---- ---- ----
Total................................................................. $115 $113 $117
</TABLE>
The company's share of the components of postretirement benefit costs shown
below related to continuing operations has not yet been determined, and
therefore the following information relates to total Monsanto costs not taking
into account the spinoff. The components of the cost of these postretirement
benefits, principally health care and life insurance, were:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Service cost for benefits earned during the year...................... $ 25 $ 21 $ 23
Interest cost on benefit obligation................................... 88 94 87
Amortization of unrecognized net (gain) loss.......................... 2 (2) 7
---- ---- ----
Total................................................................. $115 $113 $117
---- ---- ----
</TABLE>
Postretirement costs are determined by using the preceding year-end rate
assumptions. Assumptions used as of December 31 for the principal plans were:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Discount rate......................................................... 7.50% 7.25% 8.50%
Initial trend rate for health care costs<F1>.......................... 8.00% 9.00% 11.50%
Ultimate trend rate for health care costs............................. 5.00% 5.00% 5.50%
<FN>
<F1> The initial trend rate for health care costs declines by 1 percent per
year to 5 percent for years after the year 2001.
</TABLE>
A 1 percent increase in the assumed trend rate for health care costs would
have increased the cost of 1996 postretirement health care benefits by $4
million and the accumulated benefit obligation by $48 million as of December
31, 1996.
As a result of Solutia's assumption of the postretirement benefit liability
related to certain employees, Monsanto's historical accrued postretirement
liability was allocated between continuing and discontinued operations as
follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Continuing operations................................................. $ 356 $ 349
Discontinued operations............................................... 892 875
------ ------
Total................................................................. $1,248 $1,224
</TABLE>
The accrued liability related to continuing operations was included in:
<TABLE>
<S> <C> <C>
Miscellaneous accruals................................................ $26 $27
Postretirement liabilities............................................ 330 322
------- -------
Accrued liability..................................................... $356 $349
------- -------
</TABLE>
The company's share of the amounts shown below related to continuing
operations, other than the accrued liability, has not yet been determined, and
therefore the following information relates to the total Monsanto liability
34
<PAGE> 36
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
not taking into account the spinoff. As of December 31, the status of
Monsanto's postretirement health care and life insurance benefit plans, and
employee disability benefit plans was:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Accumulated benefit obligation:
Retirees.......................................................... $ 938 $1,006
Eligible active employees......................................... 60 52
Other active employees............................................ 251 213
------ ------
Total................................................................. $1,249 $1,271
Unrecognized benefits from prior service.......................... 27 34
Unrecognized subsequent net loss.................................. (28) (81)
------ ------
Accrued liability..................................................... $1,248 $1,224
------ ------
</TABLE>
The assumptions used to compute the accumulated benefit obligation of the
principal plans were changed as of December 31, 1996. That resulted in a
decrease of approximately $28 million in the obligation.
For purposes of preparing these restated financial statements, an estimate
was made of the accumulated benefit obligation that related to continuing
operations. The actual amount determined to relate to continuing operations
will likely be different from this estimate. The estimated accumulated benefit
obligation related to continuing operations was $356 million as of December 31,
1996.
EMPLOYEE SAVINGS PLANS
For some employee savings plans, employee contributions are matched in part
by Monsanto. The value of these contributions for such plans was $30 million in
each of the years 1996, 1995 and 1994.
Monsanto has established an Employee Stock Ownership Plan (ESOP), which
held 18.6 million shares of Monsanto common stock as of December 31, 1996. The
ESOP acquired shares by using proceeds from the issuance of long-term notes and
debentures that are guaranteed by Monsanto. The ESOP also borrowed $50 million
from Monsanto. A portion of the ESOP shares is allocated each year to employee
savings accounts as matching contributions. In 1996, 752,515 shares were
allocated to participants under the plan, leaving 12,623,080 unallocated shares
as of December 31, 1996. 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 dividends paid on the
shares held by the ESOP. Dividends on the common stock owned by the ESOP are
being used to repay the ESOP borrowings, which totaled $180 million as of
December 31, 1996.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Total ESOP expense.................................................... $17 $26 $29
Total ESOP expense--continuing operations............................. 14 21 24
Interest portion of total ESOP expense................................ 14 16 17
Cash contribution..................................................... 16 18 19
Dividends paid on ESOP shares held.................................... 11 10 9
</TABLE>
In connection with the spinoff, Solutia's ESOP received 2.4 million shares
of the common shares held by the ESOP, and also assumed $29 million of ESOP
borrowings.
STOCK OPTION PLANS
Effective January 1, 1996, Monsanto adopted Statement of Financial
Accounting Standard (SFAS) No. 123, "Accounting for Stock-Based
Compensation." As permitted by the standard, the company has elected to
continue following the guidance of Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to
35
<PAGE> 37
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Income from continuing operations:
As reported....................................................... $ 413 $ 461
Pro forma......................................................... 347 446
Earnings per share--continuing operations:
As reported....................................................... $0.69 $0.79
Pro forma......................................................... 0.58 0.77
</TABLE>
The resulting compensation expense may not be representative of
compensation expense to be incurred on a pro forma basis in future years.
The company has two fixed option plans. Under the Management Incentive Plan
of 1996, the company may grant options to key officers and management employees
for up to 46,250,000 shares of common stock. Under this plan, the exercise
price of each option equals not less than the fair market value of the
company's stock on the date of grant, and an option's maximum term is 10 years.
Options are granted at the discretion of the board of directors' Executive
Compensation and Development Committee (the committee) or its delegate. Options
generally vest upon the earlier of the achievement of business performance
targets or upon the ninth anniversary of the option grant date. Options granted
to senior management vest upon the attainment of pre-established prices within
specified time periods. Under the company's Shared Success Stock Option Plan,
the majority of regular full-time and regular part-time employees of the
company have been granted options on 200 shares of common stock. The maximum
number of shares for which stock options may be granted under this plan totals
13,500,000.
Approximately 5,246,200 options, which vest in April 1999, are outstanding
under this plan. Under this plan, the exercise price of each option is
determined by the committee and generally equals the market price of the
company's stock on the date of grant. An option's maximum term is 10 years.
The fair value of each option grant is estimated on the date of grant by
using the Black-Scholes option-pricing model. The following weighted-average
assumptions were used for grants in 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Expected dividend yield............................................... 1.5% 3.0%
Expected volatility................................................... 25.0% 20.0%
Risk-free interest rates.............................................. 6.0% 7.1%
Expected option lives (years)......................................... 4.0 4.5
</TABLE>
36
<PAGE> 38
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
A summary of the status of the company's stock option plans for the
three-year period ended December 31, 1996, follows:
<TABLE>
<CAPTION>
OUTSTANDING
-------------------------------
EXERCISABLE WEIGHTED-AVERAGE
SHARES SHARES EXERCISE PRICE
------ ------ --------------
<S> <C> <C> <C>
December 31, 1993....................... 28,620,625 66,313,025 $10.74
---------- ----------- ------
1994:
Granted............................. 12,896,470 15.55
Exercised........................... (9,106,225) 9.83
Expired............................. (1,559,370) 10.02
---------- ----------- ------
December 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
---------- ----------- ------
December 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
---------- ----------- ------
December 31, 1996....................... 38,362,943 63,144,238 $20.90
---------- ----------- ------
</TABLE>
The weighted-average fair values of options granted during 1996 and 1995
were $6.43 and $3.99, respectively.
