UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 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
October 31, 1997, was 507,421,820.
Page 1 of 24 pages
The exhibit index is set forth on page 19.
<PAGE>
QUARTERLY REPORT ON FORM 10Q
PHARMACIA & UPJOHN, INC.
QUARTER ENDED SEPTEMBER 30, 1997
INDEX OF INFORMATION INCLUDED IN REPORT
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Earnings 3
Condensed Consolidated Statements of Cash Flows 4
Condensed Consolidated Balance Sheets 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
PHARMACIA & UPJOHN, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(All U.S. dollar amounts in millions, except per-share data)
<CAPTION>
Unaudited
--------------------------------------------------
For Three Months For Nine Months
Ended September 30, Ended September 30,
----------------------- -----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 1,551 $ 1,721 $ 4,889 $ 5,236
Other revenue 36 20 98 66
---------- ---------- ---------- ----------
Operating revenue 1,587 1,741 4,987 5,302
Cost of products sold 476 533 1,529 1,536
Research and development 268 330 832 933
Marketing, administrative and other 585 540 1,839 1,887
Biotech merger costs 31 - 31 -
Restructuring charges 125 37 125 458
Merger costs - 16 - 67
---------- ---------- ---------- ----------
Operating income 102 285 631 421
Interest income 26 31 80 127
Interest expense (6) (9) (24) (52)
All other, net (2) (3) (3) 5
---------- ---------- ---------- ----------
Earnings before income taxes 120 304 684 501
Provision for income taxes 41 100 233 165
---------- ---------- ---------- ----------
Net earnings 79 204 451 336
Dividends on preferred stock
(net of tax) 3 3 9 9
---------- ---------- ---------- ----------
Net earnings on common stock $ 76 $ 201 $ 442 $ 327
========== ========== ========== ==========
Earnings per common share:
Primary $.15 $.39 $.86 $.64
Fully diluted $.15 $.39 $.86 $.64
</TABLE>
See accompanying notes.
<PAGE>
PHARMACIA & UPJOHN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30
(All U.S. dollar amounts in millions)
Unaudited
------------------
1997 1996
------- -------
Net cash provided by operations $ 862 $ 544
------- -------
Cash provided (required) by investment activities:
Acquisition of subsidiaries (34) (24)
Additions of properties (354) (400)
Proceeds from sales of properties 37 16
Proceeds from sales of investments 853 1,711
Purchase of investments (584) (1,303)
Other 18 3
------- -------
Net cash provided (required) by investment activities (64) 3
------- -------
Cash provided (required) by financing activities:
Proceeds from issuance of debt 32 28
Repayment of debt (27) (395)
Payments of ESOP debt (12) (8)
Debt maturing in three months or less (net) 18 498
Dividends paid to shareholders (425) (424)
Purchase of common stock (84) (77)
Sales of treasury stock 16 80
Other 10 -
------- -------
Net cash (required) by financing activities (472) (298)
------- -------
Effect of exchange rate changes on cash (41) 2
------- -------
Net change in cash and cash equivalents 285 251
------- -------
Cash and cash equivalents, beginning of period 641 841
------- -------
Cash and cash equivalents, end of period $ 926 $1,092
======= =======
Noncash event:
In August 1997, the company exchanged the net assets of its biotechnology
supply business, Biotech, having a carrying cost of approximately $194, for a
45% ownership in a newly formed life science company, Amersham Pharmacia
Biotech.
See accompanying notes.
