<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): May 19, 2000
PHARMACIA CORPORATION
(Exact Name of Registrant as Specified in Charter)
<TABLE>
<S> <C> <C>
Delaware 1-2516 43-0420020
(State of Incorporation) (Commission (IRS Employer
File Number) Identification Number)
100 Route 206 North
Peapack, NJ 07977
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code: (908) 901-8000
<PAGE> 2
Item 1. Not Applicable
Item 2. Not Applicable
Item 3. Not Applicable
<PAGE> 3
Item 4. Changes in Registrant's Certifying Accountant
On May 18, 2000, the Registrant 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 of Monsanto Company and Pharmacia & Upjohn, Inc., which was
completed on March 31, 2000 and 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
Company 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 18, 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 Company for such
years.
The Registrant has requested that Deloitte & Touche LLP furnish it with a letter
addressed to the SEC stating whether or not it agrees with the above statements.
A copy of such letter, dated May 19, 2000, is filed as Exhibit 16 to this Form
8-K.
At its June 2000 meeting, the Audit and Finance Committee of the Registrant's
Board of Directors will discuss proposals from Deloitte & Touche LLP and from
PricewaterhouseCoopers LLP to serve as the Registrant's principal independent
accountant with respect to the Registrant'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 Registrant's principal
independent accountant for the current year or agree on a process to be followed
to select the Registrant's principal independent accountant for the current
year.
<PAGE> 4
Item 5. Other Events
As previously reported in the registrant's Form 10-Q for the quarterly period
ended March 31, 2000, on March 31, 2000, a subsidiary of Monsanto Company
("Monsanto") and Pharmacia & Upjohn, Inc. ("P&U") completed their merger (the
"Merger") whereby P&U became a wholly owned subsidiary of Monsanto. On that same
date, Monsanto changed its name to Pharmacia Corporation ("the company" or
"registrant"). Accordingly, the registrant's Form 10-Q filing included restated
financial statements for the applicable periods. The company is filing herewith
certain financial information, including restated audited consolidated financial
statements of the company as of December 31, 1999 and December 31, 1998, and for
each of the years in the three-year period ended December 31, 1999, together
with the related Management's Discussion and Analysis of Financial Condition and
Results of Operations of the company, which are being filed as Exhibit 99 to
this Form 8-K and are incorporated herein by reference. Also incorporated herein
by reference is the independent accountants' reports filed as part of Exhibit
99.
The consolidated financial statements give retroactive effect to the Merger
which was accounted for as a pooling of interests as described in Note 2 to the
consolidated financial statements. Accordingly, the company has restated the
consolidated financial statements and all financial information to reflect the
combined operations, financial position and cash flows of both companies.
Pursuant to Rule 11-02(c) of Regulation S-X, the filing of restated audited
financial information as Exhibit 99 to this Current Report on Form 8-K
eliminates the requirement to include pro forma financial information in Item 7
in an amendment to the Registrant's Current Report on Form 8-K filed on April
13, 2000
Item 6. Not Applicable
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Not Applicable
(b) Not Applicable
<PAGE> 5
Item 7. Financial Statements and Exhibits
(c) Exhibits
Exhibit No. Description of Exhibit
----------- ----------------------
16 Letter of Agreement with Item 4 comments from
Deloitte & Touche LLP
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
99 Restated financial information as of December 31, 1999 and
1998 and for each of the fiscal years ended December 31,
1999, 1998 and 1997.
<PAGE> 6
SIGNATURE:
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PHARMACIA CORPORATION
---------------------
(Registrant)
DATE: May 19, 2000 /S/R. G. Thompson
R. G. Thompson
Senior Vice President
and Corporate Controller
<PAGE> 7
EXHIBIT INDEX
Exhibit Description
16 Letter of Agreement with Item 4 comments from Deloitte & Touche LLP
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Deloitte & Touche LLP
27 Financial Data Schedules
99 Restated financial information as of December 31, 1999 and 1998 and
for each of the fiscal years ended December 31, 1999, 1998 and 1997.
