FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From to
_______________________________________________________
Commission File Number 1-4147
PHARMACIA & UPJOHN, INC.
(Exact name of registrant as specified in its charter)
Delaware 98-0155411
(State of incorporation) (I. R. S. Employer
Identification No.)
Pharmacia & Upjohn Company, 7000 Portage Road, Kalamazoo, MI 49001
(Address of principal executive offices) (Zip Code)
Registrant's telephone number 616/833-4000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding twelve months, and (2) has been subject
to such filing requirements for the past 90 days. YES X NO
The number of shares of Common Stock, $1 Par Value, outstanding as of
May 1, 1997 was 507,538,271.
Page 1 of 19 pages
The exhibit index is set forth on page 14.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
PHARMACIA & UPJOHN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
For the Three Months Ended March 31
(All U.S. dollar amounts in millions, except per-share data)
Unaudited
----------------------
1997 1996
---------- ----------
Net sales $ 1,635 $ 1,740
Other revenue 27 17
---------- ----------
Operating revenue 1,662 1,757
Cost of products sold 503 503
Research and development 283 300
Marketing, administrative and other 602 629
Restructuring charges - 257
Merger costs - 22
---------- ----------
Operating income 274 46
Interest income 29 49
Interest expense (7) (20)
All other, net (2) (1)
---------- ----------
Earnings before income taxes 294 74
Provision for income taxes 100 24
---------- ----------
Net earnings 194 50
Dividends on preferred stock (net of tax) 3 3
---------- ----------
Net earnings on common stock $ 191 $ 47
========== ==========
Net earnings per common share:
Primary $.37 $.09
==== ====
Fully diluted $.37 $.09
==== ====
See accompanying notes.
<PAGE>
PHARMACIA & UPJOHN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31
(All U.S. dollar amounts in millions)
Unaudited
----------------------
1997 1996
------- -------
Net cash provided by operations $206 $ 91
-------- --------
Cash provided (required) by investment activities:
Additions of properties (105) (113)
Proceeds from sales of investments 339 733
Purchase of investments (242) (507)
Other (13) (1)
-------- --------
Net cash (required) provided by investment activities (21) 112
-------- --------
Cash provided (required) by financing activities:
Repayment of debt (6) (18)
Payments of ESOP debt (12) (8)
Debt maturing in three months or less (net) 273 (11)
Dividends paid to shareholders (142) (141)
Purchase of treasury stock (20) (33)
Proceeds from issuance of stock 7 53
Other 7 3
-------- --------
Net cash provided (required) by financing activities 107 (155)
-------- --------
Effect of exchange rate changes on cash (40) 2
-------- --------
Net change in cash and cash equivalents 252 50
Cash and cash equivalents, beginning of year 641 841
-------- --------
Cash and cash equivalents, end of period $893 $891
======== ========
See accompanying notes.
<PAGE>
PHARMACIA & UPJOHN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(All U.S. dollar amounts in millions)
March 31, December 31,
1997 1996
----------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 893 $ 641
Short-term investments 565 696
Trade accounts receivable, less allowance
of $96 (1996: $95) 1,577 1,705
Inventories 1,005 1,012
Other current assets 842 841
----------- ---------
Total current assets 4,882 4,895
----------- ---------
Long-term investments 480 512
----------- ---------
Goodwill and other intangible assets, net 1,380 1,522
----------- ---------
Properties, net 3,463 3,602
----------- ---------
Other noncurrent assets 675 642
----------- ---------
Total assets $10,880 $11,173
=========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt, including current
maturities of long-term debt $ 501 $ 235
Other current liabilities 2,034 2,268
----------- -----------
Total current liabilities 2,535 2,503
----------- -----------
Long-term debt and guarantee of ESOP debt 808 823
----------- -----------
Other noncurrent liabilities 1,559 1,606
----------- -----------
Shareholders' equity:
Preferred stock, one cent par value;
authorized 100,000,000 shares; issued
Series A convertible 7,091 shares
(1996: 7,125 shares) at stated value 286 287
Common stock, one cent par value;
authorized 1,500,000,000 shares, issued
508,420,497 shares (1996: 508,500,633 shares) 5 5
Capital in excess of par value 1,465 1,457
Retained earnings 5,656 5,603
Currency translation adjustments (1,155) (855)
Other shareholders' equity (279) (256)
----------- -----------
Total shareholders' equity 5,978 6,241
----------- -----------
Total liabilities and shareholders' equity $10,880 $11,173
=========== ===========
See accompanying notes.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
(All U.S. dollar amounts in millions, except per-share data)
A - INTERIM CONSOLIDATED FINANCIAL STATEMENTS:
The consolidated financial information presented herein is unaudited, other
than the condensed consolidated balance sheet at December 31, 1996, which is
derived from audited financial statements. The interim financial statements
and notes thereto do not include all disclosures required by generally
accepted accounting principles and should be read in conjunction with the
financial statements and notes thereto included in the company's latest annual
report on Form 10-K.
In the opinion of management, the interim financial statements reflect all
adjustments of a normal recurring nature necessary for a fair statement of the
results for interim periods. The current period's results of operations are
not necessarily indicative of results that ultimately may be achieved for the
year.
B - INVENTORIES:
March 31, December 31,
1997 1996
--------- ------------
Estimated Replacement Cost
(FIFO Basis):
Pharmaceutical and Other Finished Products $ 473 $ 437
Raw Materials, Supplies and Work-in-Process 693 726
---------- ----------
1,166 1,163
Less Reduction to LIFO Cost (161) (151)
---------- ----------
$1,005 $1,012
========== ==========
Inventories valued on the LIFO method had an estimated replacement cost (FIFO
basis) of $445 at March 31, 1997, and $410 at December 31, 1996.
C - LITIGATION:
The company is involved in a number of legal and environmental proceedings.
These include a substantial number of product liability suits claiming damages
as a result of the use of the company's products, including a number of cases
involving Halcion; administrative and judicial proceedings at approximately 50
"Superfund" sites; and site cleanup at the company's discontinued industrial
chemical operations.
While it is not possible to predict or determine the outcome of legal actions
brought against the company, or the ultimate cost of environmental matters,
the company continues to believe that the unaccrued costs and liabilities
associated with such matters will not have a material adverse effect on the
company's consolidated financial position, and unless there is a significant
deviation from the historical pattern of resolution of these issues, there
should not be a material adverse effect on the company's results of operations
or liquidity.
The company is a party along with a number of other defendants (both
manufacturers and wholesalers) in several federal civil antitrust lawsuits,
some of which have been or are in the process of being consolidated and
transferred to the Federal District Court for the Northern District of
Illinois for purposes of discovery. These suits, brought by independent
pharmacies and chains, generally allege unlawful conspiracy, price
discrimination and price fixing and, in some cases, unfair competition, and
specifically allege that the company and the other named defendants violated
the following: (1) the Robinson-Patman Act by giving substantial discounts to
hospitals, nursing homes, mail-order pharmacies and health maintenance
organizations ("HMOs") without offering the same discounts to retail
drugstores, and (2) Section I of the Sherman Antitrust Act by entering into
illegal vertical combination with other manufacturers and wholesalers to
restrict certain discounts and rebates so they benefited only favored
customers. The Federal District Court for the Northern District of Illinois
has certified a class consisting of retail pharmacies, and the same court has
pending before it a suit with approximately 2,500 named retail pharmacies as
plaintiffs. The suits seek treble damages and an injunction prohibiting the
alleged illegal practices. Thirteen of the twenty-seven pharmaceutical
company defendants (not including the company) have reached settlement
agreements with the plaintiffs in the class action pending in the Northern
District of Illinois for amounts ranging from $10 to $60. These settlements
were approved by the court in 1996. The company, together with the remaining
settling and nonsettling defendants, are appealing to the United States Court
of Appeals for the Seventh Circuit from certain of the trial judge's orders.
Actions raising claims similar to the federal lawsuits have been brought on
behalf of retail drugstores and/or consumers in a number of state courts,
including those in Alabama, Arizona, California, Colorado, District of
Columbia, Florida, Kansas, Maine, Michigan, Minnesota, Mississippi, New
Mexico, New York, Tennessee, Washington and Wisconsin. The California State
court has certified a class of consumers seeking damages resulting from the
same alleged conspiracy by the defendant pharmaceutical companies. In
February 1997, the District of Columbia judge granted the plaintiffs' motion
for class certification in part, and the parties have submitted briefs with
regard to class definition and notice issues.