The following table summarizes information about stock options outstanding
as of December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED-AVERAGE -----------------------------
RANGE OF REMAINING WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE PRICES SHARES CONTRACTUAL LIFE EXERCISE PRICE SHARES EXERCISE PRICE
--------------- ------ ---------------- -------------- ------ --------------
<S> <C> <C> <C> <C> <C>
$6 to 9 2,556,640 1.6 years $ 8.42 2,556,640 $ 8.42
10 to 14 21,777,088 5.3 11.57 21,672,088 11.56
15 to 18 14,114,885 7.5 15.70 14,074,715 15.70
20 to 29 6,326,575 9.1 26.96 59,500 20.38
30 to 36 11,817,050 9.3 31.84
40 to 55 6,552,000 9.4 42.39
---------- ----------
$6 to 55 63,144,238 7.2 $20.90 38,362,943 $12.88
========== ==========
</TABLE>
In February 1994, Monsanto established a grantor trust and contributed 12.5
million shares of Monsanto common stock to be used to satisfy compensation and
benefit arrangements and obligations, including issuance of shares upon the
exercise of certain stock options. Shares held by the grantor trust are
included in earnings per share calculations only after they are transferred to
employees.
As a result of the spinoff, options to purchase the company's common stock
under the above plans were converted into either options to purchase Solutia
common stock, 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.
37
<PAGE> 39
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
EARNINGS PER SHARE
Earnings per share were computed using the weighted average number of
common shares and common share equivalents outstanding each year (598,865,032
in 1996; 580,639,360 in 1995; and 584,924,800 in 1994). Common share
equivalents (17,659,844 in 1996; 13,391,325 in 1995; and 11,996,225 in 1994)
consist primarily of common stock issuable upon exercise of outstanding stock
options. Earnings per share assuming full dilution were not significantly
different from the primary amounts.
CAPITAL STOCK
As of December 31, 1996, there were 41,407,595 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 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 is also authorized to reduce the aforementioned 20
percent thresholds to not less than 10 percent. The rights expire in the year
2000.
COMMITMENTS AND CONTINGENCIES
Commitments, principally in connection with uncompleted additions to
property, were approximately $53 million as of December 31, 1996. Excluding the
ESOP notes and debentures, Monsanto was contingently liable as a guarantor for
bank loans and for discounted customers' receivables totaling approximately
$156 million and $381 million as of December 31, 1996 and 1995, respectively.
Future minimum payments under noncancelable operating leases and unconditional
inventory purchases are $138 million for 1997, $74 million for 1998, $63
million for 1999, $24 million for 2000, $17 million for 2001, and $53 million
thereafter.
The more significant concentrations in Monsanto's trade receivables at
year-end were:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
U.S. agricultural product distributors...................... $361 $257
European agricultural product distributors.................. 156 117
Pharmaceutical distributors worldwide....................... 399 357
Customers in the former Soviet Union........................ 44 20
</TABLE>
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 $25 million and
$26 million
38
<PAGE> 40
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
as of December 31, 1996 and 1995, respectively, for the remediation of
identified waste disposal sites related to continuing operations.
Monsanto's future remediation expenses for waste disposal sites are
affected by a number of uncertainties, including, but not limited to, the
method and extent of remediation, the percentage of material attributable to
Monsanto at the sites relative to that attributable to other parties, and the
financial capabilities of the other potentially responsible parties (PRPs). The
company does not expect the resolution of such uncertainties to have a material
effect on profitability.
In October 1996, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 96-1, "Environmental Remediation
Liabilities," which is effective for Monsanto in 1997. SOP 96-1 establishes
authoritative guidance regarding the recognition, measurement and disclosure of
environmental remediation liabilities. The company does not expect the effect of
adopting this new standard 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:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Rent Expense................................................ $111 $102 $ 90
Technological expenses:
Research and development................................ 647 568 521
Engineering, commercial development and patent.......... 55 33 38
---- ---- ----
Total technological expenses................................ 702 601 559
Interest expense:
Total interest cost..................................... 128 137 104
Less capitalized interest............................... (9) (5) (4)
---- ---- ----
Net interest expense........................................ 119 132 100
Currency losses including equity in affiliates' currency
gains and losses.......................................... 6 6 17
</TABLE>
39
<PAGE> 41
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEGMENT INFORMATION
Certain segment data and geographic data for 1996, 1995 and 1994 that
appear on pages 10 and 15-16 are integral parts of the accompanying financial
statements. The company's principal product lines are discussed in the segment
data.
<TABLE>
QUARTERLY DATA--UNAUDITED
<CAPTION>
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
------- ------- ------- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Net Sales........... 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)............ 1996 341 434 176 (356) 595
1995 265 351 149 (67) 698
Income (Loss) from
Continuing
Operations........ 1996 222 316 107 (232) 413
1995 164 229 94 (26) 461
Net Income (Loss)... 1996 260 365 170 (410) 385
1995 229 290 140 80 739
Earnings (Loss) per
share--Continuing
Operations........ 1996 0.37 0.53 0.18 (0.39) 0.69
1995 0.28 0.39 0.16 (0.04) 0.79
Earnings (Loss) per
Share............. 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............. 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
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 3/4
</TABLE>
Historically, Monsanto's income from continuing operations is higher during
the first half of the year, primarily because of the concentration of generally
more profitable sales of the Agricultural Products segment during that part of
the year.
Income from continuing operations for the fourth quarter of 1996 included
an aftertax charge of $257 million, or $0.43 per share, associated with the
closure or rationalization of certain facilities, asset write-offs, and work
force reductions.
Third-quarter 1995 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.
Income from continuing operations for the fourth quarter of 1995 included
an aftertax charge of $78 million, or $0.13 per share, for restructuring
actions.
40
<PAGE> 42
MONSANTO COMPANY AND SUBSIDIARIES
<TABLE>
FINANCIAL SUMMARY
<CAPTION>
(DOLLARS IN MILLIONS, EXCEPT PER SHARE) 1996 1995 1994 1993 1992
--------------------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operating Results
Net Sales................................ $ 6,348 $ 5,410 $4,679 $4,304 $ 4,119
Income (Loss) from Continuing
Operations............................. 413 <F1> 461 <F2> 454 <F3> 298 <F4> (151)<F5>
Income (Loss) from Discontinued
Operations............................. (28) 278 <F7> 168 196 603 <F7>
Cumulative Effect of Accounting
Changes................................ (540)
Net Income (Loss)........................ 385 739 622 494 (88)
------- ------- ------ ------ -------
Earnings per Share<F6>:
Income (Loss) from Continuing
Operations............................. $ 0.69 $ 0.79 $ 0.78 $ 0.50 $ (0.24)
Net Income (Loss)........................ 0.64 1.27 1.06 0.82 (0.14)
------- ------- ------ ------ -------
Year-End Financial Position
Total Assets............................. $11,237 $10,731 $9,103 $8,788 $ 9,210
Long-Term Debt........................... 1,608 1,667 1,405 1,502 1,423
Shareowners' Equity...................... 3,690 3,732 2,948 2,855 3,005
------- ------- ------ ------ -------
Other Data
Stock Price<F6>:
High................................. $ 43 1/4 $ 25 $ 17 3/8 $ 15 $ 14 1/4
Low.................................. 23 13 3/4 13 3/8 9 7/8 9 7/8
Year-End............................. 38 7/8 24 1/2 14 1/8 14 3/4 11 5/8
Dividends Per Share<F6>.................. $ 0.588 $ 0.540 $0.494 $0.460 $ 0.440
------- ------- ------ ------ -------
<FN>
<F1> Income from continuing operations for 1996 included restructuring and
other special 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.
<F2> Income from continuing operations for 1995 included net restructuring
expenses and other unusual items of $63 million, or $0.11 per share.
<F3> 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.
<F4> 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.
<F5> 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.
<F6> Per share amounts and shares outstanding were restated to reflect the May
1996 five-for-one stock split.
<F7> Includes sale of styrenics plastics business in 1995 and sale of Fisher
Controls in 1992.