<PAGE>
PHARMACIA & UPJOHN, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(All U.S. dollar amounts in millions)
September 30, December 31,
1997 1996
------------ ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 926 $ 641
Short-term investments 381 696
Trade accounts receivable, less allowance
of $94 (1996: $95) 1,346 1,705
Inventories 962 1,012
Other current assets 876 841
----------- -----------
Total current assets 4,491 4,895
----------- -----------
Long-term investments 542 512
----------- -----------
Goodwill and other intangible assets, net 1,246 1,522
----------- -----------
Properties, net 3,295 3,602
----------- -----------
Other noncurrent assets 913 642
----------- -----------
Total assets $10,487 $11,173
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt, including current
maturities of long-term debt $ 267 $ 235
Other current liabilities 1,978 2,268
----------- -----------
Total current liabilities 2,245 2,503
----------- -----------
Long-term debt and guarantee of ESOP debt 794 823
----------- -----------
Other noncurrent liabilities 1,505 1,606
----------- -----------
Shareholders' equity:
Preferred stock, one cent par value;
authorized 100,000,000 shares; issued
Series A convertible 7,027 shares
(1996: 7,125 shares) at stated value 283 287
Common stock, one cent par value;
authorized 1,500,000,000 shares, issued
508,647,457 shares (1996: 508,500,633 shares) 5 5
Capital in excess of par value 1,443 1,457
Retained earnings 5,633 5,603
Currency translation adjustments (1,174) (855)
Other shareholders' equity (247) (256)
----------- -----------
Total shareholders' equity 5,943 6,241
----------- -----------
Total liabilities and shareholders' equity $10,487 $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:
September 30, December 31,
1997 1996
---------- ------------
Estimated Replacement Cost
(FIFO Basis):
Pharmaceutical and Other Finished Products $ 486 $ 437
Raw Materials, Supplies and Work-in-Process 636 726
---------- ----------
1,122 1,163
Less Reduction to LIFO Cost (160) (151)
---------- ----------
$ 962 $1,012
========== ==========
Inventories valued on the LIFO method had an estimated replacement cost (FIFO
basis) of $477 at September 30, 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. These suits, brought by independent pharmacies and chains,
generally allege unlawful conspiracy, price discrimination and price fixing
and, in some cases, unfair competition, and specifically allege that the
company and the other named defendants violated the following: (1) the
Robinson-Patman Act by giving substantial discounts to hospitals, nursing
homes, mail-order pharmacies and health maintenance organizations ("HMOs")
without offering the same discounts to retail drugstores, and (2) Section I of
the Sherman Antitrust Act by entering into illegal vertical combination with
other manufacturers and wholesalers to restrict certain discounts and rebates
so they benefited only favored customers. The Federal District Court for the
Northern District of Illinois certified a national class of retail pharmacies
in November 1994. Similar actions by proposed retailer classes have been
filed in the state courts of Alabama, California, Minnesota, Mississippi, and
Wisconsin. The California and Wisconsin courts have certified retailer
classes. Motions to certify are pending in Alabama and Minnesota. 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.
Actions have been filed in 14 states and the District of Columbia on behalf of
proposed consumer classes seeking damages based on the same alleged conduct.
The courts in California and the District of Columbia have certified the
proposed consumer classes. After removal, the Federal District Court denied
certification of a proposed Alabama consumer class, but a similar action was
later remanded to the state court where it is pending. The state courts in
Maine, Michigan, and Minnesota denied certification of a consumer class, and
plaintiffs' appeals are pending. The state courts in Colorado, New York, and
Washington dismissed complaints on behalf of proposed consumer classes.
Plaintiffs appealed the dismissal in Washington and New York, and those
appeals are pending. Similar actions by proposed consumer classes are pending
in the state courts of Arizona, Florida, Kansas, North Carolina, Tennessee,
and Wisconsin.
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
In the third quarter of 1997, the company recognized restructuring costs of
$125 associated with its manufacturing rationalization program. The charge
included fixed asset write-offs of $96 for full or partial shut-down of
manufacturing operations in various locations worldwide and $29 for employee
separation payments and other exit costs. Additional charges are expected to
be recognized in future periods as the company continues to evaluate
utilization of manufacturing facilities.
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. There have been no adjustments to
previously recorded accruals.
E - BIOTECH MERGER
In the third quarter of 1997, the company merged its biotechnology supply
business, Pharmacia Biotech, with Amersham Life Science Ltd., a division of
Amersham International plc, in a noncash transaction that did not result in
the recognition of any gain or loss. The merger created a new company,
Amersham Pharmacia Biotech. Pharmacia & Upjohn owns 45 percent of the new
company which is accounted for using the equity method. In the third quarter,
the company recorded $34 in charges related to the Biotech merger consisting
of transaction costs to effect the merger and a write-off of certain acquired
research and development costs. The related caption on the consolidated
statement of earnings includes these charges as well as the company's portion
of Amersham Pharmacia Biotech's earnings for the quarter.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations:
FINANCIAL REVIEW
OVERVIEW OF CONSOLIDATED RESULTS
The table below provides an overview of consolidated results (in millions of
U.S. dollars, except per-share data):
Third Quarter Nine Months
--------------------------- --------------------------
Percent Percent
1997 Change 1996 1997 Change 1996
-------- ------- -------- -------- ------- --------
Total Revenue $1,587 (8.9)% $1,741 $4,987 (6.0)% $5,302
Operating Income 102 (64.3) 285 631 49.7 421
Net Earnings 79 (61.2) 204 451 34.3 336
Fully Diluted Earnings
Per Common Share $ 0.15 (61.5) $0.39 $ 0.86 34.4 $ 0.64
When comparing performance in the third quarter and first nine months of 1997
to the same periods in 1996, nonrecurring items need to be considered. In the
third quarter of 1997, two nonrecurring items considerably reduced operating
performance. The company recorded restructuring charges associated with its
manufacturing facility rationalization program of $125 million ($0.14 per
share, after tax). The company also recorded $34 million ($0.06 per share)
for transaction costs and the write-off of acquired research and development
relating to the recent Biotech merger. In the third quarter of 1996, merger-
related restructuring and other merger costs related to the November 1995
merger of former Pharmacia and former Upjohn amounted to $53 million ($0.06
per share). Operating performance for the first nine months of 1996 was
significantly diminished by the merger-related restructuring and other merger-
related costs of $525 million ($0.63 per share) and the impairment of an
investment of $106 million ($0.13 per share) resulting from the termination of
a product development agreement.