The U.S. Federal Trade Commission has instituted an inquiry into whether
pharmaceutical companies, including the company, may have violated federal
antitrust laws in connection with establishing prices and rebates. The
company believes that any potential liability above amounts accrued will not
have a material adverse effect on the company's consolidated financial
position or the company's results of operations or liquidity.
D - RESTRUCTURING CHARGES AND MERGER COSTS:
Since the fourth quarter of 1995, the company has recorded restructuring
accruals that included estimated costs of $610 associated with the November
1995 merger of the former Pharmacia AB and the former Upjohn Company. The
accruals reflected the planned reduction of approximately 4,350 positions, the
elimination of duplicate facilities, and other exit costs related to the
merger. Expenditures associated with these accruals are expected to be
substantially completed by the end of 1997. Of the amount originally accrued,
approximately $150 remains as current and noncurrent liabilities. There have
been no adjustments to previously recorded accruals.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations:
FINANCIAL REVIEW
Overview of Consolidated Results
U.S. dollars in millions, except per-share data that are presented on a fully
diluted, after-tax basis:
Percent
1997 Change 1996
-------- ------- --------
Total Revenue $1,662 (5.4)% $1,757
Operating Income 274 * 46**
Net Earnings 194 * 50**
Fully Diluted Earnings per Common Share $0.37 * $0.09**
*Not a meaningful comparison
**Inclusive of restructuring and merger costs
When comparing operating performance for the first quarter of 1997 to that of
1996, merger-related expenses should be considered. First quarter 1996
operating performance was significantly diminished by restructuring and merger
related costs of $279 million ($0.35 per share). Restructuring charges of
$257 million ($0.31 per share) recorded in the first quarter of 1996 resulted
primarily from work force reductions associated with the merger. Additional
costs totaling $22 million ($.04 per share) were incurred to effect the
merger. Excluding these 1996 charges from the analysis, both operating income
and earnings per share fell 16 percent in the first quarter of 1997. A 6
percent decline in sales coupled with a relatively smaller decrease in
operating expenses limited overall performance in the first three months of
1997.
NET SALES
Worldwide sales fell 6 percent to $1.6 billion in the first quarter of 1997
compared to $1.7 billion in the same period in 1996. Sales declined as a
result of combined volume and price (activity) by 1 percent while currency
exchange rate fluctuations reduced sales by 5 percent. Sales performance by
region, based on the markets in which sales were made to customers, is
provided in the table below (in millions of U.S. dollars):
Percent
Three months ended March 31, 1997 Change 1996
-------- ------- --------
European Markets $ 734 ( 9.9)% $ 814
United States Market 504 (6.3) 538
Asia Pacific Markets 298 7.5 277
Other Markets 99 (10.3) 111
-------- --------
Consolidated Sales $1,635 (6.1)% $1,740
-------- --------
U.S. sales of $504 million declined 6 percent in the quarter-to-quarter
comparison largely due to declines in over-the-counter (OTC) product sales,
down because of significant prelaunch activities in 1996. In addition, strong
sales growth in new prescription pharmaceutical products in the U.S. was
offset by weak performance in existing product lines due to both generic
competition and fourth quarter 1996 sales incentives. Total sales outside the
U.S. were $1.1 billion, down 6 percent from $1.2 billion in 1996. Sales in
Japan and Europe were particularly adversely affected in the first three
months of 1997 during which time the U.S. dollar continued to strengthen
against the yen and all major European currencies except the British pound.
The company's top eight markets based on percentage of total 1997 sales were
the U.S. (31%), Japan (11%), Italy (7%), Germany (7%), the U.K. (5%), France
(4%), Sweden (4%), and Spain (3%). Sales in Japan increased overall with
relatively large activity gains partially offset by the negative effect of
currency exchange rate changes. Activity gains in Japan in 1997 were
partially attributable to reduced volumes in the prior year quarter in
anticipation of mandatory price decreases effective in the second quarter of
1996. Sales in the top six European markets mentioned above declined due to
significant unfavorable exchange rate fluctuations; 45 percent of the total
negative exchange impact on consolidated sales occurred in these markets. In
addition, health care cost containment measures including increased patient
insurance copayments, budgetary pressure on physicians' prescribing behavior,
and price reductions further reduced sales in Europe, most notably in Germany
and Sweden.
PRODUCT SALES
The table below provides a first quarter comparison of consolidated net sales
by major product group:
U.S. dollars in millions Net Percent
Percent Change
Three months ended March 31, 1997 Change Excl.Fx* 1996
------ ------- ------- ------
Infectious Disease $ 152 ( 6.9)% (4.1)% $ 163
Metabolic Disease 165 (7.1) 0.2 178
Inflammatory 133 ( 1.9) 3.4 135
Central Nervous System 107 (18.4) (12.8) 131
Oncology 169 28.5 35.0 132
Women's Health/Urology 136 (16.9) (15.3) 163
Ophthalmology 78 25.3 32.3 62
Other Prescription Pharmaceuticals 134 (13.0) (7.6) 154
Nutrition 97 (11.4) (6.0) 110
Consumer Health Care 153 (17.8) (14.7) 186
Animal Health 86 0.2 2.6 86
Chemical and Contract Manufacturing 70 (5.7) (3.9) 74
------ ------
Total Pharmaceuticals 1,480 ( 6.0) (1.5) 1,574
Diagnostics 53 ( 9.7) 0.3 59
Biotech** 102 ( 4.8) 3.4 107
------ ------
Consolidated Net Sales $1,635 ( 6.1)% (1.2)% $1,740
====== ======
*Represents percent change from the prior year excluding the effects of
foreign currency exchange rate changes.
**1996 Biotech sales include Biacore sales of $6 million. Biacore was a
wholly-owned subsidiary until December 1996 when the company sold 59
percent of its holding.
New products achieved strong sales growth led by Camptosar with $41 million of
sales recorded in the first three months of 1997. Reported in Oncology,
Camptosar, a treatment for refractory colorectal cancer, was launched in the
U.S. in the third quarter of 1996. Xalatan, also launched in the third
quarter of 1996 in Sweden, Switzerland, and the U.S., achieved substantial
sales growth in 1997 with $29 million for the quarter. An intraocular
pressure-lowering medication for the treatment of glaucoma, Xalatan is
reported in Ophthalmology. In addition, the following three new products were
launched in the first quarter of 1997: Cabaser, for Parkinson's disease,
launched in Europe; Dostinex, a treatment for hyperprolactinemic disorders,
launched in the U.S.; and Estring, an estrogen replacement therapy for
postmenopausal women, launched in the United States.
Established products Genotropin, Cleocin, Xanax, and Medrol continued to
contribute significantly to consolidated sales providing 17 percent of 1997
first quarter sales. These products are reported in the Metabolic Disease,
Infectious Disease, Central Nervous System, and Inflammatory product groups,
respectively.
Genotropin, a growth hormone, achieved sales of $90 million, up 1 percent over
the first quarter of 1996. Excluding the adverse effects of foreign currency
exchange fluctuations, sales increased by 10 percent. An unfavorable exchange
effect reduced solid activity gains for Genotropin in the Asia/Pacific
markets, while both a negative exchange effect and lower activity decreased
sales in Europe. In Japan, anticipation of mandatory price decreases
depressed sales in the first quarter of 1996 and contributed to the
comparative activity gains for Genotropin in Asia/Pacific markets in 1997.
The antibiotic Cleocin (Dalacin outside the U.S.) and Xanax, the anti-anxiety
agent, each contributed $65 million to worldwide sales although sales of both
fell below same period prior year levels. Cleocin sales fell 2 percent
overall despite an 18 percent increase in U.S. sales. Non-U.S. sales of
Cleocin were down $4 million, a drop attributable to a decline in Europe where
an unfavorable exchange rate effect coupled with an activity decrease due
largely to increasing generic competition reduced sales by 15 percent.
Worldwide, Xanax sales were down $10 million. Although Xanax demonstrated
strong growth in several European countries, total activity gains of 5 percent
in Europe were more than offset by an adverse exchange effect of 8 percent.
Increasing generic competition in the U.S. in combination with strong fourth
quarter 1996 sales incentives kept U.S. sales of Xanax well below first
quarter 1996 levels.