</TABLE>
41
<PAGE> 43
Restated Financial Information for the Quarterly Period Ended March 31, 1997
42
<PAGE> 44
QUARTERLY PERIOD ENDED MARCH 31, 1997
FINANCIAL STATEMENTS
The restated Statement of Consolidated Income of Monsanto Company and
subsidiaries for the three months ended March 31, 1997 and 1996, the restated
Statement of Consolidated Financial Position as of March 31, 1997 and December
31, 1996, the restated Statement of Consolidated Cash Flow for the three months
ended March 31, 1997 and 1996 and related Notes to Financial Statements follow.
In the opinion of management, these unaudited restated consolidated financial
statements contain all adjustments necessary to present fairly the financial
position, results of operations and cash flows for the interim periods
reported.
Unless otherwise indicated by the context, "Monsanto" means Monsanto
Company and consolidated subsidiaries, and "the Company" means Monsanto
Company only.
MONSANTO COMPANY AND SUBSIDIARIES
<TABLE>
STATEMENT OF CONSOLIDATED INCOME
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1996
---- ----
<S> <C> <C>
Net Sales.......................................................................... $1,875 $1,612
Costs and Expenses:
Cost of Goods Sold................................................................. 791 657
Selling, General and Administrative Expenses....................................... 447 447
Technological Expenses............................................................. 202 136
Acquired In-Process Research and Development....................................... 101
Amortization of Intangible Assets.................................................. 36 31
------ ------
Operating Income................................................................... 298 341
Interest Expense................................................................... (29) (28)
Interest Income.................................................................... 10 10
Other Income (Expense)--Net........................................................ 10 (1)
------ ------
Income from Continuing Operations Before Income Taxes.............................. 289 322
Income Taxes....................................................................... 83 100
------ ------
Income from Continuing Operations.................................................. 206 222
Income from Discontinued Operations................................................ 68 38
------ ------
Net Income......................................................................... $ 274 $ 260
------ ------
Earnings per Share:
Continuing Operations.......................................................... $ 0.34 $ 0.37
Discontinued Operations........................................................ 0.11 0.06
------ ------
Total...................................................................... $ 0.45 $ 0.43
------ ------
Dividends per Share................................................................ $0.150 $0.138
------ ------
Weighted Average Number of Common and
Common Equivalent Shares (in millions)........................................... 602.6 598.4
------ ------
</TABLE>
43
<PAGE> 45
MONSANTO COMPANY AND SUBSIDIARIES
<TABLE>
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................................................... $ 106 $ 166
Trade receivables, net of allowances of $50 in 1997 and $47 in 1996.......... 2,153 1,515
Miscellaneous receivables and prepaid expenses............................... 418 286
Deferred income tax benefit.................................................. 289 282
Inventories.................................................................. 1,239 1,183
Chemicals Discontinued Operations............................................ 961 908
------- -------
Total Current Assets................................................. 5,166 4,340
------- -------
Property, Plant and Equipment.................................................... 4,575 4,428
Less Accumulated Depreciation.................................................... 2,363 2,333
------- -------
Net Property, Plant and Equipment............................................ 2,212 2,095
------- -------
Investments in Affiliates........................................................ 264 257
Intangible Assets, net of accumulated amortization............................... 2,169 2,166
Other Assets..................................................................... 690 664
Non-current Assets--Chemicals Discontinued Operations............................ 1,713 1,715
------- -------
Total Assets..................................................................... $12,214 $11,237
------- -------
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities:
Accounts payable............................................................. $ 479 $ 479
Accrued liabilities.......................................................... 1,253 1,431
Short-term debt.............................................................. 1,773 654
Chemicals Discontinued Operations............................................ 738 837
------- -------
Total Current Liabilities............................................ 4,243 3,401
------- -------
Long-Term Debt................................................................... 1,552 1,608
Deferred Income Taxes............................................................ 162 102
Postretirement Liabilities....................................................... 602 594
Other Liabilities................................................................ 498 509
Non-current liabilities--Chemicals Discontinued Operations....................... 1,330 1,333
Shareowners' Equity:
Common stock (authorized: 850,000,000 shares, par value $2)
Issued, 821,970,970 shares in 1997 and 1996.............................. 1,644 1,644
Additional contributed capital........................................... 84 65
Treasury stock, at cost (235,740,687 shares in 1997
and 237,594,831 shares in 1996)........................................ (2,643) (2,661)
Reserve for ESOP debt retirement<F1>......................................... (172) (174)
Net unrealized investment holding gains...................................... 11 11
Accumulated currency adjustment.............................................. (78) 10
Reinvested earnings.......................................................... 4,981 4,795
------- -------
Total Shareowners' Equity............................................ 3,827 3,690
------- -------
Total Liabilities and Shareowners' Equity........................................ $12,214 $11,237
------- -------
<FN>
<F1> ESOP stands for Employee Stock Ownership Plan.
</TABLE>
44
<PAGE> 46
MONSANTO COMPANY AND SUBSIDIARIES
<TABLE>
STATEMENT OF CONSOLIDATED CASH FLOW
(UNAUDITED)
(DOLLARS IN MILLIONS)
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1997 1996
---- ----
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Operating Activities:
Income from continuing operations........................................................ $ 206 $ 222
Add income taxes--continuing operations.................................................. 83 100
------ -----
Income from continuing operations before income taxes.................................... 289 322
Adjustments to reconcile to Cash Used by Continuing Operations:
Income tax payments.................................................................. (10) (103)
Items that did not use (provide) cash:
Depreciation and amortization.................................................... 103 102
Acquired in-process research and development..................................... 101
Other............................................................................ -- (5)
Working capital changes that provided (used) cash:
Accounts receivable.............................................................. (606) (518)
Inventories...................................................................... 20 34
Accounts payable and accrued liabilities......................................... (283) 94
Other............................................................................ (138) (54)
Other items.......................................................................... (79) (62)
------ -----
Cash Used in Continuing Operations........................................................... (603) (190)
Cash Used in Discontinued Operations......................................................... (71) (63)
------ -----
Total Cash Used in Operations................................................................ (674) (253)
------ -----
Investing Activities:
Property, plant and equipment purchases.................................................. (119) (104)
Seed company acquisitions and investments................................................ (244) (163)
Other acquisitions and investments....................................................... (78) (154)
Investment and property disposal proceeds................................................ 4 102
Discontinued operations--other........................................................... (7) (31)
------ -----
Cash Used in Investing Activities............................................................ (444) (350)
------ -----
Financing Activities:
Net change in short-term financing....................................................... 1,155 606
Long-term debt proceeds.................................................................. 2 109
Long-term debt reductions................................................................ (48) (133)
Treasury stock purchases................................................................. (171)
Dividend payments........................................................................ (88) (81)
Common stock issued under employee stock plans........................................... 18 76
Other financing activities............................................................... 19 45
------ -----
Cash Provided by Financing Activities........................................................ 1,058 451
------ -----
Decrease in Cash and Cash Equivalents........................................................ (60) (152)
Cash and Cash Equivalents:
Beginning of year........................................................................ 166 297
------ -----
End of period............................................................................ $ 106 $ 145
------ -----
</TABLE>
The effect of exchange rate changes on cash and cash equivalents was not
material.
45
<PAGE> 47
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN MILLIONS)
1. In December 1996, the Board of Directors ("Board") approved a plan to
spin off the company's chemicals business to shareowners by means of the
distribution of shares of a newly-formed, wholly-owned subsidiary, later named
Solutia Inc. ("Solutia"). Effective August 12, 1997, the Board declared a
dividend on September 1, 1997, to shareowners of record on August 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 shareholder approval. Shareowners approved the spinoff at
a special meeting held August 18, 1997, and the spinoff became effective
September 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 flows
and financial position of the chemicals business as discontinued operations.
