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 19, 1999
MONSANTO COMPANY
------------------------------------
(Exact Name of Registrant as Specified in Charter)
Delaware 1-2516 43-0420020
------------------------ ----------- ---------------------
(State of Incorporation) (Commission (IRS Employer
File Number) Identification No.)
800 North Lindbergh Boulevard
St. Louis, Missouri 63167
- - ---------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (314) 694-1000
<PAGE>
ITEM 5. OTHER EVENTS
Pro forma financial information relating to the proposed merger
between Monsanto Company ("Monsanto"), a Delaware corporation, and Pharmacia &
Upjohn, Inc. ("PNU"), a Delaware corporation, is attached hereto as
Exhibit 99.1.
PNU's audited consolidated balance sheets as of December 31, 1997
and 1998 and audited consolidated statements of income and cash flow for the
years ended December 31, 1996, 1997 and 1998 are attached hereto as Exhibit
99.2.
PNU's unaudited balance sheet as of September 30, 1999 and unaudited
statements of income and cash flow for the nine months ended September 30, 1998
and September 30, 1999 are attached hereto as Exhibit 99.3.
Monsanto has announced information relating to its 1999 earnings, a
copy of which is attached hereto as Exhibit 99.4 and incorporated herein by
reference.
All stockholders should read the joint proxy statement/prospectus
concerning the merger that will be filed with the SEC and mailed to
stockholders. The joint proxy statement/prospectus will contain important
information that stockholders should consider before making any decision
regarding the merger. You will be able to obtain the joint proxy
statement/prospectus, as well as other filings containing information about
Monsanto and PNU, without charge, at the SEC's Internet site
(http://www.sec.gov). Copies of the joint proxy statement/prospectus and the SEC
filings that will be incorporated by reference in the joint proxy
statement/prospectus will also be available, without charge, by contacting the
Secretary of the appropriate company.
CERTAIN INFORMATION CONCERNING PARTICIPANTS
Monsanto and certain other persons named below may be deemed to be
participants in the solicitation of proxies of Monsanto stockholders to approve
the merger. The participants in this solicitation may include the directors of
Monsanto (Robert B. Shapiro, Richard U. De Schutter, Michael Kantor, Gwendolyn
S. King, Philip Leder, M.D., Jacobus F.M. Peters, John S. Reed, John E. Robson,
William D. Ruckelshaus and Hendrik A. Verfaillie); the following executive
officers of Monsanto: Robert B. Shapiro (Chairman of the Board and Chief
Executive Officer), Hendrik A. Verfaillie (President), Richard U. De Schutter
(Vice Chairman), Gary L. Crittenden (Senior Vice President and Chief Financial
Officer), R. William Ide III (Senior Vice President, General Counsel and
Secretary), Arnold W. Donald (Senior Vice President), Steven L. Engelberg
(Senior Vice President), David L. Morley (Senior Vice President), Philip
Needleman, Ph.D. (Senior Vice President), Joan H. Walker (Senior Vice
President), Robert T. Fraley, Ph.D. (Co-President, Agricultural Sector), Hugh
Grant (Co-President, Agricultural Sector), Nick E. Rosa (Senior Vice President),
Donna A. Kindl (Senior Vice President), Bruce P. Bickner (Co-President, Global
Seed Group), Martin E. Blaylock (Vice President), Ganesh M. Kishore, Ph.D.
(Co-President, Nutrition and Consumer Products Sector), Alan L. Heller
(Co-President, G.D. Searle & Co.) and Richard B. Clark (Vice President and
Controller); and the following other members of management and employees of
Monsanto: A. Nicholas Filippello, Ph.D. (Vice President, Investor Relations),
Ann Gualtieri (Investor Relations), Scarlett Lee Foster (Public Affairs), Andrew
J. Kuchan (Investor Relations), Jeff Bergau (Public Affairs) and Daniel F.
Verakis (Public Affairs). As of the date of this communication, none of the
foregoing participants individually beneficially owns in excess of 1% of
Monsanto's common stock or in the aggregate in excess of 1% of Monsanto's common
stock.
Except as disclosed above, to the knowledge of Monsanto, none of the
directors or executive officers of Monsanto or the employees or other
representatives of Monsanto named above has any interest, direct or indirect, by
security holdings or otherwise, in Monsanto.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial statements of businesses acquired.
Not applicable.
(b) Pro forma financial information.
Not applicable.
(c) Exhibits. The following exhibits are filed as part of this report:
--------
99.1 Pro forma financial information relating to the proposed
merger between Monsanto and PNU.
99.2 PNU's audited consolidated balance sheets as of December 31,
1997 and 1998 and audited consolidated statements of income
and cash flow for the years ended December 31, 1996, 1997 and
1998.
-2-
<PAGE>
99.3 PNU's unaudited balance sheet as of September 30, 1999 and
unaudited statements of income and cash flow for the nine
months ended September 30, 1998 and September 30, 1999.
99.4 Information relating to Monsanto's 1999 earnings.
23.1 Consent of PricewaterhouseCoopers LLP.
-3-
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned hereunto duly authorized.
Dated: January 25, 2000
MONSANTO COMPANY
By /s/ Barbara L. Blackford
-------------------------------------
Name: Barbara L. Blackford
Title: Chief Counsel and Assistant
Secretary
-4-
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- - ------ -----------
99.1 Pro forma financial information relating to the proposed merger
between Monsanto and PNU.
99.2 PNU's audited consolidated balance sheets as of December 31, 1997
and 1998 and audited consolidated statements of income and cash
flow for the years ended December 31, 1996, 1997 and 1998.
99.3 PNU's unaudited balance sheet as of September 30, 1999 and
unaudited statements of income and cash flow for the nine months
ended September 30, 1998 and September 30, 1999.
99.4 Information relating to Monsanto's 1999 earnings.
23.1 Consent of PricewaterhouseCoopers LLP.
-5-
Exhibit 99.1
UNAUDITED PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION
The following information has been provided to aid you in your analysis of
the financial aspects of the merger. This information was derived from the
audited consolidated financial statements of each of Monsanto and Pharmacia &
Upjohn for the years 1996 through 1998 and the unaudited consolidated condensed
financial statements of each of Monsanto and Pharmacia & Upjohn for the nine
months ended September 30, 1999. The information is only a summary and should be
read together with the historical financial statements and related notes
contained in the annual reports and quarterly reports and other information that
we have filed with the SEC and incorporated by reference.
POOLING OF INTERESTS ACCOUNTING TREATMENT
The merger is expected to be accounted for as a "pooling of interests." This
means that, for accounting and financial reporting purposes, the companies will
be treated as if they had always been combined. We have presented unaudited pro
forma condensed combined financial information that reflects the pooling of
interests method of accounting to provide a picture of what the businesses might
have looked like had they always been combined. The pro forma condensed combined
statements of income and pro forma condensed combined statement of financial
position were prepared by combining the historical amounts of each company. The
companies would have performed differently had they always been combined. You
should not rely on the unaudited pro forma condensed combined financial
information as being indicative of the historical results that would have
occurred or the future results that will occur after the merger.
PERIODS COVERED
The following unaudited pro forma combined condensed statement of financial
position as of September 30, 1999, is presented as if the merger had occurred on
September 30, 1999. The unaudited pro forma combined condensed statements of
income for the nine months ended September 30, 1999, and for the years ended
December 31, 1998, 1997 and 1996, are presented as if the companies had always
been merged.
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1999
(UNAUDITED)
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS COMBINED
----------------------- ----------- -----------
<S> <C> <C> <C> <C>
PHARMACIA
MONSANTO & UPJOHN
-------- --------
Net Sales.................................. $ 6,804 $ 5,310 $12,114
Costs, Expenses and Other:
Cost of Goods Sold....................... 2,450 1,421 3,871
Selling, General and Administrative 2,107 2,019 4,126
Expenses.................................
Research and Development ................ 1,008 1,050 2,058
Amortization of Intangible Assets........ 259 68 327
Restructuring, Merger and Special
Charges.................................. 10 32 42
Interest Expense......................... 287 41 328
Interest Income.......................... (30) (54) (84)
Other (Income) Expense, net.............. 13 (111) (98)
-------- -------- --------
Income from Continuing Operations Before
Income Taxes............................. 700 844 1,544
Income Tax Expense......................... 243 255 498
-------- -------- --------
Income from Continuing Operations.......... $ 457 $ 589 $ 1,046
======== ======== ========
Earnings from continuing operations per
common share:
Basic.................................... $ 0.72 $ 1.12 $ 0.83
Diluted.................................. $ 0.70 $ 1.09 $ 0.81
Weighted average shares outstanding:
Basic.................................... 632.6 517.2 98.3 1,248.1
Diluted.................................. 648.6 534.5 101.6 1,284.7
</TABLE>
See accompanying notes to unaudited pro forma condensed
combined financial information.
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME (LOSS)
YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS COMBINED
----------------------- ----------- -----------
<S> <C> <C> <C> <C>
PHARMACIA
MONSANTO & UPJOHN
----------- ----------
Net Sales.................................. $ 7,237 $ 6,758 $13,995
Costs, Expenses and Other:
Cost of Goods Sold....................... 2,912 2,031 4,943
Selling, General and Administrative
Expenses................................. 2,129 2,552 4,681
Research and Development................. 1,308 1,234 2,542
Acquired In-Process Research and
Development.............................. 402 0 402
Amortization and Adjustment of Intangible
Assets................................... 286 98 384
Restructuring, Merger and Special
Charges.................................. 153 92 245
Interest Expense......................... 210 26 236
Interest Income.......................... (47) (92) (139)
Other Income, net........................ (31) (160) (191)
-------- -------- --------
Income (Loss) from Continuing Operations
Before Income Taxes...................... (85) 977 892
Income Tax Expense......................... 46 346 392
-------- -------- --------
Income (Loss) from Continuing Operations... $ (131) $ 631 $ 500
======== ======== ========
Earnings (loss) from continuing operations
per common share:
Basic.................................... $ (0.22) $ 1.20 $ 0.40
Diluted.................................. $ (0.22) $ 1.17 $ 0.39
Weighted average shares outstanding:
Basic.................................... 603.5 517.5 98.4 1,219.4
Diluted.................................. 603.5 534.0 129.6 1,267.1
</TABLE>
See accompanying notes to unaudited pro forma condensed
combined financial information.
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS COMBINED
----------------------- ----------- -----------
<S> <C> <C> <C> <C>
PHARMACIA
MONSANTO & UPJOHN
----------- ----------
Net Sales.................................. $ 6,058 $ 6,586 $12,644
Costs, Expenses and Other:
Cost of Goods Sold....................... 2,382 2,047 4,429
Selling, General and Administrative
Expenses................................. 1,745 2,642 4,387
Research and Development................. 1,049 1,246 2,295
Acquired In-Process Research and
Development.............................. 633 0 633
Amortization of Intangible Assets........ 121 107 228
Restructuring, Merger and Special
Charges.................................. 0 316 316
Interest Expense......................... 135 33 168
Interest Income.......................... (45) (113) (158)
Other Income, net........................ (89) (127) (216)
-------- -------- --------
Income from Continuing Operations Before
Income Taxes............................. 127 435 562
Income Tax Expense (Benefit)............... (22) 177 155
-------- -------- --------
Income from Continuing Operations.......... $ 149 $ 258 $ 407
======== ======== ========
Earnings from continuing operations per common share:
Basic.................................... $ 0.26 $ 0.48 $ 0.33
Diluted.................................. $ 0.24 $ 0.48 $ 0.32
Weighted average shares outstanding:
Basic.................................... 590.2 516.0 98.0 1,204.2
Diluted.................................. 610.5 529.9 105.1 1,245.5
</TABLE>
See accompanying notes to unaudited pro forma condensed
combined financial information.
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(AMOUNTS IN MILLIONS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS COMBINED
----------------------- ----------- -----------
<S> <C> <C> <C> <C>
PHARMACIA
MONSANTO & UPJOHN
----------- ----------
Net Sales.................................. $ 4,862 $ 7,176 $12,038
Costs, Expenses and Other:
Cost of Goods Sold....................... 1,953 2,116 4,069
Selling, General and Administrative
Expenses................................. 1,540 2,453 3,993
Research and Development............... 657 1,283 1,940
Amortization and Adjustment of Intangible
Assets................................... 98 119 217
Restructuring, Merger and Special
Charges.................................. 312 585 897
Interest Expense......................... 83 56 139
Interest Income.......................... (51) (161) (212)
Other Income, net........................ (86) (93) $ 8(g)(2) (171)
-------- -------- -------- --------
Income from Continuing Operations Before
Income Taxes............................. 356 818 (8) 1,166
Income Tax Expense......................... 77 268 345
-------- -------- -------- --------
Income from Continuing Operations.......... $ 279 $ 550 $ (8) $ 821
======== ======== ======== ========
Earnings from continuing operations per common share:
Basic.................................... $ 0.48 $ 1.04 $ 0.68
Diluted.................................. $ 0.47 $ 1.03 $ 0.67
Weighted average shares outstanding:
Basic.................................... 581.2 515.1 97.9 1,194.2
Diluted.................................. 598.9 530.5 100.2 1,229.6
</TABLE>
See accompanying notes to unaudited pro forma condensed
combined financial information.
