<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement. [ ] Confidential, for use of the
Commission only (as permitted by
Rule 14a-6(e)(2).
[X] Definitive proxy statement.
[ ] Definitive additional materials.
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12.
Pharmacia Corporation
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if Other Than the Registrant)
Payment of filing fee (check the appropriate box):
[x] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
- --------------------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- --------------------------------------------------------------------------------
(3) Filing Party:
- --------------------------------------------------------------------------------
(4) Date Filed:
- --------------------------------------------------------------------------------
<PAGE> 2
[PHARMACIA LOGO]
NOTICE OF
ANNUAL MEETING OF STOCKHOLDERS
JUNE 23, 2000
On behalf of the Board of Directors, you are invited, as a stockholder of
Pharmacia Corporation, to the Annual Meeting of Stockholders of the Company to
be held at The Oriental Theater, 24 Randolph Street, Chicago, Illinois, on
Friday, June 23, 2000, at 1:30 p.m. (local time) for the following purposes:
1. To elect six directors for a term of three years;
2. To consider and act upon the stockholder proposals presented in the
attached Proxy Statement; and
3. To transact such other business as may properly come before the meeting.
Stockholders of record at the close of business on May 4, 2000 are entitled to
notice of, and to vote at, the Annual Meeting of Stockholders and any and all
adjournments thereof. Since a majority of the Company's outstanding shares which
are entitled to vote at the meeting must be represented in person or by proxy to
constitute a quorum, all stockholders are urged to promptly either mark, sign
and return the enclosed proxy card, or follow the telephone, Internet, bank or
broker instructions provided for voting your shares. If you hold your shares
directly, your proxy card will contain instructions for voting by telephone or
the Internet. If your shares are held in street name by your bank or broker,
please follow their instructions.
Admittance to the Annual Meeting will be granted only to stockholders of record
on May 4, 2000. Each stockholder may also bring one guest. If you wish to attend
the meeting in person, please provide advance notice to the Company either by
checking the box on your proxy card or by following the telephone or Internet
instructions, or by providing notice to the Corporate Secretary, 100 Route 206
North, Peapack, New Jersey 07977. If you are not a shareholder of record, please
bring identification and, if you hold your shares through a broker, bank or
otherwise not in your own name, please bring proof of share ownership, such as
an account statement, for admittance. An admission list containing the names of
all those planning to attend will be placed at the registration desk at the
entrance to the meeting, where you must check-in to gain admittance to the
meeting.
/s/ Don W. Schmitz
Secretary
Peapack, New Jersey
May 22, 2000
- --------------------------------------------------------------------------------
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, THE BOARD OF DIRECTORS REQUESTS
THAT YOU PROMPTLY VOTE YOUR SHARES BY EITHER COMPLETING AND RETURNING THE
ENCLOSED PROXY CARD OR BY VOTING BY TELEPHONE, INTERNET OR THROUGH YOUR BANK OR
BROKER.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. PROXY STATEMENT.................................. 1
Election of Directors (Proxy Item No. 1)................. 2
Stock Ownership of Management and Certain Beneficial
Owners............................................ 7
Board Meetings and Committees; Compensation of
Directors......................................... 8
Executive Compensation.............................. 10
Other Information Regarding Management.............. 24
Stockholder Proposals and Pharmacia's Responses (Proxy
Items No. 2-5)......................................... 25
Relationship with Independent Accountants................ 32
General Information...................................... 32
PART II. ANNUAL REPORT................................... 33
Description of the Business......................... 33
Corporate Officers.................................. 33
Management's Discussion and Analysis................ 34
Selected Financial Data............................. 53
Reports of Independent Accountants.................. 54
Consolidated Statements of Earnings................. 56
Consolidated Balance Sheets......................... 57
Consolidated Statements of Shareholders' Equity..... 58
Consolidated Statements of Cash Flows............... 59
Notes to Consolidated Financial Statements.......... 60
Quarterly Data...................................... 90
Stockholder Information............................. Inside Back Cover
</TABLE>
<PAGE> 4
[PHARMACIA LOGO]
PART I. PROXY STATEMENT
This Proxy Statement is furnished in connection with the solicitation by the
Board of Directors of Pharmacia Corporation ("Pharmacia" or the "Company") of
proxies to be voted at the Annual Meeting of Stockholders to be held on June 23,
2000, and at any and all adjournments thereof.
On March 31, 2000, Monsanto Company ("Monsanto") completed its merger (the
"Merger") with Pharmacia & Upjohn, Inc. ("P&U") and was renamed Pharmacia
Corporation. References to Pharmacia Corporation prior to March 31, 2000 refer
to Monsanto. All information presented in this Proxy Statement consists of
information of Monsanto and P&U unless otherwise indicated. Upon the Merger,
each share of P&U common stock was converted into 1.19 shares of Pharmacia
common stock. The Company's mailing address is 100 Route 206 North, Peapack, NJ
07977.
Only stockholders of record at the close of business on May 4, 2000 will be
eligible to vote at the meeting. Except for shares owned by Pharmacia, each
share of common stock, $2 par value, of Pharmacia outstanding on such record
date will be entitled to one vote at the meeting. As of May 4, 2000,
1,269,325,253 shares of Company common stock were outstanding and entitled to
vote. In addition, on May 4, 2000, 6,625 shares of the Company's Convertible
Perpetual Preferred Stock were held by the P&U Employee Stock Ownership Trust
pursuant to the P&U Employee Savings Plan. These shares have total votes
equivalent to 11,431,437 shares of the Company's common stock. This Proxy
Statement and the accompanying form of proxy were first forwarded to
stockholders on May 22, 2000.
INCLUDED AS PART II, BEGINNING ON PAGE 33, IS THE FINANCIAL AND LEGAL
INFORMATION NORMALLY INCLUDED IN THE ANNUAL REPORT TO STOCKHOLDERS. THE COMPANY
WILL NOT BE SENDING A SEPARATE ANNUAL REPORT TO STOCKHOLDERS THIS YEAR.
Pharmacia will bear the expense of preparing and distributing this proxy
material, as well as the cost of solicitation. Pharmacia has engaged D.F. King,
a proxy solicitation firm, to assist in the solicitation of proxies for a fee of
$20,000 plus expenses. A few regular employees may also participate in the
solicitation, without additional compensation. In addition, Pharmacia will
reimburse banks, brokerage firms, and other custodians, nominees, and
fiduciaries for reasonable expenses incurred in forwarding proxy materials to
beneficial owners of Pharmacia's common stock and obtaining their proxies.
Unless you indicate to the contrary, the persons named in the accompanying proxy
will vote FOR the election of the nominees named below, AGAINST each of the
stockholder proposals, and in their discretion on any other matters properly
coming before the meeting.
A plurality of the shares present at the meeting in person or by proxy is
required for the election of directors. The affirmative vote of a majority of
the shares present at the meeting in person or by proxy is required to adopt the
stockholder proposals. Pursuant to Pharmacia's By-Laws, abstentions and votes
withheld by brokers in the absence of instructions from street-name holders
(broker non-votes) have the same effect as votes cast against a particular
proposal. Any stockholder giving a proxy has the power to revoke it at any time
before it is voted.
The proxy of a stockholder who is a participant in Pharmacia's Dividend
Reinvestment Plan will also serve as an instruction to vote the shares held for
the account of the participant under this Plan in the manner indicated on the
proxy. If a stockholder's proxy is not received, the shares held in that account
in the Dividend Reinvestment Plan will not be voted.
Participants in the Company's Savings and Investment Plan, the P&U Employee
Savings Plan, and the Solutia Inc. Savings and Investment Plan may direct the
trustees of the plans how to vote the shares allocated to the participant's
account under the plans. If a participant is also a stockholder of record, the
proxy card given by such person will govern the voting of shares held by the
participant both directly and through the Plan. Under the terms of the
respective trust agreements, the trustees will vote the shares which have not
been allocated to participant accounts or for which no instructions were timely
received in the same proportion as the shares voted by participants who do
provide such instruction.
1
<PAGE> 5
ELECTION OF DIRECTORS (PROXY ITEM NO. 1)
The Board of Directors is composed of three classes of members. One class of
directors is elected each year to hold office for a three-year term or until a
successor is duly elected and qualified. Except where the authority to do so has
been withheld, it is the intention of the persons named in the Company's proxy
to vote to elect Frank C. Carlucci, Michael Kantor, Gwendolyn S. King, Olof
Lund, John E. Robson and Bengt Samuelsson as directors. Each nominee is
currently a director of Pharmacia and was a director of either Monsanto or P&U
before the Merger.
The Board of Directors increased the size of the Board, effective upon the
Merger, from ten to eighteen directors. Richard De Schutter, who is currently a
member of the Board of Directors, will resign from the Board of Directors as of
the Annual Meeting reducing the size of the Board to seventeen directors.
The Board does not contemplate that any of the nominees will be unable to stand
for election, but should any nominee become unavailable for election, all
proxies (except proxies marked to the contrary) will be voted for the election
of a substitute candidate nominated by the Board.
The principal occupations for the past five years, age, directorships held and
other information is as of May 4, 2000, with respect to the nominees for
election and the directors whose terms will continue after the Annual Meeting,
are shown below.
TO BE ELECTED FOR A TERM EXPIRING IN 2003:
<TABLE>
<S> <C> <C>
FRANK C. CARLUCCI PRINCIPAL OCCUPATION: CHAIRMAN, THE CARLYLE GROUP
FIRST BECAME DIRECTOR: MARCH 2000
AGE: 69
Chairman, The Carlyle Group, a merchant bank. U.S. Secretary of Defense from 1987 to
1989. Director: Ashland, Inc.; Kaman Corporation; Neurogen Corporation; Chairman,
Nortel Networks Corporation, The Quaker Oats Company; SunResorts, Ltd, N.V.; Texas
Biotechnology Corporation. Member, Board of Trustees for Rand Corporation, a
[FRANK C. CARLUCCI] nonprofit entity. Director of P&U prior to the Merger and of The Upjohn Company
("Upjohn") before its combination with Pharmacia AB ("PAB").
MICHAEL KANTOR PRINCIPAL OCCUPATION: PARTNER, MAYER, BROWN & PLATT
FIRST BECAME DIRECTOR: 1997
AGE: 60
Partner, Mayer, Brown & Platt, a law firm, since 1997; U.S. Secretary of Commerce,
1996-97; U.S. Trade Representative, 1993-96; National Chairman for the Clinton/Gore
Campaign, 1992.
[MICHAEL KANTOR]
</TABLE>
2
<PAGE> 6
<TABLE>
<S> <C> <C>
GWENDOLYN S. KING PRINCIPAL OCCUPATION: RETIRED SENIOR VICE PRESIDENT,
CORPORATE AND PUBLIC AFFAIRS, PECO ENERGY COMPANY
FIRST BECAME DIRECTOR: 1993
AGE: 59
Retired Senior Vice President, Corporate and Public Affairs, PECO Energy Company
(formerly Philadelphia Electric Company), a diversified utility company, 1992-98;
Commissioner, Social Security Administration, 1989-92. Director: Lockheed Martin
[GWENDOLYN S. KING] Corp.; Marsh & McLennan Companies, Inc.; Erie Family Life Insurance Co.
OLOF LUND PRINCIPAL OCCUPATION: CHAIRMAN, TIETOENATOR
CORPORATION
FIRST BECAME DIRECTOR: MARCH 2000
AGE: 69
Chairman, TietoEnator Corporation, a telecommunications company, since 1999.
Retired President and Chief Executive Officer, Celsius Industrier AB, a defense
manufacturing company, 1984 to 1997. Chairman: SIAR Foundation; the Swedish
Financial Accounting Standards Council. Director: FPG/AMFK; LKAB; the Federation of
[OLOF LUND]
Swedish Industries. Member: Royal Academy of War Sciences. Director of P&U prior to
the Merger and of PAB before its combination with Upjohn.
JOHN E. ROBSON PRINCIPAL OCCUPATION: SENIOR ADVISOR, ROBERTSON
STEPHENS
FIRST BECAME DIRECTOR: 1996
AGE: 69
Senior Advisor, Robertson Stephens, an investment banking firm, since 1993;
Distinguished Faculty Fellow, Yale University School of Management and Visiting
Fellow, The Heritage Foundation, 1993; Deputy Secretary of the U.S. Department of
the Treasury, 1989-92; Dean, Emory University Business School, 1986-89; President
[JOHN E. ROBSON]
and Chief Executive Officer, G.D. Searle & Co., 1985 to 1986. Director: Exide
Corporation; Northrop Grumman Corp.; ProLogis Trust.
BENGT SAMUELSSON PRINCIPAL OCCUPATION: PROFESSOR OF MEDICAL AND
PHYSIOLOGICAL CHEMISTRY, KAROLINSKA INSTITUTE
FIRST BECAME DIRECTOR: MARCH 2000
AGE: 65
Professor of Medical and Physiological Chemistry, and former President, Karolinska
Institute, a university and medical research facility. Nobel Laureate in Physiology
or Medicine in 1982 and current Chairman of the Nobel Foundation. Director: Svenska
Handelsbanken; Pyrosequencing AB; the Liposome Company; Nicox, S.A.; Valbonne,
[BENGT SAMUELSSON]
France. Member: Royal Swedish Academy of Sciences; the American Academy of Arts and
Sciences; the Association of American Physicians; Adacemie des Sciences, Paris; the
U.S. National Academy of Sciences; the Royal Society, London. Director of P&U prior
to the Merger and of PAB before its combination with Upjohn.
</TABLE>
3
<PAGE> 7
TO CONTINUE IN OFFICE UNTIL 2001:
<TABLE>
<S> <C> <C>
M. KATHRYN EICKHOFF PRINCIPAL OCCUPATION: PRESIDENT, EICKHOFF ECONOMICS
INCORPORATED
FIRST BECAME DIRECTOR: MARCH 2000
AGE: 61
President, Eickhoff Economics Incorporated, an economic consulting firm; Associate
Director for Economic Policy, United States Office of Management and Budget.
Director: AT&T Corp.; Tenneco Inc.; Fleet Bank, NA. Member: the Conference of
Business Economists; the Economic Club of New York; the National Association of
[KATHRYN EICKHOFF]
Business Economists. Director of P&U prior to the Merger and of Upjohn before its
combination with PAB.
FRED HASSAN PRINCIPAL OCCUPATION: CHIEF EXECUTIVE OFFICER,
PHARMACIA CORPORATION
FIRST BECAME DIRECTOR: MARCH 2000
AGE: 54
Chief Executive Officer, Pharmacia Corporation since March 2000. President and Chief
Executive Officer, P&U, from May 1997-March 2000. Former Executive Vice President
and Director of American Home Products Corporation, 1995 to May 1997. Director of
P&U prior to the Merger.
[FRED HASSAN]
PHILIP LEDER PRINCIPAL OCCUPATION: CHAIRMAN, DEPARTMENT OF
GENETICS, HARVARD MEDICAL SCHOOL, AND SENIOR
INVESTIGATOR, HOWARD HUGHES MEDICAL INSTITUTE
FIRST BECAME DIRECTOR: 1990
AGE: 65
Chairman, Department of Genetics, Harvard Medical School since 1980; John Emory
Andrus Professor of Genetics since 1980; Senior Investigator, Howard Hughes Medical
Institute since 1986. Director: Genome Therapeutics Corporation. Trustee: The
[PHILIP LEDER]
General Hospital Corporation; The Hadassah Medical Organization; Massachusetts
General Hospital; The Charles A. Revson Foundation.
BERTHOLD LINDQVIST PRINCIPAL OCCUPATION: RETIRED PRESIDENT AND CHIEF
EXECUTIVE OFFICER OF GAMBRO AB
FIRST BECAME DIRECTOR: MARCH 2000
AGE: 61
Retired President and Chief Executive Officer of Gambro AB, a global medical
technology company. Director: Modo Paper AB; Probi AB; Novotek AB; Trelleborg AB;
Munters AB; Securitas AB. Member: Royal Swedish Academy of Sciences. Director of P&U
prior to the Merger and of PAB before its combination with Upjohn.
[BERTHOLD LINDQVIST]
</TABLE>
4
<PAGE> 8
<TABLE>
<S> <C> <C>
JOHN S. REED PRINCIPAL OCCUPATION: RETIRED CHAIRMAN, CITIGROUP INC.
FIRST BECAME DIRECTOR: 1985
AGE: 61
Retired Chairman, Citigroup Inc., a commercial bank and financial services company.
Chairman and Co-Chief Executive Officer of Citigroup Inc., 1998-April 2000; Chairman
and Chief Executive Officer, Citicorp and Citibank, N.A., 1984-98. Director: Philip
Morris Companies, Inc. Member: The Business Council.
[JOHN S. REED]
WILLIAM D. RUCKELSHAUS PRINCIPAL OCCUPATION: PRINCIPAL, MADRONA INVESTMENT
GROUP L.L.C.
FIRST BECAME DIRECTOR: 1985
AGE: 67
Principal, Madrona Investment Group L.L.C., a venture capital group, since 1996;
Chairman, Browning-Ferris Industries, Inc., a waste management and recycling
company, 1995-1999; Chairman and Chief Executive Officer, Browning-Ferris
Industries, Inc., 1988-95; Of Counsel, Perkins Coie, a law firm, 1985-88;
[WILLIAM D. RUCKELSHAUS]
Administrator, Environmental Protection Agency, 1983-85. Director: Coinstar, Inc.;
Cummins Engine Co., Inc.; Nordstrom, Inc.; Solutia Inc.; Weyerhaeuser Company.
</TABLE>
TO CONTINUE IN OFFICE UNTIL 2002:
<TABLE>
<S> <C> <C>
C. STEVEN MCMILLAN PRINCIPAL OCCUPATION: PRESIDENT AND CHIEF OPERATING
OFFICER, SARA LEE CORPORATION
FIRST BECAME DIRECTOR: MARCH 2000
AGE: 54
President and Chief Operating Officer, Sara Lee Corporation, a consumer goods
company, since 1997 and other management positions at Sara Lee before that.
Effective July 1, 2000, Mr. McMillan will be President and Chief Executive Officer
of Sara Lee Corporation. Executive Vice President Sara Lee Corporation, 1993-1997.
[C. STEVEN MCMILLIAN]
Director: Sara Lee Corporation and Dynegy Inc. Director of P&U prior to the Merger.
WILLIAM U. PARFET PRINCIPAL OCCUPATION: CHAIRMAN AND CHIEF EXECUTIVE
OFFICER, MPI RESEARCH INC.
FIRST BECAME DIRECTOR: MARCH 2000
AGE: 53
Chairman and Chief Executive Officer, MPI Research Inc., a pre-clinical toxicology
and clinical pharmaceutical testing laboratory and Co-Chairman of MPI Research Inc.
before that. Director: CMS Energy Corporation; the Financial Accounting Foundation;
Stryker Corporation; Sybron International. Director of P&U prior to the Merger and
[WILLIAM U. PARFET]
of Upjohn before its combination with PAB.
</TABLE>
5
<PAGE> 9
<TABLE>
<S> <C> <C>
JACOBUS F. M. PETERS PRINCIPAL OCCUPATION: RETIRED CHAIRMAN OF THE
EXECUTIVE BOARD AND CHIEF EXECUTIVE OFFICER, AEGON
N.V.
FIRST BECAME DIRECTOR: 1993
AGE: 68
Retired Chairman of the Executive Board and Chief Executive Officer, AEGON N.V., an
insurance company, 1984-93. Director: Kleinwort Endowment Policy Trust Plc.;
[JACOBUS F. M. PETERS] Chairman of Supervisory Board, Bank Dutch Municipalities. Member of Supervisory
Board: AEGON N.V.; Amsterdam Company for Town Restoration Ltd.; Gilde Investment
Funds; Randstad Holding N.V.; SAMAS Group N.V.; United Flower Auctions Aalsmeer,
KEMA.
ULLA REINIUS PRINCIPAL OCCUPATION: PRESIDENT, FINANSFAKTA R. AB
FIRST BECAME DIRECTOR: MARCH 2000
AGE: 62
President, Finansfakta R. AB, a publisher and financial information consultant.
Director: Swedish Association for Share Promotion; the Swedish State Pension Fund,
No. 4; and the Royal Swedish Opera. Member: Ethical Advisory Board of the Swedish
County Pension Funds. Director of P&U prior to the Merger and of PAB before its
[ULLA REINIUS] combination with Upjohn.
ROBERT B. SHAPIRO PRINCIPAL OCCUPATION: CHAIRMAN OF THE BOARD, PHARMACIA
CORPORATION
FIRST BECAME DIRECTOR: 1993
AGE: 61
Chairman of the Board, Pharmacia since March 2000. Chairman and Chief Executive
Officer, Monsanto 1997--March 2000; Chairman, President and Chief Executive
Officer, Monsanto, 1995-97; President and Chief Operating Officer, Monsanto,
1993-95; Executive Vice President and Advisory Director, Monsanto, and President,
[ROBERT B. SHAPIRO]
The Agricultural Group of Monsanto, 1990-93. Director: Northwestern Memorial
Hospital, Silicon Graphics, Inc.; Rockwell International Corporation. Trustee:
Washington University. Member: The Business Council; American Society of Corporate
Executives.
</TABLE>
6
<PAGE> 10
STOCK OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
Information is set forth below regarding beneficial ownership of common stock of
Pharmacia by (i) each person who is a director or nominee; (ii) each executive
officer named in the Summary Compensation Table on page 19; and (iii) all
directors and executive officers as a group. Except as otherwise noted, each
person has sole voting and investment power as to his or her shares. All
information is as of May 4, 2000.
<TABLE>
<CAPTION>
Shares of Shares Underlying
Common Stock Options Exercisable
Owned Directly Within 60
Name or Indirectly Days(h) Total
---- -------------- ------------------- -----
<S> <C> <C> <C>
Frank C. Carlucci(a)................................. 29,740 3,570 33,310
Richard U. De Schutter(b)............................ 244,084 1,095,730 1,339,814
M. Kathryn Eickhoff(a)............................... 8,391 3,570 11,961
Fred Hassan(c)(d).................................... 663,334 2,023,000 2,686,334
Michael Kantor....................................... 800 13,637 14,437
Gwendolyn S. King.................................... 3,865 7,387 11,252
Philip Leder......................................... 9,002 13,636 22,638
Berthold Lindqvist................................... 2,281 3,570 5,851
Olof Lund............................................ 2,727 3,570 6,297
C. Steven McMillan................................... 5,950 -- 5,950
Philip Needleman(b).................................. 209,195 1,111,497 1,320,692
William U. Parfet(a)(c)(e)........................... 1,874,357 3,570 1,877,927
Jacobus F. M. Peters................................. 4,705 10,227 14,932
John S. Reed......................................... 91,947 14,395 106,342
Ulla Reinius......................................... 2,281 3,570 5,851
John E. Robson(f).................................... 6,093 10,546 16,639
Timothy G. Rothwell(c)............................... 19,384 452,976 472,360
William D. Ruckelshaus............................... 16,286 8,919 25,205
Bengt Samuelsson..................................... 3,174 3,570 6,744
Robert B. Shapiro.................................... 1,038,079 2,833,875 3,871,954
Hendrik A. Verfaillie(b)(g).......................... 232,219 1,601,922 1,834,141
29 directors and executive officers as a
group(a)(b)(c)(d)(e)(f)(g)(h)...................... 4,609,723 11,951,814 16,561,537
</TABLE>
(a) Includes the following number of shares representing deferred directors'
fees payable in stock which are held in trust with respect to which the
individual has shared voting power: Mr. Carlucci, 28,578; Ms. Eickhoff,
3,319; Mr. Parfet, 498.
(b) Includes shares held under Pharmacia's Savings and Investment Plan ("SIP"):
Dr. Needleman, 3,473; Mr. De Schutter, 17,274; Mr. Verfaillie, 16,610; and
directors and executive officers as a group, 38,965. With respect to shares
held under the SIP, the individuals have sole discretion as to voting and,
within limitations provided by the SIP, investment of shares. With respect
to shares held under other benefit and incentive plans, employee directors
and officers have sole voting power and no current investment power.
(c) Includes the following number of shares or share equivalents credited under
the P&U Employee Savings Plan with respect to which the individual has
shared voting power: Mr. Hassan, 609; Mr. Parfet, 8,475; Mr. Rothwell, 672.
(d) Includes 4,400 held by Mr. Hassan's wife.
(e) Includes 1,864,710 shares held in trust over which Mr. Parfet shares voting
and/or dispositive power in his capacity as trustee over various trusts.
(f) Includes 1,378 shares owned jointly by Mr. Robson and his wife.
(g) Includes 150,374 shares owned jointly by Mr. Verfaillie and his wife.
7
<PAGE> 11
(h) The Securities and Exchange Commission deems a person to have beneficial
ownership of all shares which that person has the right to acquire within
60 days, including by the exercise of stock options.
The percentage of shares of outstanding common stock of Pharmacia, including
shares underlying options exercisable within 60 days beneficially owned by all
directors and executive officers as a group, is approximately 1.3%. The
percentage of such shares beneficially owned by any director, nominee or
executive officer does not exceed 1%.
------------------------------
The following table sets forth certain information regarding the only known
beneficial owner of more than 5% of Pharmacia's common stock as of December 31,
1999.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME AND ADDRESS OF BENEFICIAL PERCENT
OF BENEFICIAL OWNER OWNERSHIP OF CLASS
------------------- ----------------- --------
<S> <C> <C>
Capital Research and Management Company..................... 68,444,100(a) 5.3%(b)
333 South Hope Street
Los Angeles, California 90071
</TABLE>
(a) As reported in its Schedule 13G dated February 10, 2000, Capital Research
and Management Company, through its role as investment adviser to several
investment companies, may be deemed to be the beneficial owner of these
shares with sole dispositive power.
(b) Percentage of the Company's outstanding shares of common stock on May 4,
2000.
BOARD MEETINGS AND COMMITTEES; COMPENSATION OF DIRECTORS
During 1999, the Board of Directors of Monsanto met seven times. All incumbent
directors attended 75% or more of the aggregate meetings of the Board and of the
Board Committees on which they served during the period they held office in
1999. During 2000, the Monsanto Board of Directors met two times, the P&U Board
of Directors met two times and from January 1, 2000 to the date of this Proxy
Statement, the Pharmacia Board of Directors met one time.
The new Pharmacia Board of Directors has the following Committees:
EXECUTIVE COMMITTEE
Members: Mr. Shapiro, Chair; Messrs. Carlucci, Hassan, Lindqvist, Robson
and Ruckelshaus
The Executive Committee generally has the powers of the Board in directing the
management of the business and affairs of Pharmacia when a meeting of the full
Board cannot be arranged. The Committee did not meet in 1999 or in 2000 to date.
AUDIT AND FINANCE COMMITTEE
Members: Mr. Reed, Chair; Ms. Eickhoff, Ms. Reinius and Mr. Peters
The Audit and Finance Committee is composed of non-employee directors who are
"independent" of management as required by the rules of the New York Stock
Exchange and free from any relationship that, in the opinion of the Board, would
interfere with the exercise of independent judgment. The Committee's composition
and functioning will conform to applicable requirements of the New York Stock
Exchange and the U.S. Securities and Exchange Commission. The Company's internal
auditors and the independent accountants will meet periodically with the Audit
and Finance Committee, with and without management representatives present, to
discuss the results of their examinations, the adequacy of Pharmacia's internal
accounting controls, and the quality of Pharmacia's financial reporting. The
Audit and Finance Committee will also review Pharmacia's financial policies to
ensure Pharmacia's sound operation and long-term growth. Prior to the Merger,
the equivalent Committee of Monsanto met six times in 1999, including to (i)
review and discuss the 1999 Monsanto audited financial statements with
management and the independent auditors; (ii) discuss the matters required to be
discussed with the independent auditors by SAS 61; (iii) receive the
8
<PAGE> 12
written disclosures and the letter from the independent accountants required by
Independence Standards Board Standard No. 1; (iv) discuss the independence of
the Company's independent auditors with the independent auditors; and (v)
recommend to the Board that the audited financial statements be included in
Monsanto's Annual Report on Form 10-K for 1999.
COMPENSATION COMMITTEE
Members: Mr. Carlucci, Chair; Mrs. King and Messrs. McMillan and
Ruckelshaus
The Compensation Committee, composed of non-employee directors, approves the
establishment, modification and termination of Pharmacia's major compensation
and benefit plans and agreements. The Compensation Committee sets salaries and
makes grants and awards under the Company's compensation plans for executive
officers. Prior to the Merger, the equivalent Committee was known as the People
Committee and met eight times in 1999.
NOMINATING AND CORPORATE GOVERNANCE COMMITTEE
Members: Mr. Ruckelshaus, Chair; Messrs. Kantor, Lindqvist and Parfet
The Nominating and Corporate Governance Committee recommends the size and
composition of the Board, nominates Directors for election and removal, if
appropriate, and annually evaluates the performance of the Board and its
Directors. The Committee also recommends Board Committee charters, members and
chairpersons. The Committee nominates individuals for election as officers of
Pharmacia and reviews management succession and individual development plans.
Finally, the Nominating and Corporate Governance Committee reviews corporate
governance policies and procedures and practices. The Committee will consider
director nominees recommended by stockholders that meet the timeliness and other
requirements of the Company's By-Laws and applicable law. Any such
recommendations should be made in writing to the Secretary of the Company at the
address set forth on the first page of this proxy statement. There was no
equivalent Committee prior to the Merger, although the nominating function was
part of the responsibility of the People Committee, which met eight times in
1999.
PUBLIC ISSUES AND SOCIAL RESPONSIBILITY COMMITTEE
Members: Mrs. King, Chair; Messrs. Kantor, Lund and Robson
The Public Issues and Social Responsibility Committee reviews and monitors
Pharmacia's performance as it affects communities, customers, and the
environment. The Committee also identifies and investigates emerging issues that
will affect Pharmacia's impact on society. Prior to the Merger, the equivalent
Committee was known as the Public Policy Committee and met four times in 1999.
SCIENCE AND TECHNOLOGY COMMITTEE
Members: Dr. Samuelsson, Chair; Dr. Leder and Messrs. Parfet and Reed
The Science and Technology Committee reviews and monitors Pharmacia's science
and technology initiatives in pharmaceutical research and development,
information technology, global supply, biotechnology and similar areas. The
Committee also identifies and discusses significant emerging science and
technology issues. Prior to the Merger, the Committee met four times in 1999.
DIRECTORS' FEES AND OTHER ARRANGEMENTS
Annual compensation for non-employee members of the new Pharmacia Board of
Directors consists of a retainer fee of $50,000 ($100,000 for the Chairman of
the Board) and either 2,200 shares of Pharmacia common stock or a stock option
grant of 6,600 shares of Pharmacia common stock having an exercise price equal
to the fair market value of such stock on the date of grant and a term of ten
years. The chairperson of each Board committee receives an additional annual fee
of $20,000. Directors are permitted to defer all or part of their fees in common
stock or cash until they leave the Board. There are no additional fees for
attending regular meetings or serving on regular Board committees.
9
<PAGE> 13
EXECUTIVE COMPENSATION
COMPARISON OF CUMULATIVE TOTAL STOCKHOLDER RETURN
The merger between Monsanto and P&U did not occur until March 31, 2000 and
shares of the new Pharmacia Corporation did not begin trading until April 3,
2000. As a result, the cumulative total stockholder return on the common stock
of the merged entity over a five-year period cannot be provided. However, at the
close of the first trading day after the Merger was announced, December 20, 1999
the total market capitalization of the two companies was $48.1 billion; on March
31, 2000, the effective date of the Merger, the total market capitalization of
the Company was approximately $63.7 billion; and on May 4, 2000, the total
market capitalization of the Company was approximately $65.7 billion.
The graph below compares total stockholder return (assuming reinvestment of
dividends) on Monsanto's common stock with the cumulative total return of the
Standard & Poor's 500 Stock Index and the cumulative total return of a peer
group for the five year period prior to December 31, 1999. After the Merger on
March 31, 2000, P&U stockholders received 1.19 shares of Pharmacia common stock
for each share of P&U common stock, and Monsanto stockholders continued to hold
their Monsanto common stock although the Company was renamed Pharmacia. Because
Monsanto, and now Pharmacia, is involved in both the pharmaceutical and
agricultural businesses, no published peer group accurately mirrors the
Company's business. Accordingly, in 1997 a new peer group index (the "Custom
Composite Index") that includes Bayer AG ADR, Dow Chemical Company, E.I. DuPont
de Nemours and Company, Hoechst AG, Novartis AG, Aventis (formerly known as
Rhone-Poulenc S.A.), and AstraZeneca plc (formerly known as Zeneca Group PLC)
was used to measure the Company's relative common stock performance. The Custom
Composite Index reflects the separate performance of Ciba-Geigy AG and Sandoz
AG, prior to their merger pursuant to which Novartis AG was formed in December
1996. These indices are included for comparative purposes only and do not
necessarily reflect management's opinion that such indices are an appropriate
measure of the relative performance of the stock involved, and are not intended
to forecast or be indicative of possible future performance of the Company's
common stock.