Sales of Solu-Medrol, the injectable steroid, and other Medrol products were
$62 million in the first quarter, down 2 percent from the same period last
year. Excluding the unfavorable effect of exchange rate changes, sales grew
by 2 percent. U.S. sales rose 23 percent while non-U.S. sales fell by $4
million, or 7 percent. In both Asia/Pacific and European markets, solid
activity gains were offset by the negative effect of exchange fluctuations.
Strong performers in the quarter-to-quarter comparison of sales included
Fragmin, Caverject, and Vantin, reported in Metabolic Disease, Women's
Health/Urology, and Infectious Disease, respectively. Fragmin, a treatment
for the prevention of blood clots in connection with surgery, achieved sales
of $39 million in the first quarter, an increase of 35 percent over the prior
year. Sales of Caverject, the treatment for male impotence, were $18 million
for the first quarter, up 37 percent over the same period in 1996. Caverject
experienced double-digit growth in the U.S. and throughout top markets in
Europe. A strong flu season in the U.S. coupled with first quarter sales
incentives drove up sales of Vantin, a broad-spectrum oral antibiotic, by 29
percent with $29 million recorded in the first quarter of 1997.
In addition to intense generic competition, factors previously discussed
exerting downward pressure on sales in Asia/Pacific and European markets
lowered sales of Pharmorubicin, Adriamycin, and Healon, all products sold
primarily in these markets. Sales of Pharmorubicin and Adriamycin, both
cytostatic agents for the treatment of solid tumors and leukemias, fell by 5
percent and 31 percent, respectively, in the first quarter of 1997 compared to
the same period in 1996. Disregarding the impact of currency exchange
fluctuations, sales of Pharmorubicin advanced by 4 percent over first quarter
1996. Healon sales declined by 22 percent to $32 million; 7 percent of this
drop was due to an unfavorable exchange effect. Healon, reported in
Ophthalmology, is a viscoelastic used for cataract surgery. Both
Pharmorubicin and Adriamycin are reported in Oncology.
In the U.S., generic competition and fourth quarter 1996 sales incentives
reduced sales of Micronase and Glynase. In the quarter-to-quarter comparison,
total sales of Micronase and Glynase, both oral anti-diabetes agents reported
in Metabolic Disease, fell by 51 percent to $22 million. U.S. fourth quarter
sales incentives also lowered 1997 sales of Depo-Provera which were $41
million, a drop of 16 percent. Depo-Provera, the injectable contraceptive, is
reported in Women's Health/Urology.
Sales of Consumer Health Care products were down 18 percent from the first
quarter of 1996. The 1996 first quarter sales reflected significant
prestocking in preparation for two second quarter U.S. OTC product launches.
Rogaine 2% solution for hair loss and Nicorette Gum, the treatment for smoking
cessation, were both introduced in the second quarter of 1996. U.S. sales of
Rogaine also have declined since the 1996 launch as a result of increased
competition from generics and private labels. Rogaine was sold as a
prescription product through the first quarter of 1996 and the prescription
sales amounts were included with the OTC amounts for purposes of these
comparisons. During the first quarter of 1997, Nicorette Gum, marketed by
SmithKline Beecham, was granted a three-year period of exclusivity in the
United States.
Other associated businesses continued to provide a solid base of sales to the
company. The 10 percent decline in Diagnostics sales was attributable to the
negative effects of foreign exchange and discontinued products which more than
offset activity gains. Sales of Diagnostics products were particularly
affected by the weakened yen as 37 percent of total sales in the first quarter
of 1997 were earned in Japan.
OTHER OPERATING REVENUE
The increase in other operating revenue over the first quarter of 1996 was due
to greater revenue earned from the company's agreement with Solvay & Cie to
jointly market Luvox, a treatment for obsessive-compulsive disorder.
COSTS AND EXPENSES
Consolidated operating expenses, stated as a percent of net sales, were as
follows:
First quarter ended March 31, 1997 1996
----- -----
Cost of Products Sold 30.8% 28.9%
Research and Development 17.3 17.2
Marketing, Administrative and Other 36.9 36.2
Restructuring Charges - 14.8
Merger Costs - 1.3
Operating Income 16.7 2.6
Cost of goods sold increased as a percentage of sales primarily due to higher
production start-up expenses for new products, project expenses incurred to
achieve long-term production efficiencies, timing of project spending, and
unfavorable manufacturing variances. The increase was partially offset by
favorable effects of foreign currency fluctuations.
Research and development (R&D) spending in the first quarter of 1997 remained
relatively constant as a percentage of net sales but decreased 6 percent due
largely to favorable foreign exchange effects in Sweden and Italy. Spending
for the first quarter of 1997 supported the product filing for Detrusitol
(tolterodine tablets), a treatment for urinary incontinence, in the United
States.
The small increase in marketing, administrative and other (MA&O) expense as a
percent of sales was due primarily to promotion of new prescription
pharmaceutical products in the U.S., launch and prelaunch activities in
Europe, additional promotion and distribution costs for Fragmin in Japan, and
increased advertising and promotion of OTC pharmaceutical products. This
increased spending was offset by the favorable effects of foreign currency
fluctuations resulting in an overall decrease in MA&O expense of $27 million
from the first quarter of 1996.
The company did not incur additional merger-related restructuring charges in
the first three months of 1997. Merger-related restructuring charges recorded
in the first quarter of 1996 totaled $257 million, reflecting the planned
reduction of approximately 1,750 positions. Total restructuring charges
associated with the merger were $610 million, recorded in 1995 and 1996.
These charges reflected the planned reduction of approximately 4,350
positions. As of March 31, 1997, approximately 4,280 employees had left the
company under this program. Cash spending in the first quarter of 1997 for
this program totaled $50 million, a decrease from the first quarter of 1996
spending of $75 million. Approximately $150 million remained accrued as of
March 31, 1997, as current and noncurrent liabilities of the company. These
remaining reserves include certain accruals for pensions and other employee
benefits that will be expended over the next several years.
Merger expenses of $22 million also recorded in the first quarter of 1996
consisted largely of costs related to certain nonrecurring organizational
activities, establishing the corporate identity for the new company, and
various other costs of combining the two companies.
NONOPERATING INCOME AND EXPENSE
The favorable interest income to interest expense relationship continued to
contribute to first quarter 1997 earnings. Declines in both interest income
and interest expense for the quarter were primarily due to the termination of
certain borrowing arrangements in Europe in the third quarter of 1996 and
lower interest rates, primarily in Europe. An increase in short-term debt
occurred late in the first quarter resulting in minimal effect on interest
expense for the period. Continued reductions of short-term investments also
contributed to lower interest income for the period.
INCOME TAXES
The estimated annual effective tax rate for 1997 is 34 percent. The effective
tax rate for 1996 was 35 percent excluding the tax benefits related to
nonrecurring charges (33 percent with nonrecurring charges). The lower
recurring rate is the result of increased earnings in jurisdictions with lower
tax rates.
FINANCIAL CONDITION
March 31, December 31,
1997 1996
--------- ------------
Working Capital (U.S. dollars in millions) $2,347 $2,392
Current Ratio 1.93 1.96
Debt to Total Capitalization 17.9% 14.5%
Working capital fell slightly with the corresponding decrease in the current
ratio due to reductions in short-term investments and accounts receivable.
The increase in the ratio of debt to capitalization was the result of an
increase in short-term debt late in the first quarter of 1997.
The company's net financial asset position, presented below, declined from the
prior year end due to net reductions in both short and long-term investments.
Net increases in short-term debt were offset by increases in cash and cash
equivalents.
March 31, December 31,
1997 1996
--------- ------------
Cash, Equivalents and Investments $1,938 $1,849
Short-Term and Long-Term Debt 1,309 1,058
--------- ------
Net Financial Assets $ 629 $ 791
======== ======
Net cash provided by first quarter 1997 operations increased to $206 million
from $91 million for the first quarter of 1996. The increase was due to the
decrease in spending on restructuring, as noted above; an increase in income
taxes payable; and a decrease in accounts receivable.
Additions of property, plant and equipment totaling $105 million in the first
three months of 1997 primarily represented expansion of bulk chemical
production facilities in Ireland and continued development of manufacturing
centers of excellence in the U.S., Belgium, and Sweden. Reductions in both
short-term and long-term investments as well as increases in short-term debt
late in the quarter represented major cash inflows during the quarter, while
capital spending and payment of dividends represented major cash outflows.
The company's future cash provided by operations and borrowing capacity are
expected to cover normal operating cash flow needs, planned capital
acquisitions, and dividend payments that may be approved by the board of
directors for the foreseeable future.