<PAGE>
PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL POSITION
SEPTEMBER 30, 1999
(UNAUDITED)
(AMOUNTS IN MILLIONS)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS COMBINED
----------------------- ----------- -----------
<S> <C> <C> <C> <C>
PHARMACIA
MONSANTO & UPJOHN
----------- ----------
ASSETS
Current assets:
Cash and cash equivalents................... $ 84 $ 1,245 $ 1,329
Short term investments...................... - 137 137
Receivables................................. 2,791 1,420 4,211
Inventories................................. 1,598 1,118 2,716
Other current assets........................ 1,174 776 1,950
-------- -------- --------
Total current assets........................ 5,647 4,696 10,343
Net property, plant and equipment........... 3,050 3,278 6,328
Intangible assets, net of accumulated
amortization................................ 4,645 1,176 5,821
Other assets................................ 1,055 1,308 $ 26(d) 2,389
Net assets of discontinued operations....... 1,586 0 1,586
-------- -------- -------- --------
Total assets................................ $15,983 $10,458 $ 26 $26,467
======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt............................. $ 915 $ 1,056 $ 1,971
Accounts payable............................ 472 333 805
Accrued liabilities......................... 2,168 1,857 $ 110(d) 4,135
-------- -------- -------- --------
Total current liabilities................... 3,555 3,246 110 6,911
Long-term debt.............................. 5,961 339 6,300
Other liabilities........................... 1,224 1,325 2,549
-------- -------- -------- --------
Total liabilities........................... 10,740 4,910 110 15,760
-------- -------- -------- --------
Shareholders' equity:
Preferred stock (Monsanto).................. 0 0 273(g)(3) 273
Preferred stock (Pharmacia & Upjohn)........ 0 273 (273)(g)(3) 0
Common stock issued......................... 1,694 5 1,231(g)(l) 2,930
Additional contributed capital.............. 1,467 1,492 (1,170)(g)(l) 1,789
Treasury stock.............................. (2,449) (9) 9(g)(l) (2,449)
Retained earnings........................... 5,101 5,501 (154)(d) 10,448
Reserve for ESOP debt retirement............ (91) (247) (338)
Accumulated other comprehensive loss........ (479) (1,467) (1,946)
-------- -------- -------- --------
Total shareholders' equity.................. 5,243 5,548 (84) 10,707
-------- -------- -------- --------
Total liabilities, and shareholders' equity. $15,983 $10,458 $ 26 $26,467
======== ======== ======== ========
</TABLE>
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(a) BASIS OF PRESENTATION
The unaudited pro forma condensed combined statements of income (loss) are
based on the unaudited consolidated condensed financial statements of each of
Monsanto and Pharmacia & Upjohn for the nine months ended September 30, 1999,
and the audited consolidated financial statements of each of Monsanto and
Pharmacia & Upjohn for the years ended December 31, 1998, 1997 and 1996. The
unaudited pro forma condensed combined statement of financial position is based
on the unaudited consolidated condensed financial statements of each of Monsanto
and Pharmacia & Upjohn at September 30, 1999. In the opinion of Monsanto and
Pharmacia & Upjohn management, all adjustments and/or disclosures necessary for
a fair presentation of the pro forma data have been made. These unaudited pro
forma combined condensed financial statements are presented for illustrative
purposes only and are not necessarily indicative of the operating results or the
financial position that would have been achieved had the merger been consummated
as of the dates indicated or of the results that may be obtained in the future.
(b) ACCOUNTING POLICIES AND FINANCIAL STATEMENT CLASSIFICATIONS
The accounting policies of Monsanto and Pharmacia & Upjohn are substantially
comparable, except for their accounting policies for the sale of stock by a
subsidiary as described in "Other Pro Forma Adjustments". Certain revenues,
costs and other deductions in the consolidated statements of earnings of
Pharmacia & Upjohn have been reclassified to conform to the line item
presentation in the pro forma condensed combined statements of income (loss).
Certain assets and liabilities in the consolidated statements of financial
position of Monsanto and Pharmacia & Upjohn have been reclassified to conform
to the line item presentation in the pro forma condensed combined statement of
financial position.
(c) PRO FORMA EARNINGS PER SHARE
The pro forma combined basic earnings per share is based on income from
continuing operations less preferred stock dividends ($10 million for the nine
months ended September 30, 1999, and $13 million for each of the years ended
December 31, 1998, 1997 and 1996, respectively) and the weighted average number
of outstanding common shares. Diluted income per share includes the dilutive
effect of incentive stock options, convertible preferred stock and certain
convertible debt securities. The weighted average number of outstanding common
shares has been adjusted to reflect the exchange ratio of 1.19 shares of
Monsanto common stock for each share of Pharmacia & Upjohn common stock.
(d) MERGER-RELATED EXPENSES
A one-time charge for direct incremental Merger-related transaction costs
will be recorded in the quarter in which the Merger is consummated. The direct
incremental Merger-related transaction costs consist principally of charges
related to investment banking fees, professional services, registration and
other regulatory costs (approximately $110 million) and stock compensation
arrangements (approximately $70 million before tax). The charges for stock
compensation arrangements consist of accounting charges related to certain
Monsanto stock options which were granted with exercise prices above the fair
market value of Monsanto Common Stock on the date such options were granted (the
"Premium Options"). Pursuant to the terms of the Premium Options, at
consummation of the Merger, the exercise price of such Premium Option will be
reduced to equal the fair market value on the date of grant.
(e) INTEGRATION-RELATED EXPENSES
Monsanto and Pharmacia & Upjohn expect to incur pre-tax charges to
operations, currently estimated to be between $500 and $800 million, to reflect
costs associated with combining the operations of the two companies. These costs
will be recorded subsequent to consummation of the merger. These amounts are
preliminary estimates and are therefore subject to change. Additional
unanticipated expenses may be incurred in the integration of the businesses of
Monsanto and Pharmacia & Upjohn. Although Monsanto and Pharmacia & Upjohn expect
that the elimination of duplicative expenses as well as the realization of other
efficiencies related to the integration of the businesses may result in cost
savings, no assurance can be given that these benefits will be achieved in the
near term or at all. The unaudited pro forma condensed combined financial
statements reflect neither the impact of these charges nor the benefits from the
expected synergies.
<PAGE>
(f) AGRICULTURAL INITIAL PUBLIC OFFERING
Monsanto and Pharmacia & Upjohn have announced an intention to reorganize the
Monsanto agricultural business, as a subsidiary of the combined company and sell
up to 19.9% of this subsidiary by means of an initial public offering. The
agricultural business would become a separate legal entity, with a stand-alone
board of directors and its own publicly traded stock upon completion of the
intended initial public offering.
At the time of the initial public offering for a minority interest in the
agricultural business, any difference between the fair market value (expressed
as the offering price) and the net book value of the minority interest at the
time of the offering will be recorded as an adjustment to stockholders' equity.
No price for the intended offering has been established. Subsequent to an
offering, the combined company would reflect a minority interest in the equity
of a consolidated subsidiary on its statement of financial position and a
minority interest in the earnings of a consolidated subsidiary on its statement
of income.
(g) OTHER PRO FORMA ADJUSTMENTS
(1) A pro forma adjustment has been made to reflect the assumed issuance of
approximately 618 million shares of Monsanto common stock in exchange for all of
the outstanding Pharmacia & Upjohn common stock (based on the exchange ratio of
1.19). The actual number of shares of Monsanto common stock to be issued in
connection with the merger will be based on the number of shares of Pharmacia &
Upjohn common stock issued and outstanding at the effective time.
(2) In 1996, Pharmacia & Upjohn recorded a gain of $8 million on the issuance
of new shares by one of its subsidiaries in an initial public offering. The
accounting policy of Monsanto for this type of transaction requires that the
resulting gain be recorded as a credit to shareowners' equity rather than as
income. Therefore, the pro forma condensed combined statement of income for the
year ended December 31, 1996, has been adjusted to conform accounting policies
and eliminate the gain that was recorded by Pharmacia & Upjohn.
(3) Under the merger agreement, each outstanding share of Pharmacia & Upjohn
convertible perpetual preferred stock will be converted into the right to
receive one share of Monsanto convertible perpetual preferred stock. The terms
of the Monsanto convertible perpetual preferred stock are substantially
identical to the terms of the Pharmacia & Upjohn convertible perpetual preferred
stock.
Exhibit 99.2
Report of Independent Accountants
to the Shareholders and Board of Directors, Pharmacia & Upjohn, Inc.
In our opinion, the consolidated balance sheets and the related consolidated
statements of earnings, shareholders' equity, and cash flows (PAGES 2 TO 25)
present fairly, in all material respects, the financial position of Pharmacia &
Upjohn, Inc. and its subsidiaries at December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of Pharmacia &
Upjohn, Inc. management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
February 10, 1999, except as to Note 1 relating to the pooling of interests with
SUGEN, Inc. which is as of August 31, 1999
1
<PAGE>
Consolidated Statements of Earnings
-----------------------------------------
Pharmacia & Upjohn, Inc. and subsidiaries
<TABLE>
<CAPTION>
======================================================================================================================
FOR THE YEARS ENDED DECEMBER 31 1998 1997 1996
- - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dollar amounts in millions, except per-share data
Net sales $6,758 $6,586 $7,176
Cost of products sold 2,031 2,047 2,116
Research and development 1,234 1,246 1,283
Selling, general and administrative 2,552 2,642 2,453
Merger and Restructuring 92 316 585
Interest Income (92) (113) (161)
Interest Expense 26 33 56
All other, net (62) (20) 26
- - ----------------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES 977 435 818
Provision for income taxes 346 177 268
- - ----------------------------------------------------------------------------------------------------------------------
NET EARNINGS $ 631 $ 258 $ 550
- - ----------------------------------------------------------------------------------------------------------------------
Earnings per common share:
Basic $1.20 $ .48 $1.04
Diluted $1.17 $ .48 $1.03
======================================================================================================================
</TABLE>
Consolidated results for all periods presented have been restated retroactively
for the effects of the August 1999 merger with SUGEN accounted for as a pooling
of interests. See Note 1.
The accompanying notes are an integral part of the consolidated financial
statements.
2
<PAGE>
Consolidated Balance Sheets
-----------------------------------------
Pharmacia & Upjohn, Inc. and subsidiaries
<TABLE>
<CAPTION>
======================================================================================================================
DECEMBER 31 1998 1997
- - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Dollar amounts in millions
CURRENT ASSETS:
Cash and cash equivalents $ 881 $ 799
Short-term investments 375 591
Trade accounts receivable, less allowance of $103 (1997: $89) 1,417 1,303
Inventories 1,032 958
Deferred income taxes 378 327
Other 469 418
- - ----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 4,552 4,396
Long-term investments 454 534
Properties, net 3,234 3,310
Goodwill and other intangible assets, net 1,238 1,287
Other noncurrent assets 865 930
- - ----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $10,343 $10,457
======================================================================================================================
CURRENT LIABILITIES:
Short-term debt $ 332 $ 401
Accounts payable 511 427
Compensation and compensated absences 268 188
Dividends payable 141 141
Income taxes payable 389 404
Other 1,234 1,142
- - ----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 2,875 2,703
Long-term debt 295 411
Guarantee of ESOP debt 218 240
Postretirement benefit cost 344 337
Deferred income taxes 238 362
Other noncurrent liabilities 777 826
- - ----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 4,747 4,879
======================================================================================================================
SHAREHOLDERS' EQUITY:
Preferred stock, one cent par value; authorized 100,000,000 shares, issued
Series A convertible 6,863 shares at stated value (1997: 6,996 shares) 277 282
Common stock, one cent par value; authorized 1,500,000,000 shares,
issued 518,797,031 shares (1997: 517,971,090 shares) 5 5
Capital in excess of par value 1,531 1,579
Retained earnings 5,334 5,265
ESOP-related accounts (254) (260)
Treasury stock (35) (48)
Accumulated other comprehensive income:
Currency translation adjustments (1,246) (1,298)
Unrealized investment gains, net 5 53
Minimum pension liability adjustment (21) --
- - ----------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 5,596 5,578
- - ----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $10,343 $10,457
======================================================================================================================
</TABLE>
Consolidated financial position for all periods presented has been restated
retroactively for the effects of the August 1999 merger with SUGEN accounted for
as a pooling of interests. See Note 1.
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
Consolidated Statements of Shareholders' Equity
-----------------------------------------
Pharmacia & Upjohn, Inc. and subsidiaries
<TABLE>
<CAPTION>
======================================================================================================================
FOR THE YEARS ENDED DECEMBER 31 1998 1997 1996
- - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dollar amounts in millions
PREFERRED STOCK:
Balance at beginning of year $ 282 $ 287 $ 291
Redemptions and conversions (5) (5) (4)
- - ----------------------------------------------------------------------------------------------------------------------
Balance at end of year 277 282 287
- - ----------------------------------------------------------------------------------------------------------------------
COMMON STOCK:
Balance at end of year 5 5 5
- - ----------------------------------------------------------------------------------------------------------------------
CAPITAL IN EXCESS OF PAR VALUE:
Balance at beginning of year 1,579 1,563 1,539
Stock option, incentive and dividend reinvestment plans (56) (20) 12
Offering to the public, net of issuance costs of $2 and $2, respectively -- 30 23
Debt converted to equity with conversions of senior custom convertible notes 10 -- --
Retirements, conversions and other (2) 6 (11)
- - ----------------------------------------------------------------------------------------------------------------------
Balance at end of year 1,531 1,579 1,563
- - ----------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS:
Balance at beginning of year 5,265 5,569 5,581
Net earnings 631 258 550
Dividends declared (549) (549) (549)
Dividends on preferred stock (net of tax) (13) (13) (13)
- - ----------------------------------------------------------------------------------------------------------------------
Balance at end of year 5,334 5,265 5,569
- - ----------------------------------------------------------------------------------------------------------------------
ESOP-RELATED ACCOUNTS:
Balance at beginning of year (260) (266) (272)
Third-party debt repayment 16 11 8
ESOP expense exceeding cash contributed (2) 5 --
Additional loan (5) (7) --
Rollover of interest on ESOP note receivable (3) (3) (2)
- - ----------------------------------------------------------------------------------------------------------------------
Balance at end of year (254) (260) (266)
- - ----------------------------------------------------------------------------------------------------------------------
TREASURY STOCK:
Balance at beginning of year (48) (8) (18)
Stock options and incentive plans 130 54 103
Purchases of treasury stock (117) (94) (93)
- - ----------------------------------------------------------------------------------------------------------------------
Balance at end of year (35) (48) (8)
- - ----------------------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Balance at beginning of year (1,245) (837) (697)
Other comprehensive loss (17) (408) (140)
- - ----------------------------------------------------------------------------------------------------------------------
Balance at end of year (1,262) (1,245) (837)
- - ----------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY $ 5,596 $ 5,578 $6,313
======================================================================================================================
COMPREHENSIVE INCOME (NET OF TAX):
Currency translation adjustments $ 52 $ (443) $ (127)
Unrealized investment gains (losses) (48) 35 (13)
Minimum pension liability adjustments (21) -- --
- - ----------------------------------------------------------------------------------------------------------------------
Other comprehensive loss (17) (408) (140)
Net earnings 631 258 550
- - ----------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME (LOSS) $ 614 $ (150) $ 410
======================================================================================================================
</TABLE>
Consolidated results for all periods presented have been restated retroactively
for the effects of the August 1999 merger with SUGEN accounted for as a pooling
of interests. See Note 1.