<PAGE> 1
Exhibit 16
May 19, 2000
Securities and Exchange Commission
Mail Stop 11-3
450 5th Street, N.W.
Washington, D.C. 20549
Dear Sirs/Madams:
We have read and agree with the comments in Item 4 of Form 8-K of Pharmacia
Corporation dated May 19, 2000.
Yours truly,
/s/ DELOITTE & TOUCHE LLP
<PAGE> 1
Exhibit 23.1
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 2-36636, 2-76696, 2-90152, 33-13197, 33-21030,
33-39704, 33-39705, 33-39706, 33-39707, 33-49717, 33-53363, 33-53365,
33-53367, 333-02783, 333-02961, 333-02963, 333-33531, 333-38599, 333-34112,
333-34344, 333-45341 and 333-76653) and the Registration Statement on Form S-4
(No. 333-66175) of Pharmacia Corporation of our report dated February 7, 2000,
except as to the pooling of interests of Monsanto Company and Pharmacia &
Upjohn, Inc. which is as of March 31, 2000, relating to the financial
statements, which appears in this Current Report on Form 8-K.
PricewaterhouseCoopers LLP
Florham Park, New Jersey
May 19, 2000
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
PHARMACIA CORPORATION:
We consent to the incorporation by reference in Pharmacia Corporation's
Registration Statements on Form S-8 (Nos. 2-36636, 2-76696, 2-90152, 33-13197,
33-21030, 33-39704, 33-39705, 33-39706, 33-39707, 33-49717, 33-53363, 33-53365,
33-53367, 333-02783, 333-02961, 333-02963, 333-33531, 333-38599, 333-34112,
333-34344, 333-45341 and 333-76653) and the Registration Statement on Form S-4
(No. 333-66175) of our report dated February 25, 2000, on the consolidated
financial statements of Monsanto Company and subsidiaries as of December 31,
1999 and 1998, for the each of the three years in the period ended December 31,
1999 (not presented separately herein), appearing in this Current Report on Form
8-K.
/s/ DELOITTE & TOUCHE LLP
St. Louis, Missouri
May 19, 2000
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<FN>
<F1>Includes guarantee of ESOP dept.
<F2>Only includes R&D expense.
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0
273
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<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999<F3>
<CASH> 1,019
<SECURITIES> 0
<RECEIVABLES> 4,974
<ALLOWANCES> 243
<INVENTORY> 2,485
<CURRENT-ASSETS> 10,425
<PP&E> 11,245
<DEPRECIATION> 4,890
<TOTAL-ASSETS> 26,864
<CURRENT-LIABILITIES> 7,274
<BONDS> 6,458<F1>
0
274
<COMMON> 2,927
<OTHER-SE> 7,330
<TOTAL-LIABILITY-AND-EQUITY> 26,864
<SALES> 8,459
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<CGS> 2,734
<TOTAL-COSTS> 2,734
<OTHER-EXPENSES> 1,389<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 223
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<CHANGES> (20)
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<EPS-BASIC> 0.68
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<FN>
<F1>INCLUDES GUARANTEE OF ESOP DEBT.
<F2>ONLY INCLUDES R&D EXPENSE
<F3>RESTATED FOR 03/31/00 MERGER ACCOUNTED FOR AS A POOLING OF INTERESTS.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999<F3>
<CASH> 1,145
<SECURITIES> 0
<RECEIVABLES> 4,539
<ALLOWANCES> 242
<INVENTORY> 2,546
<CURRENT-ASSETS> 10,266
<PP&E> 11,097
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0
275
<COMMON> 2,929
<OTHER-SE> 6,998
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<OTHER-EXPENSES> 710<F2>
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<INTEREST-EXPENSE> 105
<INCOME-PRETAX> 512
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<FN>
<F1>INCLUDES GUARANTEE OF ESOP DEBT.
<F2>ONLY INCLUDES R&D EXPENSE.