The company utilizes forward exchange contracts to mitigate the effect of
currency exchange rate fluctuations on certain intercompany and third party
transactions. The company hedges net recorded currency transaction exposures
on certain existing assets and liabilities as well as net anticipated currency
transactions. The anticipated transaction hedging activities seek to protect
operating margins and cash flows from the potential adverse effects of
currency exchange rate fluctuations by offsetting the gains and losses on the
instruments with the losses and gains of the underlying anticipated cash
flows. Because forward contracts used to hedge anticipated transaction
exposures are marked-to-market each period, but the anticipated transactions
have not been recorded, the timing of recognition of the related gains and
losses will not match.
LITIGATION
Various suits and claims arising in the ordinary course of business, primarily
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
is also involved in several administrative and judicial proceedings relating
to environmental concerns, including actions brought by the U.S. Environmental
Protection Agency and state environmental agencies for remedial cleanup at
approximately 50 sites and site cleanup at the company's discontinued
industrial chemical operations. The company's estimate of the ultimate cost
to be incurred in connection with these environmental situations could change
due to uncertainties at many sites with respect to potential cleanup remedies,
the estimated cost of cleanup, and the company's ultimate share of a site's
cost.
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 to be 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; and 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 results of operations or liquidity.
The company is a party, along with many other U.S. drug manufacturers and
wholesalers, in numerous related federal and state civil antitrust lawsuits
brought by U.S. independent and chain retail pharmacies and consumers. These
suits claim violations of antitrust and pricing laws as a result of the
defendants providing discounts and rebates to allegedly favored managed care
customers that were not offered to the plaintiffs. Several of the suits are
class actions. The federal cases have been consolidated in federal court in
Chicago, Illinois. The company believes it has meritorious defenses, and
although potential liability cannot be presently estimated, a majority of the
defendants in this class action (not including the company) have agreed to $10
million to $60 million settlement of claims per defendant in this action. The
company believes that any potential liability above amounts accrued will not
have a material adverse effect on the company's consolidated financial
position or the company's results of operations or liquidity.
OTHER ITEMS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No.128, Earnings per Share, effective
for fiscal periods ending after December 15, 1997. Earlier application is not
permitted. The statement simplifies the calculation of earnings per share and
requires presentation of basic and diluted earnings per share in lieu of
primary and fully diluted earnings per share. The company anticipates the
adoption of SFAS No.128 will not have a material impact on its earnings per
share calculations.
The company is currently in the process of developing its manufacturing
facility rationalization program intended to consolidate and reduce
manufacturing facilities by 40 percent worldwide. The plan is expected to be
finalized in the second quarter of 1997.
FORWARD-LOOKING INFORMATION
Certain statements contained in this report, such as statements concerning the
company's anticipated financial or product performance, its ability to pay
dividends, and other non-historical facts, are "forward-looking statements"
(as such term is defined in the Private Securities Litigation Reform Act of
1995). Since these statements are based on factors that involve risks and
uncertainties, actual results may differ materially from those expressed or
implied by such forward-looking statements. Such factors include, among
others: management's ability to make further progress under the company's
merger integration plan; the company's ability to successfully market new and
existing products in new and existing domestic and international markets; the
success of the company's research and development activities and the speed
with which regulatory authorizations and product rollouts may be achieved;
fluctuations in foreign currency exchange rates; the effects of the company's
accounting policies and general changes in generally accepted accounting
practices; the company's exposure to product liability lawsuits and
contingencies related to actual or alleged environmental contamination; the
company's exposure to antitrust lawsuits; domestic and foreign social, legal
and political developments, especially those relating to healthcare reform and
product liabilities; general economic and business conditions; the company's
ability to attract and retain current management and other employees of the
company; and other risks and factors detailed in the company's other
Securities and Exchange Commission filings, including its Proxy Statement and
Annual Report on Form 10-K for the year ended December 31, 1996.
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a)(i) Exhibit A - Report of Independent Accountants (page 16).
(a)(ii) Exhibit 10 - J.L. Zabriskie Separation Agreement (EDGAR
filing only).
(a)(iii) Exhibit 11 - Statement regarding computation of earnings per
share (page 17).
(a)(iv) Exhibit 12 - Ratio of Earnings to Fixed Charges (page 18).
(a)(v) Exhibit 15 - Awareness of Coopers & Lybrand L.L.P. (page
19).
(a)(vi) Exhibit 27 - Financial Data Schedule (EDGAR filing only).
(b) Form 8-K - On February 25, 1997, the company filed Form 8-K
announcing the action of the Board of Directors that day to
declare a dividend of one right for each outstanding share
of common stock of the company held of record at the close
of business on March 7, 1997, or issued thereafter. The
rights are issued pursuant to the Stockholder Protection
Rights Agreement, dated March 4, 1997 included in the Form
8-K filing, between the company and Harris Trust & Savings
Bank, as Rights Agent.
<PAGE>
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 & UPJOHN, INC.
(Registrant)
DATE: May 9, 1997 /S/R. C. SALISBURY
R. C. Salisbury
Executive Vice President,
Finance and Administration
and Chief Financial Officer
DATE: May 9, 1997 /S/K. M. CYRUS
K. M. Cyrus
Senior Vice President,
General Counsel and Secretary
<TABLE>
EXHIBIT 11
PHARMACIA & UPJOHN, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE - PRIMARY
(U.S. dollars in millions, except per-share data)
<CAPTION>
Three Months Ended
March 31,
---------------------
1997 1996
----- -----
<S> <C> <C>
Net earnings $194.1 $ 49.9
Dividends on preferred stock, net of tax 3.1 3.2
------ ------
Net earnings on common shares - primary $191.0 $ 46.7
====== ======
Average number of common shares outstanding 508.4 508.0
Number of common shares issuable assuming
exercise of stock options 2.9 4.3
Contingently issuable incentive common shares .7 .5
------ ------
Total shares - primary 512.0 512.8
====== ======
Primary earnings per common share $.37 $.09
====== ======
COMPUTATION OF EARNINGS PER COMMON SHARE - FULLY DILUTED(1)
Net earnings $194.1 $ 49.9
Less ESOP contribution assumed to be required if
preferred shares are converted into common shares 1.1 1.1
Less tax benefit of preferred stock dividend on
allocated shares .3 .3
Plus tax benefit assumed on common stock dividend .2 .2
------ ------
Net earnings on common shares - fully diluted $192.9 $ 48.7
====== ======
Average number of common shares outstanding 508.4 508.0
Number of common shares issuable assuming
exercise of stock options 2.9 4.3
Contingently issuable incentive common shares .7 .5
Number of common shares issuable assuming
conversion of preferred shares 10.3 10.5
------ ------
Total shares - fully diluted 522.3 523.3
====== ======
Fully diluted earnings per common share $.37 $.09
====== ======
</TABLE>
(1) This calculation is submitted in accordance with the regulations of the
Securities and Exchange Commission although not required by APB Opinion No. 15
because it results in dilution of less than 3%.
<TABLE>
EXHIBIT 12
PHARMACIA & UPJOHN, INC. AND CONSOLIDATED SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(U.S. dollar amounts in millions)
<CAPTION>
Three Months Year Ended December 31,
Ended
March 31, 1997 1996 1995 1994 1993 1992
-------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Earnings from continuing
operations before income taxes $ 294 $ 838 $1,136 $1,271 $ 778 $ 947
Less: Equity in undistributed
net income (loss) of companies
owned less than 50% 1 5 7 8 8 6
-------- -------- --------- --------- --------- ---------
293 833 1,129 1,263 770 941
Add: Amortization of previously
capitalized interest 3 11 10 8 6 4
Fixed charges included in the above:
Interest and amortization of debt
expense 14 82 121 139 209 162
Rental expense representative
of an interest factor 9 37 35 35 32 35
-------- -------- --------- --------- --------- ---------
Earnings from continuing operations
before income taxes and fixed
charges 319 $ 963 $1,295 $1,445 $1,017 $1,142
======== ======== ========= ========= ========= =========
Interest incurred and amortization
of debt expense $ 22 $ 115 $ 149 $ 164 $ 234 $ 178
Rental expense representative of an
interest factor 9 37 35 35 32 35
-------- -------- --------- --------- --------- ---------
Total fixed charges 31 $ 152 $ 184 $ 199 $ 266 $ 213
======== ======== ========= ========= ========= =========
Ratio of earnings to fixed charges 10.21 6.33 7.05 7.24 3.82 5.35
===== ==== ==== ==== ==== ====
</TABLE>
EXHIBIT 15
Securities & Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: Pharmacia & Upjohn, Inc.