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
Consolidated Statements of Cash Flows
-----------------------------------------
Pharmacia & Upjohn, Inc. and subsidiaries
<TABLE>
<CAPTION>
======================================================================================================================
FOR THE YEARS ENDED DECEMBER 31 1998 1997 1996
- - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dollar amounts in millions
CASH FLOWS FROM OPERATIONS:
Net earnings $ 631 $ 258 $ 550
Adjustments to net earnings:
Depreciation 321 327 345
Amortization of intangibles 112 116 130
Restructuring 92 316 518
Cash expended on restructurings (140) (132) (344)
Loss on sale of nutrition 52 -- --
Net gains on sales of noncurrent assets 20 (35) (79)
Write-downs of investments, properties and intangibles 9 43 106
Deferred income taxes (153) (254) (102)
Net (earnings) loss from equity investments (57) 68 (5)
Other 11 17 (4)
Changes in:
Accounts receivable (net) (65) 196 (218)
Inventories (91) (127) (69)
Accounts payable 69 33 (25)
Income taxes payable (16) 107 52
Other current and noncurrent assets and liabilities 108 262 (70)
- - ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operations 903 1,195 785
- - ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS (REQUIRED) PROVIDED BY INVESTMENT ACTIVITIES:
Additions of properties (650) (580) (658)
Proceeds from sales of properties 37 70 50
Proceeds from sale of nutrition 332 -- --
Purchases of investments (691) (1,034) (1,578)
Proceeds from sales of investments 983 1,155 2,146
Other (3) (48) (6)
- - ----------------------------------------------------------------------------------------------------------------------
Net cash required by investment activities 8 (437) (46)
- - ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS (REQUIRED) PROVIDED BY FINANCING ACTIVITIES:
Proceeds from issuance of debt 60 58 38
Repayment of debt and ESOP guaranteed loan (243) (72) (410)
Net increase (decrease) in debt with initial maturity of 90 days or less (3) 26 33
Dividend payments (566) (567) (567)
Purchases of treasury stock (117) (95) (95)
Proceeds from stock options exercises 80 18 83
Proceeds from issuance of common stock, net 4 31 27
Other 3 2 (4)
- - ----------------------------------------------------------------------------------------------------------------------
Net cash required by financing activities (782) (599) (895)
- - ----------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (47) (26) (27)
- - ----------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 82 133 (183)
Cash and cash equivalents, beginning of year 799 666 849
- - ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 881 $ 799 $ 666
======================================================================================================================
Cash paid during the year for:
Interest (net of amounts capitalized) $ 22 $ 30 $ 61
Income taxes $ 398 $ 281 $ 287
Noncash investing activity:
Assets disposed of in exchange for equity securities $ 54 $ -- $ --
======================================================================================================================
</TABLE>
Consolidated results for all periods presented have been restated retroactively
for the effects of the August 1999 merger with SUGEN accounted for as a pooling
of interests. See Note 1.
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
Notes to Consolidated Financial Statements
Dollar amounts in millions, except per-share data
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements are presented on the basis of accounting
principles that are generally accepted in the United States. All professional
accounting standards that are effective as of December 31, 1998, have been taken
into consideration in preparing the financial statements. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make certain estimates and assumptions which affect the
reported earnings, financial position and various disclosures. Actual results
could differ from those estimates.
On August 31, 1999, the company completed its merger with SUGEN, Inc.
(Sugen) by exchanging approximately 10 million shares of its common stock for
all of the common stock of Sugen. Each share of Sugen common stock was exchanged
for .6091 of one share of Pharmacia & Upjohn (P&U) common stock. In addition,
terms on outstanding Sugen stock options, stock warrants, convertible debt, and
warrants on convertible debt were changed to convert Sugen shares to P&U shares
using the same exchange ratio.
The merger, a tax-free reorganization, was accounted for as a pooling
of interests under APB Opinion No. 16. As a result, all prior period
consolidated financial statements presented have been restated to include the
combined results of operations, financial position, and cash flows of both
companies as if Sugen had always been a part of P&U. There were no transactions
between P&U and Sugen prior to the combination. Immaterial reclassifications
were recorded to conform Sugen's financial statements to P&U's presentation.
The combined net sales of the company for the years ended 1998, 1997
and 1996 totaled $6,758, $6,586 and $7,176, respectively. These amounts
represent P&U's sales for the respective periods as Sugen did not have any sales
for these periods. The combined net income for the same periods equaled $631,
$258 and $550, respectively. These amounts represent P&U's net income of $691,
$323 and $562 for the respective periods combined with Sugen's net losses of
$40, $33 and $20. An adjustment was made in each year to reflect the tax benefit
of Sugen's net operating loss as if the companies had been combined for all
periods presented.
Principles of Consolidation
The consolidated financial statements include the accounts of the company and
all majority-owned subsidiaries. All material intercompany transactions and
balances have been eliminated in consolidation. Investments in affiliates which
are not majority owned are reported using the equity method and are recorded in
other noncurrent assets. Gains and losses resulting from the issuance of
subsidiaries' stock are recognized in consolidated earnings.
Currency Translation
The results of operations for non-U.S. subsidiaries, other than those located in
highly inflationary countries, are translated into U.S. dollars using the
average exchange rates during the year, while assets and liabilities are
translated using period-end rates. Resulting translation adjustments are
recorded as currency translation adjustments in shareholders' equity. For
subsidiaries in highly inflationary countries, currency gains and losses
resulting from translation and transactions are determined using a combination
of current and historical rates and are reported directly in the consolidated
statements of earnings.
Cash Equivalents
The company considers all highly liquid debt instruments with an original
maturity of 91 days or less to be cash equivalents.
Investments
In addition to cash equivalents, the company has investments in debt securities
that are classified in the consolidated balance sheet as short-term (restricted
bank deposits and securities that mature in more than 91 days but not more than
one year and securities with maturities beyond one year which management intends
to sell within one year) or long-term (maturities beyond one year). The company
also has investments in equity securities, all of which are classified as
long-term investments.
Investments are further categorized as being available for sale or
expected to be held to maturity. Investments categorized as available-for-sale
are marked to market based on fluctuations in the market values of the
securities, with the resulting
6
<PAGE>
adjustments, net of deferred taxes, reported as a component of other
comprehensive income in shareholder's equity until realized (see Note 2).
Investments categorized as held-to-maturity are carried at amortized cost,
without recognition of gains or losses that are deemed to be temporary, because
the company has both the intent and the ability to hold these investments until
they mature.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined by the
last-in, first-out (LIFO) method for substantially all U.S. inventories and the
first-in, first-out (FIFO) method for substantially all non-U.S.
inventories.
Properties
Property, plant and equipment are recorded at acquisition cost. Depreciation is
computed principally on the straight-line method for financial reporting
purposes, while accelerated methods are used for income tax purposes where
permitted. Maintenance and repair costs are charged to earnings as incurred
including repair costs associated with the year 2000 date recognition problem.
Costs of renewals and improvements are capitalized. Upon retirement or other
disposition of property, any gain or loss is included in earnings.
Consistent with prior years, purchased computer software is capitalized
and amortized over the software's useful life. Effective in 1998,
internally-developed software is also capitalized and amortized over its useful
life with the adoption of the American Institute of Certified Public
Accountants' (AICPA) Statement of Position (SOP) 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use." Prior to adoption,
the company expensed these costs as incurred. The effect of initially applying
the provisions of SOP 98-1 was not material to the consolidated financial
statements.
Goodwill and Other Intangibles
Goodwill represents the excess of the purchase cost over the fair value of net
assets acquired in a business or product acquisition and is presented net of
accumulated amortization. Amortization of goodwill is recorded on a
straight-line basis over periods ranging primarily from 5 to 20 years. The
company assesses the recoverability of goodwill when events or changes in
circumstances indicate that the carrying amount may be impaired. If an
impairment indicator exists, an estimate of future cash flows is developed and
compared to the carrying amount of the goodwill. If the expected undiscounted
cash flows are less than the carrying amount of the goodwill, an impairment loss
is recognized for the difference between the carrying amount of the goodwill and
discounted cash flows.
Rights acquired under patent are reported at acquisition cost.
Amortization is calculated on a straight-line basis over the remaining legal
lives of the patents. Other intangible assets are amortized over the useful
lives of those assets.
Product Liability
The company is self-insured for product liability exposures up to reasonable
risk retention levels where excess coverages have been obtained. Liability
calculations take into account such factors as specific claim amounts, past
experience with such claims, number of claims reported and estimates of claims
incurred but not yet reported. In addition to this base level of reserves,
individually significant contingent losses are accrued for in compliance with
applicable guidance. Product liability accruals are not reduced for expected
insurance recoveries.
Income Taxes
The company applies an asset and liability approach to accounting for income
taxes. Deferred tax liabilities and assets are recognized for the expected
future tax consequences of temporary differences between the financial statement
and tax bases of assets and liabilities using enacted tax rates in effect for
the years in which the differences are expected to reverse. The company records
deferred income taxes on subsidiaries' earnings that are not considered to be
permanently invested in those subsidiaries.
Currency Exchange Contracts
Forward currency exchange contracts, cross-currency interest-rate swaps, and
currency options (hereafter referred to as contracts) are held for purposes
other than trading. Contracts held to hedge anticipated transactions are marked
to market at each balance sheet date with resulting gains and losses recognized
in earnings. Contracts that hedge recorded assets and liabilities are valued at
the month-end exchange rate with resulting exchange gains and losses recognized
in earnings, offsetting the respective losses and
7
<PAGE>
gains recognized on the underlying recorded exposure. Any premium or discount is
amortized over the life of the contract. The carrying values of all contracts
are generally reported with other current assets or other current liabilities.
Gains or losses from currency transactions that are designated as hedges of
currency net investments are classified as currency translation adjustments in
shareholders' equity.
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires companies to record
derivatives on the balance sheet as assets and liabilities measured at fair
value. The accounting treatment of gains and losses resulting from changes in
the value of derivatives depends on the use of the derivative and whether it
qualifies for hedge accounting. The company will adopt SFAS No. 133 as required
no later than January 1, 2000, and is currently assessing the impact of adoption
on its consolidated financial statements.
Environmental Remediation Liabilities
In 1997, the company adopted SOP 96-1, "Environmental Remediation Liabilities,"
which provides additional guidance for recognizing, measuring and disclosing
environmental remediation liabilities. The effect of initially applying the
provisions of SOP 96-1 was not material to the consolidated financial
statements. The company accrues for these losses when they are probable and
reasonably estimable based on current law and existing technologies. The
estimated liability is reduced to reflect the anticipated participation of other
potentially responsible parties where such parties are considered solvent and it
is probable that they will pay their respective share of relevant costs. The
accruals are adjusted as further information develops or circumstances change.
Costs of future expenditures do not reflect any claims for recoveries and are
not discounted to their present value. Accruals for environmental liabilities
are classified in the consolidated balance sheets primarily as other noncurrent
liabilities.
Stock Based Compensation
Employee stock options are accounted for pursuant to Accounting Principles Board
Opinion (APB) No. 25, "Accounting for Stock Issued to Employees."
Reclassifications
Certain reclassifications have been made to conform prior periods' data to the
current presentation.
2 OTHER COMPREHENSIVE INCOME
Effective January 1, 1998, the company adopted SFAS No. 130, "Reporting
Comprehensive Income." The statement establishes standards for reporting
comprehensive income and its components. Comprehensive income is defined as all
nonowner changes in equity and is equal to net earnings plus other comprehensive
income (OCI). OCI for the company includes three components: changes in currency
translation adjustments, unrealized gains and losses on available-for-sale
securities, and minimum pension liability adjustments. The following table shows
the changes in each OCI component. Reclassification adjustments represent items
that are included in net earnings in the current period but previously were
reported in OCI. To avoid double counting these items in comprehensive income,
gains are subtracted from OCI, while losses are added.
