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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
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 1-11557
PHARMACIA & UPJOHN, INC.
(Exact name of Registrant as specified in its charter)
Delaware 98-0155411
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
95 Corporate Drive, Bridgewater, New Jersey 08807 U.S.A.
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code 888/768-5501
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<S><C>
Common Stock (par value $.01) New York Stock Exchange
Rights to Purchase Preferred Stock New York Stock Exchange
(Title of class) (Name of each exchange on which registered)
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
None.
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 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The registrant estimates the aggregate market value of the voting stock held by
non-affiliates of the registrant (based upon the NYSE--Composite Transactions
closing price on January 31, 1999 as reported in The Wall Street Journal and
treating all executive officers and directors of the Company and all beneficial
owners of 5% or more of the Registrant's voting stock as affiliates) was
approximately $29,015,207,825.
The number of shares of Common Stock, $.01 par value, outstanding as of January
31, 1999 is 506,689,393 shares.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 1999 Proxy Statement are incorporated into Parts III and IV of
this report. Portions of the 1998 Annual Report to Shareholders are incorporated
into Parts II and IV of this report.
Certain statements contained in this report, such as statements concerning the
Company's anticipated financial or product performance 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 turnaround 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; 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.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Pharmacia & Upjohn, Inc. ("the Company") is a global
pharmaceutical group engaged in the research, development, manufacture and sale
of pharmaceutical and healthcare products. The Company was formed in November
1995 through the combination of Pharmacia Aktiebolag ("Pharmacia") and The
Upjohn Company ("Upjohn"). The Company is engaged in the research, development,
manufacturing, sales and marketing of various prescription human pharmaceutical
products, nonprescription drugs, pharmaceutical chemicals and intermediates, and
pharmaceutical products for both food and companion animals. These are
considered the Company's core business and are reported as the pharmaceutical
segment.
The Company's other businesses are reported as the
nonpharmaceutical segment, consisting of specialty products for hospital care,
diagnostics and nutritional supplements, as well as the Company's investment in
its biotechnology affiliates. These businesses together constituted about 9% of
1998 total consolidated sales. The major portion of the Company's nutrition
business was sold in late 1998, and the remaining nutrition businesses in
Germany and China will be sold later.
PHARMACEUTICAL SEGMENT
INDUSTRY BACKGROUND
The world market for human pharmaceuticals is concentrated in the
U.S., Western Europe and Japan. Regulatory pressures and pricing constraints
have intensified as governmental and private healthcare providers strive to
control the rapid growth in healthcare expenditures. Pharmaceuticals are
increasingly chosen according to their therapeutic benefit in relation to cost,
for example, pharmaceuticals that minimize hospital stays and reduce treatment
costs are increasingly preferred. It is therefore essential for pharmaceutical
companies to develop new improved and more efficient products that increase the
total value both for buyers and patients. The Company believes that these
developments have also led to more intense competition in the pharmaceutical
industry worldwide. Innovation, high-quality research and development focused on
unmet medical needs, rapid product introduction, wide geographical distribution
and cost efficiency are key competitive factors in the pharmaceutical industry.
PHARMACEUTICAL PRODUCT DESCRIPTIONS
The Company researches, develops, manufactures and markets
prescription human pharmaceutical products, nonprescription drugs,
pharmaceutical chemicals and intermediates, and pharmaceutical products for both
food and companion animals. The following summary discusses the Company's
principal pharmaceutical products.
DETROL(R)/DETRUSITOL(R) Tablets (tolterodine tartrate tablets)
were introduced in the U.S. in 1998 and are also sold in 22 other countries.
This product offers a treatment for overactivity in the bladder, thus reducing
symptoms such as increased frequency and urge to urinate, as well as urge
incontinence episodes. The U.S. patent covering DETROL Tablets expires in 2012,
and in 2009 in Europe and Japan, although patent term extensions may be
possible.
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GENOTROPIN(TM), a recombinant human growth hormone identical to
the body's own hormone, is the Company's largest selling product. GENOTROPIN,
which promotes longitudinal bone growth, is used for the treatment of growth
hormone deficiency in children and adults and for patients with renal
insufficiency. It is marketed in Europe, Japan and the U.S. In 1998, the Company
began selling GENOTROPIN directly in Japan after reacquiring exclusive sales and
marketing rights to GENOTROPIN from Sumitomo Pharmaceuticals. GENOTROPIN
products are not covered by product patents, but patents covering processes to
manufacture the product and delivery systems for the products offer some level
of exclusivity for the specific presentations sold by the Company.
XALATAN(R) (latanoprost ophthalmic solution) is used for the
treatment of open-angle glaucoma and ocular hypertension in patients who are
either intolerant of, or insufficiently responsive to, other intraocular
pressure-lowering medications. The product is approved for marketing in the U.S.
and 40 other countries. Regulatory clearance in Japan is expected later this
year. XALATAN is covered by a patent in the U.S. expiring in 2011 and in Europe
and Japan in 2009, and patent term extensions in Europe and Japan may be
possible.
The Company produces several drugs for CNS disorders, including
XANAX(R), HALCION(R) and SERMION(R), none of which have significant patent
protection and are subject to intense generic competition. XANAX Tablets,
containing alprazolam, are used for symptomatic relief of anxiety with and
without depressive symptoms and for the treatment of panic disorder. The use
patent for the panic disorder indication for XANAX expires in 2002. HALCION
Tablets, containing triazolam, are a hypnotic agent used for the treatment of
insomnia. SERMION Tablets are used primarily to treat cognitive and behavioral
disorders related to senile dementia.
EDRONAX(R) (reboxetine), for the treatment of major depression,
has been approved for marketing in several European countries and was submitted
for U.S. approval in 1998. European patents provide protection until 2001, but
U.S. patents expire in 1999, although patent term extensions may be possible.
HEALON(R) Solution for Intraocular Use is a viscoelastic product
which includes sodium hyaluronate and is used primarily in cataract surgery to
facilitate the implantation of plastic intraocular lenses ("IOLs") without
injuring the sensitive cells lining the cornea and functions as a soft surgical
instrument. The Company markets HEALON and HEALON GV(R), a more viscous fluid
form, directly to ophthalmologists in Europe, the U.S. and Japan and through
independent distributors in certain other countries.
The Company is one of the world's leading producers of anticancer
drugs. CAMPTOSAR(R) (irinotecan hydrochloride injection) is marketed in the
U.S. as a second-line treatment for metastatic colorectal cancer. CAMPTOSAR
Injection is protected by a patent in the U.S. until 2004, with a patent term
extension until 2007. FARMORUBICIN(R) (or PHARMORUBICIN(R)) and ADRIAMYCIN(R)
are used in the treatment of breast cancer as well as other solid tumors.
ADRIAMYCIN was the Company's first anthracycline preparation and is no longer
subject to patent protection. Although the product patents on FARMORUBICIN have
generally expired, patents on the best selling formulation of FARMORUBICIN do
not expire until 2006. In 1998, the Company submitted applications for U.S.
approval of two therapies for the treatment of breast cancer: epirubicin
hydrochloride injection, widely used in Europe, and AROMASIN(R), an oral
hormonal enzyme required to produce estrogen.
FRAGMIN(R) Injection is a low molecular weight heparin product for
the prevention of thrombosis in connection with surgery, unstable angina
(outside the U.S.), and hemodialysis, and is used in the treatment of acute deep
vein thrombosis. FRAGMIN is approved in more than 40 countries and is protected
by patents in the U.S., Europe and Japan, with patent expiration dates ranging
from the year 2000 in some European countries to 2005 in the U.S.
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The Company provides a broad line of antibiotic products including
CLEOCIN(R) (or DALACIN(R)) and LINCOCIN(R) products. CLEOCIN PHOSPHATE(R) is an
injectable form of clindamycin that is used in the treatment of certain
life-threatening anaerobic infections. CLEOCIN T(R) is a topical formulation for
treatment of acne. CLEOCIN(R) Vaginal Cream is used to treat bacterial
vaginosis. LINCOCIN is used in the treatment of serious infections caused by
many strains of gram-positive bacteria. The Company has semi-exclusive U.S.
marketing rights to VANTIN(R) Tablets and Oral Suspension, an advanced
cephalosporin antibiotic, under patents licensed from Sankyo Company, Ltd., the
last of which expires in the U.S. in late 2001.
The Company produces various forms of chemical modifications of
hormone products under the trademark MEDROL(R) or DEPO-MEDROL(R), which are used
to treat a number of inflammatory and allergic conditions. SOLU-CORTEF(R)
Sterile Powder and SOLU-MEDROL(R) Sterile Powder are injectable corticosteroid
products.
The Company markets several steroid hormone products having a
variety of uses, including the treatment of allergic reactions, inflammation,
asthma and certain hormone deficiencies. The Company's most important synthetic
hormone product is PROVERA(R) Tablets, which is a female sex hormone replacement
agent. The Company also markets DEPO-PROVERA(R) Contraceptive Injection and
OGEN(R) Tablets and Vaginal Cream, an estrogen replacement product.
CAVERJECT(R) (alprostadil injection), a treatment for erectile
dysfunction due, among other reasons, to diabetes, cardiovascular problems,
injuries and aging, is self-administered by intracavernosal injection. CAVERJECT
is no longer covered by patents.
MIRAPEX(R)/MIRAPEXIN(R) (pramipexole tablets) is approved for
marketing in the U.S. and Europe for the treatment of the signs and symptoms of
Parkinson's disease. The product was licensed from Boehringer-Ingelheim, which
has co-promotion rights in the U.S. The compound patent expires in 2005 in
Europe and Japan and in 2006 in the U.S. CABASER(R) (cabergoline) has also been
approved in several European countries for treatment of Parkinson's disease and
is subject to European patent protection until at least 2002.
The Company markets several HIV-positive and AIDS products,
including MYCOBUTIN Capsules(R), for the prevention of Mycobacterium Avium
Complex, a fatal bacterial infection that is a common cause of death in
HIV-positive individuals and people with AIDS, which will lose U.S. patent
protection in late 1999 and in Europe from 2000 to 2003; RESCRIPTOR(R)
(delavirdine mesylate tablets), a non-nucleoside reverse transcriptase
inhibitor, launched in the U.S. in 1997 for the treatment of HIV-1 infection in
combination with appropriate antiretroviral agents, which is protected by a U.S.
patent until 2013; and VISTIDE(R) (cidofovir injection), indicated for the
treatment of cytomegalovirus (CMV) infection in the retina in AIDS patients
unsuitable for other therapy.
The Company's major oral antidiabetes agents are MICRONASE(R)
Tablets, containing glyburide, and GLYNASE(R) PresTab(R) Tablets, also
containing glyburide, for the treatment of non-insulin-dependent diabetes,
neither of which is subject to significant patent protection. The Company has
also licensed GLYSET(R) Tablets, from Bayer AG, for the treatment of Type II
diabetes.
The Company also markets AZULFIDINE/SALAZOPYRIN for the treatment
of inflammatory bowel disease and rheumatoid arthritis.
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The Company developed and manufactures nonprescription
NICORETTE(R) and NICOTROL(R) products for smokers who seek a medical product to
aid in smoking cessation. These products are sold in several forms and in many
countries. NICORETTE Chewing Gum is sold in the U.S. by SmithKline Beecham
Consumer Pharmaceuticals. NICORETTE Transdermal Patch is sold in the U.S. by
McNeil Consumer Products Company. NICORETTE is also available in inhaler and
nasal spray formulations.