CUMULATIVE TOTAL RETURN
BASED UPON AN INITIAL INVESTMENT OF $100 ON DECEMBER 31, 1994
WITH DIVIDENDS REINVESTED
[LINE GRAPH]
<TABLE>
<CAPTION>
MONSANTO * S&P 500(R) CUSTOM COMPOSITE INDEX
---------- ---------- ----------------------
<S> <C> <C> <C>
Dec-94 100.00 100.00 100.00
Dec-95 179.00 138.00 133.00
Dec-96 290.00 169.00 199.00
Dec-97 346.00 226.00 259.00
Dec-98 392.00 290.00 283.00
Dec-99 293.00 351.00 281.00
</TABLE>
* After March 31, 2000, Monsanto common stock became Pharmacia common stock.
10
<PAGE> 14
The graph below is prepared on the same basis as the prior graph, but continues
the measurement period until April 30, 2000. Please note that the periods after
December 1999 are shown on a monthly basis for ease of reference and are not to
scale with the prior annual periods.
CUMULATIVE TOTAL RETURN
BASED UPON AN INITIAL INVESTMENT OF $100 ON DECEMBER 31, 1994
WITH DIVIDENDS REINVESTED
[LINE GRAPH]
<TABLE>
<CAPTION>
PHARMACIA * S&P 500(R) CUSTOM COMPOSITE INDEX
----------- ---------- ----------------------
<S> <C> <C> <C>
Dec-94 100.00 100.00 100.00
Dec-95 178.94 137.58 123.70
Dec-96 289.22 169.17 174.80
Dec-97 347.39 225.60 234.98
Dec-98 393.80 290.08 263.31
Dec-99 294.63 351.12 262.04
Jan-00** 293.06 333.47 228.89
Feb-00** 322.93 327.16 220.53
Mar-00** 428.62 359.17 240.35
Apr-00** 415.62 348.36 239.04
</TABLE>
* Monsanto common stock on and before March 31, 2000.
** Not to scale.
REPORTS OF COMPENSATION COMMITTEES
Under the rules of the Securities and Exchange Commission, the Company is
required to report the compensation earned in 1999 and the two prior years for
Messrs. Shapiro and Hassan, who served as Chief Executive Officer of Monsanto
and P&U, respectively, the two predecessor companies of Pharmacia, and for the
next four most highly compensated executive officers of either company. In
addition, the Company is required to include a report from the respective
Board's Compensation Committees describing the applicable policies and
performance criteria used by the Committees in setting 1999 compensation for
executive officers. As a result, this proxy statement includes separate reports
on 1999 executive compensation from the Compensation Committees of Monsanto and
P&U. In addition, because the Compensation Committee of the Pharmacia Board of
Directors has established new executive compensation policies for Pharmacia
Corporation, the report from that Committee describing the compensation
philosophy and policies of the new Company is also included.
REPORT OF THE MONSANTO COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
This report of the Monsanto Compensation Committee relates to the 1999
compensation of Messrs. Shapiro, Dr. Needleman and Messrs. De Schutter and
Verfaillie included in the Summary Compensation Table set forth on page 19.
11
<PAGE> 15
Policies and Objectives
The Monsanto Compensation Committee adopted, and made awards to executive
officers under plans that were designed to:
- - focus management on business performance that creates stockholder value;
- - recognize the contribution of each business unit to stockholder value;
- - build an ownership mentality throughout the company;
- - encourage innovative approaches to the business;
- - reward for results rather than on the basis of seniority, tenure, or other
entitlement;
- - continue the emphasis on variable incentive compensation versus fixed or base
pay, particularly for senior executives; and
- - create an environment that encourages exceptional performance with an
opportunity for higher reward.
In order to further these objectives, 1999 executive officer compensation
included three components: (1) base pay, (2) an annual incentive bonus, and (3)
a long-term incentive award.
Base Pay. From November 1995 to September 1999, salaries were frozen by the
Committee except for job changes or major increases in responsibilities. In
September 1999, the Committee increased the total compensation, including the
base pay, of some executives to ensure competitive pay and to recognize the
value of the individual. This change was retroactively applied to July 1, 1999.
The levels of compensation at competitive companies which were used to calculate
such increases are derived from compensation surveys provided by independent
consultants covering pharmaceutical, agricultural chemicals and other major
companies (adjusted for company size differentials).
Annual Incentive Program. The Annual Incentive Program provided for cash awards
based upon achievement of certain corporate and business goals set at the
beginning of the year, the individual's level of responsibility and the
individual's personal performance.
The goals established for 1999 included increasing net income and net operating
cash flow; and key performance indicators such as product launches, investment
in core technologies, acquisition integration, biotech acceptance, and general
business operations. The actual annual incentive award was then determined based
on actual results measured against these goals. The Committee was also permitted
to adjust incentive awards based on the results of four additional factors:
performance compared to competitors (measured by such criteria as total
stockholder return, earnings per share, and return on equity), the impact of the
general economy, the balance achieved between long-term and short-term
objectives, and the motivational impact of the award.
Long-term Compensation. For the period 1997 through 1999, long-term compensation
for the Chief Executive Officer and other corporate executives consisted of
stock options that, for 80% of the grant, could be exercised only if Monsanto's
stock price met or exceeded three specific price targets, which were higher than
the fair market value at the time of grant, within prescribed times, provided
the options were held for a minimum of one year, and for 20% of the grant, could
be exercised at the fair market value at the time of grant.
In addition, the Chief Executive Officer and other corporate executives were
provided an opportunity to purchase a specified number of shares of Monsanto
common stock at the then fair market value by using the proceeds of a
full-recourse loan obtained from Monsanto. These executives were also eligible
to receive a deferred cash bonus equal to the amount of the full-recourse loan
plus accrued interest, which bonus must be used to repay the loan, two-thirds of
which is based on Monsanto's common stock performance relative to the
performance of the Standard & Poor's Industrials Index and one-third of which is
based upon continued service with Monsanto. However, none of the
performance-based portion of the incentive is paid unless the total return to
Monsanto's stockholders is at or above the total stockholder return of companies
at the 50th
12
<PAGE> 16
percentile of the Standard & Poor's Industrials Index, and for maximum
incentives, total stockholder return for Monsanto must be at or above the 75th
percentile.
In order to further align the interests of senior management with the interests
of stockholders, the Committee adopted a premium stock option purchase program
in 1999, which provided an opportunity for executive officers to purchase
premium stock options for Monsanto stock at $7.77 per option having an exercise
price of $75. The stock options will expire if the stock price of $75 is not
achieved within five years. Executive officers also received a premium stock
option grant in 1999 having an exercise price of $75.00, representing
competitive long-term compensation for the year 2000, which are reflected in the
stock option grant table set forth on page 21.
After implementation of the premium stock option purchase program (including the
year 2000 grant described above), for several executives, long-term compensation
was below the level set by the Committee. Those executives were granted
additional premium priced stock options in order to make up such difference.
These stock options are exercisable at $51 per share, even though the price of
the stock on the date of grant was $42.125 per share. In accordance with the
terms of the Stock Option Plan, the exercise price reverted to the fair market
value on the date of grant as a result of the change-in-control.
1999 Compensation for the Chief Executive Officer
Mr. Shapiro's 1999 salary, which was set at $800,000 per annum in November 1995,
remained at that level until the Committee raised it to $900,000 per annum
effective as of July 1, 1999.
The Committee approved an annual incentive award of $1.44 million for Mr.
Shapiro for 1999. Mr. Shapiro's award was based on company-wide goals
established by the Committee at the beginning of the year. Performance against
these goals was high and included the highly successful launch of Celebrex, net
income above budget, net operating cash flow above budget, and the high
performance on most of the key performance indicators. The Committee considered
the decline in the stock price in spite of above budget performance against
goals and the impact of acceptance of biotechnology.
Deductibility of Compensation
The Committee complied with the requirements of the U.S. Internal Revenue Code,
with respect to stock options and annual and long-term incentive programs in
order to maintain the deduction for compensation in excess of $1 million paid to
any executive officer.
COMPENSATION COMMITTEE
William D. Ruckelshaus, Chair
Gwendolyn S. King
Philip Leder
February 24, 2000
13
<PAGE> 17
REPORT OF THE P&U COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
This report of the P&U Compensation Committee relates to the 1999 compensation
of Messrs. Hassan and Rothwell included in the Summary Compensation Table set
forth on page 19.
Compensation Policies
The Committee's primary objective is to encourage and reward executive efforts
that create stockholder value through achievement of corporate objectives,
business strategies and performance goals. The Compensation Committee develops
compensation policies and practices that are consistent with and linked to the
P&U strategic business objectives. This is accomplished by blending cash and
equity compensation and by aligning the interests of executives with those of
stockholders generally.
Components of Executive Compensation
The four primary components of executive compensation are:
- - Base salary
- - Annual incentives
- - Long-term incentives
- - Employee benefits
Each category is offered to key executives in various combinations, structured
in each case to meet varying business objectives. The philosophy underlying each
element of executive compensation is discussed below.
Base Salaries: All executive base salaries, including Mr. Hassan's, were based
on several factors:
- - Competitive labor market position determined from market surveys
- - Level of job responsibility
- - Individual and team performance
These factors were not weighted, and salary increases were based on a subjective
assessment by the Compensation Committee.
The Committee's objective is to ensure base salaries that are competitive at or
near the median of a comparator group of global, research-based pharmaceutical
companies. Base salaries above the median may be necessary, in some cases, to
attract and retain key talent. Executive officer performance ratings and base
salary increases are reviewed by the Committee annually.
Annual Incentives: Target annual cash incentives and specific performance
criteria are established each year for executive officers with the actual payout
based on the extent to which the performance criteria are met. Annual incentives
are "targeted" at the industry median, with above-average and superior
performance resulting in actual payouts above the median of the market. Below a
threshold level of performance, no awards may be granted under the plan. The
weightings may be adjusted to take into account unusual circumstances. For 1999,
the actual award was based on growth in revenue, growth in earnings per share,
and individual performance. Generally, corporate revenue and earnings-per-share
growth are weighted equally with business unit and individual performance. These
performance measures were exceeded for 1999, and, accordingly, the actual
payouts for 1999 were above the median.
Long-Term Incentives: Long-term equity-based compensation, in the form of stock
options and restricted stock, comprises the largest portion of the total
compensation package for executive officers. In any given year, an executive
officer may be offered stock options and/or restricted stock. Long-term
incentives are targeted at the median, with above-average and superior
performance resulting in awards above the median of the market.
14
<PAGE> 18
Stock Options: Stock options provide executives with the opportunity to buy
P&U stock, increase their equity in P&U and share in the appreciation in
the value of the stock. The Committee grants stock options annually with
ten-year terms at an exercise price equal to the fair market value on the
date of grant. The stock options have value based on the level of stock
price appreciation over the market price on the date of grant. This
provides an incentive for executives to create wealth for the stockholders
and rewards them in proportion to the gain received by other stockholders.
Stock option awards generally vest over a three-year period for retention
purposes.
Grants for the executive officers, including Mr. Hassan, were based on a
comparison to the comparator group of global, research-based pharmaceutical
companies.
Restricted Stock: Restricted stock is used selectively to focus executives
on the long-term performance of P&U and to serve as a retention device for
high potential and key employees. Restricted stock awards generally vest
over a three-year period and are normally not granted on an annual basis.
Employee Benefits: Employee benefits offered to key executives are designed to
provide a "safety-net" of protection against the financial catastrophes that can
result from illness, disability or death, and to provide a reasonable level of
retirement income based on years of service with the Company.
1999 Compensation of the Chief Executive Officer
The compensation of Mr. Hassan was established by the Committee based on an
analysis of his past performance as Chief Executive Officer, review of
comparable compensation of chief executive officers of other leading global,
research-based pharmaceutical companies, and application of the compensation
policies described above. In order to ensure Mr. Hassan's continued leadership
and retention with the Company, the Committee entered into a new employment
agreement with Mr. Hassan in 1999.
In view of Mr. Hassan's efforts in significantly improving stockholder value and
strengthening results of operations, and consistent with the policies stated
above, Mr. Hassan received a base salary increase of 5% in January 1999, an
annual incentive payout of $1,901,400 in March 2000, 400,000 stock options in
February 1999 and 200,000 restricted shares in November 1999. All objectives set
for Mr. Hassan's incentive compensation--growth in revenue, growth in earnings
per share and individual performance--were exceeded.
The Board of Directors evaluates the performance of the Company's Chief
Executive Officer at least annually based upon both P&U's financial performance
and the extent to which the strategic and business goals established for P&U are
met. The Committee does not assign relative weights or rankings to particular
factors but will make its determination based upon a consideration of all such
factors.
Policy on Deductibility of Compensation
The Committee believes the stock options granted to P&U's executive officers
meet the requirements for fully deductible compensation under the U.S. Internal
Revenue Code. However, since the annual incentive compensation plan reserves
some discretion for the Committee to adjust awards to ensure that the efforts of
the eligible group are compensated fairly and appropriately, such awards may not
be fully deductible under the Internal Revenue Code.
COMPENSATION COMMITTEE
F. C. Carlucci, Chair
G. Douglas
B. Lindqvist
C.S. McMillan
February 11, 2000
15
<PAGE> 19
REPORT OF THE PHARMACIA COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
Compensation Policies
The overall goal of the Compensation Committee is to develop compensation
policies and practices that encourage and reward executive efforts to create
stockholder value through achievement of corporate objectives, business
strategies and performance goals. This is accomplished by blending cash and
equity compensation and by aligning the interests of executives with those of
stockholders generally.
There are certain principles to which the Committee adheres in structuring the
compensation package for each of the executive officers. They are as follows:
Long-Term and At-Risk Focus: The major portion of compensation for senior
executive officers should be composed of long-term, at-risk pay to align
management with the long-term interests of stockholders. Over time, the
Committee expects that less emphasis will be placed on base salary, annual cash
incentives and employee benefits.
Equity Based: Equity-based plans should comprise the major part of the at-risk
portion of total compensation, which is intended to instill ownership and
long-term strategic thinking and link compensation to corporate performance and
the interests of stockholders generally. Consistent with this philosophy, the
Compensation Committee established Stock Ownership Guidelines for officers and
other key employees of the Company. The Committee annually reviews each
executive officer's ownership interest as it relates to the guidelines.
Market Competitiveness: Total compensation should be targeted at the upper end
of the second highest quartile of the range of total compensation of a group of
similar global, research-based pharmaceutical companies [American Home Products
Corporation, Bristol-Myers Squibb Company, Eli Lilly and Company, Johnson &
Johnson, Merck & Company, Inc., Pfizer Inc., Schering-Plough Corporation and
Warner-Lambert Company (the "Comparator Group")] and other large,
high-performing, general industry companies. This Comparator Group, which is
different from the group used in the stock performance graph set forth on page
10, was selected as the group of companies competing for employment of the same
group of executives. Over time, the level of the Company's competitiveness in
total compensation should be based heavily on the Company's stock price
performance relative to the Comparator Group. Clearly superior performance
should result in actual total compensation levels within the top quartile of the
Comparator Group relative to the peer companies.
Components of Executive Compensation
The four primary components of executive compensation are:
- - Base salary
- - Annual incentives
- - Long-term incentives
- - Employee benefits
Each category is offered to key executives in various combinations, structured
in each case to meet varying business objectives. The philosophy underlying each
element of executive compensation is discussed below.
Base Salaries: All executive base salaries, including Mr. Hassan's, are based on
several factors:
- - Competitive labor market position determined from market surveys
- - Level of job responsibility
- - Individual and team performance
These factors are not weighted, and salary increases are based on a subjective
assessment by the Compensation Committee.
16
<PAGE> 20
The Committee's objective is to ensure that base salaries are competitive at or
near the median of the Comparator Group. Base salaries above the median may be
necessary, in some cases, to attract and retain key talent. Executive officer
performance ratings and base salary increases are reviewed by the Committee
annually.
Annual Incentives: Target annual cash incentives and specific performance
criteria are established each year for executive officers with the actual payout
based on the extent to which the performance criteria are met. Annual incentives
are "targeted" at the median of the Comparator Group, with above-average and
superior performance resulting in actual payouts above the median of the
Comparator Group. Below a threshold level of performance, no awards may be
granted under the plan. The weightings may be adjusted to take into account
unusual circumstances. For 2000, the actual awards will be based on growth in
revenue, growth in earnings per share and individual performance.
Long-Term Incentives: Long-term equity-based compensation, in the form of stock
options and restricted stock, comprises the largest portion of the total
compensation package for executive officers. In any given year, an executive
officer may be offered stock options and/or restricted stock. Long-term
incentives are targeted at the 75th percentile of the Comparator Group, with
above-average and superior performance resulting in long-term compensation in
the top quartile of the Comparator Group.
Stock Options: Stock options provide executives with the opportunity to buy
Company common stock, increase their equity in the Company and share in the
appreciation in the value of the common stock. The Committee grants stock
options annually with ten-year terms at an exercise price equal to the fair
market value on the date of grant. The stock options have value based on
the level of stock price appreciation over the market price on the date of
grant. This provides an incentive for executives to create wealth for the
stockholders and rewards them in proportion to the gain received by other
stockholders. Stock option awards generally vest ratably over a three-year
period for retention purposes.
Grants for the executive officers, including Mr. Hassan, were based on a
comparison to the Comparator Group.
Restricted Stock: Restricted stock is used to focus executives on the
long-term performance of the Company and to serve as a retention device for
high potential and key employees. Restricted stock awards generally vest
over a three-year period and are normally not granted on an annual basis.
Some restricted stock awards will only vest upon the attainment of specific
Company performance measures.
Employee Benefits: Employee benefits offered to key executives are designed to
provide a "safety-net" of protection against the financial catastrophes that can
result from illness, disability or death, and to provide a reasonable level of
retirement income based on years of service with the Company.
Chief Executive Officer Compensation
The compensation of Mr. Hassan was established by the Committee based on an
analysis of his past performance as Chief Executive Officer of P&U, review of
comparable compensation of chief executive officers of the Comparator Group, and
application of the compensation policies described above.
In view of Mr. Hassan's superior performance, and consistent with the policies
stated above for the year 2000, Mr. Hassan received a base salary of $1,300,000,
an annual incentive compensation target award of $1,300,000, 500,000 stock
options vesting ratably over a three-year period or upon a change in control,
and 300,000 performance shares that will be earned on December 31, 2004 based on
the Company's relative total stockholder return compared to the Comparator Group
and absolute total stockholder return, or upon a change-in-control.
The Board of Directors will evaluate the performance of the Company's Chief
Executive Officer at least annually based upon both the Company's financial
performance and the extent to which the strategic and business goals established
for the Company are met. The Committee does not assign relative weights or
rankings to particular factors but will make its determination based upon a
consideration of all such factors.
17
<PAGE> 21
Policy on Deductibility of Compensation
The U.S. Internal Revenue Code limits to $1 million the corporate tax deduction
for compensation paid to certain executive officers unless the compensation is
based upon non-discretionary, pre-established performance goals. The Committee
believes the stock options granted to the Company's executive officers meet the
requirements for fully deductible compensation. However, since the annual
incentive compensation plan reserves some discretion to adjust awards to ensure
that the efforts of the eligible group are compensated fairly and appropriately,
such awards may not be fully deductible under the Internal Revenue Code.
Concluding Statement
This Committee believes that the executive compensation policies and programs
described in this report serve the best interest of the stockholders.
Compensation delivered to executives is intended to be linked to and
commensurate with Company performance and with stockholder expectations. The
Committee believes that the results of the compensation philosophy described in
this report should be measured over a period of time sufficient to determine
whether such compensation strategy and philosophy is aligned with and responsive
to stockholder expectations.
COMPENSATION COMMITTEE
F. C. Carlucci, Chair
G. King
C. S. McMillan
W. Ruckelshaus
April 17, 2000
18
<PAGE> 22
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the Compensation Committee of the Board of Directors of
Monsanto, P&U or Pharmacia were officers or employees of such companies.
However, until his consulting agreement with Monsanto expired in January 2000,
Dr. Leder, who was a member of the Monsanto Compensation Committee, provided
consulting services in areas of interest to Monsanto, particularly in the field
of biological sciences. In 1999, Dr. Leder received $143,400 under the
consulting agreement.
SUMMARY COMPENSATION TABLE
THE INFORMATION ON EXECUTIVE COMPENSATION INCLUDED IN THIS SECTION OF THE PROXY
STATEMENT WAS PREVIOUSLY MADE PUBLICLY AVAILABLE IN FILINGS BY THE RESPECTIVE
COMPANIES WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION IN MARCH 2000.
<TABLE>
<CAPTION>
Long Term Compensation
---------------------------------------
Annual Compensation Awards Payouts
- ----------------------------------------------------------------------------------------------------------------------------------
(b) (c) (d) (e) (g) (h)
(a) Other (f) Securities (i)
Name and Annual Restricted Under- All Other
Principal Compen- Stock Lying LTIP Compen-
Position sation Awards Options Payouts sation
During 1999 Year Salary($) Bonus($) ($)(1) ($) (#) ($) ($)(2)
----------- ---- --------- -------- ------- ---------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
F. Hassan
President and CEO, 1999 1,114,688 1,901,400 -- 12,012,501(4) 476,000 0 50,883
P&U(3) 1998 1,050,000 1,176,000 103,116 0 357,000 0 37,000
1997(5) 644,445 636,000 -- 10,080,000(6) 595,000 0 0
R. B. Shapiro 1999 850,000 1,440,000 61,207 0 394,064 0 120,185
Chairman and CEO, 1998 800,000 800,000 -- 0 0 0 101,070
Monsanto 1997 800,000 965,000 69,466 0 79,811 750,365(7) 171,624
P. Needleman 1999 550,000 1,100,000 -- 0 96,005 0 105,221
Senior Vice President, 1998 495,833 700,000 -- 0 193,588 0 67,761
Monsanto 1997 450,000 700,000 -- 0 76,904 4,570,360(8) 53,367
R. U. De Schutter 1999 650,000 950,000 -- 0 160,339 0 156,452
Vice Chairman and Chief 1998 600,000 810,000 -- 0 0 0 60,236
Administrative Officer, 1997 525,000 700,000 -- 0 460,391 6,757,745(8) 66,339
Monsanto
H. A. Verfaillie 1999 650,000 900,000 -- 0 222,115 0 138,932
President and Chief 1998 600,000 810,000 -- 0 0 0 72,439
Operating Officer, 1997 566,667 645,000 -- 0 34,917 979,000(7) 96,146
Monsanto
T. G. Rothwell 1999 756,000 756,730 -- 0 119,000 0 51,783
Executive Vice President 1998 676,552 600,300 325,000 687,969(9) 261,800 0 42,333
and President, Global
Pharmaceutical
Operations, P&U
</TABLE>
NOTE: Information regarding shares and stock options reported in this table and
in succeeding tables has been adjusted to reflect the spin-off of
Monsanto's chemicals business in 1997, and the conversion of P&U shares
into Pharmacia shares at the rate of 1.19 Pharmacia shares for every P&U
share.
(1) Applicable regulations set reporting levels for certain non-cash
compensation. For Mr. Hassan, the amounts presented in this column include,
among other things, relocation allowance and moving expenses, amounts for
reimbursement of taxes and related gross-ups for income taxes in excess of
those that would have been incurred in his home country, and amounts paid to
Mr. Hassan's home country's social security system while he was employed in
the U.K. The 1999 and 1997 amounts for Mr. Shapiro include $36,938 and
$53,891, respectively, for personal use, as directed by resolution of the
Board of Directors, of Company aircraft, and other perquisites totaling
$24,269 and $15,575, respectively. For Mr. Rothwell, this amount reflects a
cash bonus paid in 1998 to compensate for the loss of bonus from his prior
employer.
(2) For Mr. Hassan and Mr. Rothwell, the amounts shown include the P&U's
matching contribution under the P&U Employee Savings Plan and the premiums
paid for split-dollar life insurance. Amounts shown for
19
<PAGE> 23
1999 for the following individuals include: contributions to savings plans
for Mr. Shapiro, $120,185; Dr. Needleman, $103,491; Mr. De Schutter,
$74,148; and Mr. Verfaillie, $116,432; split dollar life insurance premiums
for Mr. Shapiro, $7,497; Dr. Needleman, $10,721; Mr. De Schutter, $32,002;
and Mr. Verfaillie, $11,391; compensation for changes made to Pharmacia's
vacation program: Mr. De Schutter, $31,154 and Mr. Verfaillie, $22,500; and
performance match payments on deferred bonus awards: Dr. Needleman, $1,400;
and Mr. De Schutter, $51,150.
(3) Information is presented for Mr. Hassan, who became Chief Executive Officer
of Pharmacia effective upon the Merger. All compensation was paid by P&U, of
which Mr. Hassan was Chief Executive Officer prior to the Merger.
(4) Under the terms of Mr. Hassan's employment agreement with P&U dated November
15, 1999, he received 200,000 restricted shares of P&U common stock in 1999
(converted effective upon the Merger to 238,000 shares of Pharmacia common
stock), which are included in the table at the fair market value on date of
grant and which will vest on the first day of the month following
retirement, provided such date is not prior to December 1, 2004. At December
31, 1999, the market value of these shares was $9,087,500. Dividends are
paid on these restricted shares.
(5) Mr. Hassan commenced employment with P&U on May 10, 1997.
(6) Under the terms of Mr. Hassan's original employment agreement that he
entered into in May 1997 when he joined P&U, in order to replace equity
compensation awards received from his prior employer that he forfeited by
joining P&U, he received 315,000 restricted shares of such company's common
stock (equivalent to 374,850 shares of Pharmacia common stock), which are
included in the table at the fair market value on date of grant. All of
these shares vested in 1998.
(7) The annual incentive program for the years 1994 through 1996 was designed to
encourage sustained performance by withholding a percentage of each annual
award (15% of the 1994 award and 30% of the awards for each of 1995 and
1996), including Mr. Shapiro and, for certain employees working in selected
business units, including Mr. Verfaillie, a cash long-term incentive
opportunity. These amounts were adjusted upward or downward based on
sustained performance during the three-year period. The amounts shown
represent the March 1997 payment of the withheld amounts after application
of the sustained performance adjustment.
(8) Prior to February 1997, Dr. Needleman and Mr. De Schutter participated in
the Searle Phantom Stock Option Plan of 1986 ("Searle Phantom Plan"), which
gave participants the opportunity to receive the appreciation in the value
of a hypothetical share of the common stock of G.D. Searle & Co. ("Searle"),
now a wholly-owned subsidiary of Pharmacia. In February 1997, the Searle
Phantom Plan was terminated and Dr. Needleman and Mr. De Schutter were
credited with a combination of cash and options on Company common stock
representing current and anticipated future appreciation of the units. The
amounts shown for Dr. Needleman and Mr. De Schutter represent payments made
in lieu of grants under the Searle Phantom Plan. The amount shown for Dr.
Needleman represents payment of $660,000 in cash, $1,770,000 in deferred
cash (deferred to avoid losing the compensation deduction under Section
162(m) of the Code), and the value of 162,162 Company stock options, with an
exercise price equal to the fair market value per underlying share on the
date of grant, paid to Dr. Needleman in cash in connection with the
termination of the Searle Phantom Plan, plus $421,605 in payment of the
withheld amounts, after application of the sustained performance adjustment,
as discussed in footnote 7 to this Summary Compensation Table.
(9) Mr. Rothwell commenced employment on January 23, 1998. Under the terms of
Mr. Rothwell's employment agreement with P&U, in order to replace equity
compensation awards received from his prior employer that he forfeited by
joining P&U, he received 18,500 restricted shares of such company's common
stock (converted effective upon the Merger to 22,015 shares of Pharmacia
common stock), which are included in the table at the fair market value on
date of grant. All compensation was paid by P&U, of which Mr. Rothwell was
Executive Vice President and President, Global Pharmaceutical Operations
prior to the Merger.
20
<PAGE> 24
OPTION GRANTS IN 1999
<TABLE>
<CAPTION>
Grant Date
Individual Grants Value
- ------------------------------------------------------------------------------------ ----------------
(a) (b) (c) (e) (f)
Number of % of Total (d)
Securities Options Exercise
Underlying Granted to or Base Grant Date
Options Employees in Price Expiration Present Value
Name Granted (#) Fiscal Year ($/Share) Date ($)(1)
---- ----------- ------------ --------- ---------- -------------
<S> <C> <C> <C> <C> <C>
F. Hassan(2) 476,000 N/A 45.9 2/16/09 6,172,000
R. B. Shapiro 102,960(3) 0.2 75 4/23/07 1,350,835
229,344(4) 0.3 75 4/23/07 4,790,996
61,760(5) .01 51 6/30/09 1,248,787
P. Needleman 12,870(3) .01 75 4/23/07 168,854
62,548(4) .01 75 4/23/07 1,306,628
20,587(5) .01 51 6/30/09 416,269
R. U. De Schutter 15,444(3) .01 75 4/23/07 202,625
62,548(4) .01 75 4/23/07 1,306,628
82,347(5) .01 51 6/30/09 1,665,056
H. A. Verfaillie 77,220(3) .01 75 4/23/07 1,013,126
62,548(4) .01 75 4/23/07 1,306,628
82,347(5) .01 51 6/30/09 1,665,056
T. G. Rothwell(6) 119,000 N/A 45.9 2/16/09 1,543,000
</TABLE>
1) In accordance with Securities and Exchange Commission rules, the
Black-Scholes option pricing model was chosen to estimate the grant date
present value of the options set forth in this table. Pharmacia's use of this
model should not be construed as an endorsement of its accuracy at valuing
options. Accordingly, there is no assurance that the value realized by an
executive, if any, will be at or near the value estimated by the
Black-Scholes model. Future compensation resulting from option grants is
based solely on the performance of Pharmacia's stock price. For the options
granted under the 1999 Premium Option Purchase Program, the option purchase
price of $7.77 per share was subtracted from the Black-Scholes value before
the grant date value was determined. For other than Messrs. Hassan and
Rothwell, the following weighted-average assumptions were made for purposes
of calculating the original Grant Date Present Value: an option term of ten
years, average volatility of 42.5%, dividend yield of 0.28%, and a risk-free
interest rate equal to the then current ask yield of ten-year Treasury Bonds.
For Messrs. Hassan and Rothwell, the Black-Scholes valuation was determined
using the following assumptions: an average volatility of 24.8%, a dividend
yield of 1.98%, a risk-free interest rate of 6.64%, a projected exercise
period of 5.0 years and no additional value for reloaded stock options.
2) Information is presented for Mr. Hassan, who became Chief Executive Officer
of Pharmacia effective upon the Merger. All options were granted by P&U, of
which Mr. Hassan was Chief Executive Officer prior to the Merger and were
converted into options to purchase Pharmacia common stock effective as of the
Merger.
3) The units represent shares purchased under the 1999 Monsanto Premium Option
Purchase Program at a price of $7.77 per share paid through base salary or
bonus reductions over a four year period. These options became exercisable as
of the Merger and will expire if the stock price of $75 is not achieved
within five years.
4) The units represent long-term compensation awards for 2000 and were granted
in tandem with the Premium Option Purchase Program as described on page 13.
The shares are exercisable on a pro-rata basis
21
<PAGE> 25
based upon the number of months of employment in 2000 and will expire if the
stock price of $75 is not achieved within five years.
5) Represents the grant of 1999 Premium Priced Options as described on page 13.
These options became exercisable as of the Merger with a premium exercise
price of $51.00.
6) Information is presented for Mr. Rothwell, who became Executive Vice
President and President, Global Pharmaceutical Operations of Pharmacia
effective upon the Merger. All options were granted by P&U, of which Mr.
Rothwell was Executive Vice President and President, Global Pharmaceutical
Operations prior to the Merger and were converted into options to purchase
Pharmacia common stock effective as of the Merger. Mr. Rothwell made a stock
for stock option exercise in 1999 and received reloaded stock options for 777
shares with an exercise price of $42.8 and an expiration date of January 25,
2008.