<TABLE>
<CAPTION>
===================================================================
TAX
FOR THE YEAR ENDED BEFORE EXPENSE NET OF
DECEMBER 31, 1998 TAX OR (BENEFIT) TAX
- - -------------------------------------------------------------------
<S> <C> <C> <C>
Currency translation adjustments $ 51 $ (1) $ 52
- - -------------------------------------------------------------------
Unrealized investment (losses) (52) (20) (32)
Less: reclassification adjustments
for gains realized in net earnings 24 8 16
- - -------------------------------------------------------------------
Net unrealized investment (losses) (76) (28) (48)
- - -------------------------------------------------------------------
Minimum pension
liability adjustments (33) (12) (21)
- - -------------------------------------------------------------------
Other comprehensive (loss) $ (58) $ (41) $ (17)
===================================================================
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31, 1997
- - -------------------------------------------------------------------
<S> <C> <C> <C>
Currency translation adjustments $(446) $ -- $(446)
Less: reclassification adjustments
for (losses) realized in net earnings
from the sales of subsidiaries (3) -- (3)
- - -------------------------------------------------------------------
Net currency translation
adjustments (443) -- (443)
- - -------------------------------------------------------------------
Unrealized investment gains 85 40 45
Less: reclassification adjustments
for gains realized in net earnings 23 13 10
- - -------------------------------------------------------------------
Net unrealized investment gains 62 27 35
- - -------------------------------------------------------------------
Other comprehensive
(loss) income $(381) $ 27 $(408)
===================================================================
FOR THE YEAR ENDED
DECEMBER 31, 1996
- - -------------------------------------------------------------------
Currency translation adjustments $(128) $ (1) $(127)
- - -------------------------------------------------------------------
Unrealized investment gains 31 6 25
Less: reclassification adjustments
for gains realized in net earnings 52 14 38
- - -------------------------------------------------------------------
Net unrealized investment (losses) (21) (8) (13)
- - -------------------------------------------------------------------
Other comprehensive (loss) $(149) $ (9) $(140)
===================================================================
</TABLE>
3 RESTRUCTURING
In 1997, the company announced a comprehensive restructuring and turnaround
program that would result in restructuring charges of approximately $450 during
1997 and 1998. The company has structured the turnaround program in two phases
reflecting management development and approval of plans. The turnaround program
was initiated in the third quarter 1997 and has been scheduled to be materially
completed by December 31, 1999. The objectives of the turnaround program were to
significantly rationalize infrastructure, establish a global headquarters in New
Jersey, and eliminate duplicate resources in manufacturing, administration, and
research and development (R&D). The turnaround program mainly affects the
company's core pharmaceutical segments and corporate administration groups, with
minor restructuring of businesses included in the all other grouping (see Note
21). In the third and fourth quarters of 1997, the company recorded phase one
charges totaling $316. The second phase of the turnaround program was finalized
in the fourth quarter of 1998, resulting in an additional restructuring charge
of $92.
The charge of $92 recorded in 1998 was comprised of employee separation
costs of $68; write-downs of fixed assets and abandoned manufacturing projects
of $8; and other costs of $16.
The 1997 restructuring charge of $316 for the first phase of the
turnaround program primarily related to employee separation costs of $134;
write-downs of fixed assets and abandoned manufacturing projects of $162; and
other costs of $20.
The total restructuring charges for 1998 and 1997 included involuntary
employee separation costs for 580 and 1,320 employees worldwide, respectively.
The 1998 charge included elimination of positions in marketing and
administration of $55, R&D of $9, and manufacturing of $4. These amounts
included an adjustment of $16 of the phase one accruals, mainly attributable to
lower employee separation costs and, to a lesser extent, changes in plan
estimates. The 1997 charge included elimination of positions in marketing and
administration of $81, R&D of $22, and manufacturing of $31. As of December 31,
1998, the company had paid $101 in severance costs in connection with the 1998
and 1997 charges. The remaining balance for employee separation costs related to
the turnaround program was $101 at December 31, 1998 comprised mainly of charges
related to the phase two charge and remaining annuity separation payments for
the phase one
9
<PAGE>
charge. The company expects employee reductions for the 1998 and 1997 charges to
be substantially completed by December 31, 1999.
The 1998 and 1997 restructuring charges included asset write-downs for
excess manufacturing, administration, and R&D facilities totaling $8 and $162,
respectively. The 1998 amount included an adjustment of $15 of the phase one
accruals, mainly attributable to changes in plan estimates, favorable outcomes
on sales of facilities, and actual facility closure costs below the original
estimates. At December 31, 1998, facilities presently being marketed had a net
book value of $47. Fixed asset write-downs were based on appraisals less costs
to sell.
Other costs included in the 1998 and 1997 restructuring charges of $16
and $20, respectively, were primarily comprised of cancelled contractual lease
obligations and, to a lesser extent, demolition and other costs. Offsetting 1998
charges in this grouping was an adjustment of $6 related to all restructuring
charges prior to 1997. The company expects substantial completion of the
1997-1998 restructuring by December 31, 1999.
In 1996, the company recorded restructuring charges of $518 primarily
associated with the merger. The charges reflected the elimination of
approximately 3,500 positions in marketing and administration ($363), R&D ($59),
and manufacturing ($31); the elimination of duplicate facilities ($43); and
other exit costs resulting from the merger ($22). Implementation of the
restructuring plan was completed by December 31, 1997. Remaining reserves of $7
consist of annuity separation payments which will be paid by the first quarter
of 2000.
The following table displays a roll-forward of the liabilities for
business restructurings from December 31, 1996 to December 31, 1998:
<TABLE>
<CAPTION>
==============================================================
EMPLOYEE
SEPARATION
COSTS OTHER TOTAL
- - --------------------------------------------------------------
<S> <C> <C> <C>
Balance December 31, 1996 $ 201 $ 25 $ 226
Additions 134 20 154
Deductions (182) (25) (207)
- - --------------------------------------------------------------
Balance December 31, 1997 153 20 $ 173
Additions 68 16 84
Deductions (113) (12) (125)
- - --------------------------------------------------------------
Balance December 31, 1998 $ 108 $ 24 $ 132
- - --------------------------------------------------------------
</TABLE>
4 INCOME TAXES
The provision for income taxes included in the consolidated statements of
earnings consisted of:
<TABLE>
<CAPTION>
=========================================================
YEARS ENDED DECEMBER 31 1998 1997 1996
- - ---------------------------------------------------------
<S> <C> <C> <C>
CURRENTLY PAYABLE:
U.S. $ 68 $ 34 $ 171
Non-U.S. 432 429 214
- - ---------------------------------------------------------
Total currently payable 500 463 385
- - ---------------------------------------------------------
DEFERRED:
U.S. (46) (14) (108)
Non-U.S. (108) (272) (9)
- - ---------------------------------------------------------
Total deferred (154) (286) (117)
- - ---------------------------------------------------------
Provision for income taxes $ 346 $ 177 $ 268
=========================================================
</TABLE>
10
<PAGE>
Differences between the company's effective tax rate and the U.S. statutory tax
rate were as follows:
<TABLE>
<CAPTION>
================================================================
PERCENT OF PRETAX INCOME 1998 1997 1996
- - ----------------------------------------------------------------
<S> <C> <C> <C>
Statutory tax rate 35.0% 35.0% 35.0%
Lower rates in other
jurisdictions, net (4.6) (11.7) (4.0)
Goodwill amortization and other
non-deductible expenses 3.1 7.2 4.3
Valuation allowances associated
with Sugen merger 3.1 10.6 0
All other, net (1.2) (0.4) (2.5)
- - ----------------------------------------------------------------
Effective tax rate 35.4 40.7 32.8
================================================================
</TABLE>
The lower rates in other jurisdictions are principally attributable to
manufacturing operations in jurisdictions subject to more favorable tax rates.
Excluding restructuring and other specifically discussed items (litigation,
reacquisition of marketing rights and Biotech divestment), the annual effective
tax rate was 35 percent, 38 percent and 35 percent for 1998, 1997 and 1996,
respectively.
Deferred income taxes are in the consolidated balance sheets as follows:
<TABLE>
<CAPTION>
================================================================================
1998 1998 1997 1997
DECEMBER 31 ASSETS LIABILITIES ASSETS LIABILITIES
- - --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current $ 378 $ 49 $ 327 $ 3
Noncurrent $ 408 $238 $ 382 $362
- - --------------------------------------------------------------------------------
Components of deferred taxes were:
Property, plant and
equipment $ -- $210 $ -- $277
Inventory 172 -- 185 --
Compensation and
benefit plans 194 60 174 60
Swedish tax deferrals -- 31 -- 62
Tax loss and tax credit
carryforwards 307 -- 201 --
Environmental and product
liabilities 59 -- 107 --
Restructuring and
discontinued operations 111 -- 107 --
Tax on unremitted earnings -- 108 -- 121
All other 277 95 297 124
- - --------------------------------------------------------------------------------
Subtotal 1,120 504 1,071 644
Valuation allowances (117) -- (83) --
- - --------------------------------------------------------------------------------
Total deferred taxes $ 1,003 $504 $ 988 $644
- - --------------------------------------------------------------------------------
Net deferred tax assets $ 499 $ 344
================================================================================
</TABLE>
Valuation allowances have been provided for certain deferred tax assets that are
not likely to be realized. The changes in the valuation allowance were increases
of $34 and $13 for the years ended December 31, 1998 and 1997, respectively, and
a decrease of $84 for the year ended December 31, 1996. The increases in the
allowance during 1997 and 1998 were primarily due to certain tax credit
carryforwards which were not likely to be realized as a result of the Sugen
merger. During 1996, the valuation allowances decreased due to merger activities
in various countries which improved the likelihood of realizing the benefit of
the deferred tax assets.
Tax loss carryforwards of $220 have various expiration dates through
2018. At December 31, 1998, undistributed earnings of subsidiaries considered
permanently invested, for which deferred income taxes have not been provided,
were approximately $3,000.
11
<PAGE>
5 GAIN ON SALE OF MAJORITY INTEREST IN SUBSIDIARY
In December 1996, the company completed the sale of a portion of its holdings in
its wholly-owned subsidiary, Biacore International AB, through an initial public
offering, reducing the company's ownership to 41 percent. The investment in
Biacore, previously consolidated, is now accounted for using the equity method.
Biacore develops, manufactures, and markets advanced scientific instruments
employing affinity-based biosensor technology.
The global offering included 5.75 million total shares (or American
Depository Shares) at $16 per share. Of the total shares, 1.5 million were newly
issued and 4.25 million were sold by the company. The sale generated net
proceeds to the company of $57 and a gain of $55 recorded in 1996. The gain is
composed of an $8 gain on the issuance of new shares and a $47 gain on the sale
of existing shares.
6 BIOTECH AND NUTRITION DIVESTITURES
In August 1997, the company merged its biotechnology supply business, Pharmacia
Biotech, with Amersham Life Science, a division of Amersham International plc,
in a noncash transaction that did not result in the recognition of a gain or
loss. The merger created a new company, Amersham Pharmacia Biotech Ltd., of
which Pharmacia & Upjohn owns 45 percent and accounts for using the equity
method. In 1998, Pharmacia & Upjohn recorded a credit of $52 primarily
representing the company's share of Amersham Pharmacia Biotech's pretax
earnings. In 1997, the company recorded $79 in charges related to the Biotech
merger and subsequent restructuring of the new company. Of this total, $36
consisted of transaction costs to effect the merger and a write-off of certain
acquired research and development costs. The Biotech line item on the
consolidated statement of earnings includes these charges as well as the
company's share of Amersham Pharmacia Biotech's pretax earnings.
In December 1998, the company sold substantially all of its nutrition
business to Fresenius AG for a loss of $52. To comply with antitrust regulations
in Germany, operations there could not be sold. As of December 31, 1998, the
sale of the operations in China was still pending regulatory approval.
7 EARNINGS PER COMMON SHARE
Basic earnings per share is computed by dividing net earnings available to
holders of common stock by the weighted average number of shares of common stock
outstanding. Diluted earnings per share is computed assuming the exercise of
stock options and warrants, conversion of preferred stock and debt, and the
issuance of stock as incentive compensation to certain employees. Under these
assumptions, the weighted-average number of common shares outstanding is
increased accordingly, and net earnings is adjusted by the after-tax interest
effects of convertible debt and reduced by an incremental contribution to the
Employee Stock Ownership Plan (ESOP). This contribution is the after-tax
difference between (1) the income the ESOP would have received in preferred
stock dividends and (2) the dividend on the common shares assumed to have been
outstanding.
The following table reconciles the numerators and denominators of the basic and
diluted earnings per share computations:
<TABLE>
<CAPTION>
========================================================================================================================
1998 1998 1997 1997 1996 1996
YEARS ENDED DECEMBER 31 BASIC DILUTED BASIC DILUTED BASIC DILUTED
- - ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EPS numerator:
Net earnings $ 631 $ 631 $ 258 $258 $550 $ 550
Less: Preferred stock dividends, net of tax (13) -- (13) -- (13) --
Less: Interest effects on convertible instruments, -- 1 -- -- -- --
net of tax
Less: ESOP contribution, net of tax -- (5) -- (5) -- (5)
- - ------------------------------------------------------------------------------------------------------------------------
Income available to common shareholders $ 618 $ 627 $245 $253 $537 $ 545
- - ------------------------------------------------------------------------------------------------------------------------
EPS denominator:
Average common shares outstanding 518 518 516 516 515 515
Effect of dilutive securities:
Stock options and stock warrants -- 5 -- 3 -- 4
Convertible instruments and incentive compensation -- 11 -- 11 -- 11
- - ------------------------------------------------------------------------------------------------------------------------
Total shares 518 534 516 530 515 530
- - ------------------------------------------------------------------------------------------------------------------------
Earnings per share $1.20 $1.17 $ .48 $.48 $1.04 $1.03
========================================================================================================================
</TABLE>
12
<PAGE>
8 ACCOUNTS RECEIVABLE AND INVENTORIES
The following table displays a roll-forward of allowances for doubtful trade
accounts receivable from December 31, 1995 to December 31, 1998:
<TABLE>
<S> <C>
Balance December 31, 1995 $ 93
Additions - charged to expense 17
Deductions (15)
----
Balance December 31, 1996 95
Additions - charged to expense 11
Deductions (17)
----
Balance December 31, 1997 89
Additions - charged to expense 43
Deductions (29)
----
Balance December 31, 1998 $103
====
</TABLE>
Inventories valued on the LIFO method had an estimated replacement cost (FIFO
basis) of $521 at December 31, 1998, and $416 at December 31, 1997.