The Company produces and sells nonprescription ROGAINE(R) Extra
Strength for Men and ROGAINE(R) Regular Strength, a 5% and 2%, respectively,
solution of minoxidil applied topically to treat hair loss in men with male
pattern baldness and, in the Regular Strength formulation, in women with
androgenetic alopecia or hereditary hair loss. The product is also sold in
numerous foreign countries. ROGAINE Extra Strength for Men is covered by an ANDA
moratorium until 2000. ROGAINE Regular Strength competes in the U.S.
nonprescription market with several generic 2% topical minoxidil products.
The Company also manufactures and distributes other
non-prescription products including KAOPECTATE(R) products, for diarrhea;
MICROLAX(R) Enema, for constipation; CORTAID(R) products, anti-inflammatory
topical products; the family of UNICAP(R) vitamin products; DRAMAMINE(R),
anti-motion sickness products, NASALCROM, a nasal spray for allergic rhinitis,
PEDIACARE, a line of children's cough and cold products, and MICATIN, an
antifungal to treat athlete's foot.
NAXCEL(R) (or EXCENEL(R)) Sterile Powder is an antibiotic for
treating bovine and swine respiratory disease and early chick mortality;
LINCO-SPECTIN(R) Soluble Powder and Premix is a combination
lincomycin/spectinomycin antibiotic; LINCOMIX(R) 20 and LINCOMIX 50 Feed
Medication are feed-additive antibiotics; MGA(R) Premix is a growth-promoting
feed additive for feedlot heifers; LINCOCIN(R) is a line of small-animal
antibiotics; and LUTALYSE(R) (or DINOLYTIC(R)) Sterile Solution is used to
synchronize breeding performance in mares and cattle. The Company also markets
various products for the treatment of mastitis.
NONPHARMACEUTICAL SEGMENT
The Company owns 45% of Amersham Pharmacia Biotech, Ltd., one of
the world's leading suppliers of biotechnology equipment, systems, reagents and
chemicals for pharmaceutical and biotechnology companies and for life science
research in the public and private sectors.
The Company also owns 41% of Biacore International AB, which
develops, manufactures and markets advanced scientific instruments employing
affinity-based biosensor technology.
The Company is the world leader in the area of in vitro allergy
diagnostics. The Company's main allergy diagnostic product, the Pharmacia CAP
System(R), is a highly automated laboratory system that enables testing from
patient blood samples for allergenic sensitivity to nearly 500 substances.
Patents on the Pharmacia CAP System expire in 2004. The Company also markets an
easy-to-use, low-volume test instrument, UniCAP 100(R), for use by small to
medium size laboratories and family physicians.
The Company's largest market for allergy diagnostics is Japan,
while sales in the U.S. are relatively low because of the relatively high
incidence of more traditional in vivo (skin prick) diagnostic testing by medical
professionals in the U.S.
RESEARCH AND DEVELOPMENT
The Company aims to direct its R&D efforts to develop new
innovative pharmaceuticals and other healthcare products offering high
therapeutic benefits in a number of therapeutic areas in which the Company
believes it has the ability to establish a leading global position. The Company
also seeks to expand the markets for its existing products by identifying new
indications and administration forms as well as by expanding their international
market penetration and extending product life, including by converting suitable
patented products to over-the-counter products. The Company concentrates its R&D
resources on selected areas both where it has in-house expertise and where there
are identified substantial unmet medical needs. The Company's research
activities are being focused on four medically important therapeutic areas,
including infectious disease, metabolic disease, central nervous system disease
and oncology, and are conducted principally in the Company's three regional
centers in Kalamazoo, Michigan, Stockholm, Sweden and Milan, Italy.
The R&D process has historically taken from 10 to 15 years from
discovery to initial product launch and is conducted in various stages. During
each stage of development, there is a substantial risk that the desired
objectives will not be achievable and that the product will therefore have to be
abandoned or the objectives modified. During the "preclinical" stage, generally
the first two to four years, research is carried out in order to identify an
active substance in the laboratory and then perform pharmacology and toxicology
studies of its effects in various animals. Before testing in humans, an
application for the compound must be filed and processed by the requisite
regulatory authorities. Testing in humans is performed in different clinical
phases to assure the safety and efficacy of the new compound. In clinical Phase
I, studies to establish the tolerance, absorption, distribution, metabolism and
excretion of the compound are performed on healthy human subjects. Clinical
Phase II studies are performed on a limited number of patients to determine
efficacy and to define an effective dose. Clinical Phase III comparative studies
are then performed on a larger number of patients in order to further establish
efficacy and safety. Together, Phases I, II and III typically take from three to
five years to complete. Thereafter, an application containing all data for the
proposed drug is sent to regulatory authorities for approval, which may take an
additional one to two years. Further clinical trials, called Phase IV trials,
are generally carried out after product launch to continue to monitor the
efficacy and safety of a new drug.
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Among the Company's most important research compounds in the
area of infectious diseases are a new class of antimicrobials called
oxazolidinones, which have a novel mechanism of action: inhibition of mRNA
translation. The lead compound in this class, linezolid, is in Phase III
clinical studies to evaluate the safety and efficacy of the compound in treating
infections caused by gram-positive bacteria including antibiotic-resistant
strains of staphylococci, streptococci and enterococci. Linezolid is claimed in
a U.S. patent currently set to expire in 2014, but which could be extended
depending on the date of NDA approval. Patents issuing on patent applications
filed in various other countries will similarly expire generally in 2014, but
may be subject to extension in certain countries.
The Company is pursuing clinical development of tipranavir, a
protease inhibitor being evaluated for treatment of HIV-1 infection.
The Company's primary research area in the field of metabolic
disease concerns growth disorders. In addition, research projects are currently
in process in the field of obesity, diabetes, arteriosclerosis and vascular
disease. Research and development in the area of growth and growth factors is
concentrated on a broader spectrum of indications for GENOTROPIN. In addition,
the Company is pursuing further development of convenience products to
administer GENOTROPIN.
Oncology is another major research focus for the Company with
discovery and development efforts aimed at finding effective treatments for
various forms of tumors, particularly those which respond poorly, or are
resistant, to currently available therapy. The research programs cover
chemotherapy, hormone therapy, immunotherapy of cancer as well as novel
approaches and mechanisms of antitumor action which are being pursued mainly in
discovery phase.
Development candidates in-licensed by the Company during 1998
include almotriptan, an anti-migraine compound for which the Company will have
exclusive U.S. marketing rights; thrombopoietin (TPO), a compound in Phase
II/III testing being evaluated for use in treating cancer patients suffering
from chemotheraphy, for which the Company has worldwide rights; and JTT-501, a
compound in Phase II testing for treatment of diabetes, for which the Company
has worldwide rights.
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PRODUCTION
The Company produces its pharmaceutical products mainly in the
U.S., Sweden, Italy, Belgium, Ireland and Puerto Rico.
The Company purchases a variety of raw materials for use in its
manufacturing processes. When available, the Company has a policy of maintaining
multiple sources of supply for materials. The Company obtains its supplies of
raw materials from several companies in a number of countries. The Company has
not experienced any difficulty in obtaining a sufficient supply of raw materials
in recent years and believes that it will be able to obtain them in sufficient
quantities in the future. However, the price of its raw materials may vary from
year to year.
MARKETING AND DISTRIBUTION
The Company's pharmaceutical products are sold worldwide to
healthcare providers, veterinarians, drug stores, food stores, mass
merchandisers, distributors and wholesalers. The Company markets its products
through its own marketing companies or through local distributors and licensees.
As part of its ongoing commitment to its customers, the Company periodically
organizes educational programs to provide specialist doctors with information
on the most recent product innovations and scientific advances.
COMPETITION
The pharmaceutical industry is highly competitive. The Company's
principal competitors consist of major international corporations with
substantial resources. A drug may be subject to competition from alternative
therapies during the period of patent protection and thereafter it will be
subject to further competition from generic products. The manufacturers of
generic products typically do not bear the related research and development
costs and consequently are able to offer generic products at considerably lower
prices than the branded equivalents. A research-based pharmaceutical company
will therefore normally seek to achieve a sufficiently high profit margin and
sales volume during the period of patent protection to justify the original
investment and to fund research for the future. There are, however, a number of
factors which may enable products to remain profitable once patent protection
has ceased. These include the establishment of a strong brand image with the
prescriber or the consumer, supported by an active trademark registration and
enforcement policy, and the development of a broader range of alternative
formulations than the generic manufacturer typically supplies.
As is the case for the pharmaceutical industry in general, the
introduction of new products and processes by competitors may affect pricing
levels or result in product replacement for existing products, and there can be
no assurances that any of the Company's products may not become outmoded,
notwithstanding patent or trademark protection. In addition, increasing
governmental and other pressures towards the dispensing of generic products in
substitution for brand-name drugs may increase competition for products no
longer covered by patents.
Over the last few years, the pharmaceutical industry has
experienced increased vertical and horizontal consolidation, and the breadth of
products offered and distribution capabilities of a company may become a
competitive feature. The Company competes with other pharmaceutical companies in
discovering or licensing new chemical entities useful in treating medical
conditions. In addition, significant changes in marketing conditions are
occurring in the U.S., Swedish and other pharmaceutical markets, including
decreased pricing flexibility, restrictions on promotional and
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marketing practices and the impact of managed care, particularly with respect to
product selections and pricing concessions.
The Company's competitive position depends in part upon its
ability to develop innovative, cost-effective new products, as well as new
indications for, and improvements in, existing products. Its competitive
position also depends upon, among other things, its ability to compete on the
basis of price as well as to maintain a reputation for quality, efficacy and
cost-effectiveness with the specialist doctors and hospital purchasing groups to
which its products are targeted, as well as with the wider group of customers
which includes pharmacies, wholesalers, hospitals and insurers.
In addition, the Company's ability to maintain long-standing and
interactive relationships with specialist doctors and its ability to attract and
retain qualified scientific and other personnel, develop and implement
production and marketing plans, obtain and maintain patent protection for
selected products in its significant markets and secure adequate capital
resources are also important competitive factors.
PRICING
In addition to the normal competitive forces that affect the level
of prices, a further constraint exists in the form of price controls in most
countries in which the Company sells its products. These controls arise either
by law or because the government or other healthcare providers in a particular
jurisdiction are the principal purchasers of the product or reimburse purchasers
for the cost of the product. Price control mechanisms operate differently from
jurisdiction to jurisdiction and can result in large price differentials between
markets, which may be aggravated by currency fluctuations. These price
differentials are exploited by traders (parallel importers) who purchase branded
products in lower-priced markets for resale in higher-priced markets.
PRODUCT REGULATION
Like other pharmaceutical companies, the Company is subject to
strict controls on the manufacture, labeling, distribution and marketing of its
products. Further controls exist on the non-clinical and clinical development of
pharmaceutical products. Of particular importance is the requirement to obtain
and maintain regulatory approval for a pharmaceutical product from a country's
national regulatory authority before such product may be marketed in a
particular country.