Excluding these nonrecurring charges, operating income decreased 23 percent in
the third quarter. A 10 percent decline in sales coupled with a 5 percent
decrease in operating costs and expenses (excluding nonrecurring items)
contributed to the decline in overall performance in the quarter. For the
first nine months, operating income fell 25 percent. This decline resulted
from a 7 percent decrease in sales in conjunction with a 1 percent decrease in
operating costs and expenses (excluding nonrecurring items). Negative sales
and earnings trends are not expected to change materially for the remainder of
1997.
NET SALES
Worldwide sales declined 10 percent to $1.551 billion in the third quarter
compared to $1.721 billion in the prior-year quarter. The August merger of
Biotech caused $69 million or 4 percentage points of the sales decrease.
Sales of the new company resulting from the merger, Amersham Pharmacia
Biotech, are not included in consolidated sales because its results are now
accounted for using the equity method. The remaining 6 percentage point
decrease represented sales declines in prescription pharmaceutical and over-
the-counter (OTC) products across most major markets. The generic erosion of
older product lines, the discontinuation of special sales incentives in the
U.S., and the continuing negative impact of currency exchange outside the U.S.
were major contributors to the prescription pharmaceutical sales decline and
more than offset impressive sales growth of new products. Strong competition
and trade inventory reductions caused OTC sales to decline in the quarter.
Worldwide sales fell $347 million, or 7 percent, to $4.889 billion in the
nine-month comparison. In addition to the factors already mentioned,
prescription pharmaceutical sales decreased due to the effects of year-end
1996 trade inventory accumulations in the U.S. and various health care cost
containment measures taken by governments in Europe, most notably in Germany
and Sweden. Prelaunch trade inventory accumulations in 1996, negative
exchange effects, and strong competition contributed to the OTC sales decline
in the year-to-date comparison. Of the total decline, $86 million resulted
from the partial divestitures of Biotech in August and Biacore in 1996.
Biacore was a wholly-owned subsidiary until December 1996 when Pharmacia &
Upjohn sold 59 percent of its holding.
In 1997, sales outside the U.S. represented 67 percent of worldwide sales in
the third quarter and 69 percent in the first nine months. The magnitude of
sales in Japan and key European countries resulted in significant adverse
exchange effects to the company as the U.S. dollar remained strong relative to
the yen and most major European currencies throughout 1997. Excluding the
negative effects of exchange, sales decreased by 3 percent in the quarter and
1 percent year-to-date. Sales performance by country, based on location of
customer, is provided in the table below (in millions of U.S. dollars):
Third Quarter Nine Months
-------------------------- --------------------------
Percent Percent
1997 Change 1996 1997 Change 1996
-------- ------- -------- -------- ------- --------
United States $ 510 (13.0)% $ 585 $1,506 (9.7)% $1,668
Japan 163 (14.0) 190 530 (8.6) 579
Italy 97 (18.0) 118 346 (8.3) 378
Germany 100 (22.6) 130 330 (17.1) 397
United Kingdom 77 10.5 70 244 10.6 221
Sweden 64 (29.7) 91 208 (20.3) 261
France 57 (27.0) 78 196 (14.4) 229
Spain 41 (10.6) 46 138 (16.9) 166
Rest of World 442 7.1 413 1,391 4.0 1,337
-------- ------- -------- -------- ------- --------
Consolidated Sales $1,551 (9.8)% $1,721 $4,889 (6.6)% $5,236
======== ======= ======== ======== ======= ========
PRODUCT SALES
The tables below provide a year-to-year comparison of consolidated net sales by
major product group and by major product (in millions of U.S. dollars):
<TABLE>
<CAPTION>
Third Quarter Nine Months
----------------------------- -----------------------------
Net % Chg Net % Chg
Percent Excl. Percent Excl.