AGGREGATED OPTION EXERCISES IN 1999 AND OPTION VALUES ON DECEMBER 31, 1999
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
- ------------------------------- ----------- --------- ----------------- -------------------
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Shares Options at Options at
Acquired on Value FY-End (#)(2) FY-End ($)(2)
Exercise Realized Exercisable/ Exercisable/
Name (#) ($)(1) Unexercisable Unexercisable (3)
---- ----------- -------- ------------- -----------------
<S> <C> <C> <C> <C>
F. Hassan(4) 0 0 515,669/912,331 5,021,009/3,321,991
R. B. Shapiro 229,865 8,077,456 2,407,887/425,988 3,400,051/63,050
P. Needleman 0 0 926,018/185,479 12,887,310/24,826
R. U. De Schutter 0 0 921,425/174,305 4,919,640/27,583
H. A. Verfaillie 0 0 1,365,841/236,081 14,534,090/27,583
T. G. Rothwell(5) 47,601 850,641 39,667/292,179 180,337/1,001,203
</TABLE>
(1) The amount in column (c) reflects the value of shares received on the
exercises of options less the exercise price.
(2) Unexercised options shown in columns (d) and (e) reflect grants received
over an extended period of time. Exercisability is as of December 31, 1999.
All outstanding options became exercisable effective upon the Merger.
(3) All unvested stock options became exercisable upon the Merger.
(4) Information presented for Mr. Hassan, who became Chief Executive Officer of
Pharmacia effective upon the Merger, reflects options granted by P&U prior
to the Merger which were converted into options to purchase Pharmacia common
stock effective as of the Merger.
(5) Information presented for Mr. Rothwell, who became Executive Vice President
and President, Global Pharmaceutical Operations of Pharmacia effective upon
the Merger, reflects options granted by P&U prior to the Merger and which
were converted into options to purchase Pharmacia common stock effective as
of the Merger.
22
<PAGE> 26
PENSION PLAN
Other than Messrs. Hassan and Rothwell, who were employees of P&U prior to the
Merger and were therefore covered under such company's pension plans as
described below, the named executive officers (as well as other employees of
Pharmacia) are eligible for retirement benefits payable under Pharmacia's
tax-qualified and non-qualified defined benefit pension plans, consisting of a
prior plan account and a cash balance account. The opening balance of the prior
plan account was the lump sum value of the executive's December 31, 1996 monthly
retirement benefit earned prior to January 1, 1997, calculated using the
assumption that the monthly benefit would be payable at age 55 with no reduction
for early payment, at the rate of the greater of 1.4% (1.2% for employees hired
on or after April 1, 1986) of average final compensation multiplied by years of
service, without reduction for Social Security or other offset amounts, or 1.5%
of average final compensation multiplied by years of service, less a 50% Social
Security offset. Average final compensation for purposes of determining the
opening balance was the greater of (1) average compensation received during the
36 months of employment prior to 1997 or (2) average compensation received
during the highest three of the five calendar years of employment prior to 1997.
For each year of the executive's continued employment with Pharmacia, the
executive's prior plan account will be increased by 4% to recognize that prior
plan benefits would have grown as a result of pay increases.
For each year that the executive is employed by Pharmacia after 1996, 3% of
annual eligible compensation in excess of the Social Security wage base and a
percentage (based on age) of annual compensation (salary and annual bonus) will
be credited to the cash balance account. In addition, the cash balance account
of executives who earned benefits under Monsanto's old defined benefit pension
plan will be credited each year (for up to 10 years based on prior years of
service with Pharmacia), during which the executive is employed after 1996, with
an amount equal to a percentage (based on age) of annual compensation.
The estimated annual benefits payable as a single life annuity beginning at age
65 (assuming that each executive officer remains employed by Pharmacia until age
65 and receives 4% annual compensation increases) are as follows: Mr. Shapiro,
$751,290; Dr. Needleman, $280,810; Mr. De Schutter, $828,269; and Mr.
Verfaillie, $785,296.
Mr. Shapiro will be provided supplemental retirement benefits to recognize his
experience prior to employment by Pharmacia. Pharmacia will provide Mr. Shapiro
with supplemental retirement benefits equal to 12% of average final
compensation. The estimated annual supplemental benefits payable to Mr. Shapiro
upon retirement at age 65 are $222,837. Mr. Shapiro will also receive the same
Company contribution to the retiree medical plan as an eligible retiree with 30
years of service.
If the total of the benefits payable to Mr. De Schutter under Pharmacia's
defined benefit pension plans described above do not equal the benefit Mr. De
Schutter would have received if all of his employment service with Searle had
been with Pharmacia, he will be provided supplemental retirement benefits in an
amount equal to the benefits he would have received under Pharmacia's plans had
all his years of employment service been with Pharmacia, less the benefits
provided by the Searle plans. It is estimated that there will be no annual
supplemental benefit payable to Mr. De Schutter when he retires on August 1,
2000.
Dr. Needleman will be provided supplemental retirement benefits equal to 14% of
his annual compensation to recognize his experience prior to employment by
Pharmacia. The estimated annual supplemental benefits payable to Dr. Needleman
upon retirement at age 65 are $196,952.
In addition to the retirement benefits for Mr. Verfaillie based on his years of
service as a Company employee in the U.S., Mr. Verfaillie is also eligible for
regular retirement benefits based on his years of service as an employee outside
the U.S. In addition, he participates in Pharmacia's regular, non-qualified
pension plan designed to protect retirement benefits for employees serving in
more than one country. However, his total retirement benefits from the combined
plans when considering his total service are expected to be generally comparable
to the benefits he would have received if all of his employment had been in the
U.S.
At December 31, 1999, Messrs. Hassan and Rothwell participated in P&U's Global
Officer Pension Plan, which supplements other sources of retirement income to
provide the actuarial value of an annual life annuity of 65% of final three-year
average annual salary and cash bonus compensation prior to retirement, provided
he retires at age 65 with at least ten years of service under the Plan. The
estimated annual benefits that would be
23
<PAGE> 27
payable under P&U's Global Officer Pension Plan to Messrs. Hassan and Rothwell
(before deductions for social security or other governmental retirement income
and before deduction of any other sources of retirement income from P&U, its
predecessors and any prior employers) at year-end and at age 65, assuming
Messrs. Hassan and Rothwell were to continue employment at current compensation
until age 65 and commence benefits upon reaching age 65 are: Mr. Hassan,
$239,000 and $1,560,000, respectively; and Mr. Rothwell, $74,000 and $860,000,
respectively.
CERTAIN AGREEMENTS
Monsanto entered into Change of Control Employment Agreements with each of the
executive officers, other than Messrs. Hassan and Rothwell, named in the Summary
Compensation Table which became effective upon the Merger, which constituted a
"change of control" as defined in the Agreements. Each Change of Control
Employment Agreement provides for the continuing employment of the executive
after the change of control on terms and conditions no less favorable than those
in effect before the change of control. If the executive's employment is
terminated by Pharmacia without "cause" or if the executive terminates his or
her own employment for "good reason" (each as defined in the Change of Control
Employment Agreement), the executive is entitled to severance benefits equal to
three times his annual compensation (including bonus) and continuation of
certain benefits for three years. In addition, each of the executive officers,
other than Messrs. Hassan and Rothwell, named in the Summary Compensation Table
are entitled to receive the severance benefits if the executive voluntarily
terminates his or her own employment during the 30-day period beginning on the
first anniversary of the Merger. A cash medical allowance of $15,000 for payment
of medical insurance premiums will also be provided to Mr. Verfaillie if he does
not qualify for retiree medical coverage.
Due to Mr. Shapiro's retirement effective as of the Merger, Mr. Shapiro received
$8,831,194 pursuant to his Change of Control Employment Agreement.
In addition to any payments that may be due to him pursuant to his Change of
Control Employment Agreement, under a supplemental agreement with Mr. De
Schutter, he will receive a payment from Pharmacia in the event his employment
is terminated prior to December 31, 2000 equal to one year of base salary and
annual incentive at one-half of Mr. De Schutter's target at an outstanding level
of performance. The estimated amount that will be payable to Mr. De Schutter
pursuant to this agreement is $1,260,000.
Mr. Hassan's employment agreement with P&U, which was assumed by Pharmacia
effective upon the Merger, provides for the payment of severance pay equal to
three times annualized cash compensation, for immediate vesting of all stock
options in the case of involuntary termination and for payment of a pension
equal to the greater of (i) the amount he would have received if he had remained
employed with his prior employer until he retires and if his compensation had
been the same as that received from P&U; or (ii) the amount determined under
P&U's Global Officer Pension Plan or his employment contract dated November 15,
1999, offset in either case by any pension benefits actually received from his
prior employer.
Mr. Rothwell's employment agreement with P&U, which was assumed by Pharmacia
effective upon the Merger, provides for the payment of severance pay equal to
two times annualized cash compensation and also provides for immediate vesting
of all stock options in the case of involuntary termination.
OTHER INFORMATION REGARDING MANAGEMENT
TRANSACTIONS AND RELATIONSHIPS
Mr. Kantor is a partner at the law firm of Mayer, Brown & Platt, which provided
services to Pharmacia in 1999 and has been retained to provide services to
Pharmacia in 2000.
Ms. Eickhoff is President of Eickhoff Economics Incorporated, which provided
services to P&U in 1999 and is providing services to Pharmacia in 2000.
Mr. Parfet is Chairman and Chief Executive Office of MPI Research Inc., which
provided services to P&U in 1999 and is providing services to Pharmacia in 2000.
Total fees paid to MPI Research Inc. for 1999 were approximately $640,367.
24
<PAGE> 28
Until his retirement in April 2000, Mr. Reed served as Chairman and Co-Chief
Executive Officer of Citigroup Inc., the parent company of Salomon Smith Barney,
an investment banking firm which provided services to Pharmacia in 1999 and is
providing services to Pharmacia in 2000.
Mr. Robson is Senior Advisor of Robertson Stephens, which provided investment
advisory services to Pharmacia in 1999 and is expected to provide services to
Pharmacia in 2000.
Dr. Samuelsson is Professor of Medical and Physiological Chemistry, Karolinska
Institute. Pharmacia provides research grants and other business-related funding
to the Institute.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires all Company executive officers, directors, and persons owning more than
10% of any registered class of Company stock to file reports of ownership and
changes in ownership with the Securities and Exchange Commission. During 1999,
Mr. Nick E. Rosa, formerly a Senior Vice President of Monsanto, was
inadvertently late in filing his initial report on Form 3 and Hakan Astrom, a
Senior Vice President of P&U, was inadvertently late in one filing.
INDEBTEDNESS
The following Pharmacia executive officers received full-recourse, interest
bearing loans in the amounts shown for the purchase price of Company common
stock purchased pursuant to the Pharmacia Executive Stock Purchase Incentive
Plan described above in the Report of the Monsanto Compensation Committee on
Executive Compensation. This plan has been terminated. At the time of the
Merger, these executive officers received cash bonuses awarded under the plan
that were required to be used to repay the loans. However, these cash bonuses
did not cover the full amount due. The balance of the loans must be repaid over
a three-year period following termination of employment. The loan may also be
prepaid at any time at the executive officer's option. The amount outstanding at
May 4, 2000 is also the greatest amount of such indebtedness at any time.
<TABLE>
<CAPTION>
Aggregate Amount of
Indebtedness as of
Interest Rate May 4, 2000
Name Year of Loan (%) ($)
---- ------------ ------------- -------------------
<S> <C> <C> <C>
R. B. Shapiro 1996 6.36 6,687,767
P. Needleman 1996 6.36 743,085
R. U. De Schutter 1996/1998 6.36/5.69 0
H. A. Verfaillie 1996 6.36 2,415,029
</TABLE>
STOCKHOLDER PROPOSALS
Certain stockholders have submitted the four proposals set forth below.
Pharmacia will furnish, orally or in writing as requested, the names, addresses
and claimed share ownership positions of the proponents of these stockholder
proposals promptly upon written or oral request directed to the Secretary of
Pharmacia. The following proposals have been carefully considered by the Board,
which has concluded that their adoption would not be in the best interests of
Pharmacia or its stockholders. For the reasons stated after each proposal and
its supporting statement, the Board recommends a vote AGAINST each proposal.
In order for inclusion in the Company's proxy statement, proposals of
stockholders intended to be presented at the 2001 Annual Meeting of Stockholders
must be received by the Secretary of Pharmacia no later than December 22, 2000
at the following address: Pharmacia Corporation, 100 Route 206 North, Peapack,
New Jersey 07977. In order to be presented at the Annual Meeting outside the
processes of SEC Rule 14a-8, such proposals must be received by the Secretary at
the above address by March 15, 2001. Such proposals must meet applicable
requirements of the U.S. Securities and Exchange Commission and the Company's
By-Laws.
25
<PAGE> 29
STOCKHOLDER PROPOSAL ONE (PROXY ITEM NO. 2)
STATEMENT OF STOCKHOLDER PROPONENT
International markets for genetically engineered (GE) foods are threatened by
extensive resistance to gene protection technology, transgenic technology and
genetically altered foods;
- - Several of Europe's largest food retailers, including Tesco, Sainsbury Group,
Carrefour, and Rewe, have committed to removing GE ingredients from their
store-brand products. In the UK, three fast-food giants--McDonald's, Burger
King, and Kentucky Fried Chicken--are eliminating GE soya and corn ingredients
from their menus;
- - Gerber Products Co. announced in July 1999 that they would not allow GE corn
or soybeans in any of their baby foods;
- - Archer Daniels Midland asked its grain suppliers in August 1999 to segregate
their genetically engineered crops from conventional crops;
There is increasing scientific concern that genetically engineered agricultural
products may be harmful to humans, animals, or the environment;
- - The U.S. Department of Agriculture has acknowledged (July 13, 1999) the need
to develop a comprehensive approach to evaluating long-term and secondary
effects of GE products.
- - As early as 1989, scientists reported that GE foods may pose risks to human
health.
- - Some GE crops have been engineered to have higher levels of toxins, such as
Bacillus thuringiensis (Bt), to make them insect-resistant.
- - In 1999, the European Union suspended approval of new genetically engineered
organisms until a new safety law for genetically engineered organisms is
implemented in 2002. This followed a new study that showed Bt corn pollen may
harm monarch butterflies.
RESOLVED: Shareholders request the Board of Directors to adopt a policy of not
marketing or distributing genetically-engineered agricultural products until
long-term safety testing has shown that they are not harmful to humans, animals,
and the environment.
SUPPORTING STATEMENT FROM STOCKHOLDER
We believe that this technology involves significant social, economic, and
environmental risks. Our company should take a leadership position in delaying
market adoption of genetically engineered crops and foods. Failure to do so
could leave our company financially liable, should detrimental effects to public
health or the environment appear in the future.
------------------------------
STATEMENT OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "AGAINST" THE FOREGOING RESOLUTION
FOR THE FOLLOWING REASONS:
Pharmacia's subsidiary, Monsanto Company, is committed to the use of
biotechnology in agriculture because it is a safe and useful tool to help meet
the world's increasing need for food. Biotechnology provides many benefits to
farmers and the environment and can benefit society as a whole by providing
better nutrition, human disease protection, and even biodegradable industrial
ingredients to replace petroleum-based material.
Biotechnology is facilitating fundamental changes in agricultural
production methods resulting in increased yield and reduced use of traditional
pesticides. Indeed, the products produced from this technology have already
brought important benefits to growers and the environment after just a few years
of commercial
26
<PAGE> 30
application. Examples include Bollgard(R) cotton, which, in 1998 in the United
States allowed growers to eliminate the use of more than 1.1 million liters of
chemical insecticides. Also in 1998, field tests showed YieldGard(R) corn
provided an overall yield advantage of three to seven bushels per acre over
non-insect-protected corn-hybrid varieties, some of which were treated with
chemical insecticides. Roundup-Ready(R) crops help facilitate implementation of
soil-saving conservation tillage farming techniques and reduce the use of other
herbicides.
Genetically engineered agricultural products marketed by Monsanto have
undergone rigorous testing to ensure that the foods produced from such products
are as safe and nutritious to eat as products from other new plant varieties and
that these crops are appropriate for environmental release. Over the past
fifteen years we have worked with outside experts and with regulatory
authorities worldwide to analyze the safety issues and potential risks of the
technology using principles recommended by the World Health Organization, the
Food and Agricultural Organization of the United Nations and the Organization
for Economic Cooperation and Development. Our analysis and testing, together
with that of many independent and governmental bodies, including the U.S.
Environmental Protection Agency, the Food and Drug Administration and the
Department of Agriculture shows that modern biotechnology is a safe, sustainable
tool for farmers and an important contributor to the future success of
agriculture in meeting the world's needs. These safety assessments have been
built upon a tremendous body of knowledge regarding the safety of consumption
and use of the specific crops that are now being modified. The breadth and depth
of scientific knowledge in molecular biology, plant physiology and animal
nutrition establish that there is no scientific basis for allegations of
potential unknown effects or long-term harm that would result from the
consumption of the registered genetically engineered crops.
Safety information for our genetically enhanced soybean, corn, potato,
canola and cotton products has been published in peer-reviewed scientific
journals. Reviews by medical professionals including organizations such as the
Council of Scientific Affairs of the American Medical Association have concluded
that plant biotechnology is a safe, useful tool to enhance food safety, quality
and nutrition. In addition, published reviews by nutrition and dietetic experts,
such as the American Dietetic Association, have concluded that foods produced
using biotechnology are as safe as traditional foods.
We acknowledge that some individuals and organizations have questions and
concerns regarding the safety of biotechnology and its implications for society.
We are committed to listening to their concerns, providing answers to their
questions, and participating in a societal discussion on the larger issues. Such
questions and issues are also evaluated and taken into consideration as we
develop new products and steward existing products. Our strong commitment to the
production of safe and effective crops through biotechnology that maximize
benefits and minimize any risks remains the foundation of our agricultural
business.
Stockholders and others interested in obtaining further information about
biotechnology are encouraged to view some of the resources we have available at
http://biotechknowledge.com and http://fooddialogue.com.
Accordingly, we recommend that stockholders vote "AGAINST" this resolution.
STOCKHOLDER PROPOSAL TWO (PROXY ITEM NO. 3)
STATEMENT OF STOCKHOLDER PROPONENT
RESOLVED: That the shareholders of Pharmacia ("Company") request that the Board
of Directors of the Company in conjunction with its Compensation Committee
design and implement an executive compensation program for senior management
that will focus management on the need to maximize the Company's long-term
wealth generating capacity. The executive compensation program should establish
specific qualitative and quantitative measurements of senior management's
success in leading the Company as it seeks to provide superior long-term
performance for its shareholders and other important corporate constituents.
27
<PAGE> 31
SUPPORTING STATEMENT FROM STOCKHOLDER
The long-term success of the Company depends on the development and
implementation of a strategic plan by the Board of Directors and its management
team. The Company's strategic plan should include a comprehensive discussion of
the Company's long-term strategy and policies and programs established and
implemented to fulfill the strategy. The strategic plan should clearly reflect
the numerous Company constituents, including shareholders, employees, customers,
suppliers, and the community, that significantly influence the Company's
long-term success.
The Company's executive compensation program must be a critical component
of the Company's strategic plan for long-term success. It is imperative that the
Company's executive compensation program creates the proper incentives that
orient senior management to pursue and accomplish plan goals. Current executive
compensation schemes often present the facade of a system of pay for
performance. In reality, they lack appropriate performance benchmarks by which
management's performance can be judged. Too often, peer or market level
performance is rewarded with extraordinary compensation, which results in
unearned transfers of wealth to senior management.
Senior management should be judged and compensated according to defined
qualitative and quantitative criteria established by the Board in consultation
with its Compensation Committee. The Board should articulate its view of the
appropriate mix of cash, stock, benefits and other perquisites that will
motivate management to achieve superior long-term results. It should also
outline what it considers to be the appropriate balance of short-term and
long-term compensation that will allow the Company to attract and retain
talented individuals.
Qualitative measures of the executive compensation program should reflect
that the Company's long-term success depends on its ability to meet the needs of
the full range of corporate constituents. Companies that accomplish this
balancing prosper over the long term, as do their shareholders. Appropriate
qualitative measures may include such criteria as customer satisfaction indices,
the level and breadth of employee stock ownership, injury incident rates,
environmental performance measures, and other factors determined to be
appropriate indicators of the Company's success in addressing its constituents
interests and needs.
The Board and its Compensation Committee should identify specific
quantitative performance measures that incorporate a range of financial
performance criteria. These financial performance benchmarks should be
established at levels that promote and reward above average long-term Company
performance. The financial performance measures utilized should be properly
blended with the plans qualitative measures to produce an executive compensation
regimen that provides clear incentives for senior management to pursue and
accomplish the goals established in the Company's long-term strategic plan.
We urge you to vote for this proposal.
------------------------------
STATEMENT OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "AGAINST" THE FOREGOING RESOLUTION
FOR THE FOLLOWING REASONS:
The Board of Directors believes that the Company's executive compensation
plans already focus management on the need to maximize the Company's long-term
performance. These principles are discussed in the Report of the Pharmacia
Compensation Committee on Executive Compensation on page 16. The Compensation
Committee, consisting of four directors of the Company, none of whom are or were
ever employees or officers of the Company, is responsible for the establishment
and oversight of executive compensation policies, practices and plans that
encourage and reward those executive efforts that create long-term stockholder
value through achievement of corporate objectives, business strategies and
performance goals. The major portion of compensation for senior executive
officers is composed of equity-based, at-risk,
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<PAGE> 32
pay which is intended to instill and reward ownership, long-term strategic
thinking and link compensation to corporate performance and the interests of
stockholders generally.
ACCORDINGLY, WE RECOMMEND THAT STOCKHOLDERS VOTE "AGAINST" THIS RESOLUTION.
STOCKHOLDER PROPOSAL THREE (PROXY ITEM NO. 4)
STATEMENT OF STOCKHOLDER PROPONENT
RESOLVED: The shareholders of Pharmacia Corporation (the "Company") hereby
request that the Board of Directors take the necessary steps to develop a new
Company election system that provides for the election of the entire slate of
Company Board of Director nominees at every third annual meeting of
shareholders. The proposed new election system should be developed in conformity
with state law, stock listing requirements, and Company bylaws and articles, and
should be presented for shareholder approval at the next annual meeting of
shareholders.
SUPPORTING STATEMENT OF STOCKHOLDER
The role of the Board of Directors and senior management is to develop and
implement a long-term strategic plan that will maximize the long-term wealth
generating capacity of the Company and ensure its success. In order to foster
the proper environment for long-term strategic planning and action, terms of
office for Board of Director members must be long enough to allow them to look
beyond the upcoming quarter and focus on developing policies and programs that
will ensure sustained corporate success.
Annual elections of either the full slate or a single class of
directors -- in conjunction with the market pressures--often promote a
short-term perspective that undermines the Company's capacity to produce
sustained long-term wealth. A company focused on the short-term may fail to
invest in new capital investment projects, innovation advancements, employee
enrichment programs, and community involvement activities that are integral to
the long-term success of the company. In the absence of a long-term strategic
plan with clear goals and tactical imperatives, managements and directors often
are forced to resort to pursuing short-term stock price targets to the detriment
of the corporation and its owners.
Many shareholders consider the annual election of the entire slate of
directors or a portion of the board as an important accountability measure.
Providing the entire slate of directors three-year terms of office is not a step
away from accountability. Rather, the longer director terms of office would
establish a system in which the director elections are better aligned with the
corporate goal of long-term success. The discipline of corporate elections would
then be properly directed to rewarding good long-term corporate performance that
best serves the interests of shareholders and the Company generally. Further,
the accountability of the Board is promoted by requiring all the members of the
Board to run as a team on a non-classified basis.
Shareholders will be challenged to monitor and understand the strategic
initiatives of the Company and then exercise their rights in an appropriate
fashion. Non-election year annual meetings would provide opportunities to review
the strategic plan of the Company, assess accomplishments and shortcomings, and
provide for shareholder input on strategic changes. Triennial elections would
effectively serve as a referendum for shareholders on the Company's long-term
strategic plan and the Board's effectiveness in overseeing and implementing the
plan.
------------------------------
STATEMENT OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "AGAINST" THE FOREGOING RESOLUTION
FOR THE FOLLOWING REASONS:
The Board believes that a classified Board is in the best interests of
Pharmacia's stockholders because it ensures continuity in the composition of the
Board. It is important that a majority of the directors have prior knowledge and
understanding of Pharmacia's business in order to effectively oversee the
strategic direction
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<PAGE> 33
and management of the Company. Classification prevents sudden and disruptive
changes in corporate policies by precluding election of an entirely new group of
directors in any single year. This is particularly important in the
pharmaceutical industry where the discovery and development of new products
takes many years. At the same time, annual elections in which approximately
one-third of the Board is elected each year offer stockholders a regular
opportunity to renew and reinvigorate corporate decision-making while
maintaining the basic integrity of the Board. The Board of Directors firmly
believes that directors elected for staggered terms are just as accountable to
stockholders as they would be if all were elected every three years.
In addition, a classified Board reduces Pharmacia's vulnerability to
certain potentially abusive takeover tactics. It encourages potential acquirers
to initiate arm's length negotiations with Pharmacia. Since only approximately
one-third of Pharmacia's directorships are filled at any annual meeting of
stockholders, absent highly unusual circumstances, it is impossible to elect an
entire new Board, or even a majority of the Board, at a single meeting. The
classified Board does not preclude unsolicited acquisition proposals, but by
reducing the threat of imminent removal, positions the incumbent Board to
negotiate terms to maximize the value to all stockholders.
Adoption of this proposal would not automatically eliminate the classified
Board. Further action by the stockholders would be required to amend the By-laws
and the Certificate of Incorporation of Pharmacia. Under these documents, an 80%
vote of the outstanding shares would be required for approval. Under Delaware
law, an amendment to the Certificate of Incorporation requires a recommendation
from the Board of Directors prior to submission to stockholders. While the Board
would consider such an amendment, it remains subject to its fiduciary duty to
act in a manner it believes to be in the best interests of Pharmacia and its
stockholders generally.
ACCORDINGLY, WE RECOMMEND THAT STOCKHOLDERS VOTE "AGAINST" THIS RESOLUTION.
STOCKHOLDER PROPOSAL FOUR (PROXY ITEM NO. 5)
STATEMENT OF STOCKHOLDER PROPONENT
Whereas, Pharmacia has nomination procedures that make it DIFFICULT for
stockholders to have their nominees elected to the Board of Directors.
Directors are now elected for a THREE-YEAR TERM (rather than one year terms as
in 1997 and before) with ONE VOTE available for each nominee for each share
voted.
BE IT RESOLVED THAT THE STOCKHOLDERS REQUEST PHARMACIA TO IMPLEMENT THE
STOCKHOLDER'S PROPOSAL BELOW:
Change the election procedure for the Board of Directors TO ALLOW CUMULATIVE
VOTING (total votes are equal to the number of shares times the number of
directors to be elected). This proposal would only be effective for nominees for
Director at meetings subsequent to the 2000 Annual Meeting and would, therefore,
not affect the unexpired terms of the existing Directors.
If you agree with this proposal, please mark your proxy FOR. Otherwise,
abstentions may have the same effect as "no" votes."
SUPPORTING STATEMENT OF PROPONENT
This proposal would allow stockholders to have more influence on the
election of THEIR (not management's) Board and, consequently, the future of
THEIR company.
Since cumulative voting allows stockholders to select the nominee(s) they
want to vote for and to cast all their votes for a single (or several)
candidate(s), it can allow election of nominee(s) that are receptive to
stockholders' rights (such as better nomination procedures and annual terms for
Directors). First, California law has required state pension and college funds
to be voted in favor of cumulative voting proposals. Even
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<PAGE> 34
many successful corporations, such as Merck (an outstanding pharmaceutical
company), Lockheed-Martin, and Ingersoll-Rand, allow cumulative voting.
Moreover, Allegheny Power Systems tried to take away cumulative voting, but
their stockholders did not allow this change which would have reduced
stockholder rights.
Current procedures allow nominations to the Nominating Committee. However,
this Committee rarely, if ever, approves any stockholder candidates and
effectively becomes a "GATEKEEPER" for the Board. This pre-empts stockholder
rights. Nomination at the Annual Meeting itself is A SHAM since only "TOKEN"
votes will be counted, because most ballots are cast by proxy BEFORE THE
MEETING. Cumulative voting would allow stockholders to remove these directors if
the stockholders wanted to.
"Corporate Democracy, Inc." supports cumulative voting.
This same proposal was presented at the last two (1998 and 1999) Pharmacia
annual meetings by the same stockholder and received more than 20% of the vote
both times. The stockholder strongly encourages you to mark FOR on your ballot.
Thanks.
------------------------------
STATEMENT OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "AGAINST" THE FOREGOING RESOLUTION
FOR THE FOLLOWING REASONS:
The Board of Directors believes that the adoption of cumulative voting
would reduce the effectiveness of Pharmacia's Board of Directors and would be
detrimental to the best interests of Pharmacia and its stockholders. Each
director is now elected by a plurality of the votes cast at an Annual Meeting of
Stockholders. Pharmacia's directors are chosen for their accomplishments,
commitment, integrity and diversity of backgrounds and experience, and share the
common objective of advancing the best interests of all stockholders.
Pharmacia's Nominating and Corporate Governance Committee selects Board nominees
to represent all Pharmacia stockholders and not a special interest or a
particular constituency.
While cumulative voting might be thought to have the appearance of
fairness, it could permit a stockholder or group of stockholders owning
substantially less than a majority of a Company's stock to elect a director to
advance a special interest. This could alter the proper balance, diversity and
independence of the Board, introduce the likelihood of factionalism and discord
within the Board, and undermine the Board's ability to work effectively on
behalf of all stockholders.
Adoption of this proposal would not automatically allow cumulative voting.
Further action by the Board or stockholders would be required to amend the
By-laws and Certificate of Incorporation of Pharmacia. If the stockholders were
to vote on such an amendment, an 80% vote of the outstanding shares would be
required for approval. While the Board would consider such an amendment, it
remains subject to its fiduciary duty to act in a manner it believes to be in
the best interests of Pharmacia and its stockholders generally.
ACCORDINGLY, WE RECOMMEND THAT STOCKHOLDERS VOTE "AGAINST" THIS RESOLUTION.
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RELATIONSHIP WITH INDEPENDENT ACCOUNTANTS
On May 18, 2000, the Company engaged PricewaterhouseCoopers LLP as principal
independent accountants to report on its consolidated financial statements for
the three years ended December 31, 1999, restated to give retroactive effect to
the Merger which was accounted for as a pooling of interests.
PricewaterhouseCoopers LLP replaced Deloitte & Touche LLP as principal
independent accountants solely for the examination of the above mentioned
consolidated financial statements.
The reports of Deloitte & Touche LLP on the financial statements of Monsanto for
the past two fiscal years contained no adverse opinion or disclaimer of opinion
and were not qualified or modified as to uncertainty, audit scope or accounting
principle.
In connection with such audits for the two most recent fiscal years and through
May 15, 2000, there have been no disagreements with Deloitte & Touche LLP on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements if not resolved to the
satisfaction of Deloitte & Touche LLP would have caused them to make reference
thereto in their report on the financial statements of Monsanto for such years.
Deloitte & Touche LLP has furnished a letter to the Company stating that it
agrees with the above statements.
At its June 2000 meeting, the Audit and Finance Committee of the Company's Board
of Directors will discuss proposals from Deloitte & Touche LLP and from
PricewaterhouseCoopers LLP to serve as the Company's principal independent
accountant with respect to the Company's current year financial statements and
reports. It is expected that, at that meeting, the Audit and Finance Committee
will either select one of these firms as the Company's principal independent
accountant for the current year or agree on a process to be followed to select
the Company's principal independent accountant for the current year.
Representatives from both PricewaterhouseCoopers LLP and Deloitte & Touche LLP
will be present at the Annual Meeting of Stockholders and will be given an
opportunity to make a statement, if so desired, and will be available to respond
to appropriate questions.
GENERAL INFORMATION
The Board of Directors knows of no matter, other than those referred to in this
Proxy Statement, which will be presented at the meeting. However, if any other
matters properly come before the meeting or any adjournment, the person or
persons voting the proxies will vote in accordance with their best judgment on
such matters. Should any nominee for director be unwilling or unable to serve at
the time of the meeting or any adjournment thereof, the persons named in the
proxy will vote for the election of such other person for such directorship as
the Board of Directors may recommend, unless, prior to the meeting, the Board
has eliminated that directorship by reducing the size of the Board. The Board is
not aware that any nominee herein will be unwilling or unable to serve as a
director.
A stockholder who wishes to give a proxy to someone other than the Board's proxy
committee may strike out the names appearing on the enclosed form of proxy,
write in the name of any other person, sign the proxy, and deliver it to the
person whose name has been substituted.