Registration on Form 10-Q
We are aware that our report dated April 26, 1997, on our review of interim
financial information of Pharmacia & Upjohn, Inc. and Subsidiaries for the
three month periods ended March 31, 1997 and 1996, included in this Form 10-Q
is incorporated by reference in the Company's prospectus in Form S-8
Registration Statement (No. 33-63903) and the prospectus in Form S-8
Registration Statement (No. 333-03109). Pursuant to Rule 436(c) under the
Securities Act of 1933, this report should not be considered a part of the
registration statements prepared or certified by us within the meaning of
Sections 7 and 11 of the Act.
Coopers & Lybrand L.L.P.
Chicago, Illinois
May 9, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE EARNINGS STATEMENT AND THE BALANCE SHEET AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 893
<SECURITIES> 0
<RECEIVABLES> 1,673
<ALLOWANCES> 96
<INVENTORY> 1,005
<CURRENT-ASSETS> 4,882
<PP&E> 6,045
<DEPRECIATION> 2,582
<TOTAL-ASSETS> 10,880
<CURRENT-LIABILITIES> 2,535
<BONDS> 568<F1>
0
286
<COMMON> 5
<OTHER-SE> 5,687
<TOTAL-LIABILITY-AND-EQUITY> 10,880
<SALES> 1,635
<TOTAL-REVENUES> 1,662
<CGS> 503
<TOTAL-COSTS> 503
<OTHER-EXPENSES> 283<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7
<INCOME-PRETAX> 294
<INCOME-TAX> 100
<INCOME-CONTINUING> 194
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 194
<EPS-PRIMARY> .37
<EPS-DILUTED> .37
<FN>
<F1>EXCLUDES COMPANY'S GUARANTEE OF ESOP DEBT: 240
<F2>ONLY INCLUDES R&D EXPENSE.
</FN>
</TABLE>
EXHIBIT A
INDEPENDENT ACCOUNTANT'S REPORT
To the Shareholders and
Board of Directors
Pharmacia & Upjohn, Inc.
We have reviewed the condensed consolidated balance sheet of Pharmacia &
Upjohn, Inc. and Subsidiaries as of March 31, 1997, and the related
condensed consolidated statements of earnings and cash flows for the
three months then ended. These financial statements are the
responsibility of Pharmacia & Upjohn, Inc.'s management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical
procedures to financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
that an audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an opinion
regarding the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial
statements referred to above, for them to be in conformity with
generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet as of December 31,
1996, and the related consolidated statements of earnings, shareholders'
equity, and cash flows for the year then ended (not presented herein);
and in our report, dated February 26, 1997, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance
sheet as of December 31, 1996, is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it
has been derived.
Coopers & Lybrand L.L.P.
Chicago, Illinois
April 26, 1997
April 18, 1997
Dr. John L. Zabriskie
7051 Verdi Way
Naples, Florida 34108
Dear Dr. Zabriskie:
This letter agreement (the "Agreement") will confirm our agreement
regarding your separation from Pharmacia & Upjohn Management Company Ltd. (the
"Company") and its affiliated companies.
1. Termination Date. The effective date of your separation from all
positions and employment with the Company and its Affiliates (as defined in
paragraph 13), including as employee, officer and member of the Board of
Directors is January 20, 1997, which is your "Termination Date" for purposes
of this Agreement.
2. Payments and Benefits. You shall be entitled to compensation and
other payments and benefits in accordance with Exhibit 1, which is attached
to, and forms a part of this Agreement.
3. No Mitigation or Offset. The obligation of the Company and its
Affiliates to make any payments provided for under this Agreement shall not
(except as otherwise specifically provided herein) be affected by any set-off,
counterclaim, recoupment, defense or other claim, right or action which the
Company or its Affiliates may have against you or others. In no event shall
you be obligated to seek other employment or take other action by way of
mitigation of the amounts payable to you under any of the provisions of this
Agreement, and such amounts shall not be reduced (except as otherwise
specifically provided herein) whether or not you obtain other employment.
4. Assistance with Claims. You agree that you will assist the Company
and its Affiliates in the defense of any third-party claims that may be made
against the Company and its Affiliates arising out of activities for the
Company and its Affiliates for which you had responsibility, and will assist
the Company and its Affiliates in the prosecution of any such claims that may
be made by the Company or any Affiliate. The Company will consult with you,
and make reasonable efforts to schedule such assistance so as not to
materially disrupt your business and personal affairs. You agree, unless
precluded by law, to promptly inform the Company if you are asked to
participate (or otherwise become involved) in any lawsuits involving such
claims that may be filed against the Company or any Affiliate. You also
agree, unless precluded by law, to promptly inform the Company if you are
asked to assist in any investigation, whether governmental or private, of the
Company or any Affiliate (or their actions) regardless of whether a lawsuit
has then been filed against the Company or any Affiliate with respect to such
investigation. The Company agrees to reimburse you for all of your reasonable
out-of-pocket expenses associated with any such assistance at any time,
including travel expenses, and, for services provided after December 31, 1998,
to pay you a fee of $2,000 per day (or a pro rata fee for a portion of a day)
for providing such services, such fee to be paid promptly following your
submission of a statement.
5. Competition. You agree that for the period beginning on your
Termination Date and ending on the 24-month anniversary of your Termination
Date, you will not, without the express written consent of the Compensation
Committee of the Board of Directors of Pharmacia & Upjohn, Inc. (the "Parent
Company"), which consent shall not be unreasonably withheld, commence
employment with, be employed by, or provide substantial consulting services
to, any competing pharmaceutical company (except companies where sales from
pharmaceutical products, which exclude vaccines, devices, and diagnostic
products as they are generally used in the pharmaceutical industry, constitute
less than 20% of the total sales). In the event that you engage in the
conduct proscribed by this paragraph 5, you agree to repay the separation
benefit (which is 2.5 times the sum of your annual rate of base salary plus
your target annual incentive bonus) provided to you under paragraph 1-16 of
Exhibit 1 of this Agreement, and all outstanding stock options (as described
in paragraph 1-9 of Exhibit 1 and Exhibit 8) then held by you shall expire not
later than three months following your commencement of such employment or
provision of such services.
6. Confidential Information. Except as may be required by the lawful
order of a court or agency of competent jurisdiction, or except to the extent
you have express written authorization from the Company, you agree that you
(i) will keep secret and confidential indefinitely, (ii) will not disclose,
either directly or indirectly, to any other person, firm, or business entity,
and (iii) will not use in any way, any "Confidential Information" concerning
the Company and its Affiliates which was acquired by or disclosed to you
during the course of your employment with the Company and any of its
Affiliates, or during the period in which you provide claims information to
the Company and its Affiliates in accordance with paragraph 4. "Confidential
Information" means non-public information about the Company and its
Affiliates, and includes, without limitation, non-public information relating
to the Company's and Affiliates' customers, equipment, processes, costs,
operations and methods, whether past, current, or planned, as well as
knowledge and data relating to processes, machines, compounds and
compositions, formulae, business plans, marketing and sales information
originated, owned, controlled or possessed by the Company.
7. Disparagement.
(a) You agree that for the period beginning on your Termination Date and
ending on the five-year anniversary of your Termination Date, you will
not make any statement or disclosure that disparages the Company or its
Affiliates and is intended or reasonably likely to result in material
harm to the Company or its Affiliates; provided that the provisions of
this paragraph (a): (i) shall not apply to testimony as a witness,
compliance with other legal obligations, your assertion of or defense
against any claim of breach of this Agreement (including the Exhibits
thereto and the referenced plans and arrangements), or your statements
or disclosures to officers or directors of the Company or its
Affiliates, and (ii) shall not require you to make false statements or
disclosures.
(b) The Company agrees that for the period beginning on your Termination
Date and ending on the five-year anniversary of your Termination Date,
the Company will issue no statement that disparages you or would
reasonably result in material harm to you; provided that the provisions
of this paragraph (b): (i) shall not apply to testimony as a witness,
compliance with other legal obligations, assertion of or defense against
any claim of breach of this Agreement (including the Exhibits thereto
and the referenced plans and arrangements), or statements or disclosures
to you, (ii) shall not require false statements or disclosures to be
made; and (iii) shall not apply to statements substantially in the form
of Exhibit 2 of this Agreement. You and the Company will cooperate with
each other in any statements about your separation so as not to depart
materially from the statement set forth in such Exhibit 2.