1997 Change Curr.* 1996 1997 Change Curr.* 1996
------ ------- ------- ------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Infectious Disease $ 122 8.4% 17.8% $ 113 $ 407 (1.3)% 2.1% $ 412
Metabolic Disease 182 (5.1) 2.6 192 516 (9.4) (2.0) 570
Inflammation 131 (32.2) (27.6) 193 402 (12.7) (7.9) 460
Central Nervous System 127 (11.5) (4.6) 144 358 (14.2) (8.2) 418
Oncology 161 3.7 11.8 156 501 13.7 20.4 440
Women's Health/Urology 148 (11.4) (5.9) 167 431 (9.9) (7.7) 478
Ophthalmology 94 20.7 29.4 78 269 28.5 34.9 209
Other Prescription
Pharmaceuticals 117 29.2 38.3 90 393 (2.9) 6.4 405
Nutrition 84 (13.2) (2.8) 97 280 (11.2) (3.9) 315
Consumer Health Care 138 (18.6) (18.6) 169 458 (18.4) (15.9) 561
Animal Health 104 (3.3) (5.3) 107 283 0.3 1.1 283
Chemical and Contract
Manufacturing 67 6.7 10.6 62 203 0.8 3.8 201
------ ------- ------- ------ ------ ------- ------- ------
Total Pharmaceuticals 1,475 (6.0) 1.0 1,568 4,501 (5.3) 0.1 4,752
Diagnostics 45 (6.0) 8.0 49 156 (5.7) 5.3 166
Biotech** 31 (70.4) (62.4) 104 232 (27.0) (17.1) 318
------ ------- ------- ------ ------ ------- ------- ------
Consolidated Net Sales $1,551 (9.8)% (2.6)% $1,721 $4,889 (6.6)% (0.8)% $5,236
====== ======= ======= ====== ====== ======= ======= ======
Third Quarter Nine Months
----------------------------- -----------------------------
Net % Chg Net % Chg
Percent Excl. Percent Excl.
1997 Change Curr.* 1996 1997 Change Curr.* 1996
------ ------- ------- ------ ------ ------- ------- ------
Genotropin $ 96 1.1% 11.5% $ 95 $ 282 (3.5)% 6.1% $ 292
Xanax 70 (24.2) (13.8) 92 212 (16.4) (11.2) 254
Cleocin 75 10.3 16.9 68 210 4.5 9.6 201
Medrol 61 (4.4) 10.0 64 186 (3.0) 4.0 192
Pharmorubicin 52 (8.0) 3.6 56 148 (6.2) 3.2 157
Depo-Provera 51 16.2 20.4 44 138 (2.3) (1.6) 141
Fragmin 39 0.8 14.8 38 120 10.4 23.1 109
Nicorette 42 (25.8) (16.4) 57 118 (23.3) (15.6) 153
Camptosar 35 70.2 73.2 21 114 454.6 454.6 21
Healon 38 (23.0) (16.6) 50 112 (20.3) (13.9) 141
------ ------- ------ ------ ------ ------- ------- ------
Total $559 (4.4)% 5.1% $ 585 $1,640 (1.3)% 5.6% $1,661
====== ======= ======= ====== ====== ======= ======= ======
*Represents percent change from the prior year excluding the approximate
effects of currency exchange rate fluctuations.
**1996 includes Biacore sales of $4 million for the quarter and $27 million
for nine months.
</TABLE>
Sales of new products Xalatan, Mirapex, Caverject, and Camptosar collectively
increased $62 million in the quarter and $220 million in the first nine months
over the same periods in 1996. Strong sales growth of Xalatan, an intraocular
pressure-lowering medication for glaucoma, was attributable to continued
increasing demand and the expansion and refocusing of the U.S. sales force.
Mirapex, a new treatment for Parkinson's disease, has quickly established an
important market presence since its launch in the U.S. during July. The
company co-markets Mirapex in the U.S. with Boehringer Ingelheim
Pharmaceuticals, Inc. Sales of Caverject, the treatment for male impotence,
increased largely due to the favorable impact of new competitor promotional
spending on the erectile dysfunction market. Sales of Camptosar, a treatment
for refractory colorectal cancer, increased over the prior year but continued
to level off in the third quarter as compared to the previous two quarters as
a result of the product's initial strong market penetration in the U.S.
Camptosar received market clearance in Canada during July and is now cleared
for launch in 13 countries where the company has marketing rights.
The company launched Edronax and Detrusitol, two primary-care products, in the
third quarter. Edronax, the first of a new class of anti-depressants, was
launched in the U.K. in July. European regulatory review of the product was
completed in early October clearing the way for market introductions in 11
other countries. In September, Detrusitol was cleared for marketing in
Sweden. This achievement is a critical first step toward broader approval in
Europe. Detrusitol is a treatment for unstable bladder, a cause of urinary
incontinence. The company also received European Union centralized market
clearance for Vistide in the third quarter. Vistide is licensed from Gilead
Sciences and is a treatment for cytomegalovirus infections of the eye.
Both Fragmin and Cleocin recorded solid sales growth over the prior year.