<TABLE>
<CAPTION>
===================================================================
DECEMBER 31 1998 1997
- - -------------------------------------------------------------------
<S> <C> <C>
Estimated replacement cost (FIFO basis):
Pharmaceutical and other finished products $ 558 $ 500
Raw materials, supplies and work in process 628 618
- - -------------------------------------------------------------------
Inventories (FIFO basis) 1,186 1,118
Less reduction to LIFO cost (154) (160)
- - -------------------------------------------------------------------
Inventories $1,032 $ 958
===================================================================
</TABLE>
9 INVESTMENTS
<TABLE>
<CAPTION>
===================================================================
DECEMBER 31 1998 1997
- - -------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS:
Available-for-sale:
Kingdom of Sweden debt instruments $242 $267
Government of Italy debt instruments -- 30
Government of Belgium debt instruments -- 10
Government of Norway debt instruments -- 48
U.S. Treasury securities and
other U.S. Government obligations 6 12
Certificates of deposit 5 65
Corporate notes 15 36
Corporate commercial paper 17 31
Other 9 81
- - -------------------------------------------------------------------
Total available-for-sale 294 580
Held-to-maturity 81 11
- - -------------------------------------------------------------------
Total short-term investments $375 $591
===================================================================
</TABLE>
Amortized cost of short-term investments classified as available-for-sale
approximates fair market value. Short-term investments classified as
held-to-maturity consist primarily of bank certificates of deposit with
amortized cost approximating fair market value.
13
<PAGE>
<TABLE>
<CAPTION>
======================================================================
UNREALIZED
--------------- CARRYING
LONG-TERM INVESTMENTS COST GAINS (LOSSES) VALUE
- - ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998:
Available-for-sale:
Equity securities $164 $ 29 $(23) $170
Mortgage-backed securities--
guaranteed by the
U.S. Government 144 4 -- 148
- - ----------------------------------------------------------------------
Total available-for-sale $308 $ 33 $(23) 318
Held-to-maturity 136
- - ----------------------------------------------------------------------
Total long-term investments $454
- - ----------------------------------------------------------------------
December 31, 1997:
Available-for-sale:
Equity securities $ 55 $77 $ -- $132
Mortgage-backed securities--
guaranteed by the
U.S. Government 179 4 -- 183
- - ----------------------------------------------------------------------
Total available-for-sale $234 $81 $ -- 315
Held-to-maturity 219
- - ----------------------------------------------------------------------
Total long-term investments $534
======================================================================
</TABLE>
The total of unrealized gains (net of deferred taxes) included in shareholders'
equity amounted to $5 at December 31, 1998, compared to $53 and $18 at December
31, 1997 and 1996, respectively.
During 1997 and 1996 the company sold debt securities in the
held-to-maturity category for the amortized cost of $25 and $70, respectively.
Because these sales were initiated through the call option of the issuer, which
effectively accelerates the maturity date of the security, no gain or loss was
realized. No sales of held-to-maturity securities occurred in 1998.
The proceeds realized from the sale of available-for-sale debt
securities were $254, $942 and $1,132 for 1998, 1997 and 1996, respectively.
Profits realized on these sales are recorded as interest income. During 1998,
1997 and 1996, the proceeds realized from the sale of available-for-sale equity
securities amounted to $53, $4 and $123. Profits realized on these sales are
recorded in other nonoperating income. Based on original cost, gains of $24, $23
and $52 were realized on all sales of available-for-sale securities in 1998,
1997 and 1996, respectively.
Long-term investments held to maturity are summarized as follows:
<TABLE>
<CAPTION>
=============================================================
1998 1998 1997 1997
FAIR AMORTIZED FAIR AMORTIZED
DECEMBER 31 VALUE COST VALUE COST
- - -------------------------------------------------------------
<S> <C> <C> <C> <C>
Guaranteed by the
U.S. Government $ 71 $ 71 $ 92 $ 83
Commonwealth of
Puerto Rico debt
instruments 35 35 73 71
Bank obligations:
Certificates of
deposit 10 10 15 15
Other 20 20 51 50
- - -------------------------------------------------------------
Long-term
investments held
to maturity $136 $136 $231 $219
=============================================================
</TABLE>
14
<PAGE>
At December 31, 1998, long-term mortgage-backed securities available for sale
had scheduled maturities ranging from 2001 to 2024. Scheduled maturities of
long-term securities to be held to maturity were from 2000 to 2022.
10 PROPERTIES, NET
<TABLE>
<CAPTION>
=========================================================
DECEMBER 31 1998 1997
- - ---------------------------------------------------------
<S> <C> <C>
Land $ 100 $ 92
Buildings and improvements 1,872 1,901
Equipment 3,078 3,044
Construction in process 730 794
Less allowance for depreciation (2,546) (2,521)
- - ---------------------------------------------------------
Properties, net $ 3,234 $ 3,310
=========================================================
</TABLE>
11 LINES OF CREDIT AND LONG-TERM DEBT
The company has a borrowing facility amounting to $500 which was unused as of
December 31, 1998. The facility is available through 2004 largely to support
commercial paper borrowings in the U.S. and Europe. While the facility does not
require compensating balances, it is subject to various fees. The company also
has uncommitted lines of credit amounting to $573 available with various
international banks, of which $546 were unused at December 31, 1998.
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
=========================================================
DECEMBER 31 1998 1997
- - ---------------------------------------------------------
<S> <C> <C>
5.875% Notes due 2000 $200 $200
6.182-6.843% Medium-Term Notes due 1999 80 238
0.818-11.85% Italian Government Loans
due 1999-2004 46 54
7.5% Industrial Revenue Bonds due 2023 40 40
3.78% Industrial Revenue Bonds due 2008 -- 6
5.0% Senior Custom Convertible Notes
due 2000 5 18
Other 23 28
Current maturities (99) (173)
- - ---------------------------------------------------------
Total long-term debt $295 $411
=========================================================
</TABLE>
Current maturities of long-term debt are included with short-term debt in the
consolidated balance sheets. Annual aggregate maturities of long-term debt
during the next five years are: 2000--$221; 2001--$11; 2002--$7; 2003--$5 and
2004--$51. The company has guaranteed $275 original principal amount of ESOP
9.79% notes due in 2004. At December 31, 1998, the balance of the guarantee was
$240 of which $22 was classified as current. Principal payments that began in
1995 cause the recognition of compensation expense (see Note 18). Annual
aggregate maturities of guaranteed debt during the five years subsequent to 1999
are: 2000--$28; 2001--$35; 2002--$44; 2003--$53 and 2004--$59. In September
1997, Sugen completed the sale of $18 principal amount of 5% Senior Custom
Convertible Notes due 2000 (the "1997 Notes"). The 1997 Notes are convertible
into shares of common stock. In connection with the issuance of the 1997 Notes,
Sugen issued warrants to purchase up to 202,525 equivalent shares of common
stock at an exercise price of $27.48 per equivalent share. Upon the occurrence
of certain events, at the election of the holders of the 1997 Notes, the company
may be required to redeem in cash all or a portion of the 1997 Notes at
redemption prices, which are at a premium to the face value of the 1997 Notes.
15
<PAGE>
Information regarding interest expense and weighted average interest
rates follows:
<TABLE>
<CAPTION>
=====================================================================
YEARS ENDED DECEMBER 31 1998 1997 1996
- - ---------------------------------------------------------------------
<S> <C> <C> <C>
Interest cost incurred $ 62 $ 64 $ 89
Less: Capitalized on construction (36) (31) (33)
- - ---------------------------------------------------------------------
Interest expense $ 26 $ 33 $ 56
- - ---------------------------------------------------------------------
Weighted average interest rate on
short-term borrowings at end
of period 6.36% 7.27% 5.99%
- - ---------------------------------------------------------------------
</TABLE>
12 COMMITMENTS AND OTHER CONTINGENT LIABILITIES
Future minimum payments under noncancellable operating leases at December 31,
1998, approximately 80 percent real estate and 20 percent equipment, are as
follows: 1999--$82; 2000--$62; 2001--$42; 2002--$33; 2003--$33 and later
years--$103. Capital asset spending committed for construction and equipment but
unexpended at December 31, 1998, was approximately $480.
The consolidated balance sheets include accruals for estimated product
litigation and environmental liabilities. The latter includes exposures related
to discontinued operations, including the industrial chemical facility and
several sites which, under the Comprehensive Environmental Response,
Compensation, and Liability Act, are commonly known as Superfund sites (see Note
13). The company's ultimate liability in connection with Superfund sites depends
on many factors, including the number of other responsible parties, their
financial viability, and the remediation methods and technology to be used.
Actual costs incurred may vary from the estimates given the inherent
uncertainties in evaluating environmental exposures.
With regard to its discontinued industrial chemical facility in North
Haven, Connecticut, the company may soon be required to submit a corrective
measures study report to the U.S. Environmental Protection Agency (EPA). As the
corrective action process progresses, it may become appropriate to reevaluate
the existing reserves designated for remediation in light of changing
circumstances. It is reasonably possible that a material increase in accrued
liabilities will be required. It is not possible, however, to estimate a range
of potential losses. Accordingly, it is not possible to determine what, if any,
exposure exists at this time.
13 LITIGATION
The company is involved in a number of legal and environmental proceedings.
These include a substantial number of product liability suits claiming damages
as a result of the use of the company's products and administrative and judicial
proceedings at approximately 50 "Superfund" sites.
While it is not possible to predict or determine the outcome of legal
actions brought against the company, or the ultimate cost of environmental
matters, the company continues to believe that any potentially unaccrued costs
and liabilities associated with such matters will not have a material adverse
effect on the company's consolidated financial position. Unless there is a
significant deviation from the historical pattern of resolution of these issues,
there should not be a material adverse effect on the company's consolidated
financial position, its results of operations or liquidity.
The company has been a party along with a number of other defendants
(both manufacturers and wholesalers) in several federal civil antitrust
lawsuits, some of which were consolidated and transferred to the Federal
District Court for the Northern District of Illinois. These suits, brought by
independent pharmacies and chains, generally allege unlawful conspiracy, price
discrimination and price fixing and, in some cases, unfair competition, and
specifically allege that the company and the other named defendants violated the
following: (1) the Robinson-Patman Act by giving substantial discounts to
hospitals, nursing homes, mail-order pharmacies and health maintenance
organizations ("HMOs") without offering the same discounts to retail drugstores,
and (2) Section I of the Sherman Antitrust Act by entering into illegal vertical
combination with other manufacturers and wholesalers to restrict certain
discounts and rebates so they benefited only favored customers. The Federal
16
<PAGE>
District Court for the Northern District of Illinois certified a national class
of retail pharmacies in November 1994. Similar actions by proposed retailer
classes have been filed in the state courts of Alabama, California, Minnesota,
Mississippi, and Wisconsin. Eighteen class action lawsuits seeking damages based
on the same alleged conduct have been filed in 14 states and the District of
Columbia. The plaintiffs claim to represent consumers who purchased prescription
drugs in those jurisdictions and four other states. Two of the lawsuits have
been dismissed. The company announced in 1998 that it reached a settlement with
the plaintiffs in the federal class action cases for $103. The company believes
that any potential remaining liability above amounts accrued will not have a
material adverse effect on the company's consolidated financial position, its
results of operations, or liquidity.
14 CURRENCY RISK MANAGEMENT
The company is exposed to currency exchange rate fluctuations related to certain
intercompany and third-party transactions, primarily intercompany sales from
Sweden and Italy to other European countries, the U.S. and Japan. The exposures
and related hedging program are managed centrally using forward currency
contracts, cross-currency swaps and currency options to hedge a portion of both
net recorded currency transaction exposures on the balance sheet as well as net
anticipated currency transactions. The company also has hedged part of its net
investment in Japan. Financial instruments for trading purposes are neither held
nor issued by the company.
The company's program to hedge net anticipated currency transaction
exposures is designed to protect cash flows from potentially adverse effects of
exchange rate fluctuations. At December 31, 1998, the contract amount of the
company's outstanding contracts used to hedge net transaction exposure was $690.
The aggregate net transaction gain /(loss) included in net income for the years
ended December 31, 1998, 1997 and 1996 related to foreign currency transaction
hedges was $15, $18, and $43, respectively. Of these contracts, 20 percent were
denominated in Japanese yen, 11 percent were denominated in U.S. dollars, 8
percent were denominated in German marks, and 17 percent were denominated in
mainly other European currencies all against Swedish kronor; 10 percent were
denominated in various currencies, mainly Japanese yen and U.S. dollars, against
Italian lira; and 34 percent in various currencies, mainly European currencies
and Japanese yen, against U.S. dollars.
Gains and losses on hedges of intercompany loans and deposits offset
the currency exchange gains and losses of the underlying loans and deposits. At
December 31, 1998, the contract amount of forward exchange contracts held for
balance sheet financial exposure hedging program was $756. Of these contracts,
59 percent were denominated in U.S. dollars against European currencies; 17
percent were denominated in U.S. dollars against Japanese yen; 4 percent were
denominated in Swedish kronor against various European currencies; and 20
percent were denominated in various other currencies mainly against the Swedish
krona and the U.S. dollar.
Because the contract amounts are stated as notional amounts, the amount
of contracts disclosed above is not a direct measure of the exposure of the
company through its use of derivatives. These contracts generally have
maturities that do not exceed twelve months and require the company to exchange
currencies at agreed-upon rates at maturity. The counterparties to the contracts
consist of a limited number of major international financial institutions. The
company does not expect any losses from credit exposure.