DON SCHMITZ
Secretary
May 22, 2000
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<PAGE> 36
PART II. ANNUAL REPORT
DESCRIPTION OF THE BUSINESS
The Company is a global pharmaceutical group engaged in the research,
development, manufacture and sale of pharmaceutical and healthcare products,
and, through its subsidiary, Monsanto Company, of various agricultural products.
The Company's core business is the development, manufacture and sale of
pharmaceutical products, including both prescription and non-prescription
products for humans and animals, bulk pharmaceuticals and contract
manufacturing. The Company's major pharmaceutical brands include Celebrex(R),
Xalatan(R), Detrol(R), Camptosar(R), Genotropin(R), Ambien(R), Nicorette(R) and
Rogaine(R).
Through its Monsanto subsidiary, the Company is engaged in the research,
development, manufacture and sale of various agricultural products, including
(i) Roundup(R) herbicide; (ii) biotechnology products that produce crops which
are tolerant to Roundup(R) herbicide and protect crops from certain viruses and
insect pests; (iii) seeds, including corn, soybeans, alfalfa, sunflowers,
barley, cotton and wheat; and (iv) Posilac(R) bovine somatotropin to increase
milk production in dairy cows.
CORPORATE OFFICERS
The Company's current officers are:
<TABLE>
<S> <C>
Fred Hassan.......................... Chief Executive Officer
Richard U. De Schutter............... Senior Executive Vice President and Chief Administrative
Officer
Philip Needleman..................... Senior Executive Vice President, Chief Scientific Officer,
and Chairman, Research & Development
Hendrik A. Verfaillie................ Executive Vice President and CEO of Monsanto Agricultural
Operations
Goran Ando........................... Executive Vice President and President, Research &
Development
Christopher Coughlin................. Executive Vice President and Chief Financial Officer
Carrie Cox........................... Executive Vice President and Head, Global Business
Management
Alan L. Heller....................... Executive Vice President and Head, G.D. Searle & Co.
Operations
Tim Rothwell......................... Executive Vice President and President, Global
Pharmaceutical Operations
Steve MacMillan...................... Sector Vice President, Global Specialty Operations
Hakan Astrom......................... Senior Vice President, Investor Relations and Strategy
Richard Collier...................... Senior Vice President and General Counsel
Birgitta Klasen...................... Senior Vice President, Information Technology
Paul Matson.......................... Senior Vice President, Human Resources
Ian McInnes.......................... Senior Vice President, Global Supply
Mats Pettersson...................... Senior Vice President, Mergers & Acquisitions
Robert Thompson...................... Senior Vice President and Corporate Controller
Joan H. Walker....................... Senior Vice President, Public Affairs
Don Schmitz.......................... Vice President & Secretary
A.J. Shoultz......................... Vice President, Taxes
Alexandra van Horne.................. Vice President & Treasurer
</TABLE>
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<PAGE> 37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL REVIEW
PHARMACIA CORPORATION
OVERVIEW
On March 31, 2000 a subsidiary of Monsanto Company "Monsanto" and Pharmacia &
Upjohn, Inc. "Pharmacia & Upjohn" or "P&U" merged and Monsanto was renamed
Pharmacia Corporation ("Pharmacia" or "the company"). The tax-free
reorganization has been accounted for as a pooling-of-interests. All prior
period consolidated financial statements have been restated to reflect the
combined results of operations, financial position and cash flows of both
companies. There were no material transactions between Monsanto and Pharmacia &
Upjohn prior to the combination. Certain reclassifications have been made to
conform the respective financial statement presentations.
In the first quarter of 2000, the company recorded approximately $460 million of
merger related costs. These costs were comprised, in part, of transaction costs
including investment bankers, attorneys, registration and regulatory fees and
other incentive and change-of-control costs directly associated with the merger.
The latter includes a noncash charge of $232 million related to certain employee
stock options that were repriced in conjunction with the merger pursuant to a
change of control provision. Pursuant to the terms of these "premium options",
at consummation of the merger, the original above-market exercise price was
reduced to equal the fair market value on the date of grant. In addition to
merger related costs, the company expects to incur restructuring charges as the
combining and restructuring of Monsanto and Pharmacia & Upjohn takes place.
Pharmacia recorded sales and earnings for 1999 that showed significant growth
over the prior year. Sales of $16.4 billion in 1999 reflected a 20 percent
increase over 1998 sales of $13.7 billion which reflected a 9 percent increase
over 1997 sales of $12.6 billion. Adjusting for the divestitures of the
nutritional therapies business in 1998 and the biotech business of Pharmacia &
Upjohn in 1997, the sales growth rates become more reflective of underlying
business performance. On this basis, sales rose 22 percent during 1999 and 12
percent in 1998. Net earnings for 1999 were $1.4 billion compared with $362
million in 1998 and $711 million in 1997.
<TABLE>
<CAPTION>
Consolidated Results 1999 % Change 1998 % Change 1997
- -------------------- ---- -------- ---- -------- ----
Dollars in millions, except per share data
<S> <C> <C> <C> <C> <C>
Sales $16,425 20% $13,737 9% $12,580
Earnings before income taxes 1,898 113 892 59 562
Net earnings from continuing operations 1,306 171 481 23 390
Net earnings 1,378 281 362 (49) 711
Net earnings per common share (EPS):
--Basic $ 1.10 279 $ .29 (50) $ .58
--Diluted $ 1.07 282% $ .28 (51)% $ .57
======= === ======= === =======
</TABLE>
Trademarks of Pharmacia Corporation and its subsidiaries are indicated in upper
case letters. The term "the company" or "Pharmacia" may refer to Pharmacia
Corporation, or to Pharmacia Corporation and its consolidated subsidiaries, as
appropriate to the context.
Growth in earnings before income taxes and in net earnings are affected by a
number of events and transactions that, because of their magnitude and relative
infrequency of occurrence, warrant special reference. Throughout the discussion
that follows, the company has identified such items that management believes had
a noteworthy effect on the comparability of year-to-year performance measures.
This was done to facilitate a better understanding of the company's reported
earnings growth trends. Significant among these events and transactions were the
following which are discussed more fully below: restructuring charges in each of
the past
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<PAGE> 38
three years; the divestitures referred to in the second paragraph above; a
realignment of certain research and development (R&D) projects; settlement of
certain lawsuits; termination of a licensing arrangement in Japan; and milestone
payments on pharmaceutical licensing agreements.
In the second quarter of 1999, management committed to a plan to sell the
company's artificial sweeteners and biogums businesses. The results of
operations, financial position, and cash flows of these businesses, and of the
alginates and ORTHO lawn-and-garden products businesses, the dispositions of
which were approved by the company's board of directors in 1998, have been
reclassified as discontinued operations.
During the third quarter of 1999, the company merged with SUGEN, Inc. (Sugen), a
leader in target-driven drug discovery and development, to strengthen its R&D
efforts in cell signaling and oncology. The merger was completed on August 31
and called for the exchange of approximately 12 million shares of Pharmacia
stock for all the outstanding common stock of Sugen. Also during the third
quarter, Pharmacia acquired 20 percent of Sensus Drug Development Corporation
(Sensus), a privately held company focused on developing drugs to treat
endocrine disorders. The Sensus investment, accounted for using the equity
method, is expected to expand Pharmacia's leadership position in endocrinology.
Sugen and Sensus together represented incremental costs of approximately $162
million in 1999 compared to 1998. R&D expense comprised the majority of these
costs totaling $104 million in 1999 for the two operations whereas Sugen
spending in 1998 was $32 million. In connection with the merger with Sugen, the
company recorded approximately $70 million in merger and restructuring expenses.
The remaining incremental cost was principally interest expense.
At December 31, 1999, the company recorded a pretax charge of $64 million in
income from continuing operations for items principally associated with costs
related to the failed merger between the company and Delta & Pine Land Company
(D&PL), combined with expenses to accelerate the integration of the company's
agricultural chemical and seed operations. These net charges included the
reversal of restructuring liabilities established in 1998 of $54 million and a
gain of $35 million on the divestiture of the Stoneville Pedigreed Seed Co., a
cottonseed business. The company recorded a pretax charge of $85 million for a
termination fee and other expenses associated with the failed merger and a $67
million charge to continuing operations principally associated with actions
related to the company's continued focus on improving operating efficiency
through accelerated integration of the agricultural chemical and seed
operations.
In 1998, the company made strategic acquisitions of several seed companies. In
July 1998, the company acquired Plant Breeding International Cambridge (PBIC)
for approximately $525 million and in October 1998 the company announced the
acquisition of certain international seed operations of Cargill Inc. in Asia,
Africa, Central and South America, and Europe, excluding certain operations in
the United Kingdom, for approximately $1.4 billion. In December 1998, the
company completed its acquisition of DEKALB Genetics Corporation (DEKALB) for
approximately $2.3 billion. The company recorded the following pretax charges in
1998 for the write-off of acquired in-process research and development (R&D)
related to these acquisitions: approximately $60 million for PBIC, approximately
$150 million for DEKALB and approximately $190 million for certain Cargill Inc.
seed operations.
At the time of and in connection with the 1998 seed company acquisitions, the
company established a plan to integrate the acquired businesses by closing or
rationalizing (consolidating, shutting down or moving facilities to achieve more
efficient operations) certain assets or facilities and eliminating manufacturing
and administrative functions, resulting in a pretax charge of $78 million in
1998. During 1999, the original reserve was adjusted to reflect the actual costs
of these acquisitions.
In 1998, the company recorded net restructuring and other items of $340 million
as part of Monsanto's overall strategy to reduce costs and continue the
commitment to its core businesses. The former Pharmacia & Upjohn, Inc.
recognized restructuring charges in 1998 and 1997 as well. Restructuring charges
were $92 million in 1998 and $316 million in 1997. These restructuring efforts
were associated with P&U's global turnaround program. This program was
undertaken to achieve a simplified infrastructure, improved efficiency, and a
global focus on the core pharmaceutical business.
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<PAGE> 39
In 1997, the company acquired the Asgrow Agronomics business, Holden's
Foundation Seeds, Inc., Sementes Agroceres S.A., and Calgene Inc. which resulted
in pretax charges of $633 million for the write-off of acquired in-process R&D.
As a result of the 1997 and 1998 acquisitions, goodwill and other intangibles
totaling $4 billion were recognized as part of the purchase accounting
allocation. The resulting amortization expense of nearly $260 million in 1999
associated with these acquisitions and nearly $130 million in 1998 negatively
impacted Agricultural Products segment earnings.
Also affecting earnings comparability, in 1998 P&U reached a settlement of $103
million in a federal class-action lawsuit originally filed in 1993 on behalf of
retail pharmacies. As a consequence of the settlement, the company increased its
litigation reserves by $61 million, a charge reported in selling, general and
administrative (SG&A) expense in the second quarter of 1998. In 1997, the
company terminated a sales and marketing arrangement in Japan related to one of
its leading products, GENOTROPIN, recombinant human growth hormone. The contract
termination and related inventory repurchase resulted in a charge of $115
million recorded in sales, cost of goods sold, and SG&A expense.
Pharmacia currently reports its operations within two reportable segments:
pharmaceuticals and agricultural products. The pharmaceutical segment includes
prescription products for humans and animals, bulk pharmaceuticals and contract
manufacturing. The agricultural products segment is comprised of agricultural
chemicals, primarily ROUNDUP, seeds and genomics, animal productivity and
nutrition research. Additional information regarding segments is provided in
Note 19 to the consolidated financial statements.
As a result of the recent merger, management is in the process of redefining the
segments and as a result, related disclosures may change in future periods.
NET SALES
<TABLE>
<CAPTION>
Sales by Segment 1999 % Change 1998 % Change 1997
- ---------------- ---- -------- ---- -------- ----
Dollars in millions
<S> <C> <C> <C> <C> <C>
Pharmaceuticals $11,177 20.3% $ 9,289 4.3% $ 8,907
Agricultural products 5,248 18.0 4,448 21.1 3,673
------- ------- -------
TOTAL CONSOLIDATED SALES $16,425 19.6% $13,737 9.2% $12,580
======= ======= =======
</TABLE>
Sales growth in 1999 of 20 percent was the result of volume increases of over 25
percent partly offset by impacts from lower prices and negative effects of
currency exchange rates.
Sales in the U.S. continue to represent an increasingly significant percentage
of worldwide sales, increasing to 52 percent in 1999 from 45 percent in 1998 and
43 percent in 1997. Despite increasing growth in the U.S. relative to non-U.S.
markets, the company's geographic composition of sales will continue to result
in significant exposure to the fluctuations of exchange rates in both
translation of financial results and the underlying transactions that comprise
the results.
PHARMACEUTICAL SEGMENT:
The increase in pharmaceutical segment sales in 1999 was due largely to new
prescription product growth in the U.S. and Japan. The increase was led by the
success of CELEBREX arthritis treatment which was launched in early 1999, making
Pharmacia the No. 1 provider of branded arthritis treatments in the United
States. Although new product growth was strong in 1998, sales that year included
only partial year sales of continually growing products such as XALATAN,
glaucoma treatment. New product growth was also strong in 1997. Sales that year
were adversely affected, though, by intense generic competition and year-end
1996 trade inventory accumulations in the U.S. and across major markets in
Europe. In Japan, mandatory price decreases in each of the last three years
periods of negative exchange effects, and government restrictions in health care
reimbursements have adversely affected pharmaceutical segment sales.
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<PAGE> 40
A year-to-year consolidated net sales comparison of the Pharmaceutical segment's
top 20 products (including generic equivalents where applicable) is provided in
the table below:
<TABLE>
<CAPTION>
Sales of Top Products 1999 % Change 1998 % Change 1997
- --------------------- ---- -------- ---- -------- ----
Dollars in millions
<S> <C> <C> <C> <C> <C>
CELEBREX $1,501 -- $ N/A -- $ N/A
AMBIEN 535 17% 458 16% 396
XALATAN 507 53 332 102 165
GENOTROPIN 461 17 395 13 349
ARTHROTEC 344 (1) 346 236 103
CLEOCIN/DALACIN 343 9 314 5 299
DETROL/DETRUSITOL 329 163 125 N/A 1
XANAX 320 -- 321 15 279
MEDROL 297 13 264 10 241
CAMPTOSAR 293 52 194 26 154
DEPO-PROVERA 252 11 227 16 196
NICORETTE 234 10 213 27 168
DAYPRO 227 (26) 308 (7) 331
SPIRO LINE 225 13 200 (9) 220
FRAGMIN 213 18 181 10 165
PHARMORUBICIN 206 16 177 (9) 196
ROGAINE/REGAINE 139 4 133 3 129
HEALON 137 (3) 140 (9) 155
CYTOTEC 118 (12) 134 (28) 185
COVERA-HS 98 21 81 47 55
------ --- ------ --- ------
TOTAL $6,779 49% $4,543 20% $3,787
====== === ====== === ======
</TABLE>
The company's performance in 1999 continues to be driven by sales of new
prescription products that have been introduced within the last five years, such
as CELEBREX, XALATAN, DETROL, CAMPTOSAR, and MIRAPEX which are making up an
increasing percentage of the company's total sales. In addition, higher sales of
Ambien short-term treatment for insomnia, and the Covera-HS and spironolactone
lines of cardiovascular products, contributed to the strong sales performance.
Growth has been especially strong in the U.S. and Japan, where sales of
prescription drugs grew by 56 percent and 33 percent, respectively. According to
IMS Health, Inc., the former Pharmacia & Upjohn was the fastest growing
pharmaceutical company in Japan during 1999 as a result of expanding the sales
force by one-third since 1998 and introducing three new products into the
market.
CELEBREX arthritis treatment was launched early in 1999 and sales totaled more
than $1.5 billion or 13% of pharmaceutical segment sales. Sales of CELEBREX were
partially offset by a decrease in sales of DAYPRO and ARTHROTEC as market share
shifted to CELEBREX. The company remained the No. 1 provider of prescription
arthritis treatments in the United States, as CELEBREX, DAYPRO and ARTHROTEC
arthritis treatments combined for 54 percent of the branded market share. With
the launch of CELEBREX, the company achieved the No. 1 sales position in
prescription arthritis treatments worldwide.
AMBIEN, a short-term treatment for insomnia, continues to be a leader in the
U.S. hypnotic market and was the company's second largest selling drug in 1999.
The company will receive a gradually declining share of AMBIEN profits until
2002, in accordance with the joint venture agreement amended in 1998, when its
interest in the Lorex Pharmaceutical joint venture is expected to be purchased
by its partner, Sanofi-Synthelabo, Inc.
In 1999 XALATAN, for the treatment of open-angle glaucoma and ocular
hypertension, became the company's third largest selling drug with sales of $507
million. Since its introduction in 1996, and subsequent
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<PAGE> 41
launch in 49 countries, XALATAN has become the leading glaucoma agent in the
world on the basis of its 1999 sales. In May 1999, XALATAN was launched in
Japan, the world's second largest glaucoma market, for the first-line treatment
of patients with ocular hypertension. In preparation for the launch, Pharmacia
tripled the size of its ophthalmology sales force in Japan. As a result, the
XALATAN launch in Japan was the most successful to date. In December 1999, the
company filed a New Drug Application (NDA) for XALCOM, a fixed-dose combination
formulation containing XALATAN and timolol, which the U.S. Food and Drug
Administration (FDA) has designated for priority review.
DETROL (DETRUSITOL outside the U.S.), the leading treatment for overactive
bladder, reduces the symptoms of increased frequency and urge to urinate, as
well as urge incontinence episodes. DETROL has been launched in 30 countries
throughout the world, generating 1999 sales of $329 million, an increase of $204
million over 1998. Despite introduction of a new competitor in the U.S. market,
DETROL has maintained its position as the dominant product in the market. A
Supplemental New Drug Application (SNDA) was filed in December 1999 to
strengthen the DETROL label for urge incontinence. Management filed with
regulatory agencies in the U.S. and Europe for a once-daily version of DETROL in
February 2000. With the recent merger, the promotional sales force for DETROL in
the U.S. will consist of over 1,800 representatives.
In 1999, the company increased its efforts to build on its growing presence in
oncology and to capitalize on new opportunities to expand its global cancer care
franchise. Sales of CAMPTOSAR, the company's leading oncology agent, increased
by approximately $100 million to a total of $293 million. Sales of CAMPTOSAR
continue to benefit from new clinical data documenting its ability to improve
survival in patients with colorectal cancer. Pharmacia markets CAMPTOSAR in the
U.S. as a second-line treatment for metastatic colorectal cancer. In April 2000,
the FDA approved CAMPTOSAR as a first-line therapy for the treatment of patients
with colorectal cancer in combination with 5-fluorouracil/leucovorin.
In addition to CAMPTOSAR, the company also markets a number of other widely
prescribed oncology agents including PHARMORUBICIN and ADRIAMYCIN, anthracycline
preparations which are used in the treatment of breast cancer and other solid
tumors.
In 1999, Pharmacia received U.S. FDA approval for two new breast cancer
treatments, ELLENCE and AROMASIN. ELLENCE, the trade name for PHARMORUBICIN in
the U.S., was launched shortly after its approval in September 1999. ELLENCE has
been granted Orphan Drug Status by the FDA for the adjuvant treatment of
patients with breast cancer following surgery or radiation therapy. AROMASIN, an
oral hormonal drug that blocks the production of estrogen, was approved in 1999
for the treatment of patients with metastatic breast cancer. AROMASIN was
launched during the first quarter 2000 in the U.S. and key markets in Europe and
Latin America.
Central nervous system (CNS) products, including MIRAPEX, CABASER, and EDRONAX
are also contributing to Pharmacia's new product sales growth. MIRAPEX sales
grew 65 percent in 1999 to $81 million. In addition to MIRAPEX, Pharmacia also
markets the dopamine agonist CABASER, for Parkinson's Disease, in Europe and
Japan. In August 1999, CABASER was launched in Japan, the world's second largest
market for Parkinson's Disease. CABASER is marketed in the U.S. under the trade
name DOSTINEX for the treatment of patients with hyperprolactinemia; it is not
approved for Parkinson's Disease in the U.S. EDRONAX, for the treatment of major
depression, has been launched in eighteen European and Latin American countries
since 1997. The FDA issued an approvable letter for VESTRA, the trade name for
EDRONAX in the U.S., in July 1999. The FDA issued a second approvable letter in
February 2000 which will require the completion of an additional U.S. clinical
trial. In the U.S., VESTRA will be co-marketed by Janssen Pharmaceutica, a
division of Johnson & Johnson.
The company also produces the CNS drugs XANAX, HALCION, and SERMION, which are
subject to intense generic competition. XANAX sales remained steady at $320
million, while HALCION sales grew to $97 million on the basis of a 14 percent
increase in non-U.S. markets. SERMION, a treatment for cognitive and behavioral
disorders related to senile dementia, continued to decline in 1999 as it did in
1997 and 1998.
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<PAGE> 42
GENOTROPIN, the world's leading recombinant human growth hormone, is Pharmacia's
fourth-largest selling drug. The company recorded GENOTROPIN sales of $461
million in 1999. GENOTROPIN promotes longitudinal bone growth in children and
adults with growth hormone deficiency. Outside the U.S., GENOTROPIN is also used
in the treatment of growth disturbances associated with Turner's Syndrome and
chronic renal insufficiency. In the U.S., GENOTROPIN sales increased by 64
percent as the product is capturing one-third of all new patients who are using
growth hormone therapy. Despite intense competition and declining volume in the
growth hormone market due to government imposed prescribing restrictions,
GENOTROPIN sales in Japan increased due to a positive price effect, a favorable
currency impact, and an improving market share after recovery of full marketing
rights in 1998. The launch of GENOTROPIN MiniQuick, a new delivery system, has
resulted in strong growth of the brand in Europe. GENOTROPIN MiniQuick was
launched on a wide-scale in the U.S. in early 2000.
FRAGMIN, a low-molecular-weight heparin product for the prevention of thrombosis
that is available in more than fifty countries, generated sales of $213 million
in 1999. Outside the U.S., FRAGMIN is also used for treatment of deep vein
thrombosis and in hemodialysis. In 1999, the FRAGMIN label in the U.S. was
strengthened with the addition of new indications for the treatment of unstable
coronary artery disease and prevention of thrombosis following hip surgery. In
1999, Pharmacia and Centocor entered into a co-promotion agreement, whereby
Centocor will promote FRAGMIN to cardiovascular specialists in the U.S. With the
more competitive labeling and an increased presence in the institutional arena,
FRAGMIN sales grew 53 percent in the U.S. FRAGMIN also outpaced the growth of
the low-molecular-weight heparin market in Europe.
Pharmacia markets several hormonal products for women. DEPO-PROVERA
Contraceptive Injection is the company's largest selling hormonal product with
1999 sales of $252 million. It is approved in over one hundred countries.
Although the patents protecting DEPO-PROVERA have expired, no generic
equivalents have been approved and the company does not foresee the introduction
of a generic equivalent of DEPO-PROVERA in the U.S. within the next twelve
months. LUNELLE (LUNELLA outside the U.S.), a monthly contraceptive injection,
is expected to be approved in 2000. Because of its shorter duration of action
and different drug profile, LUNELLE is targeted to a different patient
population than DEPO-PROVERA and is not expected to cannibalize sales of
DEPO-PROVERA. The company also markets PROVERA, an agent used in progesterone
replacement and OGEN, an estrogen replacement product. In addition, Pharmacia
acquired U.S. promotional rights to three FDA approved products for hormone
replacement therapy: VAGIFEM, ACTIVELLA, and INNOFEM from Novo Nordisk A/S. The
company will begin promotion of these products in 2000.
The company produces various forms of steroids under the trade names MEDROL,
SOLU-MEDROL, and DEPO-MEDROL, which are used to treat a variety of inflammatory
conditions. In 1999, Pharmacia reported sales of $297 million for the MEDROL
family of products, a 13 percent increase compared to 1998.
Pharmacia acquired the rights to license two new products in the U.S. during
1999. PLETAL, generically known as cilostazol, is being co-promoted with Otsuka
of America Pharmaceuticals Inc. PLETAL improves pain-free walking distance in
patients who suffer from intermittent claudication, a form of peripheral
arterial disease. GLYSET, a treatment for patients with Type-II diabetes, was
licensed from Bayer AG and introduced in early 1999.
In April 2000, the U.S. Food and Drug Administration approved ZYVOX (ZYVOXA) for
the treatment of hospitalized patients with severe Gram-positive infections.
Approval in Europe is still pending. ZYVOX is the lead compound in the
oxazolidinone class of antibiotics, the first new class of antibiotics to reach
the market in over thirty years. ZYVOX will be an important addition to
Pharmacia's existing line of antibiotics which includes CLEOCIN (or DALACIN),
LINCOCIN, and VANTIN.
Generic price erosion has affected sales of older products including HEALON,
PROVERA, MICRONASE/ GLYNASE, ADRIAMYCIN, and LINCOCIN. Competition from generic
drugs is expected to continue to adversely affect future sales of these
products, and may also negatively impact the sales of other products like XANAX,
CLEOCIN and MEDROL, which also face generic competition. Brand name competitive
products negatively influenced the sales of CAVERJECT and VANTIN in 1999.
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<PAGE> 43
In the consumer health care or over-the-counter (OTC) products business, the
company's leading products are the NICORETTE line to treat tobacco dependency,
and ROGAINE (REGAINE), the treatment for hereditary hair loss. During 1999, the
company recorded $234 million in NICORETTE sales, an increase in local currency
of 13 percent over 1998. Sales of ROGAINE increased 4 percent to $139 million.
Sales of other OTC products in the U.S. declined in 1999 resulting in a net
overall flat performance for the year in the global OTC business when compared
with the prior year. Sales of NICORETTE in 1999 were led by Europe and
Australia.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cost of products sold 24.6% 29.4% 31.1%
Research and development 19.0 18.2 19.9
Selling, general and administrative 38.2 36.4 35.4
Amortization of goodwill .4 .5 .3
All other, net (1.8) (3.1) (2.0)
EBIT * 19.6 18.5 15.3
</TABLE>
* Earnings before interest and taxes (EBIT) is presented here to provide
additional information about the company's operations. This item should be
considered in addition to, but not as a substitute for or superior to, net
earnings, cash flows or other measures of financial performance prepared in
accordance with Generally Accepted Accounting Principles. Determination of
EBIT may vary from company to company.
Pharmaceutical segment earnings before interest and taxes (EBIT) in 1999
improved to $2.2 billion, a 27 percent increase over the 1998 EBIT of $1.7
billion and a 61 percent increase over an EBIT of $1.4 billion two years
previously. Pharmaceutical segment operating expenses, stated as a percentage of
net pharmaceutical sales, are provided in the table above.
COST OF PRODUCTS SOLD as a percent of sales improved significantly in 1999
compared to 1998 as a combined result of a number of favorable influences. There
was an increasing percentage of the company's sales made up of higher margin
products due to growth in certain products and divestiture of lower margin
nutrition products. The company also experienced production efficiencies and
cost reductions. Finally, currency exchange had a modest favorable effect.
Similarly, a favorable comparison in product mix and production costs drove cost
of products sold lower as a percentage of sales in 1998 as compared to 1997. New
products, representing an increasing percentage of sales, contributed a higher
gross profit than older products in price competition with generics.
Improvements in production efficiencies, increased production volumes, and the
favorable effect of currency exchange on costs more than offset the negative
currency impact on sales, further reducing the percentage.
RESEARCH AND DEVELOPMENT EXPENSE increased as a percentage of sales to 19.0
percent surpassing the level experienced in the preceding year. In addition to
strong commitments to the development of new products such as ZYVOX and a
combination dosage form of XALATAN, significant investments were made in
technology acquisitions and license agreements. Research spending was reduced by
$260 million in 1998 for milestone payments from Pfizer as part of the Celebrex
co-promotion agreement. Also, the Sugen merger and Sensus investment contributed
to higher R&D expense. Approval was granted in the U.S. and is still being
sought in Europe for ZYVOX, a new class of antibiotic active against
Gram-positive bacteria. In December 1999, the company filed a NDA for a
fixed-dose combination formulation containing XALATAN, for the treatment of
open-angle glaucoma and ocular hypertension, and timolol. Sugen spending in
1999, combined with the Sensus investment and termination of certain other
projects resulted in charges of $104 million, a $72 million increase over 1998.
Savings from lower infrastructure costs in 1998 due to efficiencies generated by
the 1997 restructuring were reinvested into strategic licensing agreements,
other R&D collaborations to supplement the company's internal research base, and
increased clinical spending on products in development. Key activities in 1998
included the acquisition of the rights to almotriptan, an anti-migraine
compound; the licensing of two new compounds for the treatment of diabetes and
anxiety; and the Hepatitis C virus and pharmacogenomics collaborations. Spending
during 1998 also supported the product filings of CELEBREX arthritis treatment,
anticancer therapies AROMASIN (exemestane) and epirubicin as well as the
development
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<PAGE> 44
activities related to filing a NDA for EDRONAX with the U.S. FDA for depression.
Spending levels in 1997 were elevated due to final stage testing for CELEBREX,
and significant transactions such as the purchase of rights to a research
compound and the cancellation of future product rights under a research
agreement.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) expense increased as a percent of
sales in 1999 due primarily to sales and promotional efforts in the U.S. The
U.S. sales force was expanded to accommodate new product launches and improve
market penetration. Products such as CELEBREX, CAMPTOSAR, PLETAL, DETROL,
FRAGMIN and GLYSET were the focus of such marketing efforts. Spending related to
Celebrex included co-promotion costs associated with the Pfizer agreement
partially offset by a $70 million milestone payment received in 1999. Outside
the U.S., XALATAN was launched in Japan in May. Likewise, there was upward
pressure in 1998 when compared to 1997 due primarily to sales force expansions
and increased product promotion in the U.S., Europe, and Japan, particularly for
the following brands: DETROL, EDRONAX, MIRAPEX, GENOTROPIN, and XALATAN. The
comparative spending increase was somewhat mitigated by the favorable effects of
exchange and a decrease in general and administrative expense.
AGRICULTURAL PRODUCTS SEGMENT:
Despite the unfavorable agricultural economy, net sales for the Agricultural
Products segment set a record at $5.2 billion, an increase of 18 percent over
the previous sales record of $4.4 billion set in 1998. The increase in net sales
was led by higher seed sales, particularly in seed lines containing the ROUNDUP
READY gene, with Monsanto branded ROUNDUP READY soybeans holding approximately
25 percent of the market for soybeans in the United States. Seed sales increased
to over $1.3 billion in 1999 compared with $670 million in 1998 primarily
because of the inclusion of a full year of results from seed companies acquired
in 1998. In addition, ROUNDUP READY corn volume increased more than 100 percent
from the prior year when the supply of ROUNDUP READY corn sold out in its
introductory year in the United States. Excluding the 1998 seed company
acquisitions and the divestiture of a tomato business, net sales increased 3
percent in 1999 compared with 1998. Net sales increased 21 percent in 1998
compared with 1997. Excluding seed company acquisitions in 1997 and 1998, net
sales increased 17 percent. The commercial success of agricultural and food
products developed through biotechnology will depend in part on government and
public acceptance of their cultivation, distribution and consumption. The
company continues to work with consumers, customers and regulatory bodies to
encourage understanding of nutritional and agricultural biotechnology products.
Continued increased demand for crops developed through biotechnology especially
ROUNDUP READY soybeans, corn and cotton, YIELDGARD insect-protected corn, and
BOLLGARD with ROUNDUP READY cotton generated substantially higher technology fee
revenues in 1999 compared with 1998. Technology fee revenues also increased
significantly in 1998 compared with 1997. Worldwide acreage of crops developed
through biotechnology increased by 48 percent to approximately 86 million acres
for the 1999 crop season compared to 58 million acres in the 1998 crop season.
In addition, the technology fee for ROUNDUP READY soybeans in the United States
increased approximately 25 percent in 1999. As a result, technology fee revenues
increased 51 percent over prior year revenues. Total cost to soybean farmers per
acre decreased as lower ROUNDUP herbicide prices more than offset increases in
technology fees for the 1999 crop season.
Contributing to the 1999 sales record was the ROUNDUP family of herbicides,
which delivered volume growth in 1999 slightly above the historical 20 percent
trend line. ROUNDUP family of herbicides volume growth in 1998 over 1997 was
over 20 percent. Operations in the United States, Canada, Brazil, Argentina, and
Australia posted record sales volumes of ROUNDUP in 1999. Lower selling prices,
principally in the United States, made ROUNDUP more cost effective in a wide
range of crop and industrial uses. The effect of generic competition in certain
markets outside the United States required modestly lower selling prices.