8. Transition.
(a) You are required to execute the resignation letter set forth in Exhibit
3 of this Agreement.
(b) You agree to return to the Company forthwith any confidential documents
or material, or other property belonging to the Company, and to return
all writings, files, records, correspondence, notebooks, notes and other
documents and things (including any copies thereof) containing any
confidential information relating to the Company and the Affiliates,
provided that you shall be entitled to retain your personal notes,
diaries, rolodexes and other similar documents of a personal nature.
9. Indemnification. If you incur liability by reason of actions taken
by you on behalf of the Company while you were an officer or director of the
Company, or by reason of actions taken by you as required under paragraph 4 of
this Agreement, you shall be eligible for indemnification from the Company in
accordance with the terms of the Indemnification Agreement between you and the
Company dated February 7, 1996. In addition, you shall continue to be covered
under any directors and officers' liability insurance policy for your acts (or
non-acts) as an officer or directors of the Company to the extent the Company
provides such coverage for its former officers.
10. Non-Alienation. To the extent legally permitted, your interests
under this Agreement shall not be subject to the claims of your creditors, and
shall not otherwise be voluntarily or involuntarily assigned, alienated or
encumbered. Your obligations under this Agreement may not be assigned.
11. Amendment. This Agreement may be amended or canceled only by
mutual agreement of the parties in writing. So long as you live, no person,
other than the parties hereto or their affiliates, shall have any rights under
or interest in this Agreement or the subject matter hereof.
12. Successors. This Agreement shall not be terminated by any merger
or consolidation of the Company or the Parent Company or any transfer of all
or substantially all of the assets of the Company or the Parent Company. In
the event of any such merger, consolidation or transfer of assets, the
provisions of this Agreement shall be binding on the surviving or resulting
corporation or the person or entity to which such assets are transferred. The
Company agrees that concurrently with any merger, consolidation or transfer of
assets referred to in the foregoing provisions of this paragraph 12, it will
cause any successor or transferee unconditionally to assume all of the
obligations of the Company hereunder. This Agreement shall inure to the
benefit of and be enforceable by or against you or your personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If you should die while any amounts would be payable
to you hereunder had you continued to live, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Agreement
to such person or persons appointed in writing by you to receive such amounts
or, if no person is so appointed, to your estate; provided, however, that
nothing in this Agreement shall be construed to require payment to your
survivors of benefits under arrangements which, by their terms, are provided
only during your lifetime (including, without limitation, retirement annuity
benefits to the extent that they do not provide for survivor benefits, and
medical benefits provided only during your lifetime).
13. Affiliates. For purposes of this Agreement, the term "Affiliate"
means (a) any corporation, partnership or at any time thereafter, joint
venture or other entity which, as of your Termination Date, owns, directly or
indirectly, at least fifty percent of the voting power of all classes of stock
of the Company (or any successor to the Company) entitled to vote; and (b) any
corporation, partnership, joint venture or other entity in which, as of your
Termination Date or at any time thereafter, at least a fifty percent voting or
profits interest is owned, directly or indirectly, by the Company, by any
entity that is a successor to the Company, or by any entity that is an
Affiliate by reason of clause (a) next above (and shall include any
predecessor to any entity described in clause (a) or (b)). For purposes of
paragraph 4 (relating to assistance with claims), paragraph 5 (relating to
competition), paragraph 6 (relating to confidential information and non-
disclosure), paragraph 7 (relating to disparagement), the Company Release
(Exhibit 4), the Employee Release (Exhibit 5), the United Kingdom Agreement
(Exhibit 6), and the Confirmation of Legal Advice (Exhibit 7), the term
"Affiliate" shall also include any entity that would have been an "Affiliate"
by reason of the preceding sentence (including any successor to the assets or
business of any such Affiliate) at any time during the period of the your
employment by the Company.
14. Effect of Breach. You acknowledge that the Company could be
irreparably injured by your violation of paragraph 5, 6, 7, or 8 of this
Agreement, and you agree that the Company and its Affiliates, in addition to
any other remedies available to it for such breach or threatened breach, shall
be entitled to seek a preliminary injunction, temporary restraining order, or
other equivalent relief, restraining you from any actual or threatened breach
of paragraph 5, 6, 7, or 8 of this Agreement. The Company acknowledges that
you could be irreparably injured by its violation of paragraph 7 of this
Agreement, and the Company agrees that you, in addition to any other remedies
available to you for such breach or threatened breach, shall be entitled to a
preliminary injunction, temporary restraining order, or other equivalent
relief, restraining the Company and its Affiliates from any actual or
threatened breach of paragraph 7 of this Agreement.
15. Waiver of Breach. The waiver by either you or the Company (or the
Affiliates) of a breach of any provision of this Agreement shall not operate
as or be deemed a waiver of any subsequent breach by either you or the Company
(or its Affiliates). Continuation of benefits hereunder by the Company (or
its Affiliates) following a breach by you of any provision of this Agreement
shall not preclude the Company from thereafter exercising any right that it
may otherwise independently have to terminate said benefits based upon the
same violation.
16. Severability. The invalidity or unenforceability of any provision
of this Agreement will not affect the validity or enforceability of any other
provision of this Agreement, and this Agreement will be construed as if such
invalid or unenforceable provision were omitted (but only to the extent that
such provision cannot be appropriately reformed or modified).
17. General Release and Waiver. As part of this Agreement, and in
consideration of the releases provided to the Company as set forth in Exhibit
5 and Exhibit 6 of this Agreement, the Company shall enter into the General
Release and Waiver as set forth in Exhibit 4 of this Agreement, which is
attached to and forms a part of this Agreement (the "Company Release"). As
part of this Agreement, and in consideration of the additional payments
provided to you in accordance with this Agreement, and in consideration of the
release provided to you as set forth in Exhibit 4 of this Agreement, you are
required to: (i) execute the General Release and Waiver, in the form set forth
as Exhibit 5 of this Agreement, which is attached to and forms a part of this
Agreement (the "Employee Release"); (ii) execute the United Kingdom Agreement,
in the form set forth as Exhibit 6 of this Agreement, which is attached to and
forms a part of this Agreement (the "United Kingdom Agreement"); and (iii)
have the Confirmation of Legal Advice, in the form set forth as Exhibit 7 of
this Agreement, which is attached to and forms a part of this Agreement
("Confirmation of Legal Advice"), completed and signed. This Agreement
(including all Exhibits to this Agreement), and the commitments and
obligations of all parties hereunder:
(a) shall become final and binding immediately following the expiration of
your right to revoke the execution of this Agreement in accordance with
paragraph 2(d) of Exhibit 5 (Employee Release);
(b) shall not become final and binding until the expiration of such right to
revoke; and
(c) shall not become final and binding if you revoke such execution.
18. Other Agreements. The rights and benefits provided to you under
this Agreement are based primarily on the benefits described in the employment
contract which was negotiated and entered into after the merger of Pharmacia
AB and The Upjohn Company, and which is dated as of March 7, 1996 (referred to
in this Agreement as the "Employment Contract", and in Exhibit 6 as the
"Service Agreement"). Except as otherwise specifically provided in this
Agreement, this instrument constitutes the entire agreement between you and
the Company and supersedes all prior agreements and understandings, written or
oral, including, without limitation, the Employment Contract and any other
employment, severance or change-in-control agreements that may have been made
by and between you and the Company or the Affiliates. As of your Termination
Date, all rights, duties and obligations of both you and the Company pursuant
to the Employment Contract and any other employment, severance or change-in-
control agreements shall terminate.
19. Notices. Notices and all other communications provided for in this
Agreement shall be in writing and shall be delivered personally or sent by
registered or certified mail, return receipt requested, postage prepaid
(provided that international mail shall be sent via overnight or two-day
delivery), or sent by facsimile or prepaid overnight courier to the parties at
the addresses set forth below (or such other addresses as shall be specified
by the parties by like notice). Such notices, demands, claims and other
communications shall be deemed given:
(a) in the case of delivery by overnight service with guaranteed next day
delivery, the next day or the day designated for delivery;
(b) in the case of certified or registered U.S. mail, five days after
deposit in the U.S. mail; or
(c) in the case of facsimile, the date upon which the transmitting party
received confirmation of receipt by facsimile, telephone or otherwise;
provided, however, that in no event shall any such communications be deemed to
be given later than the date they are actually received. Communications that
are to be delivered by the U.S. mail or by overnight service are to be
delivered to the addresses set forth below:
to the Company:
Pharmacia & Upjohn Management Company Limited
The Pharmacia & Upjohn Management Centre
67 Alma Road
Windsor
Berkshire SL4 3HD
UK
Attention: General Counsel
with a copy to:
Pharmacia & Upjohn, Inc.