17
<PAGE>
15 FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of the company's financial
instruments were as follows:
<TABLE>
<CAPTION>
==================================================================
1998 1998 1997 1997
CARRYING FAIR CARRYING FAIR
DECEMBER 31 AMOUNT VALUE AMOUNT VALUE
- - ------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Short-term investments $375 $375 $591 $591
Long-term investments 454 454 534 546
Forward currency
exchange contracts
Hedges of loans and deposits (7) (7) (14) (14)
Hedges of anticipated
transactions (13) (13) (10) (10)
FINANCIAL LIABILITIES:
Short-term debt 332 332 401 401
Long-term debt 295 305 411 409
Guaranteed ESOP debt 218 241 240 280
==================================================================
</TABLE>
Because maturities are short-term, fair value approximates carrying amount for
cash and cash equivalents, short-term investments, accounts receivable,
short-term debt, and accounts payable. Fair values of forward currency exchange
contracts, long-term investments, long-term debt, and guaranteed ESOP debt were
estimated based on quoted market prices for the same or similar instruments or
on discounted cash flows.
16 CONCENTRATIONS OF CREDIT RISK
The company invests excess cash in deposits with major banks throughout the
world and in high quality short-term liquid debt instruments. Such investments
are made only in instruments issued or enhanced by high quality institutions.
Financial instruments which potentially subject the company to concentrations of
credit risk consist principally of short-term investments in instruments issued
by the Kingdom of Sweden; otherwise, amounts invested in a single institution
are limited to minimize risk. The company has not incurred losses related to
these investments.
The company sells a broad range of pharmaceutical products to a diverse
group of customers operating throughout the world. In the U.S. and Japan, the
company makes substantial sales to relatively few large wholesale customers.
Credit limits, ongoing credit evaluation, and account monitoring procedures are
utilized to minimize the risk of loss. Collateral is generally not required.
17 SHAREHOLDERS' EQUITY
Preferred Stock
The Series A Convertible Perpetual Preferred Stock is held by the Employee Stock
Ownership Trust (ESOP Trust). The per-share stated value is $40,300.00 and the
preferred stock ranks senior to the company's common stock as to dividends and
liquidation rights. Each share is convertible, at the holder's option, into
1,450 shares of the company's common stock and has voting rights equal to 1,450
shares of common stock. The company may redeem the preferred stock at any time
after July 20, 1999, or upon termination of the ESOP at a minimum price of
$40,300.00 per share. Dividends, at the rate of 6.25 percent, are cumulative,
paid quarterly, and charged against retained earnings.
Common Stock
The number of common shares outstanding at December 31, 1998, 1997 and 1996 was
518,119,813; 516,558,279; and 516,197,570, respectively. On a per-share basis,
dividends were declared on common stock at a rate of $1.08 in 1998 and 1997. In
November 1997, Sugen completed a follow-on public offering of 1,218,200 shares
of common stock at a price of $26.27 per share. The net proceeds to the company
were approximately $30. Common stock dividends payable were $137 at December 31,
1998 and 1997.
18
<PAGE>
Capital in Excess of Par Value
Amounts of paid-in capital that exceed the par value ($.01 per share) of the
company's common stock are recorded in this account. This method was also
followed for all prior periods, including those preceding the November 1995
merger of Pharmacia AB and The Upjohn Company and the August 1999 merger between
Pharmacia & Upjohn, Inc. and Sugen, Inc., because the common stock was assumed
to have been outstanding for all years. The tax benefit related to the exercise
of certain stock options reduces income taxes payable and is reflected as
capital in excess of par. Offsetting this is the difference between the cost of
treasury shares and cash received for them, if any, when used to satisfy stock
option exercises and other employee stock awards.
ESOP-related Accounts
The company holds a note receivable from the ESOP Trust that matures on February
1, 2005; bears interest at 6.25 percent; and may be added to or repaid, in whole
or in part, at any time. Accrued interest at the end of any calendar year is
added to the note principal. At December 31, 1998, the note principal balance
was $56. Also, upon recognition of the company's guarantee of the debt of the
ESOP Trust, an offsetting amount was recorded in shareholders' equity. As
guaranteed debt is repaid, this amount diminishes correspondingly (see Notes 11
and 18). Also, to the extent the company recognizes expense more rapidly than
the corresponding cash contributions are made to the Trust, this account is
reduced. The balance in this account at December 31, 1998, was $198.
Treasury Stock
The balance at December 31, 1998, and 1997 was $35 and $48, respectively,
carried at cost. The number of treasury shares used in 1998 for stock options
and employee benefit plans, net of shares acquired, was 730,593.
Accumulated Other Comprehensive Income
Accumulated other comprehensive income reflects the cumulative balance of (1)
currency translation adjustments, the adjustments of translating the financial
statements of non-U.S. subsidiaries from local currencies into U.S. dollars (see
Note 1); (2) unrealized gains and losses on investments categorized as
available-for-sale, net of deferred taxes and reclassifications (see Note 2);
and (3) minimum pension liability adjustments, net of deferred tax (see Notes 2
and 20).
Warrants
Certain warrants to purchase shares of common stock were issued by Sugen in
connection with the Senior Custom Convertible Notes, certain collaboration
agreements, and various license, facility and equipment lease financing
arrangements. Warrants to purchase 432,549 shares were outstanding at December
31, 1998 with exercise prices and expirations ranging between $6.16 and $27.48
and October 1999 and March 2003, respectively.
Shareholder Protection Rights Plan
In February 1997, the Board of Directors approved a shareholder protection
rights plan, declaring a dividend of one right for each share of the company's
common stock outstanding on or after March 7, 1997. Exercisable 10 days after
any person or group acquires 15 percent or more or commences a tender offer for
15 percent or more of the company's common stock, the rights entitle holders to
effectively purchase a specified amount of the company's common stock at an
exercise price equal to half of its market value. The rights are redeemable for
$.01 per right and have a life of 10 years, unless redeemed earlier by the
company. In lieu of cash payment, the company has the option to exchange stock
for rights unless the acquiring person acquires more than 50 percent of the
company's common stock.
18 EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
The ESOP, created in 1989, is a funding vehicle for the Employee Savings Plan
covering essentially all active U.S. employees. As the ESOP Trust makes debt
principal and interest payments, a proportionate amount of preferred stock is
released for allocation to plan participants. The preferred shares are allocated
to participants' accounts based upon their respective savings plan contributions
and the dividends earned on their previously allocated preferred shares. As of
December 31, 1998, 1,878 preferred shares had been released and allocated; 352
shares were released but unallocated; and 4,633 shares remained unreleased, of
which 37 shares are committed to be released. Shares released during 1998, 1997
and 1996 were 391, 346 and 390, respectively.
19
<PAGE>
Under the agreement whereby the company guaranteed third-party debt of
the ESOP Trust, the company is obligated to provide sufficient cash annually to
the Trust to enable it to make required principal and interest payments. The
company satisfies this annual cash flow requirement through payment of dividends
on all preferred shares outstanding, loans and cash contributions. The company
has fully and unconditionally guaranteed the ESOP Trust's payment obligations
whether at maturity, upon redemption, upon declaration of acceleration, or
otherwise. The holders of the debt securities have no recourse against the
assets of the ESOP Trust except in the event that the Trust defaults on payments
due and the company also fails to make such payments. In that event, the holders
may have recourse against unallocated funds held by the Trust. At December 31,
1998, assets of the ESOP trust consisted primarily of $277 of Pharmacia &
Upjohn, Inc., Series A Convertible Perpetual Preferred Stock.
ESOP expense is determined by a formula that apportions debt service to
each year of the plan based on shares allocated to participants and deducts
dividends paid on all preferred stock held by the trust. ESOP expense represents
a fringe benefit and, as such, it attaches to payroll costs that comprise a
portion of all functional expense captions in the earnings statement.
Key measures of the ESOP are presented in the table that follows.
<TABLE>
<CAPTION>
===============================================================
YEARS ENDED DECEMBER 31
DOLLARS IN MILLIONS 1998 1997 1996
- - ---------------------------------------------------------------
<S> <C> <C> <C>
Interest expense of ESOP Trust $27 $28 $28
Dividend income of ESOP Trust 17 18 18
Company contribution to
ESOP Trust 18 12 16
Company ESOP expense (net) 13 14 14
===============================================================
</TABLE>
19 STOCK COMPENSATION
Under the Pharmacia & Upjohn plans incentive and nonqualified stock options are
granted to certain employees. Options granted in 1998 have a ten-year term and
vest at the end of three years or vest pro rata over three years. All options
have an exercise price equal to the market value of the underlying stock at date
of grant. Since the company has elected the disclosure-only alternative under
SFAS No. 123 and continues to account for stock options per the terms of APB No.
25, no compensation expense is recognized in earnings.
Upon a stock-for-stock exercise of an option, an active employee will
receive a new, nonqualified "reloaded" option at the then-current market price
for the number of shares surrendered to exercise the option. The "reloaded"
option will have an exercise term equal to the remaining term of the original
exercised option.
Sugen's plans include incentive and nonqualified stock options, which
are granted to certain employees, directors, and consultants. Vesting is graded
and based on plan provisions and has expiration periods of not more than ten
years. Exercise prices are specified according to the plans and may be equal to
or less than the market value at the date of grant. Compensation expense is
measured under the provisions of APB No. 25, where applicable. At the
consummation of the merger, Sugen's plans are merged into Pharmacia & Upjohn's.
20
<PAGE>
The number of shares authorized for grants each year is governed by the
related plan documents. Information concerning option activity and balances
follows:
<TABLE>
<CAPTION>
====================================================================
WEIGHTED
AVERAGE NUMBER
EXERCISE PRICE OF SHARES
PER SHARE (000)
- - --------------------------------------------------------------------
<S> <C> <C>
Balance outstanding, January 1, 1996 $23.23 13,659
Granted 36.42 3,982
Exercised 23.76 (4,332)
Canceled 20.67 (220)
- - --------------------------------------------------------------------
Balance outstanding, December 31, 1996 27.22 13,089
Granted 35.66 4,879
Exercised 22.63 (1,681)
Canceled 33.45 (236)
- - --------------------------------------------------------------------
Balance outstanding, December 31, 1997 30.18 16,051
Granted 39.51 10,285
Exercised 28.44 (4,313)
Canceled 38.02 (683)
- - --------------------------------------------------------------------
Balance outstanding, December 31, 1998 $34.78 21,340
====================================================================
</TABLE>
<TABLE>
<CAPTION>
===========================================================================
COMPOSITION OF THE WEIGHTED WEIGHTED
DECEMBER 31, 1998 BALANCE: AVERAGE AVERAGE NUMBER
OPTIONS HAVING A REMAINING EXERCISE PRICE OF SHARES
PER-SHARE EXERCISE PRICE OF: LIFE PER SHARE (000)
- - ---------------------------------------------------------------------------
<S> <C> <C> <C>
$ .62--19.49 5.80 years $15.15 1,008
$19.50--29.99 5.04 years 23.90 4,545
$30.00--39.99 7.82 years 37.22 7,947
$40.00--49.99 8.67 years 40.71 7,580
$50.00--56.34 7.77 years 53.30 260
- - ---------------------------------------------------------------------------
</TABLE>
As of December 31, 1998, 1997, and 1996, the company had exercisable options of
11,813,000, 11,392,000, and 9,232,000, respectively with weighted average
exercise prices of $36.65, $28.39, and $24.08, respectively.
Had the company elected to measure stock compensation using the fair value of
the awards at grant date under the provisions of SFAS No. 123, the company's net
income and earnings per share would have been reduced by approximately $47 or
$.10 per share for 1998, $42 or $.08 per share for 1997, and $40 or $.07 per
share for 1996. The fair value of each option grant was estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions for 1998, 1997 and 1996, respectively: dividend yield of 2.7, 2.83,
and 2.8 percent; volatility of 24, 21, and 21 percent; risk-free interest rate
of 4.72, 5.45, and 5.4 percent; and an expected life of 5.1, 5.3, and 5.5 years.
21
<PAGE>
20 RETIREMENT BENEFITS
The company has various pension plans covering substantially all employees.
Benefits provided under the defined benefit pension plans are primarily based on
years of service and the employee's compensation. The company also provides
nonpension benefits to eligible retirees and their dependents, primarily in the
form of medical and dental benefits. The following tables summarize the changes
in benefit obligations and plan assets during 1997 and 1998.
<TABLE>
<CAPTION>
====================================================================
OTHER RETIREMENT
PENSION BENEFITS BENEFITS
CHANGE IN BENEFIT OBLIGATION: 1998 1997 1998 1997
- - --------------------------------------------------------------------
<S> <C> <C> <C> <C>
Benefit obligation at
beginning of year $1,394 $1,266 $ 393 $ 366
Service cost 56 52 10 9
Interest cost 91 90 27 26
Benefits paid (133) (105) (19) (18)
Actuarial (gain) loss 53 114 (10) 7
Plan amendment and other
adjustments (14) 27 5 3
Currency exchange effects 8 (50) -- --
- - --------------------------------------------------------------------
Benefit obligation at
end of year $1,455 $1,394 $ 406 $ 393
====================================================================
</TABLE>
<TABLE>
<CAPTION>
====================================================================
CHANGE IN PLAN ASSETS: 1998 1997 1998 1997
- - --------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fair value of plan assets
at beginning of year $1,387 $1,247 $ 170 $ 144
Actual return on plan assets 184 215 40 27
Employer contribution 38 26 18 16
Benefits paid (133) (105) (19) (18)
Other adjustments (5) 21 2 1
Currency exchange effects 6 (17) -- --
- - --------------------------------------------------------------------
Fair value of plan assets at
end of year $1,477 $1,387 $ 211 $ 170
====================================================================
</TABLE>
<TABLE>
<CAPTION>
====================================================================
AT DECEMBER 31, 1998 1997 1998 1997
- - --------------------------------------------------------------------
<S> <C> <C> <C> <C>
Funded status $ 22 $ (7) $(195) $(223)
Unrecognized net actuarial
(gains) losses (11) (4) (115) (74)
Amortized net transition asset (45) (56) -- --
Unrecognized prior service cost 41 33 (34) (40)
- - --------------------------------------------------------------------
Prepaid (accrued) benefit cost $ 7 $ (34) $(344) $(337)
====================================================================
</TABLE>
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for the pension plans with accumulated benefit obligations in
excess of plan assets were $346, $291, and $90 as of December 31, 1998, and
$361, $302, and $78 as of December 31, 1997, respectively. The benefit
obligation and fair value of plan assets for benefit plans with obligations in
excess of plan assets were $752 and $301, as of December 31, 1998, and $810 and
$290 as of December 31, 1997, respectively.