The submission of an application to a regulatory authority does
not guarantee that a license to market the product will be granted. Furthermore,
each regulatory authority may impose its own requirements and may delay or
refuse to grant, or may require additional data before granting, an approval,
even though the relevant product has been approved in another country.
Regulatory authorities also have administrative powers that include product
recalls, seizure of products and other sanctions.
The U.S., Europe, Japan, Australia and Canada have very high
standards for technical appraisal and consequently, in most cases, a lengthy
approval process. The time taken to obtain approval varies by country, but
generally takes from six months to four years from the date of application,
depending upon the quality of the data produced, the degree of control exercised
by the regulatory authority, the efficiency of its review procedure and the
nature of the product. The trend in recent years has been toward greater
regulation and higher standards with higher levels of standardization among
jurisdictions.
In the U.S., most human and animal pharmaceutical products
manufactured or sold by the Company are subject to regulation by the FDA as well
as by other federal and state agencies. The FDA regulates the introduction of
new drugs, advertising of prescription drug products, manufacturing,
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laboratory and clinical practices, labeling, packaging and record-keeping with
respect to drug products. The FDA also reviews the safety and effectiveness of
marketed drugs and may require withdrawal of products from the market and
modification of labeling claims where necessary. In addition, the manufacturing,
marketing and use of Animal Health drug products are closely regulated by the
FDA.
Government approval of new drugs under the federal Food, Drug and
Cosmetic Act requires substantial evidence of safety and efficacy. As a result
of this requirement, as interpreted by the FDA, the length of time and the
laboratory and clinical information required for approval of an NDA is
considerable.
The FDA has adopted streamlined procedures for the approval of
duplicate drugs (drugs containing the same active ingredient as the originator's
product), including abbreviated NDAs. Approval of abbreviated NDAs may not be
made effective prior to expiration of valid patents. The FDA has established a
similar expedited approval process for antibiotics. The availability of the
abbreviated NDA and expedited antibiotic approval processes has reduced the time
required to obtain FDA approval of some competing products and has facilitated
generic competition.
At the state level, so-called "generic substitution" legislation
permits the dispensing pharmacist to substitute a different manufacturer's
version of a drug for the one prescribed. In a number of states, such
substitution is mandatory unless precluded by the prescribing physician.
U.S. pharmaceutical manufacturers are required to provide rebates
to state governments for prescriptions covered by Medicaid. The issue of further
price controls on sales of prescription drugs continues to be considered in
Congress and various states, and additional federal or state legislation to
limit prices of prescription drugs is possible.
It is difficult to predict the ultimate effect of streamlined
approval of duplicate or generic drugs, "generic substitution," the Medicaid
reimbursement and rebate programs and possible price limitations. However, the
Company believes that its development of patented and exclusively licensed
products may moderate the impact of programs and legislation focusing mainly on
products available from multiple suppliers.
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FINANCIAL INFORMATION
Financial information about industry segments and financial
information about foreign and domestic operations and export sales is contained
in the Company's financial statements, incorporated herein by reference to the
Registrant's Annual Report to Shareholders filed as Exhibit 13 hereto.
EMPLOYEES
The Company has approximately 30,000 employees worldwide, although
the number is continually changing based on realignment of operations and
workforce needs.
The Company believes that it has good relations with its
employees. Employees at several non-U.S. locations are represented either by
freely elected unions or by legally mandated workers' councils or similar
organizations.
YEAR 2000
The Company has established a global Year 2000 program to review
its information technology ("IT") systems and to develop plans to correct Year
2000 date recognition problems in computers. The program consists of assessment
and remediation of IT systems and embedded systems, assessment of business risks
and the development of contingency plans to address these risks. The Company
expects to complete compliance measures for its IT and embedded systems by
mid-1999 and to test these systems in the second half of 1999. The
Company anticipates total spending of $150 million between 1997 and 2000, of
which $110 million has already been spent, largely on replacement of
applications that, for reasons other than Year 2000 noncompliance, had been
previously selected for replacement. The Company believes that its Year 2000
program will prevent the Year 2000 problem from having a material adverse effect
on the Company's business, financial position, results of operations and
liquidity. However, there can be no assurance that the Year 2000 problem will
not have such an impact on the Company.
CONVERSION TO THE EURO
On January 1, 1999, several European countries began operating
with a new common currency, the euro. The euro will completely replace these
countries' national currencies by January 1, 2002. The conversion to the euro
will require the Company to modify some of its systems and certain commercial
arrangements. The cost of this is not expected to be material. The conversion to
the euro may have competitive implications on pricing and marketing strategies,
but any such impact is not
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<PAGE> 12
known at this time. The Company expects the conversion to have a limited impact
on its outstanding derivatives and other financial instruments, and a limited
impact on currency risk.
The euro conversion is not expected to have a significant impact on
the Company; however, it is uncertain what effects the new euro currency will
have on the marketplace. There can be no assurance that all problems will be
foreseen and corrected, or that there will not be a material disruption of the
Company's business.
FOREIGN EXCHANGE FLUCTUATIONS
The Company records its transactions and prepares its financial
statements in U.S. dollars, but a significant portion of its earnings and
expenditures are in other currencies. Changes in exchange rates between the U.S.
dollar and such currencies can result in increases or decreases in the Company's
costs and earnings. Fluctuations in exchange rates between the U.S. dollar and
other currencies may also affect the book value of the Company's assets outside
the United States and the amount of shareholders' equity. The Company seeks to
minimize its currency exposure by engaging in hedging transactions, where deemed
appropriate.
ENVIRONMENTAL MATTERS
The Company is subject to extensive environmental legislation and
regulation, requiring substantial environmental compliance costs, including
capital expenditures related to future production. Projects related to the
prevention, mitigation and elimination of environmental effects are implemented
worldwide.
Since several capital projects are undertaken for both environmental
control and other business purposes, such as production process improvements, it
is difficult to estimate the specific capital expenditures for environmental
control. However, it is estimated that capital expenditures for environmental
protection will exceed $20 million in 1999 and $25 million in 2000. Operating
expenses for compliance with environmental protection laws and regulations in
1998 are estimated to have been in excess of $45 million. Management estimates
that such operating expenses will be in excess of $50 million in each of years
1999 and 2000. Cash payments charged to environmental reserves in 1998 were
approximately $10 million and are anticipated to approximate $5 million in 1999.
With regard to its discontinued industrial chemical facility in North
Haven, Connecticut, the Company may soon be required to submit a corrective
measures study report to the U.S. Environmental Protection Agency (EPA). As the
corrective action process progresses, it may become appropriate to reevaluate
the existing reserves designated for remediation in light of changing
circumstances. It is reasonably possible that a material increase in accrued
liabilities will be required, but it is not possible to determine what, if any,
exposure exists at this time or when the expenditures might be made.
ITEM 2. PROPERTIES
The Company's various businesses operate through a number of offices,
research laboratories and production facilities throughout the world with
principal locations in Kalamazoo, Michigan; Stockholm, Uppsala and Helsingborg,
Sweden; Milan, Italy; and Puurs, Belgium. The Company also has major facilities
in Japan and Puerto Rico. The Company headquarters is located in Bridgewater,
New Jersey. The Company believes its properties to be adequately maintained and
suitable for their intended use and its production facilities to have a capacity
adequate for its current needs.
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<PAGE> 13
ITEM 3. LEGAL PROCEEDINGS
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.
Product liability is a significant commercial risk for the Company. Substantial
damage awards have been made in certain jurisdictions against pharmaceutical
companies based upon claims for injuries allegedly caused by the use of their
products.
The Company has been 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. The Company
reached settlement with plaintiffs in the federal class action cases that had
been consolidated in federal court in Chicago, Illinois. The Company believes
that any potential remaining liability above amounts accrued will not have a
material adverse effect on the Company's consolidated financial position, its
results of operations, or liquidity.
The Company is involved in several administrative and judicial
proceedings relating to environmental concerns, including actions brought by the
U.S. EPA and state environmental agencies for remedial cleanup at approximately
50 sites. 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, such as potential cleanup remedies, the estimated cost of cleanup
and the Company's ultimate share of a site's cost.
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 believes that any 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.
Please see the third paragraph of the section captioned
"Environmental Matters" for information concerning the Company's discontinued
industrial chemical facility in North Haven, Connecticut.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
quarter ended December 31, 1998.
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<PAGE> 14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company
The Common Stock is listed and traded on the New York Stock
Exchange (the "NYSE") under the symbol PNU. As of January 31, 1999, there were
36,809 holders of record of the Common Stock. Swedish Depositary Shares, each
representing one share of Common Stock, are traded on the Stockholm Stock
Exchange under the symbol PH&U.
Information regarding the market prices and dividends for the
Company's Common Stock and related stockholder matters appearing under the
caption "Quarterly Data" in the 1998 Annual Report to Shareholders (Exhibit 13)
is hereby incorporated by reference.
ITEM 6. SELECTED FINANCIAL DATA
Incorporated herein by reference to the Registrant's Annual
Report to Shareholders filed as Exhibit 13 hereto.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Incorporated herein by reference to the Registrant's Annual
Report to Shareholders filed as Exhibit 13 hereto.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated herein by reference to the Registrant's Annual
Report to Shareholders filed as Exhibit 13 hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Background information for the Board of Directors, including Fred
Hassan, the Company's President and Chief Executive Officer, is
incorporated herein by reference from the Company's definitive proxy
statement for the annual meeting of shareholders to be held on April
20, 1999.
In addition to Fred Hassan, the following are the Company's executive
officers:
Goran A. Ando, M.D., age 49, Executive Vice President and
President, Research & Development. He had been Executive Vice President
and Deputy Chief Executive Officer of Pharmacia since February 1995,
and before that had been at Glaxo Holdings p.l.c., where he was
director of research and development activities.
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<PAGE> 15
Hakan Astrom, age 51, Senior Vice President, Strategic Planning
and Investor Relations. He had been Group Vice President of Pharmacia
since 1993.
Richard T. Collier, age 45, Senior Vice President and General
Counsel. He had been Senior Vice President, General Counsel and Member
of the Executive Council of Rhone-Poulenc Rorer until December 1997. He
joined Rhone-Poulenc Rorer in 1986 as Assistant Counsel and held
various positions including Vice President and Assistant to the
Chairman from 1991 to 1992.
Christopher J. Coughlin, age 46, Executive Vice President and
Chief Financial Officer. He had been Executive Vice President and
Chief Financial Officer of Nabisco since 1996, and prior to that, he
was Chief Financial Officer at Sterling Winthrop, Inc.
Paul L. Matson, age 50, Senior Vice President, Human Resources. He
had been Vice President, Human Resources, of Moore Corporation Limited
until 1998. Prior to that he was a senior human resources executive
with Miles, Inc., the U.S. subsidiary of Bayer Corporation.
Mats G. Pettersson, age 53, Senior Vice President, Business
Development. He had been Group Vice President of Pharmacia since 1993
and prior to that he was Chief Financial Officer of KabiVitrum AB,
Stockholm, Sweden.
Timothy G. Rothwell, age 47, Executive Vice President and
President, Global Pharmaceutical Operations. He had been President of
Rhone-Poulenc Rorer since 1996 and was a member of that Board of
Directors since January 1997. He joined Rhone-Poulenc Rorer in 1995 as
Executive Vice President and President, Pharmaceutical Operations.