However, the effect of lower selling prices was more than offset by the
increased sales volumes. The large gains in sales volumes of ROUNDUP were driven
by lower selling prices, the continued adoption of conservation tillage (the
practice of substituting the judicious use of herbicides for mechanical
tillage), new applications, and increased use of ROUNDUP over the top of ROUNDUP
READY soybeans, cotton, canola, and corn.
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<PAGE> 45
Patent protection for the active ingredient in ROUNDUP herbicide expires in the
United States in September 2000. The company believes that it can compensate for
increased generic competition both within and outside the United States and
continue to increase revenues and profits from ROUNDUP through a combination of
marketing strategy, pricing strategy, and decreased production costs.
Net sales for the Agricultural Products segment also benefited from record sales
of POSILAC bovine somatotropin. Sales volumes of POSILAC bovine somatotropin
increased 14 percent over volumes in the prior year, following a 26 percent
increase in 1998 compared with 1997.
Declines in the U.S. dollar value of local currencies in certain Latin American
and Eastern European countries negatively affected the translation to U.S.
dollars of local currency-denominated operating results in 1999 compared with
1998. Poor economic conditions in certain world areas limited liquidity and
lessened the demand for herbicides, especially in Eastern Europe, where volumes
of ROUNDUP declined in 1999. Drought conditions in key areas of Brazil during
the planting season lessened the demand for herbicides and resulted in sales
volumes that fell short of expectations. In 1998, declines in the U.S. dollar
value of local currencies in Indonesia, Australia and Malaysia negatively
impacted the translation to U.S. dollars of local currency-denominated operating
results in 1998 compared to 1997. Poor economic conditions in Asia lessened the
demand for herbicides, especially in Southeast Asia, where volumes of ROUNDUP
declined in 1998.
Revenues from the ROUNDUP lawn-and-garden products business declined 37 percent,
or $86 million, to $146 million in 1999 compared with revenues of $232 million
in 1998 and revenues of $214 million in 1997. The 1999 decrease in revenues was
primarily because of a change in the distribution network. In connection with
the change in distribution, the company chose to reduce inventory in the
distribution channel during the year. In 1998, The Scotts Company (Scotts) paid
$32 million for the exclusive right to sell and market ROUNDUP herbicide for
lawn-and-garden uses. The $32 million was deferred and is being amortized over
20 years, the life of the contract. See Note 2 to consolidated financial
statements. In 1999, ROUNDUP for residential use was marketed by Scotts along
with its broad line of residential lawn-and-garden products. Under the current
agreement, Scotts receives a commission for its services as agent based on a
varying percentage of the earnings before interest and taxes (EBIT) for the
ROUNDUP lawn-and-garden business. Scotts is also responsible for contributing
annually towards the expenses of the ROUNDUP lawn-and-garden business. The
company recognizes the amounts due to and from Scotts as marketing expenses as
they are incurred.
Pretax items from continuing operations in 1999 for the Agricultural Products
segment totaled $111 million and included an $85 million charge associated with
the failed merger between the company and D&PL, and $61 million for the
accelerated integration of the company's agricultural chemical and seed
operations. These charges were offset by a $35 million gain from the divestiture
of the Stoneville cotton seed business. In 1998, continuing operations included
charges of $402 million for the write-off of in-process R&D and a $20 million
charge for the cancellation of stock options in exchange for cash related to the
acquisition of DEKALB. The in-process R&D charges were primarily associated with
the acquisitions of DEKALB, PBIC and certain international seed operations of
Cargill. In 1997, the pretax items included $633 million of charges for in-
process R&D write-offs associated with several seed company acquisitions.
In-process R&D charges for the seed company acquisitions cover numerous seed
breeding projects, no single one of which was significant, as is typical in the
seed breeding industry. These projects consist of conventional breeding programs
for corn, wheat and other hybrids; conventional breeding for soybean varieties;
and the development of transgenic crops. The in-process R&D projects were valued
by a discounted cash flow method with risk-adjusted discount rates, generally
from 12 to 20 percent, which took into account the stage of development of each
in-process R&D category. Successful commercialization of products developed
through these projects is expected to occur five to nine years after program
initiation. Although there are risks associated with the ultimate completion and
commercialization of these research projects, the failure of any one project
would not materially affect the total value of the research programs. The
in-process projects were at various stages of completion at the dates of
acquisition. In 1999, The company spent $82 million on biotechnology-related
activities and $47 million on conventional breeding activities related to
completing
42
<PAGE> 46
these in-process R&D projects. During the next eight years, management expects
to spend approximately $250 million on biotechnology-related activities and
approximately $180 million on conventional breeding activities to complete these
in-process R&D projects; approximately $120 million in 2000, $100 million in
2001, $80 million in 2002, $60 million in 2003, and $70 million thereafter. The
company intends to fund these costs, consisting primarily of salary and benefit
expenses for R&D employees, with cash generated from existing businesses.
Revenues from the in-process R&D projects related to the 1998 acquisitions began
in 1999. Revenues from the in-process R&D projects related to the 1997
acquisitions began in 1998.
EBIT for the Agricultural Products segment in 1999 increased $296 million
compared with 1998. EBIT totaled $496 million in 1999, compared with $200
million in 1998 and $21 million in 1997. The increase in 1999 was primarily
associated with the absence of write-offs of in-process research and development
partly offset by an increase in amortization expense related to the 1998 seed
company acquisitions. SG&A expenses rose primarily because of the inclusion of a
full year of SG&A costs from the seed companies acquired in 1998, higher seed
integration costs, and higher information technology expenses. These increases
were offset partially by $25 million of licensing fees for technical data on
glyphosate. R&D expenses grew principally because of the inclusion of the
acquired seed company R&D spending and additional biotechnology research.
Depreciation and amortization increased $145 million, or 41 percent, primarily
because of the seed company acquisitions in the prior year and the completion of
additional manufacturing capacity for herbicides.
CORPORATE/GENERAL
Due to large restructuring charges in 1998 and 1997, corporate and other
expenses, including restructuring costs, were comparatively lower in 1999. In
1998 the combined companies recorded $432 million of total restructuring
expenses and in 1997 the total restructuring costs were $316 million. Excluding
these costs, corporate expenses primarily relate to administrative costs not
associated with the business operations.
Merger and restructuring charges recorded during 1999 were $55 million which
consists of restructuring charges, integration costs, merger expenses and
reversals of previous restructuring charges. Additional restructuring charges
are expected to be incurred as the combining and restructuring of Monsanto and
Pharmacia & Upjohn takes place.
Following is a description of the charges taken by the predecessor companies.
Pharmacia & Upjohn
During 1999, the company recorded $70 million in merger and restructuring
expenses, which is comprised of $73 million of merger and restructuring charges
net of a $3 million adjustment to the 1998 turnaround restructuring. The charge
consisted of $16 million in merger transaction costs such as fees for investment
bankers, attorneys, accountants, and other costs to effect the merger with
Sugen, all of which were paid during 1999. The charge also included costs
pertaining to reorganizations that will result in the elimination of certain R&D
projects as well as the elimination of 375 employee positions, mainly impacting
the pharmaceutical segment and corporate and administrative functions. The
objective of the restructuring is to eliminate duplicate functions and
investments in R&D as well as reorganize the sales force based on anticipated
future requirements of the company. The adjustment to the prior restructuring
liabilities was attributable to lower than anticipated employee separation
costs.
Employee separation benefits included in the 1999 charge are for elimination of
positions in research and development of $26 million, corporate and
administration of $18 million and sales of $6 million. Project termination costs
totaled $4 million and asset write-downs totaled $3 million. During 1999, $3
million was paid and charged against the liability. These amounts related to a
portion of separation benefits for the approximately 50 employees severed prior
to the end of the year. The company anticipates all activities associated with
this restructuring to be substantially complete at the end of 2000. The
remaining cash expenditures are expected during 2000 with some separation
annuity payments being completed in 2001.
43
<PAGE> 47
The anticipated savings resulting from 1999 restructuring activities are
expected to be largely offset by increased spending, primarily in refocused R&D
activities including Sugen.
In 1997, the company announced a comprehensive turnaround program that resulted
in restructuring charges during 1997 and 1998. The company 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 was
materially complete 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 R&D. The turnaround program mainly affected the company's
pharmaceutical segment and corporate administration groups. In the third and
fourth quarters of 1997, the company recorded phase one charges totaling $316
million. The second phase of the turnaround program was finalized in the fourth
quarter of 1998, resulting in an additional restructuring charge of $92 million.
The charge of $92 million recorded in 1998 was comprised of employee separation
costs of $68 million; write-downs of fixed assets and abandoned manufacturing
projects of $8 million; and other costs of $16 million.
The 1997 restructuring charge of $316 million, for the first phase of the
turnaround program, primarily related to employee separation costs of $134
million; write-downs of fixed assets and abandoned manufacturing projects of
$162 million; and other costs of $20 million.
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
million, R&D of $9 million, and manufacturing of $4 million. These amounts
included an adjustment of $16 million 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 million, R&D of $22 million, and
manufacturing of $31 million. As of December 31, 1999, the company had paid $155
million in severance costs in connection with the 1998 and 1997 charges. The
remaining balance for employee separation costs related to the turnaround
program was $44 million at December 31, 1999 comprised mainly of charges related
to the phase two charge and remaining annuity separation payments. The company
expects some annuity payments to continue into 2001.
The 1998 and 1997 restructuring charges included asset write-downs for excess
manufacturing, administration, and R&D facilities totaling $8 million and $162
million, respectively. The 1998 amount included an adjustment of $15 million 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, 1999, facilities presently being
marketed had a net book value of $47 million. Fixed asset write-downs were based
on appraisals less costs to sell.
Other costs included in the 1998 and 1997 restructuring charges of $16 million
and $20 million, respectively, were primarily comprised of canceled contractual
lease obligations and other costs. Offsetting 1998 charges in this grouping was
an adjustment of $6 million related to all restructuring charges prior to 1997.
As a result of the turnaround restructuring, the company was able to reinvest
the savings achieved into the organization in more strategic ways. Incremental
spending on the sales force and product support was primarily funded by the
savings achieved through the turnaround restructuring. This investment in the
sales force, in conjunction with the efficiencies gained in the turnaround
restructuring, contributed to the sales growth and double-digit earnings growth
achieved by the company during both 1999 and 1998.
Monsanto
In 1999, the company recorded a pretax gain of $54 million from the reversal of
restructuring liabilities established in 1998. The restructuring liability
reversals were required as a result of lower actual severance and facility
shut-down costs than originally estimated. Also during 1999, the company
recorded a pretax charge of $67 million from continuing operations, principally
associated with the company's continued focus on improving operating efficiency
through accelerated integration of the agricultural chemical and seed
operations. The charge of $67 million was comprised of facility shut-down
charges of $39 million, workforce
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reduction costs of $18 million, and asset impairments of $10 million, and was
recorded in the consolidated statement of earnings as cost of goods sold of $20
million, amortization of intangible assets of $8 million and merger and
restructuring expense of $39 million.
In 1998, the company recorded net restructuring charges of $340 million as part
of the company's overall strategy to reduce costs and continue the commitment to
its core businesses. The 1998 net restructuring charges were taken in the second
and fourth quarters of 1998 and were recorded in the consolidated statement of
earnings in the following categories:
<TABLE>
<CAPTION>
Workforce Facility Asset
Reductions Closures Impairments Other Total
---------- -------- ----------- ----- -----
<S> <C> <C> <C> <C> <C>
Cost of goods sold $ 6 $ 8 $ 84 $ -- $ 98
Amortization and adjustment of intangible
assets -- 3 63 -- 66
Merger and Restructuring 103 64 (14) 153
All other, net -- -- 43 (20) 23
---- --- ---- ---- ----
TOTAL $109 $75 $190 $(34) $340
==== === ==== ==== ====
</TABLE>
In December 1998, the board of directors approved a plan to close certain
facilities, reduce the current workforce and exit nonstrategic businesses. The
activities Monsanto planned to exit in connection with this plan principally
comprised of a tomato business, and a business involved in the operation of
membership-based health and wellness centers. This plan also contemplated
exiting several small, embryonic business activities, none of which had a
significant effect on the restructuring reserve. The company recorded
restructuring charges of $327 million to cover the costs associated with these
actions in 1998. The charges reflected the elimination of approximately 1,400
jobs, primarily in manufacturing and administrative functions. Included in these
actions were approximately 190 positions that had been part of a restructuring
plan approved in 1996. The affected employees are entitled to receive severance
benefits pursuant to established severance policies or by governmentally
mandated labor regulations. The charges also reflect pretax amounts for asset
impairments, primarily for property, plant and equipment; intangible assets; and
certain investments, totaling $130 million. The asset impairments were recorded
primarily because of the company's decision to sell certain nonstrategic
businesses. As a result, the net assets of these businesses were classified as
assets held for sale and were carried at their net realizable value, estimated
to be approximately $36 million at December 31, 1998. These businesses were sold
during 1999.
Other impairment charges totaling $40 million were recorded in December 1998
because of management's decision to exit certain long-term investments. Fair
values of the impaired assets and the businesses held for sale were recorded at
their current market values or on estimated sale proceeds, based on either
discounted cash flows or sales contracts. The December 1998 restructuring
amounts also included pretax charges of $99 million for the shutdown or other
rationalization of certain production and administrative facilities.
Rationalization entails the consolidation, shutdown or movement of facilities to
achieve more efficient operations. Approximately 80 facilities, located
primarily in the United States, Europe and Latin America, were affected by these
actions. Charges for these shutdowns included $21 million for property, plant
and equipment, $15 million for intangible assets, $26 million for miscellaneous
investments, and $6 million for inventories. Leasehold termination costs of $13
million and various facility closure costs of $18 million, principally for
facilities shutdown costs, equipment dismantling and contract cancellation
payments, were also included in the shutdown charges. The closure or
rationalization of these facilities was completed by December 31, 1999. As of
December 31, 1999, cash payments of $81 million were made to eliminate
approximately 1,100 positions and deferred employee severance payment of $9
million were incurred and expected to be paid in January 2000. In addition, $20
million in facility shut-down costs were incurred in connection with the
December 1998 restructuring plan.
As of December 31, 1999, the remaining reserve balance for employee severance
related to the approximately 175 positions was $31 million, and $4 million for
contractual obligations. The company expects these employee reduction
obligations to be completed by June 2000. An additional 125 positions originally
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contemplated in the plan were eliminated through attrition. Cash payments to
complete the 1998 plan will be funded from operations and are not expected to
significantly impact Pharmacia's liquidity.
In May 1998, the company's board of directors approved a plan to exit Monsanto's
optical products business, which included the Orcolite and Diamonex optical
products business and the Diamonex performance products business (both reported
in the pharmaceutical segment), and recorded net pretax charges of $48 million.
The company recognized a $20 million pretax gain on the sale of the Orcolite
business and recorded pretax charges of $68 million for the rationalization of
the Diamonex business, primarily for severance costs and the write-off of
manufacturing facilities and intangible assets. In connection with this
rationalization, certain Diamonex product lines were sold, and others were shut
down. In connection with the shutdown of the Diamonex business approximately 200
jobs, primarily in manufacturing and administrative functions, were eliminated
at a total cost of $6 million. These actions, including workforce reductions and
payment of severance, were complete by December 31, 1999. The sale of the
remaining assets, which were classified as assets held for sale as of December
31, 1998 and carried at their net realizable value of $7 million, was completed
during 1999. Fair values of the impaired assets and the businesses held for sale
were recorded at their current market values, based on estimated cash flows,
appraisals or sales contracts. Net income generated by the optical products
businesses in 1998 and 1997 totaled $2 million, and $5 million, respectively.
Also during the second quarter of 1998, Monsanto recognized a pretax gain of $35
million primarily related to the reversal of a restructuring reserve based on a
decision not to rationalize a European pharmaceutical production facility. There
were approximately 70 jobs scheduled to be eliminated as part of this
rationalization plan. The decision was driven by changes in the business and
regulatory environment, and successes in the R&D pipeline. The net result of the
actions was a pretax charge of $13 million in the second quarter of 1998,
recorded in the consolidated statement of earnings in the following categories:
<TABLE>
<CAPTION>
Workforce Facility Asset
Reductions Closures Impairments Other Total
---------- -------- ----------- ----- -----
<S> <C> <C> <C> <C> <C>
Cost of goods sold $6 $ 2 $36 $ -- $44
Amortization and adjustment of intangible
assets -- -- 24 -- 24
Merger and Restructuring -- (26) -- (9) (35)
All other, net -- -- -- (20) (20)
-- ---- --- ---- ---
TOTAL INCREASE IN LOSS FROM
OPERATIONS BEFORE INCOME TAXES $6 $(24) $60 $(29) $13
== ==== === ==== ===
</TABLE>
Also in 1998, the company acquired several seed companies, including Plant
Breeding International Cambridge Limited (PBIC), DEKALB Genetics Corporation
(DEKALB), and certain international seed operations of Cargill, Incorporated
(Cargill), which are included in the Agricultural Products segment. The company
recorded pretax charges of $422 million related to these acquisitions, of which
$402 million related to the write-off of acquired in-process R&D and $20 million
related to the cancellation of DEKALB stock options associated with that
acquisition. Management believes that the technological feasibility of the
acquired in-process R&D has not been established and that the research has no
alternative future uses. Accordingly, the amounts allocated to in-process R&D
are required to be expensed immediately under generally accepted accounting
principles. The acquired in-process R&D was valued using a discounted cash flow
method with risk-adjusted discount rates generally ranging from 12 percent to 20
percent. This valuation took into account the stage of completion and
development cycle of each in-process R&D category. See further discussion under
Agricultural Products segment and Note 7 to Financial Statements.
As part of restructuring actions approved prior to 1998, Monsanto reorganized
U.S. staff operations, closed approximately 20 production, administrative and
research facilities and made final payments to complete contractual commitments
as part of a U. S. production facility shutdown. These actions eliminated
approximately 1,020 positions.
DISCONTINUED OPERATIONS resulted in net sales decreases in 1999 to $980 million
compared with 1998 net sales of $1.3 billion and $3.3 billion of net sales in
1997. Net sales in 1997 and 1998 included the ORTHO
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lawn-and-garden products business which was sold to Scotts in January 1999
exclusive of ROUNDUP lawn-and-garden products. Net sales and earnings from
discontinued operations for 1997 also included nine months of sales of the
chemicals business prior to its spinoff to shareholders in September 1997.
Revenues for NUTRASWEET, the company's trademark aspartame product, and tabletop
sweeteners declined in 1999 compared with 1998 reflecting increased competition.
Biogum sales declined modestly as sales of xanthan and gellan gum products
declined due to a recession in the oil field industry.
In 1999, income from discontinued operations was $92 million, compared with a
loss of $119 million, in the prior year and net income of $321 million in 1997.
The increase in 1999 of $211 million was primarily because 1998 discontinued
operations included restructuring charges of $220 million aftertax ($298 million
pretax), principally for the cost of facility shutdowns ($187 million pretax),
asset impairments ($84 million pretax), and workforce reductions ($27 million
pretax). One-time items in 1999 included a net gain of $2 million aftertax which
included the reversal of $27 million aftertax of 1998 restructuring reserves and
charges of $25 million aftertax associated with cost to exit the alginates
business. The decrease of $440 million of net income from 1997 to 1998 was
primarily because the chemical company results were no longer included in 1998
discontinued operations, and because of unusual charges which included pretax
restructuring charges of $298 million. Unusual items in 1997 included $51
million of pretax charges for in-process R&D related to the acquisition of the
Calgene oils business.
Income tax expense for discontinued operations for 1999 and 1998 exceeded the 35
percent U.S. federal statutory rate primarily because of a nondeductible
write-off of intangible assets associated with the alginates business. Income
tax expense for discontinued operations for 1997 exceeded the U.S. federal
statutory amount primarily because of nondeductible exit costs incurred to
separate the chemicals business.
In October 1999, the company completed the sale of the alginates business for
proceeds of $40 million, which resulted in an aftertax loss of $25 million on
the sale from discontinued operations. Offsetting this loss on disposal were
restructuring liability reversals of $27 million aftertax, representing
severance and facility shut-down costs originally estimated which were no longer
required as a result of the sale of the business on terms more favorable than
originally anticipated.
On February 4, 2000, the company announced the signing of a definitive agreement
to sell the tabletop sweetener business, including the EQUAL, CANDEREL and
NUTRASWEET tabletop brands, to Merisant Company. The sale closed in March 2000
and proceeds of $570 million from the sale were used to reduce debt. On February
22, 2000, the company announced the signing of a definitive agreement to sell
the biogums business to a joint venture between Hercules Inc. and Lehman
Brothers Merchant Banking Partners II, L.P. Expected proceeds are $685 million.
On March 27, 2000, the company announced the signing of a definitive agreement
to sell the artificial sweeteners business, including the NUTRASWEET brand, to
J.W. Childs Equity Partners II, L.P. for $440 million. Proceeds of the
divestiture will primarily be used to reduce debt. The company expects to
recognize a small net gain on completion of these transactions.
INTEREST EXPENSE increased significantly over the three year period from $168
million in 1997 to $408 million in 1999 as the company made strategic
investments in seed businesses and financed the acquisitions with long-term debt
of various maturities and issued Adjustable Conversion-rate Equity Securities
with a total book value of $700 million. The decline in interest income during
1999 as compared to 1998 was due to a change in investment composition and a
decline in longer-term instruments.
ALL OTHER, NET expenses associated with merger activities were primarily
responsible for the decrease in all other, net in 1999. The company recorded a
pretax charge of $85 million for a termination fee and other expenses associated
with the failed merger between the company and D&PL. The third quarter 1999 net
gain on the sale of the nutrition business in Germany was largely offset by
relocation costs associated with the establishment of the new corporate
headquarters in New Jersey.
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<PAGE> 51
INCOME TAXES
The annual effective tax rate in 1999 returned to the 1997 rate of 31% after
increasing to 46% in 1998. The rate increase in 1998 was largely due to
nondeductible charges for acquired in-process R&D and goodwill from seed company
acquisitions.
COMPREHENSIVE INCOME
Comprehensive income is defined as all non-owner changes in equity and equals
net earnings plus other comprehensive income (OCI). For Pharmacia Corporation,
OCI consists of currency translation adjustments, unrealized gains and losses on
available-for-sale securities, and minimum pension liability adjustments.
Comprehensive income (loss) in millions for 1999, 1998, and 1997 was $760, $351
and $141, respectively. Unfavorable currency movements in 1999 reduced
comprehensive income by $617 million, resulting in an amount less than net
earnings. Movements in the other components of OCI substantially offset each
other resulting in a minimal unfavorable impact on comprehensive income.
Comprehensive income was less than net earnings in 1998 because unrealized
losses on available-for-sale securities, coupled with the minimum pension
liability adjustments, more than offset favorable currency translation
adjustments (CTA). Favorable CTA reflected the weaker U.S. dollar at December
31, 1998, relative to its general strength at the prior year-end. In 1997, the
stronger U.S. dollar was responsible for large CTA losses which drove
comprehensive income lower than net income that year.
Additional information regarding OCI is provided in Note 4 to the consolidated
financial statements.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
As of December 31,
-----------------------------
1999 1998 1997
---- ---- ----
Dollars in millions
<S> <C> <C> <C>
Working capital $ 3,508 $ 3,069 $ 1,958
Current ratio 1.49:1 1.46:1 1.33:1
Debt to total capitalization 42.8% 43.5% 32.8%
</TABLE>
Working capital and the current ratio for 1999 improved in comparison to the
prior year due largely to an increase in cash and trade receivables offset
partly by higher short term borrowings. The increase in short-term debt was due
to larger current maturities and commercial paper positions at year-end. In
1997, both of these liquidity measures were significantly lower. Current asset
balances were generally lower prior to the successful launch of CELEBREX and the
acquisition of the seed companies.
The increase in the percentage of debt to total capitalization from 1997 to 1999
reflects the effect of higher long-term borrowing levels required to finance the
seed company acquisitions in 1998. Significant merger and restructuring charges
in 1998 combined with negative currency translation adjustments recorded in
equity also contributed to the higher percentage.
Net cash provided by operations is a major source of funds to finance working
capital, shareholder dividends, and capital expenditures. Cash from operations
totaled $1.7 billion in 1999, $1.3 billion in 1998, and $1.4 billion in 1997.
The increase in 1999 was largely attributable to increased earnings growth.
In addition to net cash flows provided by operations, two major sources of cash
in 1999 and 1998 were the proceeds from the sale of investments and properties
of $1,138 million in 1999 and $1,551 million in 1998.
Over the three-year period from 1997 to 1999, significant uses of cash included
acquisitions of seed companies for $4.1 billion in 1998 and $1.3 billion in
1997, expenditures for property, plant, and equipment and the company's
quarterly dividend payment to shareholders. Capital expenditures in billions
were $1.6 in 1999, $1.5 in 1998, and $1.2 in 1997. Anticipated capital spending
for 2000 includes expansion and improvements to research and manufacturing
facilities in the U.S., Belgium, Puerto Rico, Brazil, and Sweden.
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In November 1998, P&U announced a $1.0 billion stock repurchase program. Due to
the merger with Sugen, this program was discontinued in August of 1999. Shares
acquired prior to the merger were used for stock based plans with the balance
being re-sold. Total shares acquired during this program were 3 million for a
cost of $170 million. During the third quarter, approximately 1 million treasury
shares were sold for total proceeds of approximately $50 million.
The company's future cash provided by operations and borrowing capacity is
expected to cover normal operating cash flow needs, planned capital spending,
and dividends for the foreseeable future. As of December 31, 1999, lines of
credit available for company use totaled approximately $4.5 billion, of which
$3.5 billion were committed. The company had A-1+ and P-1 ratings for its
commercial paper and AA- and A1 general bond ratings from Standard & Poor's and
Moody's, respectively, as of December 31, 1999.
MARKET RISK
Market risk represents the risk of a change in the value of a financial
instrument, derivative or nonderivative, caused by fluctuations in interest
rates, currency exchange rates, and commodity and equity prices. The company
handles market risk in accordance with established policies and thereby enters
into various derivative transactions. No such transactions are entered into for
trading purposes.
Because the company's short and long-term debt exceeds cash and investments, the
exposure to interest-rate risk relates primarily to the debt portfolio. The
company is actively managing all portfolios to reduce its cost and increase its
return on investment. To ensure liquidity, the company will only invest in
instruments with high credit quality where a secondary market exists. The
company is in a position to keep all investments until final maturity and
maintains the majority of long-term debt at fixed rates.
The following sensitivity analysis presents the hypothetical change in fair
value of those financial instruments held by the company at December 31, 1999,
which are sensitive to changes in interest rates. Market risk is estimated as
the potential change in fair value resulting from an immediate hypothetical
one-percentage point parallel shift in the yield curve. The fair values of the
company's investments and loans are based on quoted market prices or discounted
future cash flows. As the carrying amounts on short-term loans and investments
maturing in less than 180 days approximate the fair value, these are not
included in the sensitivity analysis. The fair value of investments over 180
days is $226 million. The fair value of debt included in the analysis is $5,406
million and excludes Employee Stock Ownership Plan (ESOP) guaranteed debt and
the Adjustable Conversion-rate Equity Securities (ACES). A one-percentage point
change in the interest rates would change the fair value of investments over 180
days by $5 million and debt by $234 million.
The company's management of currency exposure is primarily focused on reducing
the negative impact of currency fluctuations on consolidated cash flow and
earnings. The company uses forward contracts, cross-currency swaps, and currency
options to actively manage the net exposure in accordance with established
hedging policies. The company hedges intercompany loans and deposits as well as
a portion of both firm commitments and anticipated transactions. The company's
largest contracted exposures involve the U.S. dollar, Swedish krona, British
pound and the Japanese yen. For these contracts, unfavorable currency movements
of ten percent would negatively impact the fair market values of the related
derivatives by $139 million.
The company uses futures contracts to protect against commodity price increases
mainly in the seeds business. The majority of these contracts hedge the
purchases of soybeans and corn. A ten percent decrease in soybean and corn
prices would have a negative impact on the fair value of those futures by $8
million and $3 million, respectively.
The company also has investments in equity securities. All such investments are
classified as long term investments. The fair market value of these investments
is $261 million. The majority of these investments are listed on a stock
exchange or quoted in an over-the-counter market. If the market price of the
traded securities would decrease by ten percent, the fair value of the equities
would decrease by $23 million. The company issued publicly traded instruments
called ACES. These instruments are classified as debt although their fair
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<PAGE> 53
value is based on the market price of the company's stock. The fair market value
of the ACES is $580 million. A ten percent increase in the company's stock price
would have a negative impact on fair value of $58 million. Further discussion of
financial instruments is provided in the notes to the consolidated financial
statements.
LITIGATION AND CONTINGENT LIABILITIES
Various suits and claims arising in the ordinary course of business, including
suits for personal injury alleged to have been caused by the use of the
company's products, are pending against the company and its subsidiaries. The
company also is involved in several administrative and judicial proceedings
relating to environmental concerns, including actions brought by the U.S.
Environmental Protection Agency (EPA) and state environmental agencies for
remediation.
In April 1999, a jury verdict was returned against DEKALB GENETICS CORPORATION,
a subsidiary of the company in a lawsuit filed in U.S. District Court in North
Carolina. The lawsuit claims that a 1994 license agreement was induced by fraud
stemming from nondisclosure of relevant information and that DEKALB did not have
the right to license, make or sell products using the plaintiff's technology for
glyphosate resistance under this agreement. The jury awarded $15 million in
actual damages for unjust enrichment and $50 million in punitive damages. DEKALB
has appealed this verdict, has meritorious grounds to overturn the verdict and
intends to vigorously pursue all available means to have the verdict overturned.
No provision has been made in the company's consolidated financial statements
with respect to the award for punitive damages.
On March 20, 1998, a jury verdict was returned against the company in a lawsuit
filed in the California Superior Court. The lawsuit claims that the company
delayed providing access to certain gene technology under a 1989 agreement. The
jury awarded $175 million in future damages. The company has filed an appeal and
has no provision established in the company's consolidated financial statements
with respect to this verdict. The company intends to defend itself vigorously
against this action.
G.D. Searle & Co. and Pharmacia & Upjohn, Inc., subsidiaries of the company have
been parties 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. These suits specifically allege that the
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 agreements 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. A similar action is pending by a proposed
retailer class in the state court of California. 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. Pharmacia & Upjohn announced in 1998 that
it reached a settlement with the plaintiffs in the federal class action cases
for $103 million; and Searle received a favorable verdict in 1999.
Based on information currently available and the company's experience with
lawsuits of the nature of those currently filed or anticipated to be filed which
have resulted from business activities to date, the amounts accrued for product
and environmental liabilities are considered adequate. Although the company
cannot predict and cannot make assurances with respect to the outcome of
individual lawsuits, the ultimate liability should not have a material effect on
its consolidated financial position. Unless there is a significant deviation
from the historical pattern of resolution of such issues, the ultimate liability
should not have a material adverse effect on the company's consolidated
financial position, its results of operations, or liquidity.
The company's estimate of the ultimate cost to be incurred in connection with
environmental situations could change due to uncertainties at many sites with
respect to potential clean-up remedies, the estimated cost of clean-up, and the
company's share of a site's cost. With regard to the company's discontinued
industrial
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<PAGE> 54
chemical facility in North Haven, Connecticut, the company may soon be required
to submit a corrective measures study report to the 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 or when the expenditures might be made.
In 1997, the company adopted American Institute of Certified Public Accountants'
Statement of Position (SOP) 96-1, "Environmental Remediation Liabilities." SOP
96-1 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's estimated liability includes both direct and indirect
costs associated with remediation and 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. Such 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.
YEAR 2000 DATE RECOGNITION ISSUE
Through April 2000, the global operations of the company have had no material
interruptions in services received or generated, related to the Year 2000 date
recognition issue. Barring critical failures arising from factors beyond the
company's direct control, management continues to believe that the date
recognition problem should not have a material adverse effect on the company's
consolidated financial position, its results of operations, or liquidity.
EURO CONVERSION
Effective January 1, 1999, several European countries began operating with a new
common currency, the euro. The euro will completely replace these countries'
national currencies by January 1, 2002. The conversion to the euro will require
changes in the company's operations as systems and commercial arrangements are
modified to deal with the new currency. Management created a project team to
evaluate the impact of the euro conversion on the company's operations and
develop and execute action plans, as necessary, to successfully effect the
change. The cost of this effort is not expected to be material. While
information technology systems are planned to be fully euro-compliant during the
year 2000, a minimum of euro-compliance for strategic locations was achieved in
1999.
The conversion to the euro may have competitive implications on pricing and
marketing strategies. However, any such impact is not known at this time. The
introduction of the euro will not significantly change the currency exposure of
the company, but will reduce the number of transactions performed in the market.