22
<PAGE>
<TABLE>
<CAPTION>
====================================================================
AT DECEMBER 31, 1998 1997 1998 1997
- - --------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total accrual balances $(221) $(221) $(344) $(337)
Total prepaid balances 190 187 -- --
Minimum pension liability
offsets:
Intangible assets 5 -- -- --
Shareholders' equity
(pretax) 33 -- -- --
- - --------------------------------------------------------------------
Prepaid (accrued) benefit cost $ 7 $ (34) $(344) $(337)
====================================================================
</TABLE>
<TABLE>
<CAPTION>
====================================================================
WEIGHTED-AVERAGE ASSUMPTIONS
AS OF DECEMBER 31, 1998 1997
- - --------------------------------------------------------------------
<S> <C> <C>
Discount rate 6.66% 6.95%
Salary growth rate 3.68 4.20
Return on plan assets 9.21 9.27
Health care cost rate--initially 5.83 6.33
trending down to 5.00 5.00
====================================================================
</TABLE>
The consolidated net expense amounts in the following table are exclusive of
curtailments, settlements, and termination benefit costs associated with
restructurings. Net amounts of $4, $5 and $25 before tax were recorded in 1998,
1997 and 1996, respectively, within restructuring charges. During 1996, the
company recognized administrative credits of $24 related to curtailments of its
postretirement life insurance plans. The curtailments resulted principally from
elimination of the company's obligation to provide future postretirement life
insurance benefits for those retirees electing to switch to the new plan.
<TABLE>
<CAPTION>
=============================================================================================================
PENSION BENEFITS OTHER RETIREMENT BENEFITS
COMPONENTS OF NET PERIODIC BENEFIT COST: 1998 1997 1996 1998 1997 1996
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 56 $ 52 $ 55 $ 10 $ 9 $ 10
Interest cost 91 90 88 27 26 26
Expected return on plan assets (109) (102) (100) (15) (12) (10)
Amortization of transition amount (9) (9) (9) -- -- --
Amortization of prior service cost 5 4 4 (3) (4) (4)
Recognized actuarial loss (gain) 3 4 3 (2) (1) (1)
- - -------------------------------------------------------------------------------------------------------------
Net periodic benefit cost 37 39 41 17 18 21
Curtailment gain (3) -- -- -- -- (24)
- - -------------------------------------------------------------------------------------------------------------
Net benefit cost $ 34 $ 39 $ 41 $ 17 $ 18 $ (3)
=============================================================================================================
</TABLE>
The assumption concerning health care cost trend rate has a significant effect
on the amounts reported. Increasing the rate by one percentage point in each
year would increase the postretirement benefit obligation as of December 31,
1998, by $52 and the total of service and interest cost components of net
postretirement benefit cost for the year by $6. Conversely, decreasing the rate
by one percentage point in each year would decrease the postretirement benefit
obligation as of December 31, 1998, by $46 and the total of service and interest
cost components of net postretirement benefit cost for the year by $5.
The company recorded an additional minimum liability of $38 for
underfunded plans at December 31, 1998. This liability represents the amount by
which the accumulated benefit obligation exceeds the sum of the fair market
value of plan assets and accrued amounts previously recorded. The additional
liability is offset by an intangible asset ($5) to the extent of previously
unrecognized prior service cost. The remaining amount ($33) is recorded, net of
tax benefits, as a reduction to shareholders' equity within accumulated other
comprehensive income.
23
<PAGE>
21 SEGMENT INFORMATION
Effective January 1, 1998, the company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which requires reporting
certain financial information according to the "management approach." This
approach is based on how management organizes the segments for operating
decisions. The statement requires enterprises to report certain information
about segments including information about products, geographic areas, and major
customers.
The company's core business is the development, manufacture and sale of
pharmaceutical products. This business is organized in two segments,
prescription pharmaceutical and consumer health care. The prescription
pharmaceutical segment includes general therapeutics, ophthalmology and hospital
products including oncology, and diversified therapeutics. The consumer health
care segment consists of self-medication products that are available to
consumers over the counter without a prescription. This segment includes product
line extensions of key prescription drugs, plus products to treat tobacco
dependency.
The remaining operating units include animal health, diagnostics,
nutrition, plasma, pharmaceutical commercial services and biotechnology. Due to
the size of these operating segments, they have been included in an "all other"
grouping. Animal health produces and markets both pharmaceuticals and feed
additives for livestock and pets. Diagnostics provides services to identify
specific allergies in people. Nutrition sells food replacement products,
primarily to hospitals. Plasma is a therapeutic area that prepares and markets
products derived from blood plasma. Pharmaceutical commercial services develops,
manufactures and markets certain bulk pharmaceutical chemicals and selected
high-technology and specialty chemicals. Biotechnology primarily represents
minority equity positions in biotechnology joint ventures that manufacture and
market reagents, chemicals, and systems for biotechnology companies and academic
research laboratories.
The following table shows revenues and expenses for the company's
operating segments and reconciling items necessary to total to amounts reported
in the consolidated financial statements. Information about segment assets,
interest income and expense, and income taxes is not provided on a segment level
as the segments are reviewed based on operating income. Corporate support
functions and restructuring charges also are not allocated to segments. There
are no inter-segment revenues. Depreciation is not available on a segmental
basis.
Segments for year ended December 31, 1998
<TABLE>
<CAPTION>
==================================================================================================================
PRESCRIPTION CONSUMER ALL RECONCILING
PHARMACEUTICAL HEALTH CARE OTHER ITEMS TOTAL
- - ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 4,752 $ 683 $ 1,323 $ -- $6,758
- - ------------------------------------------------------------------------------------------------------------------
Earnings from equity affiliates $ 1 $ -- $ 56 $ -- $ 57
- - ------------------------------------------------------------------------------------------------------------------
Amortization expense $ 15 $ 6 $ 11 $ 80 $ 112
- - ------------------------------------------------------------------------------------------------------------------
Operating income (loss) before corporate $ 984 $ 111 $ 324 $ (171) $1,248
Corporate and all other (271)
- - ------------------------------------------------------------------------------------------------------------------
Earnings before taxes $ 977
==================================================================================================================
</TABLE>
Segments for year ended December 31, 1997
<TABLE>
<CAPTION>
==================================================================================================================
PRESCRIPTION CONSUMER ALL RECONCILING
PHARMACEUTICAL HEALTH CARE OTHER ITEMS TOTAL
- - ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 4,370 $ 642 $ 1,574 $ -- $6,586
- - ------------------------------------------------------------------------------------------------------------------
Earnings (loss) from equity investments $ 5 $ -- $ (73) $ -- $ (68)
- - ------------------------------------------------------------------------------------------------------------------
Amortization expense $ 13 $ 5 $ 11 $ 87 $ 116
- - ------------------------------------------------------------------------------------------------------------------
Operating income (loss) before corporate $ 765 $ 119 $ 192 $ (125) $ 951
Corporate and all other (516)
- - ------------------------------------------------------------------------------------------------------------------
Earnings before taxes $ 435
==================================================================================================================
</TABLE>
24
<PAGE>
As part of the global turnaround program, the structure of the company has
changed significantly from 1996 to 1998. It is therefore not practicable to
display segmental earnings information for the year ended December 31, 1996, on
a basis comparable to that presented above. Net sales of the prescription
pharmaceutical segment in 1996 totaled $4,586 while consumer health care sales
were $710 and "all other" sales totaled $1,880. The reconciling item for
amortization expense represents goodwill amortization resulting from
acquisitions by Pharmacia AB prior to the 1995 merger with The Upjohn Company.
In addition to amortization, unallocated noncorporate general and administrative
expenses are included in the other reconciling item. Corporate and all other
amounts represent general and administrative expenses of corporate support
functions, corporate items such as restructuring charges and litigation
accruals, and net nonoperating income.
The company's products are sold throughout the world to a wide range of
customers including pharmacies, hospitals, chain warehouses, governments,
physicians, wholesalers, and other distributors. No single customer accounts for
10 percent or more of the company's consolidated sales.
The top selling 20 products in 1998 represent approximately 54 percent
of total sales with no one product constituting more than 6 percent of total
sales. A more comprehensive analysis of product sales performance is provided in
the Financial Review. The following table shows the company's sales
geographically. U.S. exports to third-party customers are less than 10 percent
of U.S. sales.
<TABLE>
<CAPTION>
====================================================================
GEOGRAPHIC SALES FOR YEARS ENDED DECEMBER 31 1998 1997
- - --------------------------------------------------------------------
<S> <C> <C>
Sales to customers in:
United States $2,498 $2,081
Japan 565 624
Italy 461 460
Germany 412 405
United Kingdom 352 300
Sweden 284 317
France 275 254
Spain 168 185
Rest of the world 1,743 1,960
- - --------------------------------------------------------------------
Total sales $6,758 $6,586
====================================================================
</TABLE>
Long-lived assets include property, plant and equipment, goodwill and
other intangibles, all net of depreciation or amortization.
<TABLE>
<CAPTION>
====================================================================
Long-lived assets, December 31 1998 1997
- - --------------------------------------------------------------------
<S> <C> <C>
United States $1,840 $1,805
Sweden 995 1,322
Italy 443 416
Japan 186 188
United Kingdom 133 147
Ireland 123 81
Rest of the world 752 638
- - --------------------------------------------------------------------
Total long-lived assets $4,472 $4,597
====================================================================
</TABLE>
25
Exhibit 99.3
PHARMACIA & UPJOHN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
($s in millions, except per-share data)
Unaudited
-----------------------------------------------
For Three Months For Nine Months
Ended September 30, Ended September 30,
----------------------- -------------------
1999 1998 1999 1998
---------- --------- -------- --------
Net sales $ 1,776 $ 1,669 $ 5,310 $ 4,909
Cost of products sold 481 516 1,421 1,495
Research and development 373 279 1,050 869
Selling, general and
administrative 667 599 2,019 1,869
Merger and restructuring 32 - 32 -
Interest income, net (7) (15) (13) (50)
All other, net (37) (22) (43) (59)
---------- --------- -------- --------
Earnings before income taxes 267 312 844 785
Provision for income taxes 82 108 255 276
---------- --------- -------- --------
Net earnings $ 185 $ 204 $ 589 $ 509
========== ========= ======== ========
Net earnings per common share:
Basic $.35 $.39 $1.12 $.97
==== ==== ==== ====
Diluted $.34 $.38 $1.09 $.95
==== ==== ==== ====
See accompanying notes.
<PAGE>
PHARMACIA & UPJOHN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($s in millions)
For the nine months ended September 30
Unaudited
--------------------
1999 1998
-------- --------
Net cash provided by operations $ 405 $ 617
-------- --------
Cash flows provided (required) by investment activities:
Proceeds from sale of subsidiaries 122 -
Additions of properties (383) (378)
Proceeds from sale of properties 24 20
Purchases of intangibles (123) (7)
Proceeds from sales of investments 414 853
Purchases of investments (126) (448)
-------- --------
Net cash (required) provided by investment activities (72) 40
-------- --------
Cash flows provided (required) by financing activities:
Issuance of debt 63 19
Repayment of debt (83) (153)
Payments of ESOP debt (22) (16)
Net increase in debt with initial maturity
of 90 days or less 579 155
Dividend payments (422) (425)
Purchases of treasury stock (170) (57)
Proceeds from sale of treasury stock and exercise
of stock options 100 58
-------- --------
Net cash provided (required) by financing activities 45 (419)
-------- --------
Effect of exchange rate changes on cash (14) (17)
-------- --------
Net change in cash and cash equivalents 364 221
Cash and cash equivalents, beginning of year 881 799
-------- --------
Cash and cash equivalents, end of period $ 1,245 $ 1,020
======== ========
See accompanying notes.
<PAGE>
PHARMACIA & UPJOHN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
($s in millions)
Unaudited
---------------------------
September 30, December 31,
1999 1998
ASSETS ------------- -----------
Current assets:
Cash and cash equivalents $ 1,245 $ 881
Short-term investments 137 375
Trade accounts receivable, less allowance
of $101 (1998: $103) 1,420 1,417
Inventories 1,118 1,032
Other current assets 776 847
----------- -----------
Total current assets 4,696 4,552
Long-term investments 384 454
Properties, net 3,278 3,234
Goodwill and other intangible assets, net 1,176 1,238
Other noncurrent assets 924 865
----------- -----------
Total assets $ 10,458 $ 10,343
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt, including current
maturities of long-term debt $ 1,056 $ 332
Other current liabilities 2,190 2,543
----------- -----------
Total current liabilities 3,246 2,875
Long-term debt and guarantee of ESOP debt 339 513
Other noncurrent liabilities 1,325 1,359
----------- -----------
Shareholders' equity:
Preferred stock, one cent par value; at
stated value; authorized 100,000,000 shares;
issued 6,758 shares (1998: 6,863 shares) 273 277
Common stock, one cent par value;
authorized 1,500,000,000 shares; issued
519,182,527 shares (1998: 518,797,031 shares) 5 5
Capital in excess of par value 1,492 1,531
Retained earnings 5,501 5,334
ESOP-related accounts and other (247) (254)
Treasury stock (9) (35)
Accumulated other comprehensive income (1,467) (1,262)
----------- -----------
Total shareholders' equity 5,548 5,596
----------- -----------
Total liabilities and shareholders' equity $ 10,458 $ 10,343
=========== ===========
See accompanying notes.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
($S IN MILLIONS, EXCEPT PER-SHARE DATA)
A - INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The consolidated financial information presented herein is unaudited. The
interim financial statements and notes thereto do not include all disclosures
required by generally accepted accounting principles and should be read in
conjunction with the financial statements and notes thereto included in the
company's latest annual report on Form 10-K.