Prior to that he was CEO and President of the U.S. pharmaceutical
business for Sandoz Pharmaceuticals.
Carrie Smith Cox, age 41, Senior Vice President and Head, Global
Business Management. She had been Vice President, Women's Health Care
at Wyeth-Ayerst Laboratories division of American Home Products until
August 1997.
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<PAGE> 16
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from the Company's definitive
proxy statement for the annual meeting of stockholders to be held
on April 20, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from the Company's definitive
proxy statement for the annual meeting of stockholders to be held
on April 20, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the Company's definitive
proxy statement for the annual meeting of stockholders to be held
on April 20, 1999.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)1. FINANCIAL STATEMENTS
The following are included in the 1998 Annual Report to
Shareholders (Exhibit 13) and are incorporated by reference into
this Form 10-K pursuant to Item 8.
Report of Independent Accountants - PricewaterhouseCoopers LLP
Consolidated Statements of Earnings, Years ended December 31,
1998, 1997 and 1996.
Consolidated Balance Sheets, December 31, 1998 and 1997.
Consolidated Statements of Shareholders' Equity, Years ended
December 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows, Years ended December 31,
1998, 1997 and 1996.
Note 7. Earnings Per Common Share, Years ended December 31, 1998,
1997 and 1996.
Note 21. Segment and Geographic Information, Years ended December
31, 1998, 1997 and 1996.
Notes to Consolidated Financial Statements.
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<PAGE> 17
(A)2. FINANCIAL STATEMENT SCHEDULES
NOTES:
(1) Schedules are omitted because they are either not required, are
not applicable or because equivalent information has been included
in the financial statements, the notes thereto or elsewhere
herein.
(2) Financial statements of 50 percent-or-less-owned affiliated
persons are omitted because such persons, in the aggregate, do not
constitute a significant subsidiary.
(A)3. EXHIBITS
(3)(i) Restated Certificate of Incorporation of the Registrant
(filed as Exhibit 4.1 to the Registrant's Registration
Statement on Form S-8 (Reg. No. 333-03109), and
incorporated herein by reference).
(3)(ii) By-laws of the Registrant.
(4)(a) Loan Agreement between Puerto Rico Industrial,
Medical and Environmental Pollution Control Facilities
Financing Authority and The Upjohn Company, dated as of
December 1, 1983, and Trust Agreement between Puerto
Rico Industrial, Medical and Environmental Pollution
Control Facilities Financing Authority and The Chase
Manhattan Bank (National Association), Trustee, dated as
of December 1, 1983 (not filed pursuant to Regulation
S-K, Item 601 (b)(4)(iii)(A); the Registrant agrees to
furnish a copy of these documents to the Securities and
Exchange Commission upon request).
(4)(b) Indenture dated as of February 1, 1990, with
respect to debt securities issued by the Upjohn Employee
Stock Ownership Trust and 9.79% Amortizing Notes, Series
A, Due February 1, 2004, issued by the Upjohn Employee
Stock Ownership Trust and guaranteed by the Registrant
(not filed pursuant to Regulation S-K, Item 601
(b)(4)(iii)(A); the Registrant agrees to furnish a copy
of these documents to the Securities and Exchange
Commission upon request).
(4)(c) Indenture dated as of August 1, 1991 between the
Company and The Bank of New York, as trustee, with
respect to Debt Securities to be issued thereunder from
time to time (not filed pursuant to Regulation S-K, Item
601(b)(4)(iii)(A); the Registrant agrees to furnish a
copy of these documents to the Securities and Exchange
Commission upon request.
(4)(d) Rights Agreement, which includes as Exhibit A the
forms of Rights Certificate and Election to Exercise and
as Exhibit B the form of Certificate of Designation and
Terms of the Participating Preferred Stock (filed as
Exhibit 4 to the Registrant's Current Report on Form 8-K
dated February 25, 1997 and incorporated herein by
reference).
(10)(a) Form of Indemnification Agreement entered into with
each Officer and Director (incorporated by reference to
Exhibit (10)(a) to the Registrant's Form 10-K for the
year ending December 31, 1995).
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<PAGE> 18
(10)(b) Form of Employment Agreement with original
executive officers of Registrant, including G.A. Ando,
H. Astrom and M. Pettersson, dated January 4, 1996
(incorporated by reference to Exhibit (10)(c) to the
Registrant's Form 10-K for the year ending December 31,
1995).
(10)(c) Employment Agreement with Fred Hassan dated May 7,
1997 (incorporated by reference to Exhibit (10) to the
Registrant's Form 10-Q for the quarter ending June 30,
1997).
(10)(d) Employment Agreement with Richard T. Collier
(incorporated by reference to Exhibit (10)(h) to the
Registrant's Form 10-K for the year ending December 31,
1997).
(10)(e) Employment Agreement with Timothy G. Rothwell
(incorporated by reference to Exhibit (10)(i) to the
Registrant's Form 10-K for the year ending December 31,
1997).
(10)(f) Employment Agreement with Christopher J. Coughlin dated
February 10, 1998.
(10)(g) Employment Agreement with Carrie Smith Cox dated August
26, 1997.
(10)(h) Employment Agreement with Paul L. Matson dated February
17, 1998.
(10)(i) Long-Term Incentive Plan (incorporated by reference
to Exhibit (10)(h) to the Registrant's Form 10-K for the
year ending December 31, 1995).
(10)(j) Annual Incentive Plan (incorporated by reference to
Exhibit (10)(i) to the Registrant's Form 10-K for the
year ending December 31, 1995).
(12) Computation of Ratio of Earnings to Fixed Charges.
(13) Annual Report to Shareholders.
(21) Subsidiaries of the Registrant.
(23) Consent of Independent Accountants.
(27) Financial Data Schedule.
(B) REPORTS ON FORM 8-K
None.
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<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) 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.
By: /s/ Fred Hassan
-----------------------------------------
Fred Hassan
President and Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of
1934, this Registration Report has been signed by the following persons on
behalf of the Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ /Soren Gyll Chairman of the Board and Director February 16, 1999
- ----------------------------------
Soren Gyll
/s/ Fred Hassan President and Chief Executive Officer and February 16, 1999
- ---------------------------------- Director
Fred Hassan
/s/ Christopher J. Coughlin Executive Vice President (Chief Financial February 16, 1999
- ---------------------------------- Officer)
Christopher J. Coughlin
/s/ Robert G. Thompson Senior Vice President (Chief Accounting February 16, 1999
- ---------------------------------- Officer)
Robert G. Thompson
/s/ Richard H. Brown Director February 16, 1999
- ----------------------------------
Richard H. Brown
- ---------------------------------- Director February 16, 1999
Frank C. Carlucci
/s/ Gustaf Douglas Director February 16, 1999
- ----------------------------------
Gustaf Douglas
/s/ M. Kathryn Eickhoff Director February 16, 1999
- ----------------------------------
M. Kathryn Eickhoff
/s/ Berthold Lindquist Director February 16, 1999
- ----------------------------------
Berthold Lindquist
/s/ Olof Lund Director February 16, 1999
- ----------------------------------
Olof Lund
/s/ C. Steven McMillan Director February 16, 1999
- ----------------------------------
C. Steven McMillan
</TABLE>
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<PAGE> 20
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ William U. Parfet Director February 16, 1999
- ----------------------------------
William U. Parfet
/s/ Ulla Reinius Director February 16, 1999
- ----------------------------------
Ulla Reinius
/s/ Bengt Samuelsson Director February 16, 1999
- ----------------------------------
Bengt Samuelsson
</TABLE>
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<PAGE> 21
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
(3)(ii) By-laws of the Registrant
(10)(f) Employment Agreement with Christopher J. Coughlin
(10)(g) Employment Agreement with Carrie Smith Cox
(10)(h) Employment Agreement with Paul L. Matson
(12) Computation of Ratio of Earnings to Fixed Charges
(13) Annual Report to Shareholders
(21) Subsidiaries of the Registrant
(23) Consent of Independent Accountants
(27) Financial Data Schedule
<PAGE> 1
EXHIBIT (3)(II)
AMENDED
BY-LAWS
OF
PHARMACIA & UPJOHN, INC.
ARTICLE I
OFFICES
SECTION 1.01. Registered Office. The registered office of Pharmacia &
Upjohn, Inc. (the "Corporation") in the State of Delaware shall be at the
principal office of The Corporation Trust Corporation in the City of Wilmington,
County of New Castle, and the registered agent in charge thereof shall be The
Corporation Trust Corporation.
SECTION 1.02. Other Offices. The Corporation may have an office or
offices at any place or places within or without the State of Delaware as the
Board of Directors of the Corporation (the "Board") may from time to time
determine or the business of the Corporation may from time to time require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 2.01. Annual Meetings. (a) The annual meeting of record holders
(a "Stockholder") of shares of the Corporation issued and outstanding (the
"Shares") of the Corporation shall be held on such other day following or on
such date as shall be set forth in the notice of annual meeting approved by the
Board and provided to Stockholders.
(b) The annual meeting of the Stockholders for 1996 shall be held in
either Sweden or the U.S., as determined by the Board of Directors, and
thereafter the location of the annual meetings shall alternate between Sweden
and the United States. Wherever located, provision shall be made for
Stockholders located in the other location to participate in the annual meeting
by means of conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other.
(c) At any such annual meeting, only such business shall be conducted
as shall have been brought before the meeting (x) by or at the direction of the
Board or (y) by any Stockholder entitled to vote thereat that complies with the
procedures set forth in Section 2.02 hereof.
1
<PAGE> 2
SECTION 2.02. Stockholder Proposals and Nominations for Directors. (a)
Any Stockholder entitled to vote at such annual meeting may propose business
(other than nominations for the election of Directors of the Corporation (the
"Directors") to be included in the agenda of such meeting only if written notice
of such Stockholder's intent is given to the Secretary of the Corporation (the
"Secretary"), either personally or by mail, postage prepaid, not earlier than 90
days nor later than 60 days in advance of the anniversary of the date of the
immediately preceding annual meeting or if the date of the annual meeting occurs
more than 30 days before or 60 days after the anniversary of such immediately
preceding annual meeting, not later than the close of business on the later of
(A) the sixtieth day prior to such annual meeting and (B) the tenth day
following the date on which public announcement of the date of such meeting is
first made. A Stockholder's notice to the Secretary shall set forth in writing
as to each business matter such Stockholder proposes to bring before the annual
meeting (A) a brief description of the business desired to be brought before the
annual meeting and the reasons for conducting such business at the annual
meeting, (B) the name and address, as they appear on the Corporation's books, of
the Stockholder proposing such business, (C) the class and number of Shares that
are beneficially owned by the Stockholder, and (D) any material interest of the
Stockholder in such business. Notwithstanding anything in these By-Laws to the
contrary, no business shall be conducted at an annual meeting except in
accordance with the procedures set forth in this Section 2.02(a). The officer of
the Corporation or other person presiding at the annual meeting shall, if the
facts so warrant, determine and declare to the meeting that business was not
properly brought before the meeting in accordance with the provisions of this
Section 2.02(a), and, if he or she should so determine, he or she shall so
declare to the meeting and any such business not properly brought before the
meeting shall not be transacted.