At this point in its overall assessment, management believes the impact of the
euro conversion on the company will not be significant. Still, uncertainty
exists as to the effects the euro currency will have on the marketplace and, as
a result, there is no guarantee that all problems will be foreseen and
corrected, or that no material disruption of the company's business will occur.
NEW ACCOUNTING STANDARDS
In 1998 the Financial Accounting Standards Board issued 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, 2001, and is currently
assessing the impact of adoption on its financial position, results of operation
and liquidity.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements" (SAB
101). SAB 101 provides guidance related to revenue
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<PAGE> 55
recognition. SAB 101 allows companies to report any changes in revenue
recognition related to adopting its provisions as an accounting change at the
time of implementation in accordance with APB Opinion No. 20, "Accounting
Changes." In response to a specific dialogue with the SEC, the company recorded
a cumulative effect of a change in accounting principle, effective January 1,
1999, for revenue recognized in 1998 related to the sale of certain marketing
rights. The effect on earnings in 1999 was an after-tax loss of $20 million. The
pretax amount of $32 million will be amortized to income over twenty years. The
proforma effect of this change on 1999 was immaterial.
The company is currently in the process of assessing whether or not there may be
other revenue recognition issues to which SAB 101 applies and has not yet
determined the effect, if any, that potential changes may have on consolidated
financial position or results of operations. Companies must adopt SAB 101 no
later than June 30, 2000, effective as of January 1, 2000.
FORWARD-LOOKING INFORMATION
Certain statements contained in this Report, and in statements and presentations
made by representatives of the company, are "forward-looking statements".
Forward-looking statements include statements regarding anticipated financial
results, growth plans, product performance, development, regulatory approval and
public acceptance of new products, the potential impact of currency fluctuations
and other economic and business developments, and other matters that are not
historical facts. Forward-looking statements often include the words "believes,"
"expects," "will," "intends," "plans," "estimates," or similar expressions.
The company's forward-looking statements are based on current expectations,
currently available information and assumptions that the company believes to be
reasonable. However, these statements are necessarily based on factors that
involve risks and uncertainties, and actual results may differ materially from
those expressed or implied by such forward-looking statements. Factors that may
cause or contribute to those differences include, among others: management's
ability to integrate the operations of the historic Monsanto Company with those
of the historic Pharmacia & Upjohn, Inc., to integrate earlier mergers and
acquisitions involving those companies, and to implement strategic initiatives;
the ability to fund research and development, the success of research and
development activities and the speed with which regulatory authorizations and
product roll-outs may be achieved; the ability to bring new products to market
ahead of competition; the ability to successfully market new and existing
products in new and existing domestic and international markets; the ability to
meet generic competition after the expiration of the company's patents,
including the expiration of its ROUNDUP herbicide patent in the United States;
domestic and foreign social, legal and political developments, especially those
relating to health care reform, governmental and public acceptance of products
developed through biotechnology, and product liabilities; the ability to
successfully negotiate pricing of pharmaceutical products with managed care
groups, health care organizations and government agencies worldwide; the effect
of seasonal conditions and of commodity prices on agricultural markets
worldwide; exposure to product liability, antitrust and other lawsuits, and
contingencies related to actual or alleged environmental contamination; the
company's ability to protect its intellectual property, and its success in
litigation involving its intellectual property; fluctuations in foreign currency
exchange rates; general domestic and foreign economic and business conditions;
the effects of the company's accounting policies and general changes in
generally accepted accounting practices; the company's ability to attract and
retain current management and other employees of the company; and other factors
that may be described elsewhere in this Report or in other company filings with
the United States Securities and Exchange Commission.
52
<PAGE> 56
PHARMACIA CORPORATION AND SUBSIDIARIES
SELECTED FINANCIAL DATA
On March 31, 2000, the company completed a merger whereby a wholly owned
subsidiary of Pharmacia Corporation (formerly Monsanto Company), merged with and
into Pharmacia & Upjohn, Inc. Monsanto was a life sciences company committed to
finding solutions to the growing global needs for food and health by applying
common forms of science and technology among agriculture, nutrition and health.
Monsanto manufactured, researched and marketed high-value agricultural products,
pharmaceuticals and nutrition-based health products. Pharmacia & Upjohn was a
global pharmaceutical group engaged in the research, development, manufacture
and sale of pharmaceutical and health care products. The merger was accounted
for as a pooling of interests under U.S. generally accepted accounting
principles. All data prior to this date, except dividends, have been restated to
reflect the combined operations of the two companies as if they had been merged
during all prior periods.
<TABLE>
<CAPTION>
Years Ended December 31
---------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Dollar amounts in millions, except
per-share data
Net sales.............................. $16,425 $13,737 $12,580 $12,066 $11,152
Earnings from continuing operations.... 1,306 481 390 838 1,123
Total assets................. 27,194 26,705 20,970 19,891 19,547
Long-term debt......................... 6,236 6,772 2,630 2,431 2,537
Diluted earnings per share from
continuing operations................ $ 1.01 $ .37 $ .31 $ .68 $ .92
Dividends declared per share(*)........ $ -- $ -- $ -- $ -- $ --
</TABLE>
(*) Dividend information for Pharmacia & Upjohn, Inc. and Monsanto Company prior
to the merger has not been presented because the information would not be
meaningful.
53
<PAGE> 57
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors
of Pharmacia Corporation
In our opinion, based on our audits and the report of other auditors, the
accompanying consolidated balance sheets and the related consolidated statements
of earnings, shareholders' equity, and cash flows present fairly, in all
material respects, the financial position of Pharmacia Corporation and its
subsidiaries at December 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999 in conformity with accounting principles generally accepted in the
United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. The consolidated financial statements
give retroactive effect to the merger forming Pharmacia Corporation on March 31,
2000 in a transaction accounted for as a pooling of interests, as described in
Note 3 to the consolidated financial statements. We did not audit the financial
statements of Monsanto Company, which statements reflect total assets of
$16,535,000,000 and $ 16,385,000,000 as of December 31, 1999 and 1998,
respectively, and total revenues of $9,172,000,000, $6,979,000,000 and
$5,994,000,000 for each of the three years in the period ended December 31,
1999. Those statements were audited by other auditors whose report thereon has
been furnished to us, and our opinion expressed herein, insofar as it relates to
the amounts included for Monsanto Company, is based solely on the report of the
other auditors. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, 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 and the report of other
auditors provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Florham Park, New Jersey
February 7, 2000, except as to the pooling of interests
of Monsanto Company and Pharmacia & Upjohn, Inc. which
is as of March 31, 2000
54
<PAGE> 58
INDEPENDENT AUDITORS' REPORT
To the shareowners of Monsanto Company:
We have audited the statement of consolidated financial position of Monsanto
Company and subsidiaries as of December 31, 1999 and 1998, and the related
statements of consolidated income (loss), cash flow, shareowners' equity and
comprehensive income (loss) for each of the three years in the period ended
December 31, 1999 (not presented separately herein). These financial statements
are the responsibility of the company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Monsanto Company and subsidiaries
as of December 31, 1999 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States of
America.
/S/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
St. Louis, Missouri
February 25, 2000
55
<PAGE> 59
CONSOLIDATED STATEMENTS OF EARNINGS
PHARMACIA CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
For The Years Ended December 31
--------------------------------------------------
1999 1998 1997
---- ---- ----
Dollar amounts in millions, except per-share data
<S> <C> <C> <C>
Net sales $16,425 $13,737 $12,580
Cost of products sold 5,319 5,004 4,444
Research and development 2,815 2,176 2,144
Selling, general and administrative 5,859 4,875 4,540
Amortization of goodwill 248 233 134
Merger and restructuring charges 55 245 316
Interest income (110) (125) (147)
Interest expense 408 236 168
Acquired in-process research and development -- 402 633
All other, net (67) (201) (214)
------- ------- -------
Earnings before income taxes 1,898 892 562
Provision for income taxes 592 411 172
------- ------- -------
Earnings from continuing operations 1,306 481 390
Income (loss) from discontinued operations, net of tax 57 (119) 321
Gain on sale of discontinued operations, net of tax 35 -- --
------- ------- -------
Earnings before cumulative effect of accounting change 1,398 362 711
Cumulative effect of accounting change, net of tax (20) -- --
------- ------- -------
NET EARNINGS $ 1,378 $ 362 $ 711
======= ======= =======
NET EARNINGS PER COMMON SHARE:
Basic
Earnings from continuing operations $ 1.04 $ .39 $ .31
Net Earnings 1.10 .29 .58
Diluted
Earnings from continuing operations 1.01 .37 .31
Net Earnings $ 1.07 $ .28 $ .57
</TABLE>
Consolidated results for all periods presented have been restated for the
effects of the March 31, 2000 merger involving a subsidiary of Monsanto Company
and Pharmacia & Upjohn, Inc. accounted for as a pooling of interests. The
accompanying notes are an integral part of the consolidated financial
statements.
56
<PAGE> 60
CONSOLIDATED BALANCE SHEETS
PHARMACIA CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
December 31
--------------------------
1999 1998
---- ----
Dollar amounts in millions
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,600 $ 970
Short-term investments 138 384
Trade accounts receivable, less allowance of $271 (1998:
$190) 4,131 3,536
Inventories 2,905 2,754
Deferred income taxes 842 843
Other 1,066 1,237
------- -------
Total Current Assets 10,682 9,724
Long-term investments 476 610
Properties, net 6,825 6,257
Goodwill, net of accumulated amortization of $493 (1998:
$307) 4,265 5,066
Other intangible assets, net of accumulated amortization of
$641 (1998: $560) 1,531 1,453
Other noncurrent assets 1,858 1,671
Net assets of discontinued operations 1,557 1,924
------- -------
Total Assets $27,194 $26,705
======= =======
CURRENT LIABILITIES:
Short-term debt $ 1,992 $ 1,401
Accounts payable 1,272 1,334
Compensation and compensated absences 677 704
Dividends payable 145 141
Income taxes payable 255 354
Other 2,833 2,721
------- -------
Total Current Liabilities 7,174 6,655
Long-term debt 5,966 6,463
Guarantee of ESOP debt 270 309
Postretirement benefit cost 1,578 1,212
Deferred income taxes 364 242
Other noncurrent liabilities 931 1,265
------- -------
Total Liabilities 16,283 16,146
------- -------
SHAREHOLDERS' EQUITY:
Preferred stock, $0.01 par value; authorized 10,000,000
shares, issued Series B convertible 6,692 shares value
(1998: 6,863 shares) 270 277
Common stock, $2 par value; authorized 3,000,000,000 shares,
issued 1,465,381,000 shares (1998: 1,464,296,000) 2,931 2,929
Capital in excess of par value 1,791 1,690
Retained earnings 10,696 9,963
ESOP-related accounts (330) (360)
Treasury stock (2,432) (2,543)
Accumulated other comprehensive loss:
Currency translation adjustments (1,979) (1,362)
Unrealized investment gains, net 30 19
Minimum pension liability adjustment (66) (54)
------- -------
Total Shareholders' Equity 10,911 10,559
------- -------
Total Liabilities and Shareholders' Equity $27,194 $26,705
======= =======
</TABLE>
The consolidated financial position for all periods presented has been restated
for the effects of the March 31, 2000 merger involving a subsidiary of Monsanto
Company and Pharmacia & Upjohn, Inc. accounted for as a pooling of interests.
The accompanying notes are an integral part of the consolidated financial
statements.
57
<PAGE> 61
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
PHARMACIA CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
For the Years Ended December 31
--------------------------------
1999 1998 1997
---- ---- ----
Dollar amounts in millions
<S> <C> <C> <C>
PREFERRED STOCK:
Balance at beginning of year $ 277 $ 282 $ 287
Redemptions and conversions (7) (5) (5)
------- ------- -------
Balance at end of year 270 277 282
------- ------- -------
COMMON STOCK:
Balance at beginning of year 2,929 2,877 2,873
Issuance of shares 2 52 4
------- ------- -------
Balance at end of year 2,931 2,929 2,877
------- ------- -------
CAPITAL IN EXCESS OF PAR VALUE:
Balance at beginning of year 1,690 672 404
Stock option, incentive and dividend reinvestment plans 106 118 115
Offering to the public -- 894 147
Retirements, conversions and other (5) 6 6
------- ------- -------
Balance at end of year 1,791 1,690 672
------- ------- -------
RETAINED EARNINGS:
Balance at beginning of year 9,963 10,234 10,377
Net earnings 1,378 362 711
Dividends declared (632) (620) (841)
Dividends on preferred stock (net of tax) (13) (13) (13)
------- ------- -------
Balance at end of year 10,696 9,963 10,234
------- ------- -------
ESOP-RELATED ACCOUNTS:
Balance at beginning of year (360) (383) (440)
Third-party debt repayment 39 35 33
Spinoff of Chemical business -- -- 31
Other (9) (12) (7)
------- ------- -------
Balance at end of year (330) (360) (383)
------- ------- -------
TREASURY STOCK:
Balance at beginning of year (2,543) (2,618) (2,669)
Stock options and incentive plans 234 192 145
Purchases of treasury stock (170) (117) (94)
Sales of treasury stock 47 -- --
------- ------- -------
Balance at end of year (2,432) (2,543) (2,618)
------- ------- -------
ACCUMULATED OTHER COMPREHENSIVE LOSS:
Balance at beginning of year (1,397) (1,386) (816)
Other comprehensive loss (618) (11) (570)
------- ------- -------
Balance at end of year (2,015) (1,397) (1,386)
------- ------- -------
Total Shareholders' Equity $10,911 $10,559 $ 9,678
======= ======= =======
COMPREHENSIVE INCOME (NET OF TAX):
Currency translation adjustments $ (617) $ 64 $ (581)
Unrealized investment gains (losses) 11 (37) 27
Minimum pension liability adjustments (12) (38) (16)
------- ------- -------
Other comprehensive loss (618) (11) (570)
Net earnings 1,378 362 711
------- ------- -------
Total Comprehensive Income $ 760 $ 351 $ 141
======= ======= =======
</TABLE>
Consolidated results for all periods presented have been restated for the
effects of the March 31, 2000 merger involving a subsidiary of Monsanto Company
and Pharmacia & Upjohn, Inc. accounted for as a pooling of interests. The
accompanying notes are an integral part of the consolidated financial statements
58
<PAGE> 62
CONSOLIDATED STATEMENTS OF CASH FLOWS
PHARMACIA CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------
1999 1998 1997
---- ---- ----
Dollar amounts in millions
<S> <C> <C> <C>
CASH FLOWS FROM OPERATIONS:
Earnings from continuing operations, net of tax $1,306 $ 481 $ 390
Adjustments to net earnings:
Depreciation 666 609 569
Amortization 479 398 237
Deferred income taxes (22) (390) (415)
Acquired in-process R&D expenses -- 402 633
Other 125 351 333
Changes in:
Accounts receivable (655) (765) (34)
Inventories (221) (314) (247)
Accounts payable and accrued liabilities 135 (118) (237)
Other non-trade receivables (109) 180 (232)
Other liabilities 9 53 189
Other items (67) 336 101
------ ------- -------
Cash provided by continuing operations 1,646 1,223 1,287
Cash provided by discontinued operations 171 198 215
------ ------- -------
NET CASH PROVIDED BY OPERATIONS 1,817 1,421 1,502
------ ------- -------
CASH FLOWS (REQUIRED) PROVIDED BY INVESTMENT ACTIVITIES:
Purchases of Property Plant & Equipment (1,678) (1,595) (1,254)
Seed company acquisitions and investments (86) (4,061) (1,325)
Other acquisitions and investments (217) (922) (1,392)
Investment and property disposal proceeds 982 1,182 1,243
Proceeds from sale of properties 156 369 70
Other (145) (3) (48)
Discontinued operations 288 (143) (365)
------ ------- -------
NET CASH REQUIRED BY INVESTMENT ACTIVITIES (700) (5,173) (3,071)
------ ------- -------
CASH FLOWS PROVIDED (REQUIRED) BY FINANCING ACTIVITIES:
Proceeds from issuance of debt <91 days 135 3,938 266
Repayment of debt <91 days (526) (328) (214)
Debt qualified for net reporting <91 days 434 (285) 2,398
Issuance of stock 202 1,090 140
Treasury stock purchases (170) (117) (94)
Dividend payments (641) (639) (861)
Other financing activities 123 177 61
------ ------- -------
NET CASH (REQUIRED) PROVIDED BY FINANCING ACTIVITY (443) 3,836 1,696
------ ------- -------
Effect of exchange rate changes on cash (44) (47) (26)
------ ------- -------
Increase in cash and equivalents 630 37 101
------ ------- -------
Cash and equivalents, beginning of year 970 933 832
------ ------- -------
Cash and cash equivalents, end of year $1,600 $ 970 $ 933
====== ======= =======
Cash paid during the year for:
Interest (net of amounts capitalized) $ 386 $ 353 $ 240
Income taxes $ 494 $ 398 $ 415
Noncash investing activity:
Assets disposed of in exchange for equity securities $ -- $ 54 $ --
</TABLE>
Consolidated results for all periods presented have been restated for the
effects of the March 31, 2000 merger involving a subsidiary of Monsanto Company
and Pharmacia & Upjohn, Inc. accounted for as a pooling of interests. The
accompanying notes are an integral part of the consolidated financial
statements.
59
<PAGE> 63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In the notes that follow, all dollar amounts are stated in millions except
per-share data. Per-share amounts are presented on a diluted, after-tax basis.
Trademarks of Pharmacia Corporation and its subsidiaries are indicated in all
upper case letters.
The term "the company" and "Pharmacia" are used to refer to Pharmacia
Corporation or to Pharmacia Corporation and its consolidated subsidiaries, as
appropriate to the context.
1 SIGNIFICANT ACCOUNTING POLICIES AND OTHER
BASIS OF PRESENTATION
The consolidated financial statements are presented on the basis of accounting
principles that are generally accepted in the United States (U.S.). All
professional accounting standards that are effective as of December 31, 1999
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 that affect the reported earnings, financial position and various
disclosures. Actual results could differ from those estimates.
On March 31, 2000, a subsidiary of Monsanto Company (Monsanto) and Pharmacia &
Upjohn (P&U) consummated a merger agreement to form Pharmacia Corporation
(Pharmacia). The merger, a U.S. 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 they had always been merged. Reclassifications were made to
conform the companies' financial statement presentations. See Note 3 for further
detail of this transaction.
On August 31, 1999, Pharmacia & Upjohn, Inc., a subsidiary of the Pharmacia
Corporation, completed a merger with SUGEN, Inc. (Sugen). The merger was
accounted for as a pooling of interests. Accordingly, all prior-period
consolidated financial statements presented had 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.
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 shareholders' equity.
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.
REVENUE RECOGNITION
Revenues are recognized when title to products is transferred and goods are
shipped to customers. Where right of return exists, revenues are reduced at the
time of sale to reflect expected returns that are estimated based on historical
experience. License revenues and revenues from the sale of product rights are
recognized when the rights have been contractually conferred to the licensee or
purchaser. Revenue is not recognized unless the
60
<PAGE> 64
collection of sales proceeds is reasonably assured and the company has no
further performance obligations under the sale or license agreement (see Note
2).
CASH EQUIVALENTS
The company considers all highly liquid debt instruments with an original
maturity of 91 days or less to be cash equivalents.
INVESTMENTS
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 quoted market values of the securities, with the resulting
adjustments, net of deferred taxes, reported as a component of other
comprehensive income in shareholder's equity until realized (see Note 4).
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. When a decline in market value is deemed to be other than
temporary, the reduction to the investment in a security is charged to expense.
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined by the
last-in, first-out (LIFO) method for most 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 using weighted average periods for each classification 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 issue. Costs of renewals and improvements are
capitalized. Upon retirement or other disposition of property, any gain or loss
is included in earnings.
Impairment tests of long-lived assets are made when conditions indicate a
possible loss. Such impairment tests are based on a comparison of undiscounted
cash flows to the recorded value of the asset. If an impairment is indicated,
the asset value is written down to its fair market value or expected cash flows
at an appropriate discount rate, if fair market value is not readily
determinable.
GOODWILL AND OTHER INTANGIBLES
Goodwill represents the excess of the purchase cost over the fair value of net
assets acquired and is presented net of accumulated amortization. Amortization
of goodwill is recorded on a straight-line basis over various periods not
exceeding 30 years. The company assesses the recoverability of goodwill and
other intangibles 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.
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<PAGE> 65
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.
DERIVATIVE CONTRACTS
Forward currency exchange contracts, cross-currency interest-rate swaps,
currency options and commodity futures (hereafter referred to as contracts) are
held for purposes other than trading. The company holds certain contracts to
hedge anticipated transactions and others to hedge recorded assets and
liabilities. Contracts hedging anticipated transactions are also marked to
market with the 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 gains recognized on the underlying recorded exposure.
Generally, any premium or discount is amortized over the life of the contract
although in some cases the amount is deferred until the realization of the
underlying transaction. 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 and effective as hedges of
currency net investments are classified as currency translation adjustments in
shareholders' equity.
ENVIRONMENTAL REMEDIATION LIABILITIES
The company accrues for environmental remediation liabilities 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" (see Note 17
for SFAS No. 123 disclosures).
RECLASSIFICATIONS
Certain reclassifications have been made to conform prior periods' data to the
current presentation.
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<PAGE> 66
2 NEW ACCOUNTING STANDARDS
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements" (SAB
101). SAB 101 provides guidance related to revenue recognition. SAB 101 allows
companies to report any changes in revenue recognition related to adopting its
provisions as an accounting change at the time of implementation in accordance
with APB Opinion No. 20, "Accounting Changes." In response to a specific
dialogue with the SEC, the company recorded a cumulative effect of a change in
accounting principle, effective January 1, 1999, for revenue recognized in 1998
related to the sale of certain marketing rights. The effect on earnings in 1999
was an after-tax loss of $20 ($0.02 per share), net of taxes of $12. The pretax
amount of $32 will be amortized to income over twenty years. The pro forma
effect of this change in 1999 was immaterial.
The company is currently in the process of assessing whether or not there may be
other revenue recognition issues to which SAB 101 applies and has not yet
determined the effect, if any, that potential changes may have on its
consolidated financial position or results of operations. Companies must adopt
SAB 101 no later than June 30, 2000, effective as of January 1, 2000.
In 1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities" (SFAS 133). 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, 2001, and is currently assessing the impact of adoption
on its consolidated financial statements.
3 MERGER OF MONSANTO AND PHARMACIA & UPJOHN
On March 31, 2000, the company completed a merger accounted for as a pooling
interests. The merger was accomplished according to an Agreement and Plan of
Merger dated December 19, 1999 as amended on February 18, 2000, whereby a wholly
owned subsidiary of formerly Monsanto Company merged with and into Pharmacia &
Upjohn and Monsanto Company changed its name to Pharmacia Corporation. Monsanto
was a life sciences company, committed to finding solutions to the growing
global needs for food and health by applying common forms of science and
technology among agriculture, nutrition and health. Monsanto manufactured,
researched and marketed high-value agricultural products, pharmaceuticals and
nutrition-based health products. Pharmacia & Upjohn (P&U) was a global
pharmaceutical group engaged in the research, development, manufacture and sale
of pharmaceutical and healthcare products.
Pursuant to the merger agreement, each share of common stock of Pharmacia &
Upjohn issued and outstanding was converted into 1.19 shares of common stock of
Pharmacia Corporation and each share of Series A Convertible Perpetual Preferred
Stock of Pharmacia & Upjohn issued and outstanding was converted into one share
of a new series of convertible preferred stock of Pharmacia Corporation
designated as Series B Convertible Perpetual Preferred Stock. The Series B
preferred shares have a conversion ratio into common shares of 1,725.5:1.
Approximately 620 million shares of common stock were issued and approximately
6,640 shares of preferred stock were issued.
The merger, a U.S. tax-free reorganization, was accounted for as a pooling of
interests under APB Opinion No. 16 "Business Combinations". 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 they had always been a combined organization.
There were no material transactions between Monsanto Company and Pharmacia &
Upjohn, Inc. prior to the combination. Certain reclassifications have been made
to conform the respective financial statement presentations.
The results of operations for the separate companies and the combined amounts
presented in the consolidated financial statements for the periods prior to the
merger follow. The reclassifications of sales represent certain
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<PAGE> 67
types of revenue and income transactions reclassified to conform the
presentation of the two combining companies. The adjustments to net income from
continuing operations represent adjustments to income tax expense as a result of
assuming the companies had always been combined.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net Sales:
Monsanto $ 9,146 $ 7,237 $ 6,058
Pharmacia & Upjohn 7,253 6,758 6,586
Reclassifications 26 (258) (64)
------- ------- -------
Combined $16,425 $13,737 $12,580
======= ======= =======
Net income from continuing operations:
Monsanto $ 503 $ (131) $ 149
Pharmacia & Upjohn 803 631 258
Adjustments -- (19) (17)
------- ------- -------
Combined $ 1,306 $ 481 $ 390
======= ======= =======
</TABLE>
4 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
Expense
Before or Net of
Tax (Benefit) Tax
------ --------- ------
<S> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1999
Currency translation adjustments $(617) $ -- $(617)
----- ---- -----
Unrealized investment gains 32 7 25
Less: reclassification adjustments for gains realized in
net earnings 21 7 14
----- ---- -----
Net unrealized investment gains 11 -- 11
----- ---- -----
Minimum pension liability adjustments (28) (16) (12)
----- ---- -----
Other comprehensive (loss) $(634) $(16) $(618)
===== ==== =====
FOR THE YEAR ENDED DECEMBER 31, 1998
Currency translation adjustments $ 63 $ (1) $ 64
----- ---- -----
Unrealized investment (losses) (53) (22) (31)
Less: reclassification adjustments for gains realized in
net earnings 8 2 6
----- ---- -----
Net unrealized investment (losses) (61) (24) (37)
----- ---- -----
Minimum pension liability adjustments (57) (19) (38)
----- ---- -----
Other comprehensive (loss) $ (55) $(44) $ (11)
===== ==== =====
</TABLE>
64
<PAGE> 68
<TABLE>
<CAPTION>
Tax
Expense
Before or Net of
Tax (Benefit) Tax
------ --------- ------
<S> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1997
Currency translation adjustments $(584) $ -- $(584)
Less: reclassification adjustments for (losses) realized
in net earnings from the sales of subsidiaries (3) -- (3)
----- ---- -----
Net currency translation Adjustments (581) -- (581)
----- ---- -----
Unrealized investment gains 73 36 37
Less: reclassification adjustments for gains realized in
net earnings 23 13 10
----- ---- -----
Net unrealized investment gains 50 23 27
----- ---- -----
Minimum pension liability adjustments (27) (11) (16)
----- ---- -----
Other comprehensive (loss) income $(558) $ 12 $(570)
===== ==== =====
</TABLE>
5 RESTRUCTURINGS
The company recorded merger and restructuring charges of $55 [$70 P&U and $(15)
Monsanto], $245 [$92 P&U and $153 Monsanto], and $316 [P&U] during 1999, 1998
and 1997, respectively. The company recorded additional charges throughout the
consolidated statement of earnings. These charges are included in the discussion
below. The following is a description of each plan and related charge taken by
the indicated predecessor companies.
During 1999, Monsanto incurred $39 related to the integration of the
agricultural chemical and seed operations and P&U incurred $16 related to the
merger with Sugen. See discussion of these charges in Note 7.
MONSANTO
In 1999, the company recorded a pretax gain of $54 from the reversal of
restructuring liabilities established in 1998. The restructuring liability
reversals were required as a result of lower actual severance and facility shut-
down costs than originally estimated.
In October 1999, the company completed the sale of the alginates business, which
resulted in the recording of discontinued operations. Included in the accounting
for the discontinued operations are the reversals of restructuring liabilities
established in 1998 of $27 aftertax which were no longer required as a result of
the sale of the alginates business on terms more favorable than originally
anticipated.
In 1998, the company recorded net restructuring charges of $340 as part of the
company's overall strategy to reduce costs and continue the commitment to its
core businesses. The 1998 net restructuring charges were taken in the second and
fourth quarters of 1998 and were recorded in the consolidated statement of
earnings in the following categories:
<TABLE>
<CAPTION>
Workforce Facility Asset
Reductions Closures Impairments Other Total
---------- -------- ----------- ----- -----
<S> <C> <C> <C> <C> <C>
Cost of goods sold $ 6 $ 8 $ 84 $ -- $ 98
Amortization and adjustment of intangible
assets -- 3 63 -- 66
Merger and Restructuring 103 64 -- (14) 153
All other, net -- -- 43 (20) 23
---- --- ---- ---- ----
Total $109 $75 $190 $(34) $340
==== === ==== ==== ====
</TABLE>
In December 1998, the board of directors approved a plan to close certain
facilities, reduce the current workforce and exit nonstrategic businesses. The
activities Monsanto planned to exit in connection with this plan principally
comprised of a tomato business, and a business involved in the operation of
membership-based health and wellness centers. This plan also contemplated
exiting several small, embryonic business
65
<PAGE> 69
activities, none of which had a significant effect on the restructuring reserve.
The company recorded restructuring charges of $327 to cover the costs associated
with these actions in 1998. The charges reflected $103 for the elimination of
approximately 1,400 jobs, primarily in manufacturing and administrative
functions. Included in these actions were approximately 190 positions that had
been part of a restructuring plan approved in 1996. The affected employees are
entitled to receive severance benefits pursuant to established severance
policies or by governmentally mandated labor regulations. The charges also
reflect pretax amounts for asset impairments, primarily for property, plant and
equipment; intangible assets; and certain investments, totaling $130. The asset
impairments were recorded primarily because of the company's decision to sell
certain nonstrategic businesses. As a result, the net assets of these businesses
were classified as assets held for sale and were carried at their net realizable
value, estimated to be approximately $36 ($33 in the agricultural products
segment, and $3 in the pharmaceutical segment) at December 31, 1998. These
businesses were sold during 1999.
Other impairment charges totaling $40 were recorded in December 1998 because of
management's decision to exit certain long-term investments. Fair values of the
impaired assets and the businesses held for sale were recorded at their current
market values or on estimated sale proceeds, based on either discounted cash
flows or sales contracts. The December 1998 restructuring amounts also included
pretax charges of $99 for the shutdown or other rationalization of certain
production and administrative facilities. Rationalization entails the
consolidation, shutdown or movement of facilities to achieve more efficient
operations. Approximately 80 facilities, located primarily in the United States,
Europe and Latin America, were affected by these actions. Charges for these
shutdowns included $21 for property, plant and equipment, $15 for intangible
assets, $26 for miscellaneous investments, and $6 for inventories. Leasehold
termination costs of $13 and various facility closure costs of $18, principally
for facilities shutdown costs, equipment dismantling and contract cancellation
payments, were also included in the shutdown charges. The closure or
rationalization of these facilities was completed by December 31, 1999. As of
December 31, 1999, cash payments of $81 million were made to eliminate
approximately 1,100 positions and deferred employee severance payment of $9 were
incurred and expected to be paid in January 2000. In addition, $20 in facility
shut-down costs were incurred in connection with the December 1998 restructuring
plan.
As of December 31, 1999, the remaining reserve balance for employee severance
related to the approximately 175 positions was $31, and $4 for contractual
obligations. The company expects these employee reduction obligations to be
completed by June 2000. An additional 125 positions originally contemplated in
the plan were eliminated through attrition. Cash payments to complete the 1998
plan will be funded from operations and are not expected to significantly impact
Pharmacia's liquidity.
In May 1998, the company's board of directors approved a plan to exit Monsanto's
optical products business, which included the Orcolite and Diamonex optical
products business and the Diamonex performance products business (both reported
in the pharmaceutical segment), and recorded net pretax charges of $48. The
company recognized a $20 pretax gain on the sale of the Orcolite business and
recorded pretax charges of $68 for the rationalization of the Diamonex business,
primarily for severance costs and the write-off of manufacturing facilities and
intangible assets. In connection with this rationalization, certain Diamonex
product lines were sold, and others were shut down. In connection with the
shutdown of the Diamonex business approximately 200 jobs, primarily in
manufacturing and administrative functions, were eliminated at a total cost of
$6. These actions, including workforce reductions and payment of severance, were
complete by December 31, 1999.