<F3>RESTATED FOR 03/31/00 MERGER ACCOUNTED FOR AS A POOLING OF INTERESTS.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998<F3>
<CASH> 970
<SECURITIES> 0
<RECEIVABLES> 3,726
<ALLOWANCES> 190
<INVENTORY> 2,754
<CURRENT-ASSETS> 9,724
<PP&E> 11,142
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0
277
<COMMON> 2,929
<OTHER-SE> 7,353
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<FN>
<F1>INCLUDES GUARANTEE OF ESOP DEBT.
<F2>ONLY INCLUDES R&D EXPENSE.
<F3>RESTATED FOR 03/31/00 MERGER ACCOUNTED FOR AS A POOLING OF INTERESTS.
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0
278
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0
279
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<F2>Only includes R&D expense.
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0
280
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<FN>
<F1>Include guarantee of ESOP debt.
<F2>Only includes R&D expense.
<F3>Restated for 03\31\00 merger accounted for as a pooling of interests.
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0
282
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<FN>
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<PAGE> 1
Exhibit 99
Restated Financial Information
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
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Dollars in millions, except per share data
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 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.
- --------------------------------------------------------------------------------
Page 1
<PAGE> 2
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
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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.
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
------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C>
Dollars in millions
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>
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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.
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
- --------------------- ---- ------- ----- ------- ----
<S> <C> <C> <C> <C> <C>
Dollars in millions
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
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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 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
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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.
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.
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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.
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.
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 below.
1999 1998 1997
---- ---- ----
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
* 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.
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
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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
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
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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.
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
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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 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.
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
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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.
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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 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.
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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
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
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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 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
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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.
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.
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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
------- ------- -------
<S> <C> <C> <C>
Dollars in millions
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.
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
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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
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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 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 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
- --------------------------------------------------------------------------------
Page 18
<PAGE> 19
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 STANDARD
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 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.
- --------------------------------------------------------------------------------
Page 19
<PAGE> 20
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.
Page 1 of 36
<PAGE> 21
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
<PAGE> 22
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
<PAGE> 23
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.
Page 2 of 36
<PAGE> 24
CONSOLIDATED BALANCE SHEETS
PHARMACIA CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
DECEMBER 31 1999 1998
- ----------- -------- --------
<S> <C> <C>
Dollar amounts in millions
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.
Page 3 of 36
<PAGE> 25
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
PHARMACIA CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31 1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Dollar amounts in millions
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
Page 4 of 36
<PAGE> 26
CONSOLIDATED STATEMENTS OF CASH FLOWS
PHARMACIA CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1999 1998 1997
- -------------------------------- ------- ------- -------
<S> <C> <C> <C>
Dollar amounts in millions
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.
Page 5 of 36
<PAGE> 27
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 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
Page 6 of 36
<PAGE> 28
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.
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 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
Page 7 of 36
<PAGE> 29
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.
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 proforma 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.
Page 8 of 36
<PAGE> 30
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 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
FOR THE YEAR ENDED BEFORE EXPENSE NET OF
DECEMBER 31, 1999 TAX OR (BENEFIT) TAX
- ------------------ ----- ----------- ------
<S> <C> <C> <C>
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)
===== ==== =====
</TABLE>
Page 9 of 36
<PAGE> 31
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)
==== ==== ====
TAX
FOR THE YEAR ENDED BEFORE EXPENSE NET OF
DECEMBER 31, 1997 TAX OR (BENEFIT) TAX
------ ----------- ------
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)
===== ==== =====
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.
Page 10 of 36
<PAGE> 32
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 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.
Page 11 of 36
<PAGE> 33
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.
Page 12 of 36
<PAGE> 34
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 theimpaired 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 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>
==================================================================================================================================
RESTRUCTURING: WORKFORCE FACILITY ASSET
REDUCTIONS CLOSURES IMPAIRMENTS OTHER TOTAL
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <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.
Page 13 of 36
<PAGE> 35
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.
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.
Page 14 of 36
<PAGE> 36
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.