(b) Nominations for the election of Directors may be made by the Board
or any Stockholder entitled to vote for the election of Directors. Any
Stockholder entitled to vote for the election of Directors at the annual meeting
of the Stockholders of the Corporation, may nominate a person or persons for
election as a Director only if written notice of such Stockholder's intent to
make such nomination is given to the Secretary in accordance with the procedures
set forth in this Section 2.02(a). Each such notice shall set forth the name and
address of the Stockholder who intends to make the nomination and of the person
or persons to be nominated for election as a Director; a representation that the
Stockholder is a holder of record of Shares of the Corporation entitled to vote
at such meeting and intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice; a description of all
arrangements or understandings between the Stockholder and each nominee and any
other person or persons (naming such person or persons) pursuant to which the
nomination or nominations for election as a Director are to be amended by the
Stockholder; such other information regarding each nominee proposed by such
Stockholder as would have been required to be included in a proxy statement
filed pursuant to the proxy rules of the Untied States Securities and Exchange
Commission (the "SEC") if such nominee had been nominated, or was intended to be
nominated, for election as a Director by the Board; and the consent of each
nominee to serve as a Director of the Corporation if so elected. The Board may
refuse to acknowledge the nomination of any person not made in compliance with
the foregoing procedures.
2
<PAGE> 3
(c) For purposes of this Section 2.02, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or a comparable Swedish or United States news service or in a document
publicly filed by the Corporation with the Stockholm Stock Exchange (the "SSE")
and the SEC pursuant to Section 13, 14 or 15(d) of the United States Securities
Exchange Act of 1934, as amended.
SECTION 2.03. Special Meetings. Special meetings of Stockholders for
any purpose or purposes may be called by the Chairman of the Board (the
"Chairman"), the President and Chief Executive Officer, or a majority of the
Directors.
SECTION 2.04. Notice of Meetings. Except as otherwise provided by law,
written notice of each annual or special meeting of Stockholders stating the
place, date and time of such meeting and, in the case of a special meeting, the
purpose or purposes for which such meeting is to be held, shall be given by
first class mail (airmail in the case of international communications) by the
Corporation to the Stockholders not less than 10 nor more than 60 days before
the date of such meeting. The Corporation shall use all reasonable efforts to
cause the bank acting as the depositary (the "Depositary") with respect to the
Swedish Depositary Shares representing shares of common stock of the Corporation
(the "SDSs") or its designee to mail such notice in Sweden to record holders
(the "Swedish Holders") of SDSs. If mailed, such notice shall be deemed to be
given when deposited in the Untied States or (in the case of mailing by the
Depositary) Swedish mail, postage prepaid, directed to the Stockholder or
Swedish Holder at such Stockholder or Swedish Holder's address as it appears on
the records of the Corporation or the Depositary, as the case may be.
SECTION 2.05. Waiver of Notice. Notice of any annual or special meeting
of Stockholders need not be given to any Stockholder that files a written waiver
of notice with the Secretary, signed by the person entitled to notice, whether
before or after such meeting. Neither the business to be transacted at, not he
purpose of, any meeting of Stockholders need be specified in any written waiver
of notice thereof. Attendance of a Stockholder at a meeting, in person or by
proxy, shall constitute a waiver of notice of such meeting, except when such
Stockholder attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business on the grounds that
the notice of such meeting was inadequate or improperly given.
SECTION 2.06. Adjournments. Whenever a meeting of Stockholders, annual
or special, is adjourned to another date, time or place, notice need not be
given of the adjourned meeting if the date, time and place thereof are announced
at the meeting at which the adjournment is taken. If the adjournment is for more
than 30 days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
Stockholder entitled to vote thereat. At the adjourned meeting, any business may
be transacted which might have been transacted at the original meeting.
SECTION 2.07. Quorum. Except as otherwise provided by law or the
Certificate of Incorporation of the Corporation, as the same may be amended
and/or restated from time to time (the "Certificate of Incorporation") or
elsewhere in these By-Laws, the record holders of a
3
<PAGE> 4
majority of the Shares of the Corporation entitled to vote thereat, present in
person or by proxy, shall constitute a quorum for the transaction of business at
all meetings of Stockholders, whether annual or special. If, however, such
quorum shall not be present in person or by proxy at any meeting of
Stockholders, the Stockholders entitled to vote thereat may adjourn the meeting
from time to time in accordance with Section 2.05 hereof until a quorum shall be
present in person or by proxy.
SECTION 2.08. Voting. Except as otherwise provided in the Certificate
of Incorporation, each Stockholder shall be entitled to one vote for each Share
held by such Stockholder. Except as otherwise provided by law or the Certificate
of Incorporation or these By-Laws, when a quorum is present at any meeting of
Stockholders, the vote of the record holders of a majority of the Shares
constituting such quorum shall decide any question brought before such meeting.
Voting at any meeting of the Stockholders need not be by written ballot unless
the holders of a majority of the Shares present in person or by proxy at such
meeting shall so determine.
SECTION 2.09. Proxies. Each Stockholder entitled to vote at a meeting
of Stockholders may authorize another person or persons to act for such
Stockholder by proxy. Such proxy shall be filed with the Secretary before such
meeting of Stockholders, at such time as the Board may require. No proxy shall
be voted or acted upon more than three years from this date, unless the proxy
provides for a longer period.
SECTION 2.10. No Stockholders' Consent in Lieu of Meeting. Any action
required or permitted to be taken by the Stockholders of the Corporation must be
effected at a duly called annual meeting or special meeting of such Stockholders
and may not be effected by any consent in writing by any such Stockholders.
SECTION 2.11. Organization. Meetings of Stockholders shall be presided
over by the Chairman, or in the absence of the Chairman by the President and
Chief Executive Officer, or in the absence of the President and Chief Executive
Officer by an Executive Vice President, or in the absence of the foregoing
persons by a chairman designated by the Board, or in the absence of such
designation by a chairman chosen at the meeting. The Secretary of the
Corporation (the "Secretary"), or in the absence of the Secretary and Assistant
Secretary, shall act as secretary of the meeting, but in the absence of the
Secretary and any Assistant Secretary the chairman of the meeting may appoint
any person to act as secretary of the meeting.
SECTION 2.12. Inspectors. Prior to any meeting of Stockholders, the
Board or the President and Chief Executive Officer shall appoint one or more
inspectors to act at such meeting and make a written report thereof and may
designate one or more persons as alternate inspectors to replace any inspector
who fails to act. If no inspector or alternate is able to act at the meeting of
Stockholders, the person presiding at the meeting shall appoint one or more
inspectors to act at the meeting. Each inspector, before entering upon the
discharge of his or her duties, shall take and sign an oath faithfully to
execute the duties of inspector with strict impartiality and according to the
best of his or her ability. The inspectors shall ascertain the number of Shares
and the voting power of each, determine the Shares represented at the meeting
and the validity of proxies
4
<PAGE> 5
and ballots, count all votes and ballots, determine and retain for a reasonable
period a record of the disposition of any challenges made to any determination
by the inspectors and certify their determination of the number of Shares
represented at the meeting and their count of all votes and ballots. The
inspectors may appoint or retain other persons to assist them in the performance
of their duties. The date and time of the opening and closing of the polls for
each matter upon which the Stockholders will vote at a meeting shall be
announced at the meeting. No ballot, proxy or vote, not any revocation thereof
or change thereto, shall be accepted by the inspectors after the closing of the
polls. In determining the validity and counting of proxies and ballots, the
inspectors shall be limited to an examination of the proxies, any envelopes
submitted therewith, any information provided by a Stockholder who submits a
proxy by telegram, cablegram or other electronic transmission from which it can
be determined that the proxy was authorized by the Stockholder, ballots and the
regular books and records of the Corporation, and they may also consider other
reliable information for the limited purpose of reconciling proxies and ballots
submitted by or on behalf of banks, brokers, their nominees or similar persons
which represent more votes than the holder of a proxy is authorized by the
record owner to cast or more votes than the Stockholder holds of record. If the
inspectors consider other reliable information for such purpose, they shall, at
the time they make their certification, specify the precise information
considered by them, including the person or persons from whom they obtained the
information, when the information was obtained, the means by which the
information was obtained and the basis for the inspectors' belief that such
information is accurate and reliable.
SECTION 2.13. Fixing Date for Determination of Stockholders of Record.
In order that the Corporation may determine the Stockholders entitled to notice
of or to vote at any meeting of Stockholders or any adjournment thereof, the
Board may fix a record date, which record date shall not precede the date upon
which the resolution fixing the record date is adopted by the Board, and which
record date shall not be more than 60 nor less than 10 days before the date of
such meeting. If no record date is fixed by the Board, the record date for
determining Stockholders entitled to notice of or to vote at a meeting of
Stockholders shall be at the close of business on the day next preceding the day
on which notice is given, or, if notice is waived, at the close of business on
the day next preceding the day on which the meeting is held. A determination of
Stockholders of record entitled to notice of or to vote at a meeting of
Stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board may fix a new record date for the adjourned meeting.
In order that the Corporation may determine the Stockholders entitled
to receive payment of any dividend or other distribution or allotment of any
rights or the Stockholders entitled to exercise any rights in respect of any
change, conversion or exchange of stock, or for the purpose of any other lawful
action, the Board may fix a record date, which record date shall not precede the
date upon which the resolution fixing the record date is adopted, and which
record date shall be not more than 60 days prior to such action. If no record
date is fixed, the record date for determining Stockholders for any such purpose
shall be at the close of business on the day on which the Board adopts the
resolution relating thereto.
SECTION 2.14. List of Stockholders Entitled to Vote. The Secretary
shall prepare and make, at least 10 days before every meeting of Stockholders, a
complete list of the Stockholders
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entitled to vote at the meeting, arranged in alphabetical order, and showing the
address of each Stockholder and the number of Shares registered in the name of
each Stockholder. Such list shall be open to the examination of any Stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least 10 days prior to the meeting, either at a place within the
city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not so specified, at the place where the meeting
is to be held. The list shall also be produced and kept at the time and place of
the meeting during the whole time thereof and may be inspected by any
Stockholder who is present.
ARTICLE III
BOARD OF DIRECTORS
SECTION 3.01. General Powers. The business and affairs of the
Corporation shall be managed by the Board, which may exercise all such powers of
the Corporation and do all such lawful acts and things as are not by law, the
Certificate of Incorporation of these By-Laws directed or required to be
exercised or done by Stockholders.
SECTION 3.02. Number and Term of Office. The number of Directors shall
not be less than eight nor more than sixteen, with the number fixed from time to
time by the Board. At least half of the Directors shall be independent Directors
as such term is used in Rule 303 of the Rules of the New York Stock Exchange as
in existence on the date hereof, or as amended from time to time hereafter (the
"Independent Directors"). Directors need not be Stockholders. Until the election
of Directors at the annual meeting of Stockholders held in 2001, one-half of the
Directors shall be citizens of Canada or the United States (the "U.S.
Directors") and one-half of the Directors shall be nationals of Sweden or member
states of the European Union (the "European Directors"). The Board shall be
divided into three classes, each class to have, as near as may be possible, an
equal number of Directors and an equal number of U.S. Directors and European
Directors such that, although each class may not have equal numbers of U.S.
Directors and European Directors, the Board shall include an equal number of
U.S. Directors and European Directors. The term of office of Directors of the
first class shall expire at the annual meeting of Stockholders held in 1996; the
term of office of Directors of the second class shall expire at the annual
meeting of Stockholders held in 1997; and the term of office of Directors of the
third class shall expire at the annual meeting of Stockholders held in 1998.