In the opinion of management, all adjustments necessary for a fair presentation
are reflected in the interim period financial statements presented. The current
period's results of operations are not necessarily indicative of results that
ultimately may be achieved for the year. The company is presenting its
consolidated statement of earnings in a "single-step" format and, accordingly,
reclassifications of prior year amounts have been made to conform to this
presentation.
In 1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities". This statement requires companies to record derivatives on
the balance sheet as assets and liabilities measured at fair value. The
accounting treatment of gains and losses resulting from changes in the value of
derivatives depends on the use of the derivative and whether it qualifies for
hedge accounting. The company expects to adopt SFAS No. 133 no earlier than
January 1, 2000, and is currently assessing the impact of adoption on its
financial position, results of operations, and liquidity.
B - INVENTORIES
September 30, December 31,
1999 1998
------------ ------------
Estimated replacement cost (FIFO basis):
Pharmaceutical and other finished products $ 453 $ 558
Raw materials, supplies and work-in-process 811 628
---------- ----------
1,264 1,186
Less reduction to LIFO cost (146) (154)
---------- ----------
$ 1,118 $1,032
========== ==========
Inventories valued on the LIFO method had an estimated replacement cost (FIFO
basis) of $665 at September 30, 1999, and $521 at December 31, 1998.
C - CONTINGENT LIABILITIES
The consolidated balance sheets include accruals for estimated product
litigation and environmental liabilities. The latter includes exposures related
to discontinued
<PAGE>
operations, including the industrial chemical facility referred to below and
several sites which, under the Comprehensive Environmental Response,
Compensation, and Liability Act, are commonly known as Superfund sites (see Note
D). The company's ultimate liability in connection with Superfund sites depends
on many factors, including the number of other responsible parties and their
financial viability and the remediation methods and technology to be used.
Actual costs to be incurred may vary from the estimates given the inherent
uncertainties in evaluating environmental exposures.
With regard to its discontinued industrial chemical facility in North Haven,
Connecticut, the company may soon be required to submit a corrective measures
study report to the U.S. Environmental Protection Agency (EPA). As the
corrective action process progresses, it may become appropriate to reevaluate
the existing reserves designated for remediation in light of changing
circumstances. It is reasonably possible that a material increase in accrued
liabilities will be required but it is not possible to determine what, if any,
exposure exists at this time, nor is it possible to estimate the range of
potential costs.
D - LITIGATION
The company is involved in a number of legal and environmental proceedings.
These include a substantial number of product liability suits claiming damages
as a result of the use of the company's products as well as administrative and
judicial proceedings at approximately 50 Superfund sites.
While it is not possible to predict or determine the outcome of legal actions
brought against the company, or the ultimate cost of environmental matters, the
company continues to believe that any potentially unaccrued costs and
liabilities associated with such matters should not have a material adverse
effect on the company's consolidated financial position, and unless there is a
significant deviation from the historical pattern of resolution of these issues,
there should not be a material adverse effect on the company's results of
operations or liquidity.
The company has been a party along with a number of other defendants (both
manufacturers and wholesalers) in several federal civil antitrust lawsuits, some
of which were consolidated and transferred to the Federal District Court for the
Northern District of Illinois. These suits, brought by independent pharmacies
and chains, generally allege unlawful conspiracy, price discrimination and price
fixing and, in some cases, unfair competition, and specifically allege that the
company and the other named defendants violated the following: (1) the
Robinson-Patman Act by giving substantial discounts to hospitals, nursing homes,
mail-order pharmacies and health maintenance organizations ("HMOs") without
offering the same discounts to retail drugstores, and (2) Section I of the
Sherman Antitrust Act by entering into illegal vertical combination with other
manufacturers and wholesalers to restrict certain discounts and rebates so they
benefited only favored customers. The Federal District Court for the Northern
District of Illinois certified a national class of retail pharmacies in November
1994. Similar actions by proposed retailer classes have been filed in the state
courts of Alabama, California, Minnesota, Mississippi, and Wisconsin. Eighteen
class action lawsuits seeking damages based on the same alleged conduct have
been filed in 14 states and the District of Columbia. The plaintiffs claim to
represent consumers who purchased prescription drugs in those
<PAGE>
jurisdictions and four other states. Two of the lawsuits have been dismissed.
The company announced in 1998 that it reached a settlement with the plaintiffs
in the federal class action cases for $103 which was paid during the first
quarter of 1999.
The company believes that any potential remaining liability above amounts
accrued will not have a material adverse effect on the company's consolidated
financial position, its results of operations, or liquidity.
E - COMPREHENSIVE INCOME
Total comprehensive income for the three months ended September 30, 1999 and
1998 was $372 and $309, respectively. Total comprehensive income for the nine
months ended September 30, 1999 and 1998, was $474 and $412, respectively.
F - EARNINGS PER SHARE
Basic earnings per share is computed by dividing net earnings available to
holders of common stock by the weighted average number of shares of common stock
outstanding. Diluted earnings per share is computed assuming the exercise of
stock options and warrants, conversion of preferred stock and debt, and the
issuance of stock as incentive compensation to certain employees. Under these
assumptions, the weighted-average number of common shares outstanding is
increased accordingly, and net earnings is adjusted by the after-tax interest
effects of convertible debt and reduced by an incremental contribution to the
Employee Stock Ownership Plan (ESOP). This contribution is the after-tax
difference between (1) the income the ESOP would have received in preferred
stock dividends and (2) the dividend on the common shares assumed to have been
outstanding.
The following table reconciles the numerators and denominators of the basic and
diluted earnings per share computations:
For the three months ended September 30, 1999 1999 1998 1998
Basic Diluted Basic Diluted
------- ------- ------- -------
EPS numerator:
Net earnings $ 185 $ 185 $ 204 $ 204
Less: Preferred stock dividends,
net of tax (3) - (3) -
Less: ESOP contribution, net of tax - (1) - (1)
Less: Interest effects on convertible
instruments, net of tax - (1) - -
Rounding adjustment (1) - (1) -
------- ------- ------- -------
Income available to common shareholders $ 181 $ 183 $ 200 $ 203
======= ======= ======= =======
For the three months ended September 30, 1999 1999 1998 1998
Basic Diluted Basic Diluted
------- ------- ------- -------
EPS denominator:
Average common shares outstanding 518 518 518 518
<PAGE>
Effect of dilutive securities:
Stock options and stock warrants - 6 - 6
Convertible instruments
and incentive compensation - 10 - 11
------- ------- ------- -------
Total shares 518 534 518 535
======= ======= ======= =======
Earnings per share $.35 $.34 $.39 $.38
======= ======= ======= =======
For the nine months ended September 30, 1999 1999 1998 1998
Basic Diluted Basic Diluted
EPS numerator: ------- ------- ------- -------
Net earnings $ 589 $ 589 $ 509 $ 509
Less: Preferred stock dividends,
net of tax (10) - (10) -
Less: ESOP contribution, net of tax - (4) - (4)
Add: Interest effects on convertible
instruments, net of tax - - - 1
------- ------- ------- -------
Income available to common shareholders $ 579 $ 585 $ 499 $ 506
======= ======= ======= =======
1999 1999 1998 1998
Basic Diluted Basic Diluted
EPS denominator: ------- ------- ------- -------
Average common shares outstanding 517 517 517 517
Effect of dilutive securities:
Stock options and stock warrants - 7 - 5
Convertible instruments
and incentive compensation - 11 - 11
------- ------- ------- -------
Total shares 517 535 517 533
======= ======= ======= =======
Earnings per share $1.12 $1.09 $.97 $.95
======= ======= ======= =======
G - SEGMENT INFORMATION
The company's core business is the development, manufacture and sale of
pharmaceutical products. This business is organized into two segments,
prescription pharmaceutical and consumer health care. The remaining operating
units are included in the "all other" grouping. These operating units include
animal health, diagnostics, plasma, pharmaceutical commercial services,
nutrition, and biotechnology products. As of the end of 1998, the company had
divested substantially all of its biotechnology and nutrition lines.
The following table shows revenues and expenses for the company's operating
segments and reconciling items necessary to total to amounts in the consolidated
financial
<PAGE>
statements. Information about segment interest income and expense, income taxes,
corporate support functions, and depreciation are not available on a segment
basis. There are no intersegment revenues.
For the three months ended September 30,
Sales Profit
------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Prescription pharmaceutical $ 1,360 $ 1,193 $ 244 $ 291
Consumer health care 165 158 43 28
All other 251 318 79 73
--------- --------- --------- ---------
$ 1,776 $ 1,669 366 392
========= =========
Unallocated corporate and other (99) (80)
--------- ---------
Earnings before income taxes $ 267 $ 312
========= =========
For the nine months ended September 30,
Sales Profit
------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Prescription pharmaceutical $ 4,010 $ 3,439 $ 790 $ 757
Consumer health care 508 485 97 59
All other 792 985 230 222
--------- --------- --------- ---------
$ 5,310 $ 4,909 1,117 1,038
========= =========
Unallocated corporate and other (273) (253)
--------- ---------
Earnings before income taxes $ 844 $ 785
========= =========
H - 1999 MERGER AND RESTRUCTURING
On August 31, 1999, the company completed its merger with SUGEN, Inc. (Sugen) by
exchanging approximately 10 million shares of its common stock for all of the
common stock of Sugen. Each share of Sugen common stock was exchanged for .6091
of one share of Pharmacia & Upjohn (P&U) common stock. In addition, terms on
outstanding Sugen stock options, stock warrants, convertible debt, and warrants
on convertible debt were changed to convert Sugen shares to P&U shares using the
same exchange ratio.
The merger, a tax-free reorganization, was accounted for as a pooling of
interests under APB Opinion No. 16. As a result, all prior period consolidated
financial statements presented have been restated to include the combined
results of operations, financial position, and cash flows of both companies as
if Sugen had
<PAGE>
always been a part of P&U. There were no transactions between P&U and Sugen
prior to the combination. Immaterial reclassifications were recorded to conform
Sugen's financial statements to P&U's presentation.
The results of operations for the separate companies and the combined amounts
presented in the consolidated financial statements follow. The adjustment
represents the tax benefit of Sugen's net operating loss which had been fully
reserved for by Sugen.
Six months ended
June 30, 1999
Net sales: ----------------
Pharmacia & Upjohn $ 3,534
SUGEN -
----------
Combined $ 3,534
==========
Net income:
Pharmacia & Upjohn $ 437
SUGEN (47)
Adjustment 14
----------
Combined $ 404
==========
In connection with the merger, the company recorded $32 in merger and
restructuring expenses in the third quarter of 1999. The charge consisted of
merger transaction costs such as fees for investment bankers, attorneys,
accountants, and other costs to effect the merger. The charge also included
costs pertaining to reorganizations which will result in the termination of
certain R&D projects as well as the elimination of 91 employee positions in R&D
and sales. Termination benefits approximate $12. Cash expenditures related to
the restructuring costs are expected in the first half of 2000.
I - TURNAROUND RESTRUCTURING
The company announced a global turnaround program in 1997 to rationalize
infrastructure, establish a global headquarters, and eliminate duplicate
resources in manufacturing, administration, and research and development. The
program was implemented in two phases throughout 1998. At September 30, 1999,
the remaining accrual balance was $70 and related principally to the
fourth-quarter 1998 phase of the turnaround program. Cash spending caused the
decrease in the accrual.
Exhibit 99.4
Monsanto Pre-Announces Fourth Quarter and Full-Year 1999 Earnings
Monsanto Company has announced that the company will delay releasing its fourth
quarter and full-year earnings until Feb. 10, to coincide with the release of
Pharmacia & Upjohn's earnings. The company also announced that earnings for the
fourth quarter and full-year were better than most analysts had forecast.
Both the agricultural and pharmaceutical businesses had earnings before interest
expense and taxes (EBIT) in the fourth quarter well in excess of EBIT for the
comparable period last year after adjusting for non-recurring factors.
For the full year, after adjusting for non-recurring factors, Monsanto earned
approximately $1 per share. Both the pharmaceutical and agricultural businesses
performed at or above expectations. Celebrex arthritis treatment ended up with
sales of $1.5 billion, even though the product was not launched until late
January 1999. Volumes for Roundup herbicide remained strong and reached the
product's historical 20 percent growth trend line for the entire year.
Monsanto also highlighted the progress it made on its balance sheet in 1999. The
company reduced debt as a result of better than expected management of capital
expenditures. Also, working capital as a percentage of sales declined in 1999
when compared with working capital as a percentage of sales in 1998.
Monsanto Company and Pharmacia & Upjohn announced on December 19, 1999 that they
have entered into a definitive agreement to merge the two companies. Monsanto
stated that the merger process is proceeding on schedule.
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We 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, 333-38599, 333-45341 and
333-76653) and Registration Statement on Form S-4 (No. 333-66175) of our report
dated February 10, 1999, except as to Note 1 relating to the pooling of
interests with SUGEN, Inc. which is as of August 31, 1999, which appears in
Exhibit 99.2 to this Current Report on Form 8-K of Monsanto Company.
/s/ PricewaterhouseCoopers LLP
Chicago, Illinois
January 24, 2000