Fragmin is a treatment for the prevention of blood clots in connection with
surgery. For the first nine months of 1997, sales of Fragmin increased 10
percent driven by new indications approved in Europe. Double-digit growth in
local currency in the U.K. and Germany was moderated by unfavorable exchange
effects throughout Europe and lower sales in France due to competitive
pressures. Sales of Fragmin also grew in the United States. Excluding
exchange effects, Fragmin sales rose 15 percent in the quarter and 23 percent
year-to-date. Sales of the antibiotic Cleocin (Dalacin outside the U.S.) grew
10 percent in the third quarter. Cleocin continued to show strong growth in
the U.S., emerging markets, and Latin American markets. However, sales
declined significantly in Germany, largely due to increasing generic
competition and price decreases. In the nine-month comparison, Cleocin
achieved a 10 percent increase in sales excluding an unfavorable exchange
impact of 5 percent.
Sales of Genotropin, a human growth hormone, increased slightly in the third
quarter but declined 4 percent in the nine-month comparison. In the U.S.,
sales continued to increase as new patient recruitment efforts prove
successful. Earlier this month, the U.S. FDA cleared the product for
marketing for use in treating growth hormone deficiency in adults. Sales
declined overall in Europe due to increased competition, governmental policies
restricting treatment, and the negative effects of currency exchange. In
local currency, performance in key European markets was mixed: good growth in
the U.K. and Germany was more than offset by declining sales in France, Italy,
and Spain. In Japan, a major market for Genotropin, third quarter sales
increased despite negative exchange effects due mainly to supply disruptions
in the prior-year quarter.
U.S. sales of Xanax, the anti-anxiety agent, fell in both the third quarter
and first nine months as generic competition continued to erode sales and
year-end 1996 trade inventory accumulations reduced current year demand.
Outside the U.S., Xanax achieved sales growth in local currency in the major
markets of Italy, Spain, and France, as well as many smaller markets across
Europe and Latin America. This growth was moderated by adverse exchange
effects resulting in an overall increase in non-U.S. sales of 2 percent for
the first nine months.
Generic competition in both the U.S. and Europe eroded sales of several older
product lines including Provera, Healon, Pharmorubicin, Micronase, and
Adriamycin. Collectively, sales for these products decreased $53 million in
the quarter and $167 million in the first nine months. In addition, U.S.
sales of Provera, Micronase, and Adriamycin were adversely affected in the
quarter by the discontinuation of special sales incentives that were offered
in the prior-year quarter. On a year-to-date basis, year-end 1996 trade
inventory accumulations in the U.S. also contributed to the sales declines for
these products.
Consumer Healthcare's OTC product sales declined by $32 million in the third
quarter and $103 million in the first nine months. In the quarter-to-quarter
comparison, lower Rogaine sales reflected strong private-label competition in
the U.S. as well as wholesaler inventory reductions in anticipation of the
expected approval of Rogaine Extra Strength. In July, the U.S. FDA Advisory
Committee recommended Rogaine Extra Strength be made available for OTC sales.
Sales of the Nicorette smoking cessation product line in the U.S. were also
lower in the quarter. The decline was primarily attributable to the poor
sales performance of the Nicotrol patch launched in the U.S. in the third
quarter of 1996. In the nine-month comparison, adverse exchange effects
reduced sales across many product lines outside the U.S. In local currency,
the Nicorette product line performed well with strong growth in the U.K.,
Italy, France, and Japan. Year-to-date OTC sales levels were also lower due
to the initial establishment of retail inventories in the U.S. for the 1996
launches of Rogaine and several Nicorette products. These factors adversely
affecting sales more than offset the positive net sales growth resulting from
the second quarter product swap with Johnson & Johnson. In June, the company
acquired Nasalcrom, PediaCare, and Micatin in exchange for Motrin IB and
Mycitracin in order to strengthen the company's OTC product portfolio.
While the other associated businesses continued to provide a solid base of
sales to the company, their performance was mixed in the third quarter. Sales
of Chemical and Contract Manufacturing rose 7 percent while sales of Animal
Health and Diagnostics declined by 3 and 6 percent, respectively, largely due
to the negative effects of exchange. In local currency, sales of each
associated business rose in the first nine months of 1997 over the same period
in 1996.
Sales of Biotech and Biacore were not reported in consolidated sales after the
date of their partial divestitures which resulted in a comparative sales
decrease of $73 million in the third quarter and $86 million year-to-date. In
August, the company contributed its asset holdings in its Biotech
biotechnology subsidiary to Amersham Pharmacia Biotech. The company holds a
45 percent interest in Amersham Pharmacia Biotech and, accordingly, accounts
for its share of the net results of operations of the new company on the
equity basis. Similarly, in December 1996, Pharmacia & Upjohn sold 59 percent
of its holding in Biacore and since then has accounted for its investment in
Biacore on the equity basis.