Except as otherwise required by law, the Certificate of Incorporation or these
By-Laws, the Directors shall be elected at an annual meeting of the Stockholders
at which a quorum is present. Directors shall be elected by a plurality of the
votes of the Shares present in person or represented by proxy and entitled to
vote on the election of Directors. At each annual meeting of Stockholders,
Directors of the class whose term then expires shall be elected for a full term
of three years to succeed the Directors of such class, so that the term of
office of the Directors of one class shall expire in each year; provided,
however, that nothing herein shall be construed to prevent (i) the election of a
Director to succeed him or herself, or (ii) the election of a Director for the
remainder of an unexpired term in the class of Directors to which he or she is
elected.
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SECTION 3.03. The Chairman. (a) (i) Until the annual meeting of
Stockholders at which Directors are elected in 2001, the Chairman and the
President and Chief Executive Officer may not both be citizens of Canada or the
United States and may not both be nationals of Sweden or member states of the
European Union, and (ii) the Chairman and the President and Chief Executive
Officer may not be the same person unless otherwise approved by 80% of the
Directors.
(b) The Chairman shall have authority to sign and acknowledge in the
name and on behalf of the Corporation all stock certificates, contracts or other
documents and instruments except when the signing thereof shall be expressly
delegated to an officer or agent by the Board or required by law to be otherwise
signed or executed and, unless otherwise provided by law or by the Board shall
authorize any officer, employee or agent of the Corporation to sign, execute and
acknowledge in his or her place and stead all such documents and instruments.
(c) The Chairman shall be a non-executive chairman of the Board who
shall devote such time as may be required to fulfill his or her obligations as
Chairman. The Chairman may hold such responsibilities with respect to the
governance of the Corporation as from time to time may be assigned by the Board
or the Executive Committee. In addition, the Chairman may serve as a paid
consultant to the Corporation.
SECTION 3.04. Mandatory Retirement. No Director of the Corporation
shall continue to remain a Director beyond the annual meeting of Stockholders at
which Directors are elected next following or coinciding with his or her
attaining age 70; provided, however, that any Director who is a Director at the
time these By-Laws first become effective may continue to remain a Director
until the first day of the month following or coinciding with his or her
attaining age 72.
SECTION 3.05. Resignation. Any Director may resign at any time by
giving written notice to the Board, the Chairman or the Secretary. Such
resignation shall take effect at the time specified in such notice or, if the
time be not specified, upon receipt thereof by the Board, the Chairman or the
Secretary, as the case may be. Unless otherwise specified therein, acceptance of
such resignation shall not be necessary to make it effective.
SECTION 3.06. Removal. Any or all of the Directors may be removed for
due cause by vote of the record holders of a majority of the holders of Shares
entitled to vote thereon at a meeting of the Stockholders; provided, however,
that no such removal can be made at such meeting unless the notice thereof
specifies such removal and the reasons therefor as one of the matters that will
be considered at said meeting.
SECTION 3.07. Vacancies. Newly created directorships resulting from any
increase in the number of Directors and any vacancies on the Board resulting
from death, resignation, disqualification, removal, or other cause shall be
filled solely by the affirmative vote of a majority of the remaining Directors
then in office, even though less than a quorum. Any Director elected in
accordance with the preceding sentence shall hold office for the remainder of
the full term of the class of Directors in which the new directorship was
created or the vacancy occurred
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and until such Director's successor shall have been elected and qualified. No
decrease in the number of Directors constituting the Board shall shorten the
term of any incumbent Director.
SECTION 3.08. Meetings. (a) Annual Meetings. As soon as practicable
after each annual election of Directors by the Stockholders, the Board shall
meet for the purpose of organization, election of a Chairman and officers of the
Corporation, and the transaction of other business, unless it shall have
transacted all such business by written consent pursuant to Section 3.09 hereof.
(b) Other Meetings. Other meetings of the Board shall be held at such
times as the Chairman, the President and Chief Executive Officer, the Secretary,
and any two European Directors or two U.S. Directors shall from time to time
determine.
(c) Notice of Meetings. The Secretary shall give written notice to each
Director of each meeting of the Board, which notice shall state the place, date,
time and purpose of such meeting. Notice of each such meeting shall be given to
each Director, if by mail, addressed to him or her at his or her residence or
usual place of business, at least five days before the day on which such meeting
is to be held, or shall be sent to him or her at such place by telecopy,
telegraph, cable, or other form of recorded communication, or be delivered
personally or by telephone not later than three days before the day on which
such meeting is to be held. A written waiver of notice, signed by the Director
entitled to notice, whether before or after the time of the meeting referred to
in such waiver, shall be deemed equivalent to notice. Neither the business to be
transacted at, nor the purpose of any meeting of the Board need be specified in
any written waiver of notice thereof. Attendance of a Director at a meeting of
the Board shall constitute a waiver of notice of such meeting, except as
provided by law.
(d) Quorum and Manner of Acting. Except as otherwise required by law,
the Certificate of Incorporation or these By-Laws, a majority of the Directors
then in office shall constitute a quorum at any meeting of the Board, and the
Board shall act only when a quorum is present. Except as otherwise provided in
these By-Laws, a majority of the quorum shall decide any questions that come
before the meeting.
(e) Place of Meetings. The Board may hold its meetings at such place or
places within or without the State of Delaware as the Board or the Chairman may
from time to time determine, or as shall be designated in the respective notices
or waivers of notice of such meetings.
(f) Organization. At each meeting of the Board, the Chairman or, in his
or her absence, the President and Chief Executive Officer or, if both of such
persons are absent, a chairman chosen by a majority of the Directors present
shall act as chairman of the meeting. The Secretary, or in the absence of the
Secretary an Assistant Secretary, shall act as secretary of the meeting, but in
the absence of the Secretary and any Assistant Secretary the chairman of the
meeting may appoint any person to act as secretary of the meeting.
SECTION 3.09. Directors' Consent in Lieu of Meeting. Any action
required or permitted to be taken at any meeting of the Board or of any
committee thereof may be taken
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without a meeting, without prior notice and without a vote, if a consent in
writing, setting forth the action so taken, shall be signed by all the members
of the Board or such committee and such consent is filed with the minutes of the
proceedings of the Board or such committee.
SECTION 3.10. Action by Means of Telephone or Similar Communications
Equipment. In accordance with standards established by the Executive Committee,
any one or more members of the Board, or of any committee thereof, may
participate in a meeting of the Board or such committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation in a meeting
by such means shall constitute presence in person at such meeting.
SECTION 3.11. Compensation. Unless otherwise restricted by the
Certificate of Incorporation, the Board may determine the compensation of
Directors. In addition, as determined by the Board, Directors may be reimbursed
by the Corporation for their expenses, if any, in the performance of their
duties as Directors. No such compensation or reimbursement shall preclude any
Director from serving the Corporation in any other capacity and receiving
compensation therefor.
ARTICLE IV
COMMITTEES
SECTION 4.01. The Executive Committee. The Board may, in its
discretion, designate annually an Executive Committee (the "Executive
Committee") consisting of any even number of Directors, but in any event not
fewer than four Directors as it may from time to time determine. The Executive
Committee shall have and may exercise all the powers and authority of the Board
(except as stated below) in situations where the Board cannot meet, but as a
matter of corporate governance, whenever possible, the full Board shall meet in
person or by conference telephone. The committee shall have no power or
authority to amend the Certificate of Incorporation of the Corporation, adopt an
agreement of merger or consolidation, recommend to the Stockholders the sale,
lease or exchange of all or substantially all of the Corporation's property and
assets, recommend to the Stockholders a dissolution of the Corporation or a
revocation of a dissolution, amend the By-Laws of the Corporation, elect
officers or fill vacancies on the Board or any committee of the Board, declare a
dividend, authorize the issuance of stock, or such other powers as the Board may
from time to time specifically eliminate. The Executive Committee shall report
its activities to the Board whenever action is taken.
SECTION 4.02. Audit Committee. The Board shall designate annually an
Audit Committee (the "Audit Committee") consisting of an even number of
Directors, but in any event not fewer than four Directors as it may from time to
time determine, all of whom shall be Independent Directors, to assist the Board
in fulfilling its responsibilities to oversee financial policy and planning,
capital spending plans, material financial transactions, accounting,
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auditing and financial reporting practices, internal control policies and
procedures, corporate compliance policies and public and social policy matters
of he corporation.
Specifically, the Audit Committee is authorized and directed on behalf of the
Board to:
(a) Recommend to the Board of Directors the selection or discharge of a
firm to serve as the Company's principal independent accountants to
audit the financial statements of the Company and its subsidiaries.
(b) Review and, when appropriate, refer to the Board for decision, matters
related to the Corporation's financial policy and planning, capital
spending plans, material financial transactions and matters of public
and social policy affecting the Corporation.
(c) Review with the corporation's financial management and with the
independent accountants, the Corporation's financial statements, basic
accounting and financial policies and practices, competency of control
personnel, standard and special tests used in verifying the
Corporation's statements of account and in determining the soundness of
the Corporation's financial condition, and report to the Board the
results of such reviews.
(d) Review the policies and practices pertaining to publication of
quarterly and annual financial statements to assure consistency with
audited results and the implementation of policies and practices
recommended by the independent accountants.
(e) Ensure that suitable independent audits are made of the operations and
results of the Corporation and its important subsidiaries and
affiliates.
(f) Review and approve the audit program to be conducted by the
Corporation's internal auditors and the results of completed audits.
(g) Review the nature of, and fees charged for, all audit and all major
non-audit services performed by the Corporation's independent
accountants.
(h) Employ, at its discretion, independent auditors and legal counsel, at
the expense of the Corporation, to assist the Committee in performing
its responsibilities and duties, and conduct any additional reviews,
discussions or investigations which in it is discretion would be of
assistance in fulfilling its responsibilities and duties.
(i) Review annually the Corporation's information security program and the
specific security policies, programs and practices employed to protect
against information misuse.
(j) Review policies and procedures for legal and regulatory compliance and
to prevent illegal or improper payments. Monitor compliance with the
Corporation's code of business conduct.
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(k) Oversee the Company's policies, practices, and procedures relating to
new drug development, clinical testing, and regulatory approval, and
make recommendations regarding such matters to management or the full
Board as it deems appropriate.
(l) Review annually internal auditing's analysis of corporate officer
expenses, including their use of corporate assets.
(m) Perform such other duties, functions and powers as the Board may from
time to time prescribe.
SECTION 4.03. Compensation Committee. The Board may, in its discretion,
designate annually a Compensation Committee (the "Compensation Committee")
consisting of an even number of Directors, but in any event not fewer than four
Directors, as it may from time to time determine. The Compensation Committee
shall review, report and make recommendations to the Board on the following
matters:
(a) The compensation arrangements for Directors, The Chief Executive
Officer and other corporate officers following an annual review of
management's recommendations for the individuals involved. If
circumstances involving corporate officers require a salary adjustment
between such reviews, a recommendation may be made directly to the
Board by the President and Chief Executive Officer without the
necessity of a meeting of the Compensation Committee.
(b) Management recommendations for individual stock options to be granted
under existing stock option plans to Corporate Officers.