Discontinued operations also include certain other operations of the company's
chemicals business which have been sold. Operating results for discontinued
operations were:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
1997 1996
---- ----
<S> <C> <C>
Net Sales............................................................. $699 $692
---- ----
Income before income taxes............................................ $105 $ 60
Income taxes.......................................................... 37 22
---- ----
Net Income............................................................ $ 68 $ 38
</TABLE>
Interest expense of $14 million and $12 million for the first quarter of
1997 and 1996, respectively, has been allocated to the operating results of
Solutia based on debt assumed by Solutia.
To consummate the spinoff, Monsanto contributed certain assets to Solutia,
and Solutia assumed certain liabilities of Monsanto beginning June 1, 1997. In
addition to the assets and liabilities reported in the Statement of
Consolidated Financial Position as discontinued operations as of March 31, 1997
and December 31, 1996, the assets contributed to Solutia and liabilities
assumed by Solutia included a joint venture interest in Monsanto's elemental
phosphorus business, cash of $75 million and short-term debt of $1,000 million.
Also in connection with the spinoff, Solutia's ESOP received 2.4 million shares
of unallocated company common stock held by the ESOP, and also 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 of approximately $120 million increased Monsanto's shareowners'
equity. The amount may be adjusted based upon the final determination of the
net liabilities assumed.
In connection with the spinoff, various agreements entered into by the
Company and Solutia allocated responsibility between them for various debts,
liabilities and obligations. These agreements provide that Solutia will
indemnify the Company for the liabilities assumed by Solutia pursuant to such
agreements.
The following notes relate to the continuing operations of Monsanto, unless
otherwise indicated.
2. In the first quarter of 1997, Monsanto completed the acquisitions of the
Asgrow Agronomics ("Asgrow") seed business from Empresas La Moderna S. A. and
acquired the remaining interest in a Brazilian foundation seed company for a
combined purchase price of approximately $250 million. The 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 estimated fair value of assets acquired and
liabilities assumed totaled approximately $400 million and $150 million,
respectively. The purchase price allocations are based upon preliminary
assumptions and are subject to revision. Monsanto recorded an aftertax charge
of $63 million, or $0.11 per share, in the first quarter of 1997, principally
related to the write-off of acquired research from Asgrow. The amount of this
write-off was determined by an independent valuation. Management does not
believe that the technological feasibility of the acquired in-process
technology has been established and that it has no alternative future uses.
Accordingly, the amounts allocated to in-process research and technology are
required to be expensed immediately under generally accepted accounting
principles.
46
<PAGE> 48
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In April 1997, Monsanto announced a definitive agreement to acquire the
remaining shares of Calgene, Inc. ("Calgene") that Monsanto did not already
own for $8.00 per share in cash, or approximately $240 million. Monsanto
extended a tender offer for the remaining shares of Calgene that was
conditioned upon the tender of a majority of the outstanding shares of Calgene
not owned by Monsanto and certain other conditions. At the expiration of the
tender offer on May 2, 1997, approximately 26.8 million shares were tendered.
As a result, Monsanto owned approximately 94 percent of the outstanding Calgene
shares. Monsanto expects to acquire the remaining shares at the same $8.00 per
share in cash. It is anticipated that a charge associated with acquired
research will be recorded in conjunction with the acquisition of these shares.
3. Earnings per share were computed using the weighted average number of
common shares and common share equivalents outstanding each period (602,615,901
and 598,410,185 in 1997 and 1996, respectively). Common share equivalents
(17,105,134 and 17,709,740 in 1997 and 1996, respectively) consist of common
stock issuable upon exercise of outstanding stock options. Earnings per share
assuming full dilution were not significantly different from the primary
amounts.
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128").
Under this new standard, the presentation of primary and fully diluted earnings
per share required by current standards is replaced by basic and diluted
earnings per share. Basic earnings per share measures operating performance
assuming no dilution from securities or contracts to issue common stock.
Diluted earnings per share measures operating performance giving effect to the
dilution that would occur when securities or contracts to issue common stock
are exercised or converted. This statement is effective for Monsanto for
financial statements issued after December 15, 1997. Pro forma earnings per
share computed under the provisions of FAS 128 would have been:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
1997 1996
---- ----
<S> <C> <C>
Basic earnings per share from continuing operations................... $0.35 $0.38
Diluted earnings per share from continuing operations................. $0.34 $0.37
</TABLE>
4. Components of inventories for continuing operations at March 31, 1997
and December 31, 1996 were as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
<S> <C> <C>
Finished goods........................................................ $ 679 $ 630
Goods in process...................................................... 285 287
Raw materials and supplies............................................ 341 333
------ ------
Inventories, at FIFO cost............................................. 1,305 1,250
Excess of FIFO over LIFO cost......................................... (66) (67)
------ ------
Total............................................................. $1,239 $1,183
------ ------
</TABLE>
5. 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. While the results of litigation cannot be predicted with certainty,
management believes, based upon the advice of Company counsel, that the final
outcome of such litigation will not have a material adverse effect on
Monsanto's consolidated financial position, profitability or liquidity in any
one year, as applicable.
47
<PAGE> 49
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. Segment data for the three months ended March 31, 1997 and 1996 were as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-------------------------------------------------------------
1997 1996
-------------------------- --------------------------
OPERATING OPERATING
NET INCOME NET INCOME
SALES (LOSS) SALES (LOSS)
----- --------- ----- ---------
<S> <C> <C> <C> <C>
Segment:
Agricultural Products............................... $ 868 $176 $ 689 $232
Nutrition and Consumer.............................. 397 93 389 72
Pharmaceuticals..................................... 515 56 476 61
Corporate & Other................................... 95 (27) 58 (24)
------ ---- ------ ----
Total................................................... $1,875 $298 $1,612 $341
------ ---- ------ ----
</TABLE>
In 1997, Monsanto created a new organizational structure that transferred
various businesses among segments. After the spinoff of Solutia on September 1,
1997, the company is reporting under the new organizational structure. Segment
information for 1997 and 1996 has been reclassified to conform to the current
presentation.
Financial information for the first quarter of 1997 and 1996 should not be
annualized. Monsanto's sales and operating income are historically higher
during the first half of the year, primarily because of the concentration of
generally more profitable sales from the Agricultural Products segment in the
first half of the year.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
The following review relates to the continuing operations of Monsanto,
unless otherwise indicated.
Note 6 of the Notes to Financial Statements indicates operating results by
operating unit, including the concentration of the generally more profitable
sales of Agricultural Products in the first half of the year.
RESULTS OF OPERATIONS--FIRST QUARTER 1997 COMPARED WITH THE FIRST QUARTER 1996
Net income for the first quarter of 1997 was $274 million, or $0.45 per
share, compared with net income of $260 million, or $0.43 per share, in the
first quarter of last year. Income from continuing operations was $206 million,
or $0.34 per share, compared with income from continuing operations of $222
million, or $0.37 per share, in the first quarter last year. As further
discussed in Note 2, first quarter results from continuing operations for 1997
included an aftertax charge of $63 million, or $0.11 per share, for acquired
in-process research and development, principally related to the acquisition of
Asgrow. Net sales of $1,875 million were 16 percent higher than the comparable
figure in 1996.