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:
=========================================
EMPLOYEE
SEPARATION
COSTS OTHER TOTAL
-----------------------------------------
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
=========================================
Page 15 of 36
<PAGE> 37
6 INCOME TAXES
The components of earnings before income taxes were:
YEARS ENDED DECEMBER 31 1999 1998 1997
- ----------------------- ------ ----- -----
U.S. $ 768 $ (37) $(211)
Non-U.S 1,130 929 773
------ ----- -----
EARNINGS BEFORE INCOME TAXES $1,898 $ 892 $ 562
====== ===== =====
The provision for income taxes included in the consolidated statements of
earnings consisted of:
YEARS ENDED DECEMBER 31 1999 1998 1997
- -------------------------- ----- ----- -----
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
===== ===== =====
Differences between the company's effective tax rate and the U.S. statutory tax
rate were as follows:
PERCENT OF PRETAX INCOME 1999 1998 1997
- -------------------------- ------ ------ ------
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%
====== ====== ======
Page 16 of 36
<PAGE> 38
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>
1999 1999 1998 1998
DECEMBER 31 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, 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.
Page 17 of 36
<PAGE> 39
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 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.
Page 18 of 36
<PAGE> 40
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."
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>
Page 19 of 36
<PAGE> 41
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>
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.
Page 20 of 36
<PAGE> 42
<TABLE>
<CAPTION>
UNREALIZED
----------------- CARRYING
LONG-TERM INVESTMENTS COST GAINS (LOSSES) VALUE
- --------------------- ---- ----- -------- --------
<S> <C> <C> <C> <C>
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>
1999 1999 1998 1998
FAIR AMORTIZED FAIR AMORTIZED
DECEMBER 31 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.
Page 21 of 36
<PAGE> 43
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>
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
Page 22 of 36
<PAGE> 44
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>
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.
Page 23 of 36
<PAGE> 45
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
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
DECEMBER 31 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
Page 24 of 36
<PAGE> 46
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.
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.
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.
Page 25 of 36
<PAGE> 47
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 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
Page 26 of 36
<PAGE> 48
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.
Combined measures of the ESOP plans are presented in the table that follows.
YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
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
Page 27 of 36
<PAGE> 49
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 AVERAGE NUMBER
EXERCISE PRICE OF SHARES
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>
<TABLE>
<CAPTION>
COMPOSITION OF THE WEIGHTED WEIGHTED
DECEMBER 31, 1999 BALANCE: AVERAGE AVERAGE NUMBER
OPTIONS HAVING A REMAINING EXERCISE PRICE OF SHARES
PER-SHARE EXERCISE PRICE OF: LIFE PER SHARE (000)
---------- ---------- -----
<S> <C> <C> <C>
$ 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.
Page 28 of 36
<PAGE> 50
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
CHANGE IN BENEFIT OBLIGATION: 1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
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>
<TABLE>
<CAPTION>
CHANGE IN PLAN ASSETS: 1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
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>
Page 28 of 36
<PAGE> 51
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 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
COMPONENTS OF NET PERIODIC BENEFIT COST: 1999 1998 1997 1999 1998 1997
<S> <C> <C> <C> <C> <C> <C>
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
Page 30 of 36
<PAGE> 52
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 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>
Page 31 of 36
<PAGE> 53
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.
<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>
Page 32 of 36
<PAGE> 54
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.
<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.
Page 33 of 36
<PAGE> 55
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.
Page 34 of 36
<PAGE> 56
QUARTERLY DATA
--------------
PHARMACIA CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
1999 (UNAUDITED) FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Dollar amounts in millions, except per-share data
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
------- ------- ------- -------
<S> <C> <C> <C> <C>
Dollar amounts in millions, except per-share data
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
Page 35 of 36
<PAGE> 57
RECONCILIATION OF QUARTERLY DATA
(Dollar amounts in million, except per-share data)
<TABLE>
<CAPTION>
Income Before
Net Gross Cumulative Effect Net
Sales Profit of Accounting 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.
Page 36 of 36