The sale of the remaining assets, which were classified as assets held for sale
as of December 31, 1998 and carried at their net realizable value of $7, was
completed during 1999. Fair values of the impaired assets and the businesses
held for sale were recorded at their current market values, based on estimated
cash flows, appraisals or sales contracts. Net income generated by the optical
products businesses in 1998 and 1997 totaled $2, and $5, respectively. Also
during the second quarter of 1998, Monsanto recognized a pretax gain of $35
primarily related to the reversal of a restructuring reserve based on a decision
not to rationalize a European pharmaceutical production facility. There were
approximately 70 jobs scheduled to be eliminated as part of this rationalization
plan. The decision was driven by changes in the business and regulatory
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<PAGE> 70
environment, and successes in the R&D pipeline. The net result of the actions
was a pretax charge of $13 in the second quarter of 1998, recorded in the
consolidated statement of earnings in the following categories:
<TABLE>
<CAPTION>
Workforce Facility Asset
Reductions Closures Impairments Other Total
---------- -------- ----------- ----- -----
<S> <C> <C> <C> <C> <C>
Cost of goods sold $6 $ 2 $36 $ -- $ 44
Amortization and adjustment of intangible
assets -- -- 24 -- 24
Merger and Restructuring -- (26) -- (9) (35)
All other, net -- -- -- (20) (20)
-- ---- --- ---- ----
Total increase in loss from operations
before income taxes $6 $(24) $60 $(29) $ 13
== ==== === ==== ====
</TABLE>
Activity related to the 1998 and 1996 restructuring plans were as follows:
<TABLE>
<CAPTION>
Workforce Facility Asset
Restructuring: Reductions Closures Impairments Other Total
-------------- ---------- -------- ----------- ----- -----
<S> <C> <C> <C> <C> <C>
JAN. 1, 1997 RESERVE BALANCE $224 $ 41 $ -- $ -- $ 265
Costs charged against reserves (76) (39) -- -- (115)
DEC. 31, 1997 RESERVE BALANCE 148 2 -- -- 150
Reversal of reserves related to 1996 plan (48) -- -- -- (48)
Costs charged against reserves (21) (2) -- -- (23)
1998 Restructuring:
May 1998 6 2 60 -- 68
Dec. 1998 103 99 130 28 360
Reclassification of reserves to other
balance sheet accounts:
Property -- (21) (73) -- (94)
Investments -- -- (40) -- (40)
Intangible assets -- (14) (66) -- (80)
Inventory -- (6) (15) -- (21)
Receivables -- (26) -- -- (26)
Other Assets -- -- 4 (28) (24)
DEC. 31, 1998 RESERVE BALANCE 188 34 -- -- 222
Costs charged against reserves:
1998 Plan (81) (20) -- -- (101)
Reversal of reserves related to 1998 plan (44) (10) -- -- (54)
Reclassification of reserves to other
balance sheet accounts:
1998 Plan -- other liabilities (23) -- -- -- (23)
---- ---- ---- ---- -----
DEC. 31, 1999 RESERVE BALANCE $ 40 $ 4 $ -- $ -- $ 44
==== ==== ==== ==== =====
</TABLE>
In 1998, $33 of restructuring reserves were reversed due to a reduction of
approximately 120 job eliminations and $15 because of a decision not to
rationalize a European pharmaceutical production facility both of which had been
part of the 1996 restructuring plan.
Approximately $85 of workforce reduction costs originally accrued as part of the
1996 plan were delayed, principally as a result of the failed merger with
American Home Products. Monsanto remained committed to accomplishing these
workforce reductions and transferred the remaining accrual to the 1998 plan.
Total 1998 restructuring plan of $428 was partially offset by $68 from reversal
of prior year restructuring reserves no longer needed and $20 gain from the sale
of Orcolite business, resulting in a net charge to earnings of $340.
67
<PAGE> 71
Restructuring liability reversals were required in 1999 as a result of lower
actual severance and facility shut-down costs than originally estimated.
As part of restructuring actions approved prior to 1998, Monsanto reorganized
U.S. staff operations, closed approximately 20 production, administrative and
research facilities and made final payments to complete contractual commitments
as part of a U. S. production facility shutdown. These actions eliminated
approximately 1,020 positions.
PHARMACIA & UPJOHN
During 1999, the company recorded $54 in restructuring expenses which is
comprised of $57 of restructuring charges net of a $3 adjustment to the 1998
turnaround restructuring. The charge included costs pertaining to
reorganizations that will result in the elimination of certain research and
development (R&D) projects as well as the elimination of 375 employee positions,
mainly impacting the pharmaceutical segment and corporate and administrative
functions. The objective of the restructuring is to eliminate duplicate
functions and investments in R&D as well as reorganize the sales force based on
anticipated future requirements of the company. The adjustment to the prior
restructuring liabilities was attributable to lower than anticipated employee
separation costs.
Employee separation benefits included in the 1999 charge are for elimination of
positions in research and development of $26, corporate and administration of
$18 and sales of $6. Project termination costs totaled $4 and asset write-downs
totaled $3. During 1999, $3 was paid and charged against the liability. These
amounts related to a portion of separation benefits for the approximately 50
employees severed prior to the end of the year. The company anticipates all
activities associated with this restructuring to be substantially complete at
the end of 2000. The remaining cash expenditures are expected during 2000 with
some separation annuity payments being completed in 2001.
In 1997, the company announced a comprehensive turnaround program that resulted
in restructuring charges during 1997 and 1998. The company 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 was
materially complete 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 R&D. The turnaround program mainly affected the company's
pharmaceutical segment and corporate administration groups. 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, 1999, the company had paid
$155 in severance costs in connection with the 1998 and 1997 charges. The
remaining balance for employee separation costs related to the turnaround
program was $44 at December 31, 1999 comprised mainly of charges related to the
phase two charge and remaining annuity separation payments. The company expects
some annuity payments to continue into 2001.
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<PAGE> 72
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, 1999, 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 canceled contractual lease obligations
and other costs. Offsetting 1998 charges in this grouping was an adjustment of
$6 related to all restructuring charges prior to 1997.
The following table displays a roll-forward of the liabilities for business
restructurings from December 31, 1996 to December 31, 1999:
<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
----- ---- -----
Additions 50 4 54
Deductions (67) (17) (84)
----- ---- -----
Balance December 31, 1999 $ 91 $ 11 $ 102
===== ==== =====
</TABLE>
6 INCOME TAXES
The components of earnings before income taxes were:
<TABLE>
<CAPTION>
Years Ended December 31
-----------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
U.S $ 768 $(37) $(211)
Non-U.S 1,130 929 773
------ ---- -----
Earnings Before Income Taxes $1,898 $892 $ 562
====== ==== =====
</TABLE>
The provision for income taxes included in the consolidated statements of
earnings consisted of:
<TABLE>
<CAPTION>
Years Ended December 31
-------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CURRENTLY PAYABLE:
U.S $215 $ 380 $ 131
Non-U.S 394 422 488
---- ----- -----
Total currently payable 609 802 619
---- ----- -----
DEFERRED:
U.S 48 (276) (176)
Non-U.S (65) (115) (271)
---- ----- -----
Total deferred (17) (391) (447)
---- ----- -----
PROVISION FOR INCOME TAXES $592 $ 411 $ 172
==== ===== =====
</TABLE>
69
<PAGE> 73
Differences between the company's effective tax rate and the U.S. statutory tax
rate were as follows:
<TABLE>
<CAPTION>
Percent of Pretax Income 1999 1998 1997
- ------------------------ ---- ---- ----
<S> <C> <C> <C>
Statutory tax rate 35.0% 35.0% 35.0%
Lower rates in other jurisdictions, net (4.0) (6.2) (16.6)
U.S. R&D tax credit (2.1) (3.8) (4.1)
Non-deductible goodwill 3.8 6.7 6.7
Acquired in-process R&D 0.3 8.0 1.2
Valuation allowances 0.0 5.5 8.5
All other, net (1.9) 0.9 (0.2)
---- ---- -----
Effective Tax Rate 31.1% 46.1% 30.5%
==== ==== =====
</TABLE>
The lower rates in other jurisdictions are principally attributable to
manufacturing operations in jurisdictions subject to more favorable tax rates.
Deferred income taxes are in the consolidated balance sheets as follows:
<TABLE>
<CAPTION>
December 31
----------------------------------------------
1999 1999 1998 1998
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Components of deferred taxes were:
Property, plant and Equipment $ -- $594 $ -- $423
Inventory 404 -- 257 --
Compensation and retirement plans 501 45 461 60
Swedish tax deferrals -- 49 -- 31
Tax loss and tax credit carryforwards 801 -- 597 --
Environmental and product liabilities 46 -- 59 --
Restructuring and discontinued operations 130 -- 297 --
Tax on unremitted earnings -- 106 -- 108
Intangibles 120 -- 180 --
All other 508 169 456 234
------ ---- ------ ----
Subtotal 2,510 963 2,307 856
Valuation allowances (240) -- (161) --
------ ---- ------ ----
Total deferred taxes $2,270 $963 $2,146 $856
------ ==== ------ ====
Net deferred tax assets $1,307 $1,290
====== ======
</TABLE>
Valuation allowances have been provided for certain deferred tax assets that are
not likely to be realized. The increase in the valuation allowance in 1999 was
primarily attributable to the establishment of a valuation allowance in Brazil
due to the weakening of the Brazilian economy against the U.S. dollar. The
valuation allowance related to Brazil had no effect on the 1999 effective tax
rate because it was recorded in other comprehensive income (loss) as an
accumulated currency adjustment.
As of December 31, 1999, Pharmacia had tax loss carryforwards of approximately
$797, of which $367 have various expiration dates through 2018. At December 31,
1999, undistributed earnings of subsidiaries considered permanently invested,
for which deferred income taxes have not been provided, were approximately
$5,300.
7 MERGERS, ACQUISITIONS AND DIVESTITURES
In December 1999, the company withdrew its filing for U.S. antitrust clearance
of its proposed merger with Delta and Pine Land Company (D&PL) in light of the
U.S. Department of Justice's unwillingness to approve the transaction on
commercially reasonable terms. On January 3, 2000, the company paid D&PL $80 in
cash,
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<PAGE> 74
equal to the amount of a termination fee set forth in the merger agreement, plus
reimbursement of $1 in expenses. In addition, the company recognized $4 of
related expenses in 1999 in connection with the failed merger with D&PL,
resulting in a total charge of $85.
On August 31, 1999, the company completed its merger with Sugen by exchanging
approximately 12 million shares of its common stock for all of the common stock
of Sugen. Each share of Sugen common stock was exchanged for .7248 of one share
of Pharmacia common stock. In addition, terms of outstanding Sugen stock
options, stock warrants, convertible debt, and warrants on convertible debt were
changed to convert Sugen shares to Pharmacia shares using the same exchange
ratio.
In connection with the merger, the company recorded $16 in merger transaction
costs such as fees for investment bankers, attorneys, accountants, and other
costs to effect the merger with Sugen, all of which were paid during 1999. These
charges were recorded in merger and restructuring on the consolidated statement
of earnings.
ACQUISITIONS
In 1998, the company's agricultural segment made strategic acquisitions of
several seed companies. In July 1998, Pharmacia acquired Plant Breeding
International Cambridge Limited (PBIC) for approximately $525. In October 1998,
Pharmacia announced the acquisition of certain international seed operations of
Cargill, Incorporated in Asia, Africa, Central and South America, and Europe,
excluding certain operations in the United Kingdom, for approximately $1,400. In
December 1998, Pharmacia completed its acquisition of DEKALB Genetics
Corporation (DEKALB) for approximately $2,300. Pharmacia recorded the following
pretax charges in 1998 for the write-off of acquired in-process R&D related to
these acquisitions: approximately $60 for PBIC, approximately $150 for DEKALB
and approximately $190 for certain Cargill international seed operations.
Management believed that the technological feasibility of the acquired in-
process R&D had not been established and that it had no alternative future uses.
Accordingly, the amounts allocated to in-process R&D are required to be expensed
immediately under generally accepted accounting principles.
Pharmacia accounted for the 1998 acquisitions as purchases. On October 20, 1999,
Pharmacia and Cargill reached an agreement that resolves outstanding issues
related to Pharmacia's purchase of certain international seed operations of
Cargill. Under terms of the agreement, Cargill made a cash payment of $335 to
Pharmacia for the lost use of certain germplasm and damages caused by the delay
in integrating certain international seed operations and legal expenses.
Additionally, Pharmacia and Pioneer Hi-Bred International, Inc. (Pioneer)
announced a resolution of the litigation between them stemming from Pharmacia's
purchase of Cargill's international seed operations. Under terms of this
agreement, Pharmacia was required to destroy genetic material derived from
Pioneer's seed lines and pay damages of $42 to Pioneer. As a result, the
purchase price for certain international seed operations of Cargill was reduced
by $265. The company's final purchase price allocations for the principal
acquisitions made during 1998 are to goodwill, $2,686; germplasm and core
technology, $505; trademarks, $222; in-process research and development, $402;
exit costs and employee termination liabilities, ($64); inventories and other
individually insignificant tangible assets and liabilities, $212. The final
purchase price allocations were based on final valuation studies. The net
balance of $28 from the Cargill and Pioneer settlements was recorded in the 1999
Statement of Consolidated Earnings as reimbursement of incremental cost
incurred.
At the time of and in connection with the 1998 seed company acquisitions,
Pharmacia established a plan to integrate the acquired business. Pharmacia is in
the process of closing, or rationalizing (consolidating, shutting down or moving
facilities to achieve more efficient operations), certain assets or facilities
and eliminating approximately 1,400 jobs, primarily in manufacturing and
administrative functions, as part of this integration plan. Approximately 300 of
these positions were related to Pharmacia's existing seed operations and were
therefore included in the December 1998 restructuring plan. The costs related to
1,000 of the positions and the other actions, were originally estimated to be
$78,and were recognized as liabilities in 1998. As of December 31, 1999, over
900 positions have been eliminated at a cost of approximately $50. The remaining
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<PAGE> 75
200 positions (including an estimated 100 additional positions identified in
1999) are expected to be eliminated by the third quarter of 2000 at a cost of
$14 which will complete the original plan. In addition, the original liability
established in 1998 was reduced by $14 as a result of lower actual severance
costs and attrition and was recorded as an adjustment to the final purchase
price allocations to goodwill.
During 1999, the company recorded a pretax charge of $67 from continuing
operations, principally associated with the company's continued focus on
improving operating efficiency through accelerated integration of the
agricultural chemical and seed operations. The charge of $67 was comprised of
facility shut-down charges of $39, workforce reduction costs of $18, and asset
impairments of $10, and was recorded in the consolidated statement of earnings
as cost of goods sold of $20, amortization of intangible assets of $8 and merger
and restructuring expense of $39. The affected employees are entitled to receive
severance benefits pursuant to established severance policies or by
governmentally mandated labor regulations.
The in-process R&D charges for the 1998 and 1997 seed company acquisitions cover
numerous seed breeding projects, no single one of which was significant, as is
typical in the seed industry. These projects consist of conventional breeding
programs for corn, wheat and other hybrids; conventional breeding for soybean
varieties; and, the development of transgenic crops. Successful
commercialization of products developed through these projects is expected to
occur five to nine years after program initiation. The in-process projects were
at various stages of completion at the dates of acquisition. Revenues from the
in-process R&D projects related to the 1997 acquisitions began in 1998. Revenues
from the in-process R&D projects related to the 1998 acquisitions began in 1999.
On average, a new seed technology is in the research process or developmental
stage for eight years before it is launched in a commercial product.
Additionally, based on historical experience, Pharmacia assumed that one eighth
of the products in the 'in-process pipeline' would be released or launched each
year for the next eight years. From this information, a weighted-average percent
complete was computed. The present value of future cash flows was then
multiplied by the estimated percentage complete as of the valuation date to
determine the value of the acquired in-process R&D. The in-process R&D projects
were valued using a discounted cash flow method with risk-adjusted discount
rates generally ranging from 12 percent to 20 percent, which took into account
the stage of completion and the appropriate development cycle of each in-process
R&D category.
DIVESTITURES
On July 1, 1999, Pharmacia announced its intention to sell the artificial
sweetener and biogum businesses. In addition, Pharmacia has transferred the
remaining ROUNDUP lawn-and-garden and nutrition research operations to the
agricultural products segment. In 1998, the company committed to a plan to sell
the alginates and ORTHO lawn-and-garden products businesses. In September 1997,
the company spun off its chemical businesses to shareholders by distributing
shares of a newly formed company called Solutia, Inc. The financial results of
these businesses have been reclassified as discontinued operations and, for all
periods presented, the consolidated financial statements and notes have been
reclassified to conform to this presentation. Previously reported amounts have
also been reclassified to make them consistent with the current presentation.
See Notes to Financial Statements, Note 20 -- Discontinued Operations for
further details.
In 1999, Pharmacia completed the sale of Stoneville Pedigreed Seed Company
(Stoneville). Proceeds were $92, resulting in a pretax gain of $35. Proceeds
from the sale were used to reduce debt. In April 1999, Pharmacia completed the
sale of NSC Technologies Company to Great Lakes Chemical Corporation for
proceeds of $125. Proceeds from the sale were primarily used to reduce debt and
resulted in a pretax gain of approximately $40.
In December 1998, the company sold substantially all of P & U's nutritional
therapies business to Fresenius AG for a loss of $52. To comply with antitrust
regulations in Germany, operations there were not sold to Fresenuis. In the
third quarter of 1999, the company completed the sale of the nutrition business
in Germany to Baxter Deutschland GmbH for a gain. The consummation of the
disposal of the final component of the business, the China operations, was
concluded in the first quarter of 2000 at a small gain.
The earnings statement effects of these events and activities are reported in
"All other, net."
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<PAGE> 76
8 EARNINGS PER SHARE
Basic earnings per share is computed by dividing the net earnings measure by the
weighted average number of shares of common stock outstanding. Diluted earnings
per share is computed assuming the exercise of stock options, conversion of
preferred stock, 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 reduced by an
incremental contribution to the Employee Stock Ownership Plan (ESOP). This
contribution is the after-tax difference between the income the ESOP would have
received in preferred stock dividends and 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>
Years Ended December 31
-----------------------------------------------------------
1999 1999 1998 1998 1997 1997
Basic Diluted Basic Diluted Basic Diluted
----- ------- ----- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
EPS numerator:
Earnings from continuing operations $1,306 $1,306 $ 481 $ 481 $ 390 $ 390
Less: Preferred stock dividends, net of
tax (13) -- (13) -- (13) --
Less: ESOP contribution, net of tax -- (5) -- (5) -- (5)
Interest effects -- convertible
instruments -- -- -- 1 -- --
------ ------ ------ ------ ------ ------
Earnings from continuing operations
available to common shareholders $1,293 $1,301 $ 468 $ 477 $ 377 $ 385
====== ====== ====== ====== ====== ======
EPS denominator:
Average common shares outstanding 1,249 1,249 1,219 1,219 1,204 1,204
Effect of dilutive securities:
Stock options and stock warrants -- 23 -- 34 -- 28
Convertible instruments and incentive
compensation -- 12 -- 13 -- 13
------ ------ ------ ------ ------ ------
Total shares 1,249 1,284 1,219 1,266 1,204 1,245
====== ====== ====== ====== ====== ======
Earnings per share from continuing
operations $ 1.04 $ 1.01 $ .39 $ .37 $ .31 $ .31
====== ====== ====== ====== ====== ======
</TABLE>
9 ACCOUNTS RECEIVABLE AND INVENTORIES
The following table displays a roll-forward of allowances for doubtful trade
accounts receivable for the three years ended December 31, 1999:
<TABLE>
<S> <C>
Balance December 31, 1996 $129
Additions -- charged to expense 41
Deductions (28)
----
Balance December 31, 1997 142
Additions -- charged to expense 77
Deductions (29)
----
Balance December 31, 1998 190
Additions -- charged to expense 110
Deductions (29)
----
Balance December 31, 1999 $271
====
</TABLE>
73
<PAGE> 77
Inventories valued on the LIFO method had an estimated replacement cost (FIFO
basis) of $1,038 at December 31, 1999, and $903 at December 31, 1998.
<TABLE>
<CAPTION>
December 31,
----------------
1999 1998
---- ----
<S> <C> <C>
Estimated replacement cost (FIFO basis):
Finished products $1,281 $1,622
Raw materials, supplies and work in process 1,794 1,321
------ ------
Inventories (FIFO basis) 3,075 2,943
Less reduction to LIFO cost (170) (189)
------ ------
Inventories $2,905 $2,754
====== ======
</TABLE>
10 INVESTMENTS
<TABLE>
<CAPTION>
December 31
------------
1999 1998
---- ----
<S> <C> <C>
Short-Term Investments:
Available-for-sale:
Certificates of deposit $ 38 $ 5
Kingdom of Sweden debt instruments 23 242
Corporate notes 15 15
U.S. Treasury securities and other U.S. Government
obligations 14 6
Corporate commercial paper -- 17
Other 2 9
---- ----
Total available-for-sale 92 294
Held-to-maturity 46 90
---- ----
Total short-term investments $138 $384
==== ====
</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.
74
<PAGE> 78
<TABLE>
<CAPTION>
Unrealized Unrealized Carrying
Cost Gains (Losses) Value
---- ---------- ---------- --------
<S> <C> <C> <C> <C>
Long Term Investments:
December 31, 1999
Available-for-sale:
Equity securities $221 $53 $(13) $261
Mortgage-backed securities-- guaranteed by
the U.S. Government 114 -- (1) 113
Other 16 -- -- 16
---- --- ---- ----
Total available-for-sale $351 $53 $(14) $390
==== === ====
Held-to-maturity 86
----
Total Long-Term Investments $476
====
December 31, 1998
Available-for-sale:
Equity securities $216 $66 $(37) $245
Mortgage-backed securities-- guaranteed by
the U.S. Government 144 4 -- 148
---- --- ---- ----
Total available-for-sale $360 $70 $(37) $393
==== === ====
Held-to-maturity 217
----
Total Long-Term Investments $610
====
</TABLE>
The total of unrealized gains (net of deferred taxes) included in shareholders'
equity amounted to $30 at December 31, 1999, compared to $19 and $56 at December
31, 1998 and 1997, respectively.
The proceeds realized from the sale of available-for-sale debt securities were
$349, $254 and $942 for 1999, 1998 and 1997, respectively. Profits realized on
these sales are recorded as interest income. During 1999, 1998 and 1997, the
proceeds realized from the sale of available-for-sale equity securities amounted
to $48, $53 and $4. Profits realized on these sales are recorded in "All other,
net." Based on original cost, gains and losses of $25, $(16) and $23 were
realized on all sales of available-for-sale securities in 1999, 1998 and 1997,
respectively.
Long-term investments held-to-maturity are summarized as follows:
<TABLE>
<CAPTION>
December 31
----------------------------------------
1999 1999 1998 1998
Fair Amortized Fair Amortized
Value Cost Value Cost
----- --------- ----- ---------
<S> <C> <C> <C> <C>
Guaranteed by the U.S. Government $51 $51 $111 $111
Corporate notes 30 30 -- --
Commonwealth of Puerto Rico debt instruments 5 5 35 35
Bank obligations:
Certificates of Deposit -- -- 42 42
Other -- -- 29 29
--- --- ---- ----
Long-term investments held to maturity $86 $86 $217 $217
=== === ==== ====
</TABLE>
At December 31, 1999, 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.
75
<PAGE> 79
11 PROPERTIES, NET
<TABLE>
<CAPTION>
December 31,
------------------
1999 1998
---- ----
<S> <C> <C>
Land $ 195 $ 235
Buildings and improvements 3,189 3,103
Equipment 6,670 6,333
Construction in process 1,704 1,471
Less allowance for depreciation (4,933) (4,885)
------- -------
Properties, net $ 6,825 $ 6,257
======= =======
</TABLE>
12 LINES OF CREDIT AND DEBT
The company has committed borrowing facilities amounting to $3,500 that were
unused as of December 31, 1999. Expiration periods occur as follows: $2,000 in
2000, $1,000 in 2001 and $500 in 2004. The facilities exist largely to support
commercial paper borrowings. While there are no related compensating balances,
the facilities are subject to various fees. The company also has uncommitted
lines of credit amounting to $1,022 available with various U.S. and
international banks, of which $62 were used at December 31, 1999.
SHORT TERM DEBT
<TABLE>
<CAPTION>
December 31,
----------------
1999 1998
---- ----
<S> <C> <C>
Commercial paper $1,253 $ 659
Current maturities of long-term debt 442 165
Notes payable to banks 177 416
Bank overdrafts 120 161
------ ------
Total Short-Term Debt $1,992 $1,401
====== ======
</TABLE>
76
<PAGE> 80
LONG TERM DEBT
<TABLE>
<CAPTION>
December 31,
----------------
1999 1998
---- ----
<S> <C> <C>
Commercial paper $1,000 $1,000
Adjustable conversion-rate equity security units due 2003 700 700
6.6% debentures due 2028 697 694
5.75% notes due 2005 599 596
5 3/8% notes due 2001 500 498
6.5% debentures due 2018 498 496
Variable -- rate notes due 2003 480 575
Industrial revenue bond obligations, 5.7% average rate at
December 31, 1999, due 2001 to 2028 324 337
5 7/8% notes due 2008 199 199
6.75% debentures due 2027 199 198
Medium-term notes, 7.0% average rate at December 31, 1999,
due 2001 to 2018 165 165
8.2% debentures due 2025 150 150
8.7% debentures due 2021 100 100
8 7/8% debentures due 2009 99 99
5.6% yen note due 2016 99 86
6% notes due 2000 -- 150
Other 157 420
------ ------
Total Long-Term Debt $5,966 $6,463
====== ======
</TABLE>
Annual aggregate maturities of long-term debt during the next five years are:
2001-$622; 2002-$193; 2003-$1,086; 2004-$38 and 2005-$694. The company has
guaranteed three ESOP related notes for original principal amounts of $275
(9.79%), $80 (8.13%) and $80 (7.09%) with maturities ranging between 2000 and
2006. At December 31, 1999, the balance of the guarantee was $309 of which $39
was classified as current. Principal payments cause the recognition of
compensation expense (see Note 16). Annual aggregate maturities of guaranteed
debt through expiration are: 2001-$46; 2002-$57; 2003-$66; 2004-$72.
In November 1998, the company issued 17,500,000 units of 6.50 percent Adjustable
Conversion-rate Equity Security (ACES) units at a stated value of $40.00 per
unit, for an aggregate initial offering price of $700. Each unit consists of a
purchase contract for the company's common stock and a junior subordinated
deferrable debenture. Under the purchase contracts, in November 2001 the unit
holders will purchase for $40 not more than one share and not less than 0.8197
of one share of the company's common stock per unit, depending on the average
trading price of the common stock during a specified period in November 2001. In
addition, the company pays quarterly deferrable contract fees to the unit
holders at 0.55 percent of the stated amount. The junior subordinated deferrable
debentures have a principal amount equal to the stated amount of the units, an
interest rate of 5.95 percent, and mature in 2003 subject to a call option
granted to a third party.
Information regarding interest expense and weighted average interest rates
follows:
<TABLE>
<CAPTION>
Years Ended December 31
-------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Interest cost incurred...................................... $ 463 $ 286 $ 212
Less: Capitalized on construction........................... (55) (50) (44)
----- ----- -----
Interest expense............................................ $ 408 $ 236 $ 168
----- ----- -----
Weighted average interest rate on short-term borrowings at
end of period............................................. 6.79% 6.79% 6.43%
----- ----- -----
</TABLE>
77
<PAGE> 81
13 COMMITMENTS, CONTINGENT LIABILITIES AND LITIGATION
Future minimum payments under noncancellable operating leases, and unconditional
purchase obligations at December 31, 1999 (approximately 65 percent real estate,
17 percent research and development alliances and, 18 percent equipment and
inventory purchases) are as follows: 2000-$190; 2001-$142; 2002-$114; 2003-$60;
2004-$53 and later years $193. Capital asset spending committed for construction
and equipment but unexpended at December 31, 1999, was approximately $280.
Pharmacia was contingently liable as a guarantor for bank loans and for
discounted customers' receivables totaling approximately $77 as of December 31,
1999, and $158 as of December 31, 1998.
The consolidated balance sheets include accruals for estimated product and
intellectual property litigation and environmental liabilities. The latter
includes exposures related to discontinued 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. 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 the company's discontinued industrial chemical facility in North
Haven, Connecticut, the company will soon be required to submit a corrective
measures study report to the U.S. Environmental Protection Agency (EPA). It now
appears likely that this report will need to be submitted for EPA review in the
latter part of 2000, at which time 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, additional
exposure exists at this time.
In April 1999, a jury verdict was returned against DEKALB GENETICS CORPORATION,
a subsidiary of the company in a lawsuit filed in U.S. District Court in North
Carolina. The lawsuit claims that a 1994 license agreement was induced by fraud
stemming from nondisclosure of relevant information and that DEKALB did not have
the right to license, make or sell products using the plaintiff's technology for
glyphosate resistance under this agreement. The jury awarded $15 in actual
damages for unjust enrichment and $50 in punitive damages. DEKALB has appealed
this verdict, has meritorious grounds to overturn the verdict and intends to
vigorously pursue all available means to have the verdict overturned. No
provision has been made in the company's consolidated financial statements with
respect to the award for punitive damages.
On March 20, 1998, a jury verdict was returned against the company in a lawsuit
filed in the California Superior Court. The lawsuit claims that the company
delayed providing access to certain gene technology under a 1989 agreement. The
jury awarded $175 in future damages. The company has filed an appeal and has no
provision established in the company's consolidated financial statements with
respect to this verdict. The company intends to defend itself vigorously against
this action.
G.D. Searle & Co. and Pharmacia & Upjohn, Inc., subsidiaries of the company have
been parties 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. These suits specifically allege that the
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 agreements 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. A similar action is pending by a proposed
retailer class in the state court of California. 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
78
<PAGE> 82
purchased prescription drugs in those jurisdictions and four other states. Two
of the lawsuits have been dismissed. Pharmacia & Upjohn announced in 1998 that
it reached a settlement with the plaintiffs in the federal class action cases
for $103; and Searle received a favorable verdict in 1999.
Although the results of litigation cannot be predicted with certainty,
management's belief is that any potential remaining liability that might exceed
amounts already accrued will not have a material adverse effect on the company's
consolidated financial position, profitability or liquidity.
14 FINANCIAL INSTRUMENTS
FINANCIAL INSTRUMENT FAIR VALUES
The carrying amounts and estimated fair values of the company's financial
instruments were as follows:
<TABLE>
<CAPTION>
1999 1999 1998 1998
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Financial Assets:
Short-term investments $ 138 $ 138 $ 384 $ 384
Long-term investments 476 476 610 610
Forward currency exchange contracts:
Hedges of loans and deposits (19) (19) (1) (1)
Hedges of anticipated transactions (2) (1) (13) (12)
Currency/Interest swaps hedges of loans and deposits (3) (3) -- --
Commodity futures (3) (3) (6) (6)
Interest rate swaps -- (2) -- (7)
Financial Liabilities:
Short-term debt 1,992 1,992 1,401 1,401
Long-term debt 5,966 5,678 6,463 6,781
Guaranteed ESOP debt $ 270 $ 283 $ 309 $ 344
</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 derivative 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.
Because the contract amounts on derivative instruments 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 related to these instruments
FOREIGN CURRENCY RISK MANAGEMENT
The company is exposed to currency exchange rate fluctuations related to certain
intercompany and third party transactions. The exposures and related hedging
programs 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. During 1999, several European countries began using the euro. This
reduces the number of currencies in which contracts are denominated although
increasing the company's concentration in a particular currency. 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.
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<PAGE> 83
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, 1999, the contract amount of the company's
outstanding contracts used to hedge net transaction exposure was $730. The
aggregate net transaction losses included in net earnings for the years ended
December 31, 1999, 1998 and 1997 related to foreign currency transaction hedges
were $(33), $(7), and $(34), respectively.
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, 1999, the contract amount of forward exchange and currency swap
contracts held for balance sheet financial exposure hedging program was $1,446.
INTEREST RATE MANAGEMENT
Interest-rate swap agreements are used to reduce interest rate risks and to
manage interest expense. By entering into these agreements, the company changes
the fixed/variable interest-rate mix of its debt portfolio. As of December 31,
1999, the company was party to interest-rate swap agreements with an aggregate
notional principal amount of $90 related to existing debt. The agreements
effectively convert floating-rate debt into fixed-rate debt, and the agreements
end in 2000. This reduces the company's risk of incurring higher interest costs
in periods of rising interest rates.
COMMODITY RISK MANAGEMENT
Commodity futures and options contracts are used to hedge the price volatility
of certain commodities, primarily soybeans and corn. This hedging activity is
intended to manage the price paid to production growers for corn and soybean
seeds. As of December 31, 1999, the company had futures contracts of $78, $28,
$9 for soybeans, corn and lean hogs, respectively.