7000 Portage road
Kalamazoo, MI 49001
USA
Attention: General Counsel
or to you:
Dr. John L. Zabriskie
7051 Verdi Way
Naples, Florida 34108
Each party, by written notice furnished to the other party, may modify the
applicable delivery address, except that notice of change of address shall be
effective only upon receipt.
20. Arbitration of All Disputes. Any controversy or claim arising out
of or relating to this Agreement (or the breach thereof) shall be settled by
final, binding and non-appealable arbitration in Kalamazoo, Michigan by three
arbitrators. Except as otherwise expressly provided in this paragraph 20, the
arbitration shall be conducted in accordance with the rules of the American
Arbitration Association (the "Association") then in effect. One of the
arbitrators shall be appointed by the Company, one shall be appointed by you,
and the third shall be appointed by the first two arbitrators. If the first
two arbitrators cannot agree on the third arbitrator within 30 days of the
appointment of the second arbitrator, then the third arbitrator shall be
appointed by the Association. This paragraph 20 shall not be construed to
limit the Company's right or your right to obtain relief under paragraph 14
with respect to any matter or controversy subject to paragraph 14, and,
pending a final determination by the arbitrator with respect to any such
matter or controversy, the Company or you shall be entitled to obtain any such
relief by direct application to a court of law, without being required to
first arbitrate such matter or controversy. Your costs of arbitration or
litigation, including, without limitation, your reasonable attorneys' fees,
shall be borne by the Company in accordance with paragraph 1-17 of Exhibit 1.
21. Governing Law. This Agreement shall be construed in accordance
with the laws of the State of Michigan, without regard to the conflict of law
provisions of any state; provided, however, that the terms of Exhibits 6 and 7
shall be construed in accordance with the laws of England and Wales.
22. Exhibits, Other Documents. Except as otherwise expressly provided
in this Agreement, or except where the context clearly requires otherwise, all
references in this Agreement to "the Agreement" or "this Agreement" shall be
deemed to include references to each of the Exhibits to this Agreement. To
the extent that the terms of this Agreement (including the Exhibits to this
Agreement) provide that your rights or obligations set forth in this Agreement
(including the Exhibits to this Agreement) are to be determined under, or are
to be subject to, the terms of any other plan or other document, this
Agreement (including the Exhibits to this Agreement) shall be deemed to
incorporate by reference such plan or other document.
23. Counterparts. This Agreement may be executed in more than one
counterpart, but all of which together will constitute one and the same
agreement.
If you agree to the terms of this Agreement, please indicate your
agreement by signing and returning a copy of this letter to the undersigned,
along with a signed copy of Exhibit 3 (Letter of Resignation), a signed and
notarized copy of Exhibit 5 (Employee Release), a signed copy of Exhibit 6
(United Kingdom Agreement), and a completed, signed copy of Exhibit 7
(Confirmation of Legal Advice).
Very truly yours,
Pharmacia & Upjohn
Management Company Ltd.
By:
Its:
Very truly yours,
Pharmacia & Upjohn, Inc.
By:
Its:
Accepted and agreed to this
____ day of _________, 1997.
John L. Zabriskie
<PAGE>
Exhibit 1
COMPENSATION AND BENEFITS
This Exhibit 1 describes your right to compensation, benefits and
other payments and distributions from the Company under the Agreement.
1-1. Prior Amounts. The Company has previously paid to you the
amount of all earned and previously unpaid salary and the customary goods and
services allowances for the period ending on your Termination Date.
1-2. Bonus Payment. The Company has paid to you the amount of your
incentive compensation bonus for the performance period ending December 31,
1996.
1-3. Salary Continuation. The Company shall pay you, on the Initial
Payment Date (as defined below), a lump-sum cash payment of $158,333.00, which
is equal to your base salary rate at the Termination Date for 60 days.
1-4. Benefit Continuation. For the period beginning on your
Termination Date, and ending on the earlier of (i) thirty (30) months
following your Termination Date, or (ii) the commencement date of equivalent
benefits from a new employer, such benefits to be determined on a benefit by
benefit basis, the Company or Pharmacia & Upjohn Company (the "U.S.
Affiliate") shall continue to keep in full force and effect (or otherwise
provide) all policies of accident, disability and life insurance with respect
to you and your dependents with the same level of coverage, upon the same
terms and otherwise to the same extent, as in effect from time to time for
active senior executives of the U.S. Affiliate, and the U.S. Affiliate and you
shall share the costs of such continuation of coverage in the same proportion
as such costs would have been shared if you were Executive Vice President of
the Company and President of the U.S. Affiliate. At the cessation of your
life insurance coverage by reason of clause (i) or (ii) of this paragraph 1-4,
you shall be eligible for the retiree life insurance plan, as in effect from
time to time, to the same extent provided by the U.S. Affiliate to other
executives retiring from the U.S. Affiliate during 1997, with such eligibility
determined based on 28 years of service plus your actual service with the
Company and its Affiliates, and your deemed service from the Termination Date
through November 30, 1997. A summary of such life insurance coverage, as
currently in effect, is set forth in Exhibit 11.
1-5. Expense Reimbursement.
(a) You will be entitled to be reimbursed for the business expenses you
incurred during the period ending on your Termination Date, subject to
the rules established by the Company relating to such reimbursement.
(b) The amount of the reimbursement due to you in accordance with the
provisions of paragraph 1-5(a) shall be reduced by the amount of any
outstanding advances to you from the Company. To the extent that the
amount of such outstanding advances exceeds the reimbursement due to
you under paragraph 1-5(a), you shall owe the difference to the
Company, and the Company shall be entitled to offset this amount
against other amounts due to you.
1-6. Vacation. The Company shall pay to you, on the Initial Payment
Date, the amount of $109,615.38, which is in settlement of any and all
vacation that you have accrued, and to which you are entitled from the
Company. You will not accrue or be entitled to any vacation after your
Termination Date.
1-7. Repatriation. You will be reimbursed for your relocation to the
United States in accordance with the relocation reimbursement policies
generally applied by the U.S. Affiliate to senior expatriates being relocated
to the United States (the "Repatriation Policies"), including, without
limitation, the following:
(a) The Company will assume any remaining lease payments or penalties for
premature termination of the lease for your primary residence in the
United Kingdom.
(b) You will be entitled to reimbursement for any loss below fair market
value on the sale of your wife's car which was purchased in the United
Kingdom.
(c) You will be entitled to reimbursement for two return trips to the
United States for house hunting for you and your wife.
(d) You will be entitled to reimbursement for up to one year of storage
for your household goods.
(e) You shall be entitled to receive an additional payment (a "Gross-Up
Payment") in an amount such that after payment by you of all taxes
(including any interest or penalties imposed with respect to such
taxes) including, without limitation, any foreign, U.S., or state
income taxes (and any interest and penalties imposed with respect
thereto) imposed upon the Gross-Up Payment, you retain amounts equal
to the reimbursements due under the Repatriation Policies.
1-8. Tax Equalization. You will be subject to the tax equalization
policies applicable to other senior executives of the Company and the Parent
Company, subject to the following:
(a) Your tax equalization shall be determined based on all income (i)
relating to your United Kingdom assignment or (ii) other income
subject to United Kingdom tax as a result of your United Kingdom
assignment (subject to the limit of the Company's tax equalization
policies) being subject to a U.S. hypothetical tax, which includes,
without limitation, Federal and Michigan income tax and U.S. social
security taxes which you would have paid had you remained in Michigan.
Accordingly, the Company and/or the Parent Company shall withhold
such hypothetical taxes as if you were a resident of Michigan at the
time of payment of such income.
(b) To the extent that the U.K. (or any foreign government or
subdivision), the U.S., or the State of Michigan (or any other state)
in fact imposes taxes with respect to (i) your income, including tax
reimbursements, relating to your United Kingdom assignment, or (ii)
other income subject to U.K. tax as a result of your United Kingdom
assignment and tax reimbursements with respect thereof, the Company
and/or the Parent Company shall satisfy (or reimburse you for your
satisfaction of) any actual taxes paid at the time of payment or at a
later date.