OTHER OPERATING REVENUE
Other operating revenue increased over the third quarter and first nine months
of 1996 due to higher 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:
Third Quarter Nine Months
--------------- ----------------
1997 1996 1997 1996
---- ---- ---- ----
Cost of Products Sold 30.7% 31.0% 31.3% 29.3%
Research and Development 17.3 19.2 17.0 17.8
Marketing, Administrative
and Other 37.7 31.4 37.6 36.0
Restructuring Charges 8.1 2.2 2.6 8.8
Biotech Merger/P&U Merger Costs 2.0 0.9 0.6 1.3
Operating Income 6.6 16.6 12.9 8.0
During the third quarter, cost of products sold decreased slightly as a
percentage of sales compared to 1996. The decrease resulted from increases in
production volume and favorable foreign currency effects. During the first
nine months, cost of products sold increased as a percentage of sales due to
decreased sales levels and increased manufacturing expenses. The unfavorable
effects of selling price erosion, product mix, and currency exchange caused
sales levels to decline. Manufacturing expense increased because of higher
production start-up expenses for new products, project expenses incurred in
1997 to achieve long-term production efficiencies, and unfavorable
manufacturing variances resulting largely from decreased volume. The increase
in manufacturing expenses was partially offset by the favorable effects of
exchange.
Research and development (R&D) spending in the third quarter and first nine
months of 1997 declined as a percentage of sales. Major factors contributing
to the lower levels of spending included the favorable effects of exchange due
to the concentration of non-U.S. R&D activity in Sweden and Italy; the
recognition of a $26 million contractual obligation in the prior-year quarter
for a co-development agreement to acquire future rights to a product; and the
ongoing efforts to focus R&D resources on selected projects. During the third
quarter, the company filed a New Drug Application for Cyclo-Provera, a new,
once-monthly contraceptive. The company expects to file for mutual
recognition in Europe in early 1998.
Marketing, administrative, and other (MA&O) expense increased as a percentage
of sales due to increased spending in 1997 in combination with a 10 percent
sales decrease in the quarter. Current year spending increased as a result of
higher advertising and promotion expense for new products; prelaunch and
launch activities throughout the world; sales force expansions in the U.S. and
certain Latin American countries; and increased information technology
expenses. The additional 1997 spending was partially offset by the favorable
effects of exchange. In the third quarter of 1996, MA&O expense was reduced
by a gain of $46 million on the sale of an equity interest and related
dissolution of a joint venture. Partially offsetting this gain was the
establishment of a product liability provision of $15 million. In the nine-
month comparison, 1996 MA&O expense included the impairment of an investment
of $106 million resulting from the termination of a product development
agreement.
In the third quarter of 1997, the company finalized certain plans for its
manufacturing facility rationalization program and recognized related
restructuring costs of $125 million. Additional charges are expected to be
recognized in future periods as the company continues to evaluate utilization
of manufacturing facilities. The program is intended to consolidate and
reduce manufacturing facilities by 40 percent worldwide and is part of the
global restructuring program announced in July. The objective of the global
initiative is to improve effectiveness by simplifying the company's structure
and improving its decision-making processes. Additional restructuring charges
of approximately $325 million are expected to be recognized in the fourth
quarter when global redesign plans are completed. Cash spending for this
program is anticipated to approximate one-half or $225 million of the
estimated $450 million total restructuring charges to be recorded in the
latter half of 1997. The majority of the cash spending will occur in 1998.
A strategic element of the global redesign, but not included in the
restructuring charges indicated above, is the establishment of a new global
headquarters in New Jersey. The new headquarters will incorporate all
corporate functions as well as the prescription pharmaceutical marketing and
sales organization for the company's North American operations. The company's
current management center in the U.K. and its prescription sales and marketing
offices in Michigan will be phased out in concert with a phased build-up of
the new headquarters. The move supports the company's strategy for aggressive
growth in the United States.
Biotech merger costs of $34 million were recorded in the third quarter of
1997. These charges included transactions costs to effect the merger and
charges associated with the write-off of acquired R&D. Pharmacia & Upjohn
expects to record an additional charge in the fourth quarter for the merger-
related restructuring of Amersham Pharmacia Biotech. Total charges associated
with the merger are estimated to be $0.10 to $0.16 per share, after tax,
including the third-quarter charge of $0.06 per share. Beginning in 1998,
Amersham Pharmacia Biotech is expected to make positive contributions to
earnings.
Merger-related restructuring charges recorded in the third quarter of 1996
totaled $37 million and in the first nine months $458 million, reflecting the
planned reduction of approximately 3,650 positions. Total restructuring
charges associated with the merger were $610 million and reflected the planned
reduction of approximately 4,350 positions. Position reductions are expected
to be substantially complete by the end of 1997. Cash spending in the first
nine months of 1997 for this program totaled $115 million, a decrease in
spending of $300 million compared to the same period in 1996. Approximately
$85 million remains accrued as of September 30, 1997, as current liabilities
of the company.