Net sales for Agricultural Products increased 26 percent from net sales in
the first quarter of 1996. The increase was driven by significantly higher
worldwide sales volumes of the family of Roundup(R) herbicides, with
particularly strong volume gains in Latin America and the U. S. The increased
volume can be attributed principally to favorable weather conditions, on
balance, in many key markets. In addition, certain marketing and incentive
programs helped to support the sales increase. The sales increase also
benefited from sales of Posilac(R) bovine somatotropin and from the
consolidation of the results of operations for Asgrow. Operating income for
Agricultural Products decreased $56 million, or 24 percent, compared with first
quarter operating income in 1996. However, as further described in Note 2,
operating income includes $101 million of pretax charges for acquired
in-process research and development, primarily associated with the acquisition
of Asgrow. If these charges were excluded, operating income in the first
quarter of 1997 would have increased 19 percent compared with operating income
in the first quarter of 1996. In addition to the effect of higher sales
volumes, operating income benefited from lower manufacturing costs. These
48
<PAGE> 50
MONSANTO COMPANY AND SUBSIDIARIES
positive factors were partially offset by higher marketing expenditures
associated with product launches and higher biotechnology research and
development spending.
Net sales for the Nutrition and Consumer segment in the first quarter of
1997 increased 2 percent when compared with sales for the first quarter last
year. First quarter 1997 sales benefited from higher sales of biogum and
lawn-and-garden products. These increases were partially offset by decreases in
tabletop sweeteners and aspartame, primarily due to lower sales volumes.
Operating income for Nutrition and Consumer increased significantly in the
first quarter of 1997 compared with operating income in the same period last
year, primarily because of lower operating expenses.
Pharmaceuticals' net sales for the first quarter of 1997 increased $39
million, or 8 percent, compared with net sales in the same period last year.
The sales increase was the result of higher sales volumes and pricing. Sales of
key products continued to drive performance. Combined sales of Daypro(R) and
Arthrotec(R) arthritis treatments increased 22 percent in the first quarter of
1997 compared with the first quarter of last year, primarily because of higher
sales volumes. First quarter sales of Ambien(R), a short-term treatment for
insomnia, declined moderately compared to a very strong quarter in 1996,
primarily because of the timing of wholesaler buying patterns. Operating income
in the first quarter of 1997 for Pharmaceuticals declined modestly compared
with the first quarter last year. The positive effect of the sales increase on
operating earnings was offset by higher research and development expenses
associated with new product candidates advancing to later and more expensive
phases of development. In addition, last year's first quarter operating income
benefited from cost-sharing alliances.
First-quarter 1997 sales for the Corporate and Other segment increased
significantly versus the prior-year quarter primarily due to the inclusion of
sales from Calgene's tomato business. 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.
For Monsanto, technological expenses in the first quarter of 1997 were
higher than the same period last year, principally because of higher research
and development expenses in the Agricultural Products and Pharmaceuticals
segments. "Other Income (Expense)--Net" increased primarily because amounts
in the first quarter last year included an aftertax charge of approximately $8
million for Monsanto's share of the purchased research and development costs
resulting from the equity investments in Calgene and DeKalb Genetics
Corporation.
CHANGES IN FINANCIAL CONDITION--MARCH 31, 1997 COMPARED WITH DECEMBER 31, 1996
Working capital (including discontinued operations) at March 31, 1997
decreased slightly to $923 million from $939 million at December 31, 1996,
primarily because of higher short-term debt, which was partially offset by a
seasonal increase in Agricultural Products' trade receivables and lower accrued
liabilities. The current ratio was 1.2 at March 31, 1997 compared to 1.3 at
year-end 1996. The percent of total debt to total capitalization increased to
46 percent at quarter-end compared with 38 percent at year-end 1996, primarily
because of the increase in short-term debt.
Cash used in continuing operations totaled a net $603 million in the first
quarter of 1997, compared with $190 million of net cash used in continuing
operations in 1996. The increase in cash used in continuing operations resulted
primarily from higher seasonal working capital levels for Agricultural Products
and significantly higher payouts associated with employee incentive programs.
The increased incentive payouts included the final payment of certain deferred
amounts related to the third year of a three-year incentive plan. Investing
activities in 1997 used $444 million, which includes the acquisition of Asgrow.
The increase in short-term financing was primarily used to fund Agricultural
Products' higher seasonal working capital levels and the Asgrow acquisition.
49
<PAGE> 51
Restated Financial Information for the Quarterly Period Ended June 30, 1997
50
<PAGE> 52
QUARTERLY PERIOD ENDED JUNE 30, 1997
FINANCIAL STATEMENTS
The restated Statement of Consolidated Income of Monsanto Company and
subsidiaries for the three months and six months ended June 30, 1997 and 1996,
the restated Statement of Consolidated Financial Position as of June 30, 1997
and December 31, 1996, the restated Statement of Consolidated Cash Flow for the
six months ended June 30, 1997 and 1996 and related Notes to Financial
Statements follow. In the opinion of management, these unaudited restated
consolidated financial statements contain all adjustments necessary to present
fairly the financial position, results of operations and cash flows for the
interim periods reported.
Unless otherwise indicated by the context, "Monsanto" means Monsanto
Company and consolidated subsidiaries, and "the Company" means Monsanto
Company only.
MONSANTO COMPANY AND SUBSIDIARIES
<TABLE>
STATEMENT OF CONSOLIDATED INCOME
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales................................................... $2,095 $1,847 $3,970 $3,459
Costs and Expenses:
Cost of Goods Sold.......................................... 866 737 1,657 1,394
Selling, General and Administrative Expenses................ 507 479 954 926
Technological Expenses...................................... 252 166 454 302
Acquired In-Process Research and Development................ 72 173
Amortization of Intangible Assets........................... 35 31 71 62
------ ------ ------ ------
Operating Income............................................ 363 434 661 775
Interest Expense............................................ (40) (37) (69) (65)
Interest Income............................................. 13 15 23 25
Other Income (Expense)--Net................................. 17 29 27 28
------ ------ ------ ------
Income from Continuing Operations Before Income Taxes....... 353 441 642 763
Income Taxes................................................ 103 125 186 225
------ ------ ------ ------
Income from Continuing Operations........................... 250 316 456 538
Income from Discontinued Operations......................... 74 49 142 87
------ ------ ------ ------
Net Income.................................................. $ 324 $ 365 $ 598 $ 625
------ ------ ------ ------
Earnings per Share
Continuing Operations................................... $ 0.41 $ 0.53 $ 0.75 $ 0.90
Discontinued Operations................................. 0.13 0.09 0.24 0.15
------ ------ ------ ------
Total............................................... $ 0.54 $ 0.62 $ 0.99 $ 1.05
------ ------ ------ ------
Dividends per Share......................................... $0.160 $0.150 $0.310 $0.288
------ ------ ------ ------
Weighted Average Number of Common and Common Equivalent
Shares (in millions)...................................... 606.5 597.6
------ ------
</TABLE>
51
<PAGE> 53
MONSANTO COMPANY AND SUBSIDIARIES
<TABLE>
STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(DOLLARS IN MILLIONS, EXCEPT PER SHARE)
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
-------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................................... $ 176 $ 166
Trade receivables, net of allowances of $55 in 1997 and $47 in 1996......... 2,454 1,515
Miscellaneous receivables and prepaid expenses.............................. 443 286
Deferred income tax benefit................................................. 269 282
Inventories................................................................. 1,164 1,183
Chemicals Discontinued Operations........................................... 939 908
------- -------
Total Current Assets................................................ 5,445 4,340
------- -------
Property, Plant and Equipment................................................... 4,634 4,428
Less Accumulated Depreciation................................................... 2,401 2,333
------- -------
Net Property, Plant and Equipment........................................... 2,233 2,095
------- -------
Investments in Affiliates....................................................... 272 257
Intangible Assets, net of accumulated amortization.............................. 2,258 2,166
Other Assets.................................................................... 727 664
Non-current Assets--Chemicals Discontinued Operations........................... 1,713 1,715
------- -------
Total Assets.................................................................... $12,648 $11,237
------- -------
LIABILITIES AND SHAREOWNERS' EQUITY
Current Liabilities:
Accounts payable............................................................ $ 603 $ 479
Accrued liabilities......................................................... 1,216 1,431
Short-term debt............................................................. 2,021 654
Chemicals Discontinued Operations........................................... 645 837
------- -------
Total Current Liabilities........................................... 4,485 3,401
------- -------
Long-Term Debt.................................................................. 1,551 1,608
Deferred Income Taxes........................................................... 97 102
Postretirement Liabilities...................................................... 637 594
Other Liabilities............................................................... 436 509
Non-current liabilities--Chemicals Discontinued Operations...................... 1,353 1,333
Shareowners' Equity:
Common stock (authorized: 850,000,000 shares, par value $2)
Issued, 821,970,970 shares in 1997 and 1996............................. 1,644 1,644
Additional contributed capital.......................................... 98 65
Treasury stock, at cost (232,471,639 shares in 1997
and 237,594,831 shares in 1996)....................................... (2,615) (2,661)
Reserve for ESOP debt retirement<F1>........................................ (166) (174)
Net unrealized investment holding gains..................................... 13 11
Accumulated currency adjustment............................................. (97) 10
Reinvested earnings......................................................... 5,212 4,795
------- -------
Total Shareowners' Equity........................................... 4,089 3,690
------- -------
Total Liabilities and Shareowners' Equity....................................... $12,648 $11,237
------- -------
<FN>
<F1> ESOP stands for Employee Stock Ownership Plan.