(c) The annual performance of the Chief Executive Officer and other
corporate officers.
(d) Any proposed stock option plans, stock purchase plans, retirement plans
and any other plans, systems and practices of the Corporation relating
to the compensations of corporate officers.
(e) Such other matters as the Board may from time to time prescribe.
SECTION 4.04. Nominating and Corporate Governance Committee Nominating
and Corporate Governance Committee. The Board may, in its discretion, designate
annually a Nominating AND Corporate Governance Committee (the "Nominating
Committee") consisting of an even number of Directors, but in any event not
fewer than four Directors, as it may from time to time determine. The Nominating
Committee shall review, report and make recommendations to the Board on the
following matters:
(a) The size and composition of the Board; selection criteria for
Directors; nominees for election as Directors; removal of Directors if
deemed appropriate; Board committee charters; members and chairpersons;
evaluation and performance of the Board and individual Directors.
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(b) After consultation with management, selection and recommendation to the
Board of appropriate individuals for election, appointment and
promotion as officers of the Corporation with a view to ensuring the
continuity of able, capable management; plans for management succession
and individual development plans.
(c) Corporate governance policies, procedures and practices.
(d) Such other matters as the Board may from time to time prescribe.
SECTION 4.05. Committee Members, Chairman, Books and Records. Until the
annual meeting of Stockholders at which Directors are elected in 2001, (a)
one-half of the members of each committee will be citizens of Canada or the
United States and one-half of the members of each committee will be nationals of
Sweden or member states of the European Union, (b) a U.S. Director shall be the
chairman of each of the Nominating Committee and the Compensation Committee, (c)
the Chairman shall be the chairman of the Executive Committee and (d) a European
Director shall be the chairman of the Audit Committee. Each committee shall fix
its own rules of procedure and shall meet at such times and places and upon such
call or notice as shall be provided by such rules. It shall keep a record of its
acts and minutes of its proceedings, and all action of the committee shall be
reported to the Board at the next meeting of the Board.
SECTION 4.06. Alternates. Alternate members of the committees
prescribed by this Article IV may be designated by the Board from among the
Directors to serve as occasion may require. Whenever a quorum cannot be secured
for any meeting of any such committees from among the regular members thereof
and designated alternates, the member or members of such committee present at
such meeting and not disqualified from voting, whether or not he, she or they
constitute a quorum, may unanimously appoint another qualified member of the
Board to act at the meeting in the place of such absent or disqualified member.
Alternative members of such committees shall receive a reimbursement
for expenses and compensation at the same rate as regular members of such
committees.
SECTION 4.07. Other Committees. The Board may create such other
committees, each to consist of any even number of Directors, as it may from time
to time determine, and each such committee shall serve for such term and shall
have and may exercise, during intervals between meetings of the Board, such
duties, functions and powers as the Board may from time to time prescribe. In
the Board's discretion, any such committee may have among its members any number
of executive officers.
SECTION 4.08. Quorum and Manner of Acting. At each meeting of any
committee the presence of a majority of the members of such committee, whether
regular or alternate, shall be necessary to constitute a quorum for the
transaction of business, and if a quorum is present the concurrence of a
majority of those present shall be necessary for the taking of any action;
provided, however, that no action may be taken by the Executive Committee when
two or more officers of the corporation are present as members at a meeting of
either such committee unless
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such action shall be concurred in by the vote of two or more members of such
committee who are not officers of the Corporation.
ARTICLE V
OFFICERS
SECTION 5.01. Officers. The officers of the Corporation shall be the
President and Chief Executive Officer, such Executive Vice Presidents, the
Secretary, and a Treasurer and may include one or more Vice Presidents as the
Board may appoint from time to time, one or more Assistant Secretaries and one
or more Assistant Treasurers. Any two or more offices may be held by the same
person.
SECTION 5.02. Authority and Duties. All officers shall have such
authority and perform such duties in the management of the Corporation as may be
provided in these By-Laws or, to the extent not so provided, by resolution of
the Board.
SECTION 5.03. Mandatory and Voluntary Retirement. Each Officer shall
tender his or her resignation to the President and Chief Executive Officer,
effective as of the first day of the month following or coinciding with his or
her attaining age 65.
SECTION 5.04. Term of Office, Resignation and Removal. (a) The
President and Chief Executive Officer and the Executive Vice Presidents shall be
appointed by the Board and all other officers shall be nominated by the Chairman
and the President and Chief Executive Officer jointly and appointed by the
Board. Each officer shall hold office for such term as may be determined by the
Board.
(b) Any officer may resign at any time by giving written notice to the
Board, the Chairman, the President and Chief Executive Officer or the Secretary.
Such resignation shall take effect at the time specified in such notice or, if
the time be not specified, upon receipt thereof by the Board, the Chairman, the
President and Chief Executive Officer or the Secretary, as the case may be.
Unless otherwise specified therein, acceptance of such resignation shall not be
necessary to make it effective.
(c) Any officer elected or appointed by the Board may be removed by the
Board at any time, but such removal shall be without prejudice to the contract
rights, if any, of the person so removed. Election or appointment of an officer
shall not itself create contractual rights.
SECTION 5.05. Vacancies. Any vacancy occurring in any office of he
Corporation, for any reason, shall be filled by the Board or the Chairman and
the Prescient and Chief Executive Officer in the same manner as set forth in
Section 5.04, as the case may be. Unless earlier removed pursuant to Section
5.04 hereof, any officer appointed to fill any such vacancy shall serve only
until such time as the unexpired term of his or her predecessor expires unless
reappointed.
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SECTION 5.06. The President and Chief Executive Officer. The President
and Chief Executive Officer shall, in the absence of the Chairman, preside at
all meetings of the Stockholders and of the Board. The President and Chief
Executive Officer shall be the Chief Executive Officer and shall have general
charge and supervision of the business of the Corporation and, in general, shall
perform all duties incident to the office of chief executive officer or
president of a corporation and such other duties as may, from time to time, be
assigned to him or her by the Board or as may be provided by law. The President
and Chief Executive Officer shall have authority to sign and acknowledge in the
name and on behalf of the Corporation all stock certificates, contracts or other
documents and instruments and, unless otherwise provided by law or by the Board,
may authorize any officer, employee or agent of the Corporation to sign, execute
and acknowledge in his place and stead all such documents and instruments.
SECTION 5.07. The Executive Vice Presidents. Executive Vice Presidents
shall generally assist, and report to, the President and Chief Executive Officer
and perform such other duties as the Board or the President and Chief Executive
Officer shall prescribe.
SECTION 5.08. Vice Presidents. Vice Presidents shall perform such
duties as the President and Chief Executive Officer shall prescribe.
SECTION 5.09. The Secretary. The Secretary shall, to the extent
practicable, attend all meetings of the Board and all meetings of Stockholders
and shall record all votes and the minutes of all proceedings in a book to be
kept for that purpose, and shall perform the same duties for any committee of
the Board when so requested by such committee. He or she shall give or cause to
be given notice of all meetings of Stockholders and of the Board, shall perform
such other duties as may be prescribed by the Board, the Chairman or the
President and Chief Executive Officer and shall act under the supervision of the
Chairman and the President and Chief Executive Officer. He or she shall keep in
safe custody the seal of the Corporation and affix the same to any instrument
that requires that the seal be affixed to it and which shall have been duly
authorized for signature in the name of the Corporation and, when so affixed,
the seal shall be attested by his or her signature or by the signature of the
Treasurer of the Corporation or an Assistant Secretary or Assistant Treasurer of
the Corporation. He or she shall keep in safe custody the certificate books and
stockholder records and such other books and records of the Corporation as the
Board, the Chairman or the President and Chief Executive Officer may direct and
shall perform all other duties incident to the office of Secretary and such
other duties as from time to time may be assigned to him or her by the Board,
the Chairman or the President and Chief Executive Officer.
SECTION 5.10. Assistant Secretaries. Assistant Secretaries of the
Corporation, if any, shall generally assist the Secretary and perform such other
duties as the Board or the Secretary shall prescribe, and, in the absence or
disability of the Secretary, shall perform the duties and exercise the powers of
the Secretary.
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SECTION 5.11. The Treasurer. The Treasurer of the Corporation shall
have the care and custody of all the funds of the Corporation and shall deposit
such funds in such banks or other depositories as the Board, or any officer or
officers, or any officer and agent jointly, duly authorized by the Board, shall,
from time to time, direct or approve. He or she shall disburse the funds of the
Corporation under the direction of the Board, the Chairman and the President and
Chief Executive Officer. He or she shall keep a full and accurate account of all
moneys received and paid on account of the Corporation and shall render a
statement of his or her accounts whenever the Board, the Chairman or the
President and Chief Executive Officer shall so request. He or she shall perform
all other necessary actions and duties in connection with the administration of
the financial affairs of the Corporation and shall generally perform all the
duties usually appertaining to the office of treasurer of a corporation. When
required by the Board, he or she shall give bonds for the faithful discharge of
his or her duties in such sums and with such sureties as the Board shall
approve.
SECTION 5.12. Assistant Treasurers. Assistant Treasurers of the
Corporation shall generally assist the Treasurer and perform such other duties
as the Board or the Treasurer shall prescribe, and, in the absence or disability
of the Treasurer, shall perform the duties and exercise the powers of the
Treasurer.
ARTICLE VI
DIVIDENDS, FINANCE, AND PROXIES
SECTION 6.01. Dividends. Dividends shall be declared only out of any
assets or funds of the Corporation legally available for the payment of
dividends at such times as the Board shall direct. Dividends shall be paid to
holders of the Shares in U.S. dollars. The Corporation shall make such
arrangements as are necessary or appropriate to ensure that all dividends
payable to Swedish Holders are paid in Swedish kronor.
SECTION 6.02. Checks, Drafts and Notes. All checks, drafts and other
orders for the payment of money, notes and other evidences of indebtedness
issued in the name of the Corporation shall be signed by such officer or
officers, agent or agents of the Corporation and in such manner as shall be
determined, from time to time, by resolution of the Board.
SECTION 6.03. Execution of Proxies. The President and Chief Executive
Officer shall have the power and authority to transfer, vote, consent, or take
any other action with respect to any securities of another issuer which may be
held or owned by the Corporation and to make, execute, and deliver any waiver,
proxy or consent with respect to any such securities. All such proxies and
consents, unless otherwise authorized by the Board, shall be signed in the name
of the Corporation by the President and Chief Executive Officer or his or her
designee.
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ARTICLE VII
SWEDISH DEPOSITARY SHARES PROGRAM
SECTION 7.01. SDSs and Swedish Holders. The Corporation shall use all
reasonable efforts to maintain the listing and index membership of its SDSs in
Sweden and its SDSs on the "A" list as such term is used by the SSE. The
Corporation shall use all reasonable efforts to establish arrangements such that
the Swedish Holders shall have the opportunity to exercise such rights with
respect to the Corporation as would be exercisable by such Swedish Holders if
they held shares of common stock of the Corporation directly.
ARTICLE VIII
REPORTING REQUIREMENTS
SECTION 8.01. Shareholder Communications. All communications to
Stockholders shall be made available in both the English and Swedish languages,
including, without limitation, the annual and any semiannual or quarterly
reports of the Corporation, and financial statements, and all such
communications shall be made available to all Swedish Holders.