Merger costs of $16 million recorded in the third quarter of 1996 related to
the November 1995 merger and consisted largely of costs associated with
certain nonrecurring organizational activities, the establishment of the
corporate identity for the new company, and various other costs of combining
the two companies. For the first nine months of 1996, merger costs were $67
million.
NONOPERATING INCOME AND EXPENSE
The decline in both interest income and interest expense for the quarter was
primarily due to lower interest rates in Europe. For the first nine months of
1997, the decline was also caused by the termination of certain borrowing
arrangements in Europe in July 1996.
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 1997
rate is the result of increased earnings in jurisdictions with lower tax
rates.
FINANCIAL CONDITION
September 30, December 31,
1997 1996
------------ -----------
Working Capital (U.S. dollars in millions) $2,246 $2,392
Current Ratio 2.00 1.96
Debt to Total Capitalization 15.1% 14.5%
Working capital decreased while the current ratio increased because current
liabilities fell more than current assets in relative terms. Current assets
declined due to decreases in short-term investments and accounts receivable
partially offset by an increase in cash and cash equivalents. Current
liabilities decreased primarily due to a decline in accounts payable. The
increase in the ratio of debt to capitalization resulted from a comparable
debt level in conjunction with a decline in total shareholders' equity.
The company's net financial asset position, presented below, declined slightly
from the prior year-end due to the net increase in short-term debt. Net
reductions in both short and long-term investments were mostly offset by
increases in cash and cash equivalents.
September 30, December 31,
1997 1996
------------ -----------
Cash, Equivalents and Investments $1,849 $1,849
Short-Term and Long-Term Debt 1,061 1,058
------ ------
Net Financial Assets $ 788 $ 791
====== ======
Net cash provided by operations for the first nine months of 1997 increased to
$862 million from $544 million for the same period in the prior year. The
1996 operating cash flows were low due to large cash expenditures related to
the merger and restructuring combined with an increase in receivables,
inventories, and other current assets. In 1997, merger and restructuring
related spending declined, as noted above. In addition, current assets
decreased, particularly accounts receivable.
Reductions in short-term investments as well as increases in short-term debt
represented major cash inflows during 1997, while capital spending and payment
of dividends represented major cash outflows. Additions of property, plant
and equipment totaling $354 million included expansion of bulk chemical
production facilities in Ireland; manufacturing centers in the U.S., Belgium,
Italy and Sweden; and nutritional plants in Sweden and China. 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 and currency options 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 a portion of 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 and options 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. Gains and losses from contracts related to hedges for product
shipments are recognized as "Cost of Products Sold" and are included in the
operating section of the statement of cash flows. Gains and losses from
forward exchange contracts related to hedges on other activities are
recognized as "All Other, Net", and are included in the investing section of
the statement of cash flows.
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 recently finalized an assessment of the expected impact of the
Year 2000 date recognition problem on existing automated systems worldwide.
Solutions will involve a mix of purchasing new systems and modifying existing
systems, with the emphasis on replacement rather than repair of many older
applications developed in-house. The company anticipates spending between
$120 to $140 million over the next two years, approximately 80 percent on
replacement of applications that for reasons other than the date recognition
problem had already been selected for replacement. A portion of the total
spending will be capitalized as purchased software.
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: sales and earnings projections; the effectiveness of and expense
estimates related to future projects including restructuring plans and the
Year 2000 date recognition problem; 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 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; 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.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a)(i) Exhibit A - Report of Independent Accountants (page 21).
(a)(ii) Exhibit 11 - Statement regarding computation of earnings per
share (page 22).
(a)(iii) Exhibit 12 - Ratio of Earnings to Fixed Charges (page 23).
(a)(iv) Exhibit 15 - Awareness of Coopers & Lybrand L.L.P. (page
24).
(a)(v) Exhibit 27 - Financial Data Schedule (EDGAR filing only).
(b) Form 8-K - No reports on Form 8-K were filed during the
quarter ended September 30, 1997.