</TABLE>
52
<PAGE> 54
MONSANTO COMPANY AND SUBSIDIARIES
<TABLE>
STATEMENT OF CONSOLIDATED CASH FLOW
(UNAUDITED)
(DOLLARS IN MILLIONS)
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1997 1996
---- ----
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Operating Activities:
Income from continuing operations........................................... $ 456 $ 538
Add income taxes--continuing operations..................................... 186 225
------ ------
Income from continuing operations before income taxes....................... 642 763
Adjustments to reconcile to Cash Provided by (Used in) Continuing
Operations:
Income tax payments..................................................... (72) (221)
Items that did not use (provide) cash:
Depreciation and amortization expense............................... 227 202
Acquired in-process research and development expense................ 173
Other............................................................... 4 30
Working capital changes that provided (used) cash:
Accounts receivable................................................. (907) (862)
Inventories......................................................... 101 76
Accounts payable and accrued liabilities............................ (260) (75)
Other............................................................... (155) (42)
Other items............................................................. (68) 38
------ ------
Cash Used in Continuing Operations.............................................. (315) (91)
Cash Provided by (Used in) Discontinued Operations.............................. (23) 20
------ ------
Total Cash Used in Operations................................................... (338) (71)
------ ------
Investing Activities:
Property, plant and equipment purchases..................................... (273) (218)
Seed company acquisitions and investments................................... (245) (163)
Other acquisitions and investments.......................................... (338) (454)
Investment and property disposal proceeds................................... 16 131
Discontinued Operations..................................................... (33) (91)
------ ------
Cash Used in Investing Activities............................................... (873) (795)
------ ------
Financing Activities:
Net change in short-term financing.......................................... 1,367 1,035
Long-term debt proceeds..................................................... 8 129
Long-term debt reductions................................................... (61) (159)
Treasury stock purchases.................................................... (253)
Dividend payments........................................................... (182) (168)
Common stock issued under employee stock plans.............................. 55 106
Other financing activities.................................................. 34 76
------ ------
Cash Provided by Financing Activities........................................... 1,221 766
------ ------
Increase (Decrease) in Cash and Cash Equivalents................................ 10 (100)
Cash and Cash Equivalents:
Beginning of year........................................................... 166 297
------ ------
End of period............................................................... $ 176 $ 197
------ ------
</TABLE>
The effect of exchange rate changes on cash and cash equivalents was not
material.
53
<PAGE> 55
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN MILLIONS)
1. In December 1996, the Board of Directors ("Board") approved a plan to
spin off the company's chemicals business to shareowners by means of the
distribution of shares of a newly-formed, wholly-owned subsidiary, later named
Solutia Inc. ("Solutia"). Effective August 12, 1997, the Board declared a
dividend on September 1, 1997, to shareowners of record on August 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 shareholder approval. Shareowners approved the spinoff at
a special meeting held August 18, 1997, and the spinoff became effective
September 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 flows
and financial position of the chemicals business as discontinued operations.
Discontinued operations also include certain other operations of the company's
chemicals business which have been sold. Operating results for discontinued
operations were:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- --------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $757 $732 $1,456 $1,424
---- ---- ------ ------
Income before income taxes $111 $ 82 $ 216 $ 142
Income taxes 37 33 74 55
---- ---- ------ ------
Net Income $ 74 $ 49 $ 142 $ 87
</TABLE>
Interest expense of $15 million and $14 million for the second quarter of
1997 and 1996, respectively, and $29 million and $26 million for the six months
ended June 30, 1997 and 1996, respectively, has been allocated to the operating
results of Solutia based on debt assumed by Solutia.
To consummate the spinoff, Monsanto contributed certain assets to Solutia,
and Solutia assumed certain liabilities of Monsanto beginning June 1, 1997. In
addition to the assets and liabilities reported in the Statement of
Consolidated Financial Position as discontinued operations as of June 30, 1997
and December 31, 1996, the assets contributed to Solutia and liabilities
assumed by Solutia included a joint venture interest in Monsanto's elemental
phosphorus business, cash of $75 million and short-term debt of $1,000 million.
Also in connection with the spinoff, Solutia's ESOP received 2.4 million shares
of unallocated company common stock held by the ESOP, and also 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 of approximately $120 million increased Monsanto's shareowners'
equity. The amount may be adjusted based upon the final determination of the
net liabilities assumed.
In connection with the spinoff, various agreements entered into by the
Company and Solutia allocated responsibility between them for various debts,
liabilities and obligations. These agreements provide that Solutia will
indemnify the Company for the liabilities assumed by Solutia pursuant to such
agreements.
The following notes relate to the continuing operations of Monsanto, unless
otherwise indicated.
2. In the first quarter of 1997, Monsanto completed the acquisitions of the
Asgrow Agronomics ("Asgrow") seed business from Empresas La Moderna S. A. and
acquired the remaining interest in a Brazilian foundation seed company for a
combined purchase price of approximately $250 million. The 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 estimated fair value of assets acquired and
liabilities assumed totaled approximately $400 million and $150 million,
respectively. The purchase price allocations are based upon preliminary
assumptions and are subject to revision. Monsanto recorded an aftertax charge
of $63 million, or $0.11 per share, in the first quarter of 1997, principally
related to the write-off of acquired research from Asgrow. The amount of this
write-off was determined by an independent valuation. Management believes that
the technological feasibility of the acquired in-process technology has not
been established and that it has no alternative future uses.
54
<PAGE> 56
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Accordingly, the amounts allocated to in-process research and technology are
required to be expensed immediately under generally accepted accounting
principles.
In May 1997, Monsanto completed its acquisition of the remaining shares of
Calgene, Inc. ("Calgene") that Monsanto did not already own for $8.00 per
share in cash, or approximately $254 million. In conjunction with this
acquisition, Monsanto recorded a $72 million aftertax charge ($72 million
pretax), or $0.11 per share, in the second quarter of 1997 for acquired
in-process research and development. This charge was not tax effected because
the transaction was a stock acquisition rather than an asset purchase. The
estimated fair value of the assets acquired and liabilities assumed totaled
approximately $310 million and $56 million, respectively. 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 technology has not been established and that it has no alternative
future uses. Accordingly, the amounts allocated to in-process research and
technology are required to be expensed immediately under generally accepted
accounting principles.