CREDIT RISK MANAGEMENT
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. At
December 31, 1999, the company had no financial instruments that represented a
significant concentration of credit risk. The amounts invested in any single
institution are limited to minimize risk. The company has not incurred credit
risk losses related to these investments.
The company sells a broad range of pharmaceutical and agricultural products to a
diverse group of customers operating throughout the world. In the United States,
Latin America and Japan, the company makes substantial sales to relatively few
large wholesale customers. The company's agricultural products business is
highly seasonal. It is subject to weather conditions and natural disasters that
affect commodity prices and seed yields. Credit limits, ongoing credit
evaluation, and account-monitoring procedures are utilized to minimize the risk
of loss. Collateral is generally not required.
15 SHAREHOLDERS' EQUITY
PREFERRED STOCK
The Series B 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
1,725.5 shares of the company's common stock and has voting rights equal to
1,725.5 shares of common stock. The company may redeem the preferred stock at
any time or upon termination of the ESOP at a minimum price of $40,300.00 per
share. Dividends, if declared and at the rate of 6.25 percent, are cumulative,
paid quarterly, and charged against retained earnings.
80
<PAGE> 84
COMMON STOCK
The number of common shares outstanding at December 31, 1999, 1998, and 1997 was
1,254,637,000; 1,245,858,000; and 1,209,989,000, respectively. Individually,
Monsanto Company and Pharmacia & Upjohn, Inc. declared dividends at a rate of
$0.12 and $1.08, $0.12 and 1.08, and $0.50 and $1.08, for 1999, 1998, and 1997,
respectively. Common stock dividends payable were $141 and $137 at December 31,
1999 and 1998, respectively.
CAPITAL IN EXCESS OF PAR VALUE
Amounts of paid-in capital that exceed the par value ($2.00 per share) of the
company's common stock are recorded in this account. 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
Upon recognition of the company's guarantee of the debt of the ESOP trusts,
offsetting amounts were recorded in shareholders' equity. As guaranteed debt is
repaid, this amount diminishes correspondingly (see Notes 12 and 16). In
addition, the company has extended various loans to the ESOP trusts. The
guarantees and the company loans constitute charges to shareholders' equity.
Finally, to the extent the company recognizes expense more rapidly than the
corresponding cash contributions are made to the preferred stock ESOP, this
shareholders' equity balance is reduced.
TREASURY STOCK
The balance at December 31, 1999 and 1998 was $2,432 and $2,543, respectively,
carried at cost.
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 4);
and (3) minimum pension liability adjustments, net of deferred tax.
SHAREHOLDER RIGHTS PLAN
Pursuant to the company's Shareholder Rights Plan, in December 1999, the
company's board of directors declared a dividend, effective as of February 5,
2000, of one preferred stock purchase right on each then-outstanding share of
the company's common stock. The February 5, 2000 dividend replaced the preferred
stock purchase rights, which were granted in 1990 and set to expire on February
5, 2000 under the company's 1990 Shareholder Rights Plan. Pursuant to the
current Shareholder Rights Plan, if a person or group acquires beneficial
ownership of 20 percent or more, or announces a tender offer that would result
in beneficial ownership of 20 percent or more of the company's outstanding
common stock, the rights become exercisable. And, for every right held, the
owner will be entitled to purchase one one-thousandth of a share of a Series A
preferred stock for $250. If Pharmacia is acquired in a business combination
transaction while the rights are outstanding, for every right held, the holder
will be entitled to purchase, for $250, common shares of the acquiring company
having a market value of $500. In addition, if a person or group acquires
beneficial ownership of 20 percent or more of the company's outstanding common
stock, for every right held, the holder (other than such person or members of
such group) will be entitled to purchase, for $250, a number of shares of the
company's common stock having a market value of $500. At any time prior to the
acquisition of such a 20 percent position, the company can redeem each right for
$0.001. The board of directors also is authorized
81
<PAGE> 85
to reduce the aforementioned 20 percent thresholds to not less than 10 percent.
The rights expire in the year 2010.
ADJUSTABLE CONVERSION-RATE EQUITY SECURITIES
In November 1998, the company issued 17,500,000 units of 6.50 percent Adjustable
Conversion-rate Equity Security Units (ACES) at a stated value of $40.00 per
unit. For further information, see the Notes to Financial Statements, Note 12
Lines of Credit and Debt.
16 EMPLOYEE STOCK OWNERSHIP PLANS (ESOP)
The company operates two Employee Stock Ownership Plans that serve as the
funding vehicles for certain employee savings plans. Pursuant to these plans,
the company matches, in part, employee contributions -- one plan utilizing
common stock and the other, preferred stock of the company.
The common stock plan held 14.7 million shares of stock as of December 31, 1999.
At its inception, the ESOP acquired shares by using proceeds from the issuance
of long-term notes and debentures guaranteed by the company, and the ESOP also
borrowed $50 from the company. A portion of the ESOP shares is allocated each
year to employee savings accounts as matching contributions. In 1999, 1,302,590
shares were allocated to participants under the plan. An additional 634,548
shares were released in 1999 awaiting allocation to participants, leaving 7.3
million unallocated shares as of December 31, 1999. Allocated shares held by the
ESOP are considered outstanding for earnings-per-share calculations; unallocated
shares are not. Compensation expense is equal to the cost of the shares
allocated to participants, less cash dividends paid on the shares held by the
ESOP. Dividends on the common stock owned by the ESOP are used to repay the ESOP
borrowings, which were $100 as of December 31, 1999. Common shares released
during 1999, 1998 and 1997 were 1,937,138; 944,215 and 954,778, respectively.
The preferred stock ESOP was created in 1989. 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, 1999, 2,097 preferred shares had been released and allocated; 383
shares were released but unallocated; and 4,212 shares remained unreleased, of
which 61 shares are committed to be released. Preferred shares released during
1999, 1998 and 1997 were 421, 391 and 346, respectively. Eventual conversion of
all preferred shares is assumed in the earnings per share computations.
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
31,1999, assets of the ESOP trust consisted primarily of $270 of Pharmacia
Corporation Perpetual Preferred Stock.
Expense of the preferred stock ESOP 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.
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<PAGE> 86
Combined measures of the ESOP plans are presented in the table that follows.
<TABLE>
<CAPTION>
Years Ended December 31
------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Interest expense of ESOP Trust $ 34 $ 37 $ 40
Dividend income of ESOP Trusts:
Preferred 17 17 18
Common 2 2 8
Company contribution to ESOP Trusts 59 32 18
Company ESOP expense $ 45 $ 34 $ 32
</TABLE>
17 STOCK COMPENSATION
The former Monsanto Company granted stock options under two fixed plans. Key
officers and management employees were granted stock-based awards, including
stock options, of up to 87.6 million shares of common stock under the Monsanto
Management Incentive Plan of 1996. The exercise price of each option equaled no
less than the market price of the company's stock on the date of grant. An
option's maximum term was ten years and generally vested upon the achievement of
certain performance targets or the ninth anniversary of the grant or upon change
of control of the company. Certain options to senior management vested upon the
attainment of pre-established prices within specified time periods and were
re-priced upon a changed in control of the company. Under the former Monsanto
Shared Success Stock Option Plan, most regular full-time and regular part-time
employees of the company were granted options on 330 shares of common stock in
1997, 500 shares in 1998 and 300 shares in 1999. The maximum number of shares
for which options could be granted under this plan was 27.3 million. The
exercise price of each option was generally equal to the price of the company's
stock on the date of grant, with a maximum term of 10 years.
Incentive and nonqualified stock options were granted to certain former
Pharmacia & Upjohn employees. Options granted in 1999 were to have vested at the
end of three to five years or vest pro rata over three years. However, these
options vested upon change of control. All options have an exercise price equal
to the market value of the underlying stock at date of grant and a maximum term
of ten years. Upon a stock-for-stock exercise of an option, an active former
Pharmacia & Upjohn 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.
Information concerning option activity and balances follows:
<TABLE>
<CAPTION>
Weighted Number
Average Exercise Of Shares
Price Per Share (000)
---------------- ---------
<S> <C> <C>
Balance outstanding, January 1, 1997 $21.29 78,720
Granted 33.19 33,546
Exercised 19.60 (14,003)
Canceled 34.22 (3,757)
------ -------
Balance outstanding, December 31, 1997 25.25 94,506
Granted 46.49 53,791
Exercised 19.50 (15,508)
Canceled 35.12 (3,744)
------ -------
Balance outstanding, December 31, 1998 34.51 129,045
Granted 46.86 17,950
Exercised 22.05 (11,527)
Canceled 46.80 (5,575)
------ -------
Balance Outstanding, December 31, 1999 $36.79 129,893
=======
</TABLE>
83
<PAGE> 87
<TABLE>
<CAPTION>
Composition of the December 31, 1999 Balance:
---------------------------------------------
Weighted
Weighted Average
Average Exercise Number
Remaining Price Of Shares
Options Having a Per-Share Exercise Price of: Life Per Share (000)
- --------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
$ 0.51- 9.99 3.13 years $ 9.24 5,577
$10.00-19.99 3.85 years 14.30 14,782
$20.00-29.99 5.71 years 25.89 9,552
$30.00-39.99 6.96 years 33.88 44,338
$40.00-54.99 8.22 years 48.69 51,244
$55.00-75.00 8.70 years 61.87 4,400
</TABLE>
As of December 31, 1999, 1998 and 1997, Pharmacia had exercisable options of
65,889,000, 65,112,000 and 58,814,000, respectively, with weighted average
exercise prices of $27.78, $26.26 and $20.49, respectively.
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation,"
Pharmacia Corporation has elected to continue following the guidance of APB 25,
"Accounting for Stock Issued to Employees" for measurement and recognition of
stock-based transactions with employees. In accordance with APB 25, no
compensation cost has been recognized for the company's option plans. Had the
determination of compensation cost for these plans been based on the fair market
value at the grant dates of the awards under these plans, consistent with the
method of SFAS No. 123, Pharmacia Corporation's earnings from continuing
operations would have been reduced by approximately $239 or $.19 per share for
1999 $264 or $.21 per share for 1998, and $143 or $.11 per share for 1997.
In computing the pro forma compensation expense, 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:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Expected dividend yield 0.34% 0.25% 0.29%
Expected volatility 39.50% 30.00% 27.00%
Risk-free interest rate 4.40% 5.60% 6.40%
Expected option lives (years) 4.1 4.0 4.3
</TABLE>
18 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 1998 and 1999.
<TABLE>
<CAPTION>
Other Retirement
Pension Benefits Benefits
---------------- ----------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Change in Benefit Obligation:
Benefit obligation at beginning of year $4,110 $3,877 $809 $776
Service cost 124 114 26 23
Interest cost 264 261 55 54
Benefits paid (459) (355) (43) (45)
Actuarial (gain) loss (97) 199 -- (4)
Plan amendment and other adjustments 26 14 1 5
------ ------ ---- ----
Benefit obligation at end of year $3,968 $4,110 $848 $809
====== ====== ==== ====
</TABLE>
84
<PAGE> 88
<TABLE>
<CAPTION>
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Change In Plan Assets:
Fair value of plan assets at beginning of year $3,623 $3,416 $211 $170
Actual return on plan assets 620 494 41 40
Employer contribution 69 55 26 18
Plan Participant Contributions 3 3
Benefits paid (459) (355) (27) (19)
Other adjustments (2) 4 1 2
Currency exchange effects 5 6 -- --
------ ------ ---- ----
Fair value of plan assets at end of year $3,859 $3,623 $252 $211
====== ====== ==== ====
</TABLE>
<TABLE>
<CAPTION>
At December 31,
--------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Funded status $(109) $(487) $(596) $(598)
Unrecognized net gains (433) 11 (112) (84)
Unamortized net transition asset (40) (60) -- --
Unrecognized prior service cost 120 135 (35) (44)
----- ----- ----- -----
Accrued Liability $(462) $(401) $(743) $(726)
===== ===== ===== =====
</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, $730, $661, and $118 as of December 31, 1999, and
$2,446, $2,291, and $2,090 as of December 31, 1998, respectively.
<TABLE>
<CAPTION>
At December 31,
--------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Postretirement liabilities $(822) $(715) $(714) $(698)
Other current liabilities -- -- (29) (28)
Prepaid balances 231 215 -- --
Minimum pension liability offsets:
Intangible assets 16 15 -- --
Shareholders' equity (pretax) 113 84 -- --
----- ----- ----- -----
Accrued Benefit Cost $(462) $(401) $(743) $(726)
===== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
Weighted-Average Assumptions
As Of December 31,
-----------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Discount rate 7.43% 6.72% 6.98%
Salary growth rate 3.67 - 4.50 3.68 - 4.00 4.00 - 4.20
Return on plan assets 9.51 9.38 9.41
Health care cost rate -- initially 5.25 - 5.62 5.75 - 5.83 6.33 - 7.00
trending down to 5.00 - 5.25 4.75 - 5.00 5.00
</TABLE>
In connection with the classification of the former nutrition and consumer
products segment of Monsanto Company as discontinued operations (see Note 20),
no postretirement benefit liabilities, pension liabilities or related assets
were allocated or assumed by the discontinued businesses for their active
employees or for certain former employees. The company has retained the pension
liability, postretirement liability and related assets for the employees of the
former Nutrition and Consumer Products segment now classified as discontinued
operations in the consolidated financial statements because it is uncertain, at
this time, whether the pension liabilities, postretirement liabilities and
retained assets will be assumed by the buyers of these
85
<PAGE> 89
businesses. In connection with the spin-off of Monsanto's chemical business as
Solutia Inc., Solutia assumed the pension liabilities, postretirement liability
and received related assets for its active employees and for certain former
employees of the chemical business.
The consolidated net expense amounts in the following table are exclusive of
curtailments, settlements, and termination benefit costs associated with
restructurings related to former Pharmacia & Upjohn business. Net amounts of $4
and $5 before tax were recorded in 1998 and 1997, respectively, within
restructuring charges.
<TABLE>
<CAPTION>
Pension Benefits Other Retirement Benefits
--------------------- ---------------------------
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Components of Net Periodic Benefit
Cost:
Service cost $ 124 $ 114 $ 113 $ 26 $ 23 $ 19
Interest cost 264 261 238 55 54 53
Expected return on plan assets (320) (265) (269) (20) (15) (12)
Amortization of transition amount (8) (9) (9) -- -- --
Amortization of prior service cost 4 5 4 (3) (3) (4)
Recognized actuarial loss (gain) 52 25 17 11 (3) (4)
----- ----- ----- ----- ----- -----
Net periodic benefit cost 116 131 94 69 56 52
Settlement/curtailment loss (gain) 3 (3) -- -- -- --
----- ----- ----- ----- ----- -----
Net Benefit Cost $ 119 $ 128 $ 94 $ 69 $ 56 $ 52
===== ===== ===== ===== ===== =====
</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,
1999 by $56 and the total of service and interest cost components of net
postretirement benefit cost for the year by $15. Conversely, decreasing the rate
by one percentage point in each year would decrease the postretirement benefit
obligation as of December 31, 1999 by $50 and the total of service and interest
cost components of net postretirement benefit cost for the year by $16.
The company has recorded an additional minimum liability of $128 for underfunded
plans at December 31, 1999. 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. An intangible asset ($15) to the
extent of previously unrecognized prior service cost offsets the additional
liability. The remaining amount ($113) is recorded, net of tax benefits, as a
reduction to shareholders' equity within accumulated other comprehensive income.
19 SEGMENT INFORMATION
The company operates in two primary segments: pharmaceuticals and agricultural
products. The pharmaceutical segment includes prescription products for humans
and animals, bulk pharmaceuticals and contract manufacturing.
The agricultural products segment is comprised of agricultural chemicals,
primarily ROUNDUP, seeds and genomics, animal productivity and nutrition
research.
The following tables show revenues and earnings for the company's operating
segments and reconciling items necessary to total to the amounts reported in the
consolidated financial statements. Information about segment interest income and
expense, and income taxes is not provided on a segment level as the segments are
reviewed based on earnings before interest and income taxes (EBIT). Corporate
support
86
<PAGE> 90
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, 1999:
<TABLE>
<CAPTION>
Corporate
Pharmaceutical Agricultural and Other Total
-------------- ------------ --------- -----
<S> <C> <C> <C> <C>
Sales $11,177 $5,248 $ -- $16,425
Earnings from equity affiliates 34 (18) (12) 4
Amortization 82 317 80 479
EBIT * $ 2,189 $ 496 $(489) 2,196
Interest expense, net 298
Earnings before income taxes $ 1,898
</TABLE>
SEGMENTS FOR YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Corporate
Pharmaceutical Agricultural and Other Total
-------------- ------------ --------- -----
<S> <C> <C> <C> <C>
Sales $ 9,289 $4,448 $ -- $13,737
Earnings from equity affiliates 57 (26) (9) 22
Amortization 95 201 102 398
EBIT * $ 1,721 $ 200 $(918) 1,003
Interest expense, net 111
Earnings before income taxes $ 892
</TABLE>
SEGMENTS FOR YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Corporate
Pharmaceutical Agricultural and Other Total
-------------- ------------ --------- -----
<S> <C> <C> <C> <C>
Sales $ 8,907 $3,673 $ -- $12,580
Earnings from equity affiliates (68) 6 -- (62)
Amortization 85 60 92 237
EBIT * $ 1,360 $ 21 $(798) 583
Interest expense, net 21
Earnings before income taxes $ 562
</TABLE>
As a result of the merger involving a subsidiary of Monsanto Company and
Pharmacia & Upjohn, management reporting methodologies will tend to evolve and
segment definition and related disclosures may change in future periods.
* Earnings before interest and taxes (EBIT) is presented here to provide
additional information about the company's operations. This item should be
considered in addition to, but not as a substitute for or superior to, net
earnings, cash flow or other measures of financial performance prepared in
accordance with generally accepted accounting principles. Determination of
EBIT may vary from company to company.
Corporate and all other amounts represent general and administrative expenses of
corporate support functions, corporate items such as restructuring charges and
litigation accruals, and nonoperating income and expenses.
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 1999 represent approximately 63 percent of total
sales with no one product constituting more than 15 percent of total sales. The
following table shows the company's sales geographically.
87
<PAGE> 91
<TABLE>
<CAPTION>
Geographic Sales for Years Ended December 31
---------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Sales to customers in:
United States $ 8,611 $ 6,298 $ 5,402
Europe/Africa 3,963 4,306 4,129
Asia Pacific 1,850 1,547 1,713
Latin America 1,480 1,183 991
Canada 521 403 345
------- ------- -------
Total Sales $16,425 $13,737 $12,580
======= ======= =======
</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
--------------------
1999 1998
---- ----
<S> <C> <C>
United States $ 7,848 $ 7,641
Europe/Africa 3,254 3,624
Asia Pacific 313 374
Latin America 1,179 1,106
Canada 27 31
------- -------
Total Long-Lived Assets $12,621 $12,776
======= =======
</TABLE>
20. DISCONTINUED OPERATIONS
On July 1, 1999, the company announced its intention to sell the artificial
sweetener (bulk aspartame and tabletop sweeteners) and biogum businesses.
Pharmacia expects to sell these businesses for a net gain by July 2000. The
results of operations, financial position, and cash flows of these businesses,
and of the alginates and ORTHO lawn-and-garden products businesses, the
divestitures of which were approved by the companys' Board of Directors in 1998,
have been reclassified as discontinued operations; and, for all periods
presented, the consolidated financial statements and notes have been
reclassified to conform to this presentation. In addition, the company
transferred the ROUNDUP lawn-and-garden and nutrition research operations of the
former Nutrition and Consumer Products segment to the Agricultural Products and
Corporate segments, respectively.
Net sales and income from discontinued operations in 1999 include one month of
the ORTHO lawn-and-garden products business, and nine months of the alginates
business for 1999. Net sales, income and net assets from discontinued operations
include the ORTHO lawn-and-garden products, alginates, artificial sweeteners,
and biogums businesses for 1998. Net sales and income from discontinued
operations in 1997 also include eight months of the chemicals business which was
spun off to shareholders Sept. 1, 1997.
88
<PAGE> 92
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net Sales $ 980 $1,288 $3,279
------ ------ ------
Income (Loss) from Discontinued Operations Before Income Tax $ 150 $ (158) $ 506
Income Tax Expense (Benefit) 58 (39) 185
------ ------ ------
Net Income (Loss) from Discontinued Operations $ 92 $ (119) $ 321
====== ====== ======
Net Assets of Discontinued Operations:
Current Assets $ 545 $ 994
Non-Current Assets 1,240 1,269
------ ------
Total Assets $1,785 $2,263
------ ------
Current Liabilities $ 213 $ 272
Non-Current Liabilities 15 67
------ ------
Total Liabilities $ 228 $ 339
------ ------
Net Assets of Discontinued Operations $1,557 $1,924
====== ======
</TABLE>
Interest expense charged to discontinued operations was $96 million in 1999,
$103 million in 1998, and $74 million in 1997, based on working capital
requirements and expected proceeds from the discontinued Nutrition and Consumer
Products segment and debt assumed by the spun-off chemical business.
Historically, the company did not allocate any debt to the Nutrition and
Consumer Products or Chemicals businesses because the company centrally manages
cash requirements for its operations.
Net assets of the Nutrition and Consumer Products segment do not include pension
liabilities, pension assets, and post retirement benefit liabilities associated
with its active employees or former employees. Expenses related to pension and
post retirement benefits have been allocated to discontinued operations based on
payroll costs. The company has not revised its existing retirement plans for any
employment status changes associated with the divestiture of the Nutrition and
Consumer Products segment. In 1997, the chemical company assumed the pension
liability and related pension assets for its active employees and certain former
employees of the chemical business.
In January 1999, the company completed the sale of the ORTHO lawn-and-garden
products business. Proceeds of $340 million were used to reduce debt in 1999 and
for general corporate purposes. On September 7, 1999, the company announced the
sale of the alginates business to International Specialty Products (ISP).
Proceeds of $40 million from the sale were used to reduce debt. The closing of
this transaction occurred on Oct. 15, 1999, which resulted in an aftertax loss
of $25 million from discontinued operations. Offsetting this loss on disposal
were restructuring liability reversals of $27 million aftertax, which were
required as severance and facility shut-down costs were no longer required as a
result of the sale on terms more favorable than originally anticipated.
On February 4, 2000, the company announced the signing of a definitive agreement
to sell the tabletop sweetener business, including the EQUAL, CANDEREL and
NUTRASWEET tabletop brands, to Merisant Company. The sale closed in March 2000
and proceeds of $570 million from the sale were used to reduce debt. On February
22, 2000, the company announced the signing of a definitive agreement to sell
the biogums business to a joint venture between Hercules Inc. and Lehman
Brothers Merchant Banking Partners II, L.P. Expected proceeds are $685 million.
On March 27, 2000, the company announced the signing of a definitive agreement
to sell the artificial sweeteners business including the NUTRASWEET brand, to
J.W. Childs Equity Partners II, L.P. for $440 million. Proceeds of the
divestiture will primarily be used to reduce debt. The company expects to
recognize a small net gain on completion of these transactions.
89
<PAGE> 93
QUARTERLY DATA
PHARMACIA CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
1999 (Unaudited)
---------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Dollar amounts in millions, except per-share data
<S> <C> <C> <C> <C>
Net sales $4,100 $4,359 $3,738 $4,228
Gross Profit 2,723 3,002 2,494 2,887
Earnings before cumulative effect of accounting
change 344 536 234 284
Net income 324 536 234 284
Basic earnings per share -earnings before cumulative
effect of accounting change .27 .43 .19 .23
Diluted earnings per share -earnings before
cumulative effect of accounting changes .27 .42 .18 .22
Basic earnings per share -net earnings .25 .43 .19 .23
Diluted earnings per share -net earnings .25 .42 .18 .22
Market Price: *
High $50.75 $50.13 $45.44 $47.50
Low 37.38 38.25 32.75 33.56
</TABLE>
<TABLE>
<CAPTION>
1998 (Unaudited)
---------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
Dollar amounts in millions, except per-share data
<S> <C> <C> <C> <C>
Net sales $3,209 $3,738 $3,265 $3,525
Gross Profit 2,073 2,403 2,104 2,153
Earnings before cumulative effect of accounting
change 365 383 99 (485)
Net earnings 365 383 99 (485)
Basic earnings (loss) per share -earnings before
cumulative effect of accounting change .30 .31 .08 (.40)
Diluted earnings (loss) per share -earnings before
cumulative effect of accounting changes .29 .30 .07 (.40)
Basic earnings (loss) per share -net earnings .30 .31 .08 (.40)
Diluted earnings (loss) per share -net earnings .29 .30 .07 (.40)
Market Price:*
High $53.06 $60.38 $63.94 $55.88
Low 38.31 51.31 50.50 33.75
</TABLE>
* Amounts calculated on a pre-merger basis
90
<PAGE> 94
RECONCILIATION OF QUARTERLY DATA
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER-SHARE DATA)
<TABLE>
<CAPTION>
Income Before
Cumulative Effect
Net Gross of Accounting Net
Sales Profit Change Income
----- ------ ----------------- ------
<S> <C> <C> <C> <C>
1999 (unaudited)
First Quarter
Monsanto $2,310 $1,439 $ 132 $ 112
Pharmacia & Upjohn 1,774 1,281 212 212
Adjustments 16 3 -- --
------ ------ ----- -----
Total $4,100 $2,723 $ 344 $ 324
====== ====== ===== =====
Second Quarter
Monsanto $2,572 $1,722 $ 344 $ 344
Pharmacia & Upjohn 1,760 1,313 192 192
Adjustments 27 (33) -- --
------ ------ ----- -----
Total $4,359 $3,002 $ 536 $ 536
====== ====== ===== =====
Third Quarter
Monsanto $1,922 $1,193 $ 49 $ 49
Pharmacia & Upjohn 1,776 1,295 185 185
Adjustments 40 6 -- --
------ ------ ----- -----
Total $3,738 $2,494 $ 234 $ 234
====== ====== ===== =====
Fourth Quarter
Monsanto $2,342 $1,520 $ 70 $ 70
Pharmacia & Upjohn 1,943 1,471 214 214
Adjustments (57) (104) -- --
------ ------ ----- -----
Total $4,228 $2,887 $ 284 $ 284
====== ====== ===== =====
1998 (unaudited)
First Quarter
Monsanto $1,719 $1,069 $ 196 $ 196
Pharmacia & Upjohn 1,586 1,100 174 174
Adjustments (96) (96) (5) (5)
------ ------ ----- -----
Total $3,209 $2,073 $ 365 $ 365
====== ====== ===== =====
Second Quarter
Monsanto $2,079 $1,237 $ 257 $ 257
Pharmacia & Upjohn 1,654 1,161 131 131
Adjustments 5 5 (5) (5)
------ ------ ----- -----
Total $3,738 $2,403 $ 383 $ 383
====== ====== ===== =====
Third Quarter
Monsanto $1,706 $1,083 $(100) $(100)
Pharmacia & Upjohn 1,669 1,153 204 204
Adjustments (110) (132) (5) (5)
------ ------ ----- -----
Total $3,265 $2,104 $ 99 $ 99
====== ====== ===== =====
Fourth Quarter
Monsanto $1,733 $ 936 $(603) $(603)
Pharmacia & Upjohn 1,849 1,313 122 122
Adjustments (57) (96) (4) (4)
------ ------ ----- -----
Total $3,525 $2,153 $(485) $(485)
====== ====== ===== =====
</TABLE>
On March 30, 2000, the company completed the merger with Pharmacia & Upjohn.
Certain reclassifications and adjustments have been made between accounts
pursuant to this transaction.
91
<PAGE> 95
STOCKHOLDER INFORMATION
TRANSFER AGENT, REGISTRAR AND DIVIDEND DISBURSING AGENT
EquiServe Trust Company, N.A.
P.O. Box 2500
Jersey City, New Jersey
07303-2500
1-888-312-8333 (Toll Free in
the U.S. and Canada
1-781-575-2016 (Collect outside
the U.S. and Canada)
STOCK EXCHANGE
Shares of the Company are listed on the New York Stock Exchange and the
Stockholm Stock Exchange under the symbol PHA
REPORTS TO THE SECURITIES
AND EXCHANGE COMMISSION
For copies of the Company's Form 10-K and 10-Q filings, please call:
1-877-768-6973
INVESTOR RELATIONS
Security analysts, investment professionals and shareholders should direct their
business-related inquiries to:
Craig Tooman
Pharmacia Corporation
100 Route 206 North
Peapack, New Jersey
07977
U.S.A.
908-901-8853
INTERNET ADDRESS
Pharmacia & Upjohn's Internet address is:
http://www.pharmacia.com
<PAGE> 96
[PHARMACIA LOGO]
<PAGE> 97
<TABLE>
<S><C>
|
PLEASE MARK YOUR | 2314
[X] VOTES AS IN THIS |___
EXAMPLE.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS
GIVEN, THIS PROXY WILL BE VOTED "FOR" ITEM 1 AND "AGAINST" ITEMS 2, 3, 4, AND 5.
1. Election of FOR WITHHELD 2. STOCKHOLDER FOR AGAINST ABSTAIN 4. STOCKHOLDER PROPOSAL FOR AGAINST ABSTAIN
Directors for [ ] [ ] PROPOSAL ONE. [ ] [ ] [ ] THREE. [ ] [ ] [ ]
Terms expiring in
2003.
(See reverse)
For, except vote withheld from the 3. STOCKHOLDER [ ] [ ] [ ] 5. STOCKHOLDER PROPOSAL [ ] [ ] [ ]
following Nominee(s): PROPOSAL TWO. FOUR.
- ---------------------------------
I plan to attend the [ ]
meeting.
Please sign your name or names exactly as printed
hereon. When shares are held by joint tenants,
both should sign. Trustees and other fiduciaries
should so indicate when signing.
--------------------------------------------------
The signer(s) hereby revokes all proxies heretofore given by the --------------------------------------------------
signer(s) to vote at said meeting or any adjournment thereof. SIGNATURE(S) DATE
- ------------------------------------------------------------------------------------------------------------------------------------
/\ FOLD AND DETACH HERE /\
PHARMACIA CORPORATION
Dear Stockholder:
We encourage you to vote your shares either by telephone or via the Internet. This will eliminate the need to return your proxy
card. You will need your proxy card and Social Security Number (where applicable) when voting your shares electronically. The Voter
Control Number that appears in the box above, just below the perforation, must be used in order to vote by telephone or via the
Internet.
The EquiServe Vote by Telephone and Vote by Internet systems can be accessed 24-hours a day, seven days a week up until the day
prior to the meeting.
TO VOTE BY TELEPHONE: 1-877-PRX-VOTE (1-877-779-8683)
Using a touch-tone phone call (in U.S.) toll-free:
From outside the United States, call direct: 1-201-536-8073
TO VOTE BY INTERNET:
Log on to the Internet and go to the website: HTTP://WWW.EPROXYVOTE.COM/PHA
NOTE: If you vote over the Internet, you may incur costs such as telecommunication and Internet access charges for which you will
be responsible.
THANK YOU FOR VOTING YOUR SHARES.
YOUR VOTE IS IMPORTANT!
DO NOT RETURN THIS PROXY CARD IF YOU ARE VOTING BY TELEPHONE OR THE INTERNET.
</TABLE>
<PAGE> 98
PROXY
PHARMACIA CORPORATION
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
ANNUAL MEETING OF STOCKHOLDERS
THE ORIENTAL THEATER
24 RANDOLPH STREET
CHICAGO, ILLINOIS
1:30 P.M. (LOCAL TIME), JUNE 23, 2000
The undersigned hereby appoints Robert Shapiro and Fred Hassan, and each of
them, with full power of substitution, as Proxies to vote all shares of stock of
Pharmacia Corporation which the undersigned is entitled to vote at the 2000
Annual Meeting of Stockholders, and at any adjournments thereof, as indicated on
the reverse side hereof and in their discretion on any other matters properly
coming before the meeting.
If the undersigned is a participant in the Dividend Reinvestment Plan or in any
employee compensation or benefit plan that allocates stock to a participant's
plan account, then this card will also provide voting instructions with respect
to the stock held in the undersigned's plan account.
Election of Directors:
Nominees: (01) F.C. Carlucci; (02) M. Kantor; (03) G.S. King; (04) O. Lund; (05)
J.E. Robson; and (06) B. Samuelsson
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY PROMPTLY IN THE ENCLOSED BUSINESS
REPLY ENVELOPE (NO POSTAGE REQUIRED) OR, IF YOU CHOOSE, YOU MAY VOTE YOUR
SHARES BY TELEPHONE OR VIA THE INTERNET. PLEASE SEE REVERSE SIDE FOR
INSTRUCTIONS.
(PLEASE SIGN ON REVERSE SIDE)
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