(c) Payments, distributions, and rights that do not (i) relate to your
United Kingdom assignment or (ii) are not subject to U.K. tax as a
result of your United Kingdom assignment shall not be subject to tax
equalization. For purposes of this Agreement, determination of
whether a payment, distribution or right relates to your United
Kingdom assignment shall be made in accordance with applicable U.K.
tax law.
(d) You have indicated that you are not a resident of the State of
Michigan. Accordingly, the Company shall withhold only those Michigan
taxes which would be due as a non-resident on income allocated to
Michigan which is not covered by the Company's tax equalization
policies. For this purpose, the Company does not warrant that the
State of Michigan will agree with its allocation, and you will be
responsible for any additional taxes resulting from a revised
allocation. However, the Company will reimburse you for any penalties
associated with the original allocation. In addition, in the event
that the U.S. and/or the state of Michigan asserts a deficiency in the
amount of taxes which it asserts should have been withheld and paid
with respect of payments made by the Company to you, the Company shall
not satisfy any such deficiency until you have been given written
notice by the Company, and such notice shall be provided promptly
after the Company's receipt thereof so that, subject to the deadlines
imposed on the Company by law, you are provided with a reasonable
opportunity to defend against the imposition of such tax at your own
cost.
(e) The Company will reimburse you (or has reimbursed you) for certain
foreign, United States and state taxes for amounts relating to your
U.K. assignment or other amounts subject to U.K. tax as a result of
your United Kingdom assignment. If you receive a refund of any such
taxes for any reason including the use of any tax credits in
subsequent years (including, without limitation, alternative minimum
tax credit carryover, or foreign tax credit carryover), you are
required to promptly pay to the Company the amount of such refunds
(net of any taxes or inclusive of any tax benefits resulting
therefrom).
1-9. Stock Options. Immediately prior to your Termination Date, you
held options (the "Options") to purchase a total of 841,500 shares of common
stock of the Parent Company ("Parent Stock") as set forth in Exhibit 8 (which
is attached to and forms a part of this Agreement). Exercise of the Options
shall be subject to the following:
(a) All of the Options shall be fully exercisable as of the Termination
Date (or shall become fully exercisable as of the Termination Date, to
the extent that they were not previously exercisable).
(b) Except as otherwise provided in the applicable option agreement, the
Options may be exercised for up to five years after the Termination
Date.
1-10. Stock Deferral Programs. You shall be entitled to distribution
of the amounts credited to your accounts under The Upjohn 1992 Performance
Share Plan and The Upjohn 1992 Incentive Compensation Plan. Your rights to
such distributions shall be subject to the following:
(a) You shall be fully vested in your accounts under such plans.
(b) Distribution shall be made at March 1, 1998, and in the amounts
determined in accordance with the applicable plan terms (including any
prior elections regarding distribution you may have made under such
plans) based on your last day of employment with the Company being the
Termination Date.
(c) The amount of such distributions shall be based on the account
balances as set forth in Exhibit 9 (which is attached to and forms a
part of this Agreement), subject to adjustment in accordance with the
terms for periods after the date reflected in such exhibit.
1-11. Supplemental Retirement Bonus. As of the Initial Payment Date,
you will receive distribution of the Supplemental Retirement Bonus, which will
equal the sum of 87,629 shares of Parent Stock, plus such additional shares of
Parent Stock as would result from having dividends on such stock reinvested
(in accordance with the terms of the Parent Company's dividend reinvestment
plan) through the date of distribution of the Supplemental Retirement Bonus,
and subject to adjustment as appropriate to reflect any recapitalization or
other changes in the capital stock of the Parent Company. Distribution of the
Supplemental Retirement Bonus shall be made in a lump sum, with the form of
distribution (as elected by you in writing in advance) to be made in shares of
Parent Stock, or in cash having a value equal of such shares, with such value
based on the closing price of the Parent Stock on the last business day
immediately preceding the date of such distribution.
1-12. Retirement Benefits. You will be eligible to receive
retirement benefits under U.S. Affiliate's qualified retirement plan, based on
the terms of that plan, and based on your termination of employment having
occurred on your Termination Date. You will be eligible to receive retirement
benefits under the Parent Company's Global Offices Pension Plan (the "Non-
Qualified Retirement Plan") as if you had been employed by the Company (or the
Parent Company) for the sum of 28 years plus your actual years of service with
the Company and its Affiliates as if you had continued employment until
November 29, 1997 less the amount of any other retirement benefits you are
entitled to receive by virtue of your employment service with the Company or
its Affiliates or any other employer, except for the retirement bonus
described in paragraph 1-11. Payment of such retirement benefits shall be
made in a lump sum on July 1, 1997. The determination of your retirement
benefit amount under the Non-Qualified Retirement Plan shall be based on the
Hewitt computations set forth in Exhibit 10, which is attached to and forms a
part of this Agreement.
1-13. Retiree Medical Benefits. You (and your dependents) shall be
eligible for the medical benefit plan, as in effect from time to time, to the
same extent provided by the U.S. Affiliate to other executives retiring from
the U.S. Affiliate during 1997, with such eligibility determined based on 28
years of service plus your actual service with the Company and its Affiliates,
and your deemed service from the Termination Date through November 30, 1997.
A summary of such medical coverage, as currently in effect, is set forth in
Exhibit 11. During the period required by law, the type of medical coverage
to be provided to you and your eligible family members under this paragraph 1-
13 shall be the coverage required to be provided in accordance with the
provisions of section 4980B of the United States Internal Revenue Code of
1986, as amended (the "Code") and section 601 of the United States Employee
Retirement Income Security Act (sometimes referred to as "COBRA coverage");
and the period of such coverage provided under this paragraph 1-4 shall be
counted toward the Company's (and the Parent Company's) obligation to provide
COBRA coverage.
1-14. Outplacement. The Company shall pay for reasonable
outplacement services provided by a professional outplacement service
reasonably acceptable to the Company (by direct payment to the outplacement
service or by prompt reimbursement to you following submission of receipts to
the Company); provided, however, that such services are provided before
December 31, 1997 and cost no more than $100,000.00.
1-15. Other Benefits. Except with respect to benefits described in
paragraphs 1-1 through 1-14, and except as otherwise specifically provided in
this Agreement, you shall be entitled to benefits under the employee benefits
plans and arrangements maintained by the U.S. Affiliate, as in effect from
time to time, determined as though you had continued in the employ of the
Company until your Termination Date.
1-16. Separation Benefits. The Company shall pay you, on the Initial
Payment Date, a lump-sum cash payment of $4,500,000.00, which is equal to 2.5
times the sum of your annual rate of base salary plus your target annual
incentive bonus for 1996.
1-17. Legal Fees. The Company will reimburse you for the legal fees
you incur in connection with the Agreement. If any contest or dispute shall
arise under this Agreement involving the failure or refusal of the Company or
the Parent Company to perform fully in accordance with the terms hereof, the
Company shall reimburse you, on a current basis, for your reasonable legal
fees and expenses, if any, incurred by you in connection with such contest or
dispute regardless of the result thereof. Any dispute over the reasonableness
of legal fees shall be submitted to an arbitration for resolution.
1-18. Withholding. All amounts otherwise payable under the Agreement
shall be subject to customary withholding and other employment taxes.
1-19. Initial Payment Date. For purposes of this Agreement, the
"Initial Payment Date" shall be the first business day following the
expiration of your right to revoke the execution of this Agreement in
accordance with paragraph 2(d) of Exhibit 5 (Employee Release) of this
Agreement (which period of permitted revocation is seven days from the date of
execution of this Agreement, as set forth in such paragraph 2(d)).
1-20. Other Payments. Except as specified in this Exhibit 1, or
otherwise expressly provided in or pursuant to the Agreement, you shall be
entitled to no compensation, benefits or other payments or distributions, and
references in the Employee Release to the release of claims against the
Company shall be deemed to also include reference to the release of claims
against all compensation and benefit plans, arrangements, understandings or
agreements established or maintained by the Company or any of its Affiliates.
1-21. Parent Company Guaranty of Payment. The Parent Company shall
be liable for, and agrees to pay, any amounts owed to you hereunder in the
event of non-performance of the Company.