3. Earnings per share were computed using the weighted average number of
common shares and common share equivalents outstanding each period (606,520,278
and 597,579,951 in 1997 and 1996, respectively). Common share equivalents
(19,544,947 and 17,752,303 in 1997 and 1996, respectively) consist of common
stock issuable upon exercise of outstanding stock options. Earnings per share
assuming full dilution were not significantly different from the primary
amounts.
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128").
Under this new standard, the presentation of primary and fully diluted earnings
per share required by current standards is replaced by basic and diluted
earnings per share. Basic earnings per share measures operating performance
assuming no dilution from securities or contracts to issue common stock.
Diluted earnings per share measures operating performance giving effect to the
dilution that would occur when securities or contracts to issue common stock
are exercised or converted. This statement is effective for Monsanto for
financial statements issued after December 15, 1997. Pro forma earnings per
share computed under the provisions of FAS 128 would have been:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- ------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic earnings per share from continuing
operations $0.43 $0.55 $0.78 $0.93
Diluted earnings per share from continuing
operations $0.41 $0.53 $0.75 $0.90
</TABLE>
4. Components of inventories for continuing operations at June 30, 1997 and
December 31, 1996 were as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
-------- ------------
<S> <C> <C>
Finished goods...................................... $ 579 $ 630
Goods in process.................................... 257 287
Raw materials and supplies.......................... 385 333
------ ------
Inventories, at FIFO cost........................... 1,221 1,250
Excess of FIFO over LIFO cost....................... (57) (67)
------ ------
Total........................................... $1,164 $1,183
------ ------
</TABLE>
55
<PAGE> 57
MONSANTO COMPANY AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. 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. While the results of litigation cannot be predicted with certainty,
management believes, based upon the advice of Company counsel, that the final
outcome of such litigation will not have a material adverse effect on
Monsanto's consolidated financial position, profitability or liquidity in any
one year, as applicable.
6. Segment data for the three months and six months ended June 30, 1997 and
1996 were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
------------------------------------------------------------
1997 1996
------------------------- -------------------------
OPERATING OPERATING
NET INCOME NET INCOME
SALES (LOSS) SALES (LOSS)
----- --------- ----- ---------
<S> <C> <C> <C> <C>
Segment:
Agricultural Products...................... $1,063 $387 $ 883 $342
Nutrition and Consumer..................... 409 9 457 87
Pharmaceuticals............................ 513 14 456 36
Corporate & Other.......................... 110 (47) 51 (31)
------ ---- ------ ----
Total.......................................... $2,095 $363 $1,847 $434
------ ---- ------ ----
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------------------------------------
1997 1996
------------------------- -------------------------
OPERATING OPERATING
NET INCOME NET INCOME
SALES (LOSS) SALES (LOSS)
----- --------- ----- ---------
<S> <C> <C> <C> <C>
Segment:
Agricultural Products...................... $1,931 $563 $1,572 $574
Nutrition and Consumer..................... 806 102 846 159
Pharmaceuticals............................ 1,028 70 932 97
Corporate & Other.......................... 205 (74) 109 (55)
------ ---- ------ ----
Total.......................................... $3,970 $661 $3,459 $775
------ ---- ------ ----
</TABLE>
In 1997, Monsanto created a new organizational structure that transferred
various businesses among segments. After the spinoff of Solutia on September 1,
1997, the company is reporting under the new organizational structure. Segment
information for 1997 and 1996 has been reclassified to conform to the current
presentation.
Financial information for the first six months of 1997 and 1996 should not
be annualized. Monsanto's sales and operating income are historically higher
during the first half of the year, primarily because of the concentration of
generally more profitable sales from the Agricultural Products segment in the
first half of the year.
56
<PAGE> 58
MONSANTO COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
The following review relates to the continuing operations of Monsanto,
unless otherwise indicated.
Note 6 of the Notes to Financial Statements indicates operating results by
operating unit, including the concentration of the generally more profitable
sales of Agricultural Products in the first half of the year.
RESULTS OF OPERATIONS--SECOND QUARTER 1997 COMPARED WITH THE SECOND QUARTER
1996
Net income for the second quarter of 1997 was $324 million, or $0.54 per
share, compared with net income of $365 million, or $0.62 per share, in the
second quarter of last year. Income from continuing operations for the second
quarter of 1997 was $250 million, or $0.41 per share, compared with income from
continuing operations of $316 million, or $0.53 per share, in the second
quarter of last year. As further discussed in Note 2, second quarter results
from continuing operations included an aftertax charge of $72 million, or $0.11
per share, for acquired in-process research and development related to the
acquisition of the remaining shares of Calgene. Net sales of $2,095 million
were 13 percent higher than the comparable figure in 1996.
Net sales for Agricultural Products increased 20 percent versus sales for
the same period last year to $1,063 million. Net sales in the second quarter of
1997 benefited from higher sales volumes of the family of Roundup(R)
herbicides. The increased sales volumes reflected continued strong worldwide
demand, with significant volume gains in Latin America, Canada and Australia.
The sales increase was also driven by licensing revenues associated with sales
of Roundup Ready(R) soybeans and cotton, Bollgard(R) insect-protected cotton
and Yieldgard(R) corn. In addition, the sales increase benefited from the
inclusion of Asgrow sales. Operating income for the segment increased $45
million, or 13 percent, from the prior year. However, as further discussed in
Note 2, operating income for Agricultural Products included a $21 million
pretax charge for the segment's share of acquired in-process research and
development associated with the acquisition of the remaining shares of
Calgene's cotton business. If this charge was excluded, operating income in the
second quarter of 1997 would have increased 19 percent compared with operating
income in the second quarter of 1996, primarily because of the effects of
higher sales volumes and lower manufacturing costs. This increase was partially
offset by higher research and development spending for biotechnology projects.
Net sales for the second quarter of 1997 for the Nutrition and Consumer
segment declined 11 percent compared to net sales for the same period last
year. These declines were primarily the result of lower sales volumes of
aspartame and tabletop sweeteners partially offset by the effect of higher
biogum sales volumes. Operating income for the segment declined $78 million
from the prior year. However, as further discussed in Note 2, operating income
for the Nutrition and Consumer sector included a $51 million pretax charge for
the segment's share of acquired in-process research and development associated
with the acquisition of the remaining shares of Calgene's oils business. If
this charge was excluded, operating income in the second quarter of 1997 would
have decreased $27 million, or 31 percent, compared with operating income in
the second quarter of 1996, primarily due to lower sales volumes.
Pharmaceutical net sales for the quarter increased 13 percent, or $57
million over the second quarter of 1996 to $513 million. The increase in net
sales was primarily the result of higher sales volumes for key products.
Combined second quarter sales of Ambien(R), a short-term treatment for
insomnia, and Daypro(R) and Arthrotec(R) arthritis treatments increased 48
percent versus sales of these products in the second quarter of last year. The
sales increase was partially offset by lower sales volumes of Verapamil
products. Operating income in the second quarter of 1997 of $14 million
decreased $22 million versus the second quarter of 1996. Operating income was
negatively affected by higher research and development spending as five new
product candidates have moved into the later, more expensive phase III clinical
trials. In addition, second quarter results in 1996 benefited from cost-sharing
alliance payments that were not repeated in the second quarter of 1997.
Second-quarter 1997 sales for the Corporate and Other segment increased
significantly versus the prior-year quarter primarily due to the inclusion of
sales from Calgene's tomato business. 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. The segment recorded
second-quarter operating losses of $47 million and $31 million
57
<PAGE> 59
MONSANTO COMPANY AND SUBSIDIARIES
in 1997 and 1996, respectively. The increased operating loss in
quarter-to-quarter comparisons was primarily due to increased spending on
growth initiatives.