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: November 11, 1997 /S/R. C. SALISBURY
R. C. Salisbury
Executive Vice President,
Finance and Administration
and Chief Financial Officer
+44 1753 757575
DATE: November 11, 1997 /S/D. W. SCHMITZ
D. W. Schmitz
Vice President, Corporate Assistant
Secretary, and Acting General Counsel
+44 1753 757575
<TABLE>
EXHIBIT 11
PHARMACIA & UPJOHN, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE - PRIMARY
(In millions, except per-share data)
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net earnings $ 79.1 $203.8 $451.5 $336.1
Dividends on preferred stock, net of tax 3.1 3.2 9.3 9.5
------ ------ ------ ------
Net earnings on common shares - primary $ 76.0 $200.6 $442.2 $326.6
====== ====== ====== ======
Average number of common shares outstanding 507.5 508.6 507.9 508.4
Number of common shares issuable assuming
exercise of stock options 2.4 4.1 2.4 3.9
Contingently issuable incentive common shares .6 .5 .6 .5
----- ----- ----- -----
Total shares - primary 510.5 513.2 510.9 512.8
===== ===== ===== =====
Primary earnings per common share $.15 $.39 $.86 $.64
==== ==== ==== ====
COMPUTATION OF EARNINGS PER COMMON SHARE - FULLY DILUTED(1)
Net earnings $ 79.1 $203.8 $451.5 $336.1
Less ESOP contribution assumed to be required
if preferred shares are converted into common
shares 1.0 1.0 3.1 3.1
Less tax benefit of preferred stock dividend on
allocated shares .3 .4 1.0 1.0
Plus tax benefit assumed on common stock dividend .2 .2 .6 .6
------ ------ ------ ------
Net earnings on common shares - fully diluted $ 78.0 $202.6 $448.0 $332.6
====== ====== ====== ======
Average number of common shares outstanding 507.5 508.6 507.9 508.4
Number of common shares issuable assuming
exercise of stock options 2.4 4.1 2.4 3.9
Contingently issuable incentive common shares .6 .5 .6 .5
Number of common shares issuable assuming
conversion of preferred shares 10.2 10.3 10.3 10.4
----- ----- ----- -----
Total shares - fully diluted 520.7 523.5 521.2 523.2
===== ===== ===== =====
Fully diluted earnings per common share $.15 $.39 $.86 $.64
==== ==== ==== ====
(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>
<TABLE>
EXHIBIT 12
PHARMACIA & UPJOHN, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(U.S. dollar amounts in millions)
<CAPTION>
Nine Months Year Ended December 31,
Ended
Sept 30, 1997 1996 1995 1994 1993 1992
------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Earnings from continuing
operations before income taxes $ 684 $ 838 $1,136 $1,271 $ 778 $ 947
Less: Equity in undistributed
net income (loss) of companies
owned less than 50% 3 5 7 8 8 6
-------- ----- ------ ------ ------ ------
681 833 1,129 1,263 770 941
Add:
Amortization of previously
capitalized interest 9 11 10 8 6 4
Fixed charges included in the above:
Interest and amortization of debt
expense 43 82 121 139 209 162
Rental expense representative
of an interest factor 28 37 35 35 32 35
-------- ----- ------ ------ ------ ------
Earnings from continuing operations
before income taxes and fixed
charges $ 761 $ 963 $1,295 $1,445 $1,017 $1,142
======== ===== ====== ====== ====== ======
Interest incurred and amortization
of debt expense $ 64 $ 115 $ 149 $ 164 $ 234 $ 178
Rental expense representative of an
interest factor 28 37 35 35 32 35
-------- ----- ------ ------ ------ ------
Total fixed charges $ 92 $ 152 $ 184 $ 199 $ 266 $ 213
======== ===== ====== ====== ======= ======
Ratio of earnings to fixed charges 8.24 6.33 7.05 7.24 3.82 5.35
==== ==== ==== ==== ==== ====
</TABLE>
EXHIBIT 15
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: Pharmacia & Upjohn, Inc. and Subsidiaries
Quarterly Report on Form 10-Q
We are aware that our report dated October 30, 1997 on our review of interim
financial information of Pharmacia & Upjohn, Inc. and Subsidiaries for the
three-month and nine-month periods ended September 30, 1997 and 1996 and
included in the Company's quarterly report on Form 10-Q for the quarter then
ended is incorporated by reference in the Company's prospectus on Form S-8
Registration Statement (No. 033-63903) and the prospectus on 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 that Act.
Coopers & Lybrand L.L.P.
Chicago, Illinois
November 12, 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 926
<SECURITIES> 0
<RECEIVABLES> 1,440
<ALLOWANCES> 94
<INVENTORY> 962
<CURRENT-ASSETS> 4,491
<PP&E> 5,881
<DEPRECIATION> 2,586
<TOTAL-ASSETS> 10,487
<CURRENT-LIABILITIES> 2,245
<BONDS> 554<F1>
0
283
<COMMON> 5
<OTHER-SE> 5,655
<TOTAL-LIABILITY-AND-EQUITY> 10,487
<SALES> 4,889
<TOTAL-REVENUES> 4,987
<CGS> 1,529
<TOTAL-COSTS> 1,529
<OTHER-EXPENSES> 832<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24
<INCOME-PRETAX> 684
<INCOME-TAX> 233
<INCOME-CONTINUING> 451
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 451
<EPS-PRIMARY> .86
<EPS-DILUTED> .86
<FN>
<F1>DOES NOT INCLUDE GUARANTEE OF ESOP DEBT OF 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 September 30, 1997, and the related
condensed consolidated statements of earnings and cash flows for the
three-month and nine-month periods ended September 30, 1997 and 1996.
These financial statements are the responsibility of the company'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 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
October 30, 1997