For Monsanto, technological expenses for the second quarter of 1997 were
higher than the comparable period in 1996, primarily because of the
aforementioned increases in research and development expenses in the
Agricultural Products and Pharmaceuticals segments. The increase in selling,
general and administrative expenses for Monsanto in the second quarter of 1997
over those in the second quarter of last year resulted, in part, because of the
addition of administrative expenses associated with Asgrow and Calgene.
Expenses for these businesses were not part of the Monsanto's consolidated
administrative expense totals in 1996. "Other Income (Expense)--Net" for the
second quarter of 1997 reflected an increase in income from equity affiliates.
However, the quarter-to-quarter comparison was affected by a gain on the sale
of certain pharmaceutical assets that was recorded in the second quarter last
year.
RESULTS OF OPERATIONS--FIRST SIX MONTHS 1997 COMPARED WITH FIRST SIX MONTHS
1996
Net income for the first six months of 1997 was $598 million, or $0.99 per
share, compared with net income of $625 million, or $1.05 per share, in the
first six months of last year. Income from continuing operations for the first
six months of 1997 was $456 million, or $0.75 per share, compared with income
from continuing operations of $538 million, or $0.90 per share, in the first
six months of last year. As further discussed in Note 2, results for the first
six months of 1997 included aftertax charges totaling $135 million, or $0.22
per share for acquired in-process research and development, principally related
to the Asgrow and Calgene acquisitions. Net sales of $3,970 million were 15
percent higher than the comparable figure in 1996.
Net sales for Agricultural Products increased $359 million, or 23 percent,
during the first six months of 1997 compared to the same period in 1996. The
increase in net sales in 1997 was primarily the result of higher worldwide
sales volumes of Roundup(R) herbicide. The sales increase also reflects higher
sales of crops developed through biotechnology including Roundup Ready(R)
soybeans, canola and cotton and Bollgard(R) insect-protected cotton and
Yieldgard(R) corn. In addition, the sales increase benefited from the inclusion
of Asgrow sales. Operating income in 1997 decreased $11 million, or 2 percent,
compared with the results for the first six months of 1996. However, as further
described in Note 2, operating income includes $122 million of pretax charges
for acquired in-process research and development, primarily associated with the
acquisition of Asgrow and the Agricultural Products segment's share of the
remaining equity interest in Calgene. If these charges were excluded, operating
income in the first half of 1997 would have increased $111 million, or 19
percent. In addition to the effect of higher sales volumes, operating income
benefited from lower manufacturing costs. These positive factors were partially
offset by higher marketing expenditures associated with product launches and
higher biotechnology research and development spending.
Net sales for the Nutrition and Consumer segment decreased 5 percent in the
first half of 1997 compared to the first half of 1996. Sales of tabletop
sweeteners and aspartame in the first six months of 1997 declined from the same
period last year, primarily because of lower sales volumes. These decreases
were partially offset by higher sales volumes of biogum products. Operating
income for Nutrition and Consumer decreased $57 million in the first half of
1997 compared with the first six months of 1996. However, as further described
in Note 2, operating income includes $51 million of pretax charges for acquired
in-process research and development associated with segment's share of the
remaining equity interest in Calgene. If these charges were excluded, operating
income in the first half of 1997 would have declined slightly compared to
first-half operating income last year, primarily because of the effect of the
lower sales volumes, partially offset by lower operating expenses.
Pharmaceuticals' net sales for the first half of 1997 increased $96 million
over net sales in the same period last year. These increases can be attributed
to higher sales volumes of Ambien(R), Daypro(R) and Arthrotec(R). In the first
six months of 1997, sales of these products increased 25 percent over sales for
the same period in 1996. The sales increase was partially offset by lower sales
volumes of Verapamil products. Operating income for the first six months of
1997 declined $27 million compared to the first six months of 1996. Operating
income was negatively affected by higher research and development expenses
associated with new product candidates advancing to later and more expensive
phases of development. In addition, operating income in the first half of last
year benefited from cost-sharing alliances.
58
<PAGE> 60
MONSANTO COMPANY AND SUBSIDIARIES
Year-to-date 1997 sales for the Corporate and Other segment increased
significantly versus the prior-year six-month period primarily due to the
inclusion of sales from Calgene's tomato business. 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.
The segment recorded an operating loss of $74 million for the first six months
of 1997 compared to a $55 million loss for the same period in 1996. The
increased operating loss was primarily due to increased spending on growth
initiatives.
For Monsanto, technological expenses for the first half of 1997 were higher
than the comparable period in 1996, primarily because of the increase in
research and development expenses in the Agricultural Products and
Pharmaceuticals segments. The increase in selling, general and administrative
expenses for Monsanto in the first half of 1997 over those in the comparable
period of last year resulted, in part, because of the addition of
administrative expenses associated with Asgrow and Calgene. Expenses for these
businesses were not part of the Monsanto's consolidated administrative expense
totals in 1996.
CHANGES IN FINANCIAL CONDITION--JUNE 30, 1997 COMPARED WITH DECEMBER 31, 1996
Working capital (including discontinued operations) at June 30, 1997
increased to $960 million from $939 million at December 31, 1996, primarily
because of a seasonal increase in trade receivables, financed through an
increase in short-term debt. The current ratio was 1.2 at June 30, 1997 and 1.3
at year-end 1996. The percent of total debt to total capitalization increased
to 47 percent at June 30, 1997 versus 38 percent at year-end 1996 primarily
because of the increase in short-term debt.
Cash used in continuing operations totaled a net $315 million in 1997,
compared with $91 million in 1996. The increase in cash used in continuing
operations resulted primarily from higher seasonal working capital requirements
for Agricultural Products and significantly higher payouts associated with
employee incentive programs and other reserves. The increased incentive payouts
included the final payment of certain deferred amounts related to the third
year of a three-year incentive plan. Investing activities in 1997 used $873
million, principally for the acquisition of Asgrow and remaining equity
interest in Calgene. The increase in short-term financing was primarily used to
finance acquisition activity and higher seasonal working capital levels for
Agricultural Products.
59
<PAGE> 61
SIGNATURES
Pursuant to the requirements 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 MICHAEL R. HOGAN
-----------------------------------
Michael R. Hogan
Vice President and Controller
(Principal Accounting Officer)
Date: December 5, 1997
60
<PAGE> 62
EXHIBIT INDEX
These Exhibits are numbered in accordance with the Exhibit Table of Item
601 of Regulation S-K.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1 Omitted--Inapplicable
2 Omitted--Inapplicable
4 Omitted--Inapplicable
16 Omitted--Inapplicable
17 Omitted--Inapplicable
20 Omitted--Inapplicable
23 1. Consent of Company Counsel
2. Consent of Independent Auditors
24 Omitted--Inapplicable
27 Omitted--Inapplicable
</TABLE>
61
<PAGE> 1
EXHIBIT 23.1
CONSENT OF COMPANY COUNSEL
I hereby 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, and 333-38599) and on Form
S-3 (No. 33-60189) of the references to Company counsel in the "Commitments and
Contingencies" note to the Company's financial statements for the year ended
December 31, 1996, in Note 5 to the Notes to Financial Statements for the
quarterly period ended March 31, 1997, and in Note 5 to the Notes to Financial
Statements for the quarterly period ended June 30, 1997, all as appearing in the
Company's Form 8-K Report filed on the date hereof. 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.
R. WILLIAM IDE III
General Counsel
Monsanto Company
Saint Louis, Missouri
December 5, 1997
62
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
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, and 333-38599) and on
Form S-3 (No. 33-60189) of our report dated February 28, 1997 (September 1,
1997 as to the effects of the spinoff described in the note on pages 24 and 25)
appearing in this Form 8-K Report.
DELOITTE & TOUCHE LLP
Saint Louis, Missouri
December 4, 1997
63