ARTICLE IX
SHARES AND TRANSFERS OF SHARES
SECTION 9.01. Certificates Evidencing Shares. The shares of the
Corporation shall be evidenced by certificates in such form or forms as shall be
approved by the Board. Certificates shall be signed by the Chairman or the
President and Chief Executive Officer or both and by the Secretary or any
Assistant Secretary. Any signature on a certificate may be a facsimile. In the
event any such officer who has signed or whose facsimile signature has been
placed upon a certificate shall have ceased to hold such office or to be
employed by the Corporation before such certificate is issued, such certificate
may be issued by the Corporation with the same effect as if such officer had
held such office on the date of issue.
SECTION 9.02. Stock Ledger. A stock ledger in one or more counterparts
shall be kept by the Secretary, in which shall be recorded the name and address
of each person, firm or corporation owning the shares evidenced by each
certificate evidencing shares issued by the Corporation, the number of shares
evidenced by each such certificate, the date of issuance thereof and, in the
case of cancellation, the date of cancellation. Except as otherwise expressly
required by law, the person in whose name shares stand on the stock ledger of
the Corporation shall be deemed the owner and record holder thereof for all
purposes.
16
<PAGE> 17
SECTION 9.03. Transfer of Shares. Registration of transfers of shares
shall be made only in the stock ledger of the Corporation upon request of the
registered holder of such shares, or of his attorney thereunto authorized by
power of attorney duly executed and filed with the Secretary, and upon the
surrender of the certificate or certificates evidencing such shares properly
endorsed or accompanied by a stock power duly executed, together with such proof
of the authenticity of signatures as the Corporation may reasonably require.
SECTION 9.04. Addresses of Stockholder. Each Stockholder and Swedish
Holder shall designate to the Secretary an address at which notices of meetings
and all other corporate notices may be served or mailed to such Stockholder or
Swedish Holder, as the case may be, and, if any Stockholder shall fail to so
designate such an address, corporate notices may be served upon such Stockholder
by mail directed to the mailing address, if any, as the same appears in the
stock ledger of the Corporation or at the last known mailing address of such
Stockholder or Swedish Holder, as the case may be.
SECTION 9.05. Lost, Destroyed and Mutilated Certificates. Each
Stockholder shall promptly notify the Corporation of any loss, destruction or
mutilation of any certificate or certificates evidencing any share or shares of
which he is the recordholder. The Board may, in its discretion, cause the
Corporation to issue a new certificate in place of any certificate theretofore
issued by it and alleged to have been mutilated, lost, stolen or destroyed, upon
the surrender of the mutilated certificate or, in the case of loss, theft or
destruction of the certificate, upon satisfactory proof of such loss, theft or
destruction, and the Board may, in its discretion, require the recordholder of
the shares evidenced by the lost, stolen or destroyed certificate or his legal
representative to give the Corporation a bond sufficient to indemnify the
Corporation against any claim made against it on account of the alleged loss,
theft or destruction of any such certificate or the issuance of such new
certificate.
SECTION 9.06. Regulations. The Board may make such other rules and
regulations as it may deem expedient, not inconsistent with these By-Laws,
concerning the issue, transfer and registration of certificates evidencing
shares.
ARTICLE X
SEAL
Section 10.01. Seal. The Board may approve and adopt a corporate seal,
which shall be in the form of a circle and shall bear the full name of the
Corporation, the year of its incorporation and the words "Corporate Seal
Delaware".
ARTICLE XI
FISCAL YEAR
SECTION 11.01. Fiscal Year. The fiscal year of the Corporation shall
end on the thirty-first day of December of each year.
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<PAGE> 18
ARTICLE XII
INDEMNIFICATION AND INSURANCE
SECTION 12.01. Indemnification. (a) The Corporation shall indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Corporation) by reason of the fact that he or she is or was a
Director, officer, employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a Director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him or her in connection with
such action, suit or proceeding if he or she acted in good faith and in a manner
he or she reasonably believed to be in, or not opposed to, the best interests of
the Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful. The termination of
any action, suit or proceeding by judgment, order, settlement, conviction, or
upon a plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
or she reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his or her conduct was unlawful.
(b) The Corporation shall indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action
or suit by or in the right of the Corporation to procure a judgment in its favor
by reason of the fact that he or she is or was a Director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a Director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against expenses (including attorneys'
fees) actually and reasonably incurred by him or her in connection with the
defense or settlement of such action or suit if he or she acted in good faith
and in a manner he or she reasonably believed to be in or not opposed to the
best interests of the Corporation and except that no indemnification shall be
made in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable to the Corporation unless and only to the extent that
the Court of Chancery of the State of Delaware or the court in which such action
or suit was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case, such
person is fairly and reasonably entitled to indemnity for such expenses which
the Court of Chancery or such other court shall deem proper.
(c) To the extent that a Director, officer, employee or agent of the
Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in Sections 12.01(a) and (b) of these
By-Laws, or in defense of any claim, issue or matter therein, he or she shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him or her in connection therewith.
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<PAGE> 19
(d) Any indemnification under Sections 12.01(a) and (b) of these
By-Laws (unless ordered by a court) shall be made by the Corporation only as
authorized in the specific case upon a determination that indemnification of the
Director, officer, employee or agent is proper in the circumstances because he
or she has met the applicable standard of conduct set forth in Sections 12.01(a)
and (b) of these By-Laws. Such determination shall be made (i) by the Board by a
majority vote of a quorum consisting of Directors who were not parties to such
action, suit or proceeding, or (ii) if such quorum is not obtainable, or, even
if obtainable, a quorum of disinterested Directors so directs, by independent
legal counsel in a written opinion, or (iii) by the Stockholders of the
Corporation.
(e) A Director of this Corporation shall not be liable to the
Corporation or its Stockholders for monetary damages for breach of fiduciary
duty as a Director, except for liability (i) for any breach of the Director's
duty of loyalty to the Corporation or its Stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct of a knowing
violation of the law, (iii) under Section 174 of the General Corporation Law of
the State of Delaware (the "General Corporation Law"), or (iv) for any
transaction from which the Director derived an improper personal benefit.
(f) Expenses (including attorneys' fees) incurred by an officer or
Director in defending any civil, criminal, administrative or investigative
action, suit or proceeding may be paid by the Corporation, as the Board deems
appropriate, in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such Director or
officer to repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified by the Corporation pursuant to this Article XII. Such
expenses (including attorneys' fees) incurred by other employees and agents may
be so paid upon such terms and conditions, if any, as the Board deems
appropriate.
(g) The indemnification and advancement of expenses provided by, or
granted pursuant to, other Sections of this Article XII shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any law, by-law, agreement, vote
of stockholders or disinterested Directors or otherwise, both as to action in an
official capacity and as to action in another capacity while holding such
office.
(h) For purposes of this Article XII, references to "the Corporation"
shall include, in addition to the Corporation, any constituent corporation,
including Pharmacia Aktiebolag ("Pharmacia"), The Upjohn Corporation ("Upjohn")
and any companies to which Pharmacia and Upjohn had previously extended rights
similar to those afforded by this Article XII which would have had power and
authority to indemnify its Directors, officers, employees or agents so that any
person who is or was a Director, officer, employee or agent of such constituent
corporation, or is or was serving at the request of such constituent corporation
as a Director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, shall stand in the same position under
the provisions of this Article XII with respect to the resulting or surviving
corporation as he or she would have with respect to such constituent corporation
if its separate existence had continued.
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<PAGE> 20
(i) For purposes of this Article XII, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the Corporation" shall include any
service as a Director, officer, employee or agent of the Corporation which
imposes duties on, or involves service by, such Director, officer, employee or
agent with respect to any employee benefit plan, its participants, or
beneficiaries; and a person who acted in good faith and in a manner he or she
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interest of the Corporation" as referred to in this Article
XII.
(j) The indemnification and advancement of expenses provided by, or
granted pursuant to, this Article XII shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a Director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
SECTION 12.02. Insurance for Indemnification. The Corporation may
purchase and maintain insurance on behalf of any person who is or was a
Director, officer, employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a Director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise, is
entitled to indemnification under the Corporation's Restated Certificate of
Incorporation against any liability asserted against him or her and incurred by
him or her in any such capacity, or arising out of his or her status as such,
whether or not the Corporation would have the power to indemnify him or her
against such liability under the provisions of Section 145 of the General
Corporation Law.
ARTICLE XIII
AMENDMENTS
SECTION 13.01. Amendments. (a) Except as provided in paragraph (b)
below, any By-Law (including these Restated By-Laws) may be adopted, amended or
repealed by the Stockholders, or by vote of the Board or by a written consent of
Directors pursuant to Section 3.09 hereof.
(b) Notwithstanding paragraph (a) above, (i) any amendment, alteration,
change or repeal in any respect of any provision of the first sentence of
Section 1.02, Section 3.02, Sections 3.03(a) and (c), the first sentence of
Section 4.05, Section 6.01, Article VII and Article VIII shall require the
affirmative vote of 80% of all the Directors or the affirmative vote of 66-2/3%
of the then outstanding shares of capital stock of the Corporation entitled to
vote on matters submitted to stockholders of the Corporation (the "Voting
Stock", and a "Supermajority Vote"); (ii) any amendment, alternation, change or
repeal in any respect of any provision of Section 2.01(b) shall require the
affirmative vote of 80% of the Directors or a Supermajority Vote, provided,
however, that in the event that (X) the number of persons that are residents in
or nationals of Sweden holding Shares, whether directly or as SDSs (the "Swedish
Persons"), falls below 5% of the total
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<PAGE> 21
number of persons holding Voting Stock or (Y) such Swedish Persons cease to
beneficially own at least 5% of the Voting Stock (including shares held by the
Depositary), then any such amendment, alteration, change or repeal in any
respect of any of these provisions shall require the affirmative vote of a
majority of the Directors or the affirmative vote of the holders of a majority
of the Voting Stock; and (iii) any amendment, alteration, change or repeal in
any respect of Section 13.01(a) hereof or subparagraphs (i) or (ii) of this
Section 13.01(b) shall require the affirmative vote of 80% of all the Directors
or a Supermajority Vote.
21
<PAGE> 1
EXHIBIT (10)(F)
February 10, 1998
Mr. C. J. Coughlin
28 Old Harter Road
Morristown, NJ 07960
Dear Chris:
This letter confirms the terms of our offer for your employment as Executive
Vice President and Chief Financial Officer of Pharmacia & Upjohn, Inc. (the
"Company"). I very much hope that you will find this opportunity attractive and
rewarding and will accept our offer. The principal terms of your employment will
be:
1. You will join the Company as soon as possible (your "Employment
Commencement Date") as an employee of the Company, and, subject to your
acceptance of this offer, the Company's Board of Directors will elect you as
Executive Vice President and Chief Financial Officer of the Company at its
meeting next Monday, February 16.
The term of this agreement will be from your Employment Commencement Date until
December 31, 2000, and will be automatically renewed for an indefinite period
thereafter (the "Term"), unless and until at least sixty (60) days' prior
written notice of termination is given by either party stating the date of
termination.
You will devote substantially all of your business time to your duties and
responsibilities with the Company. However, you will not be precluded from (i)
serving on the board of directors of other companies (subject to the reasonable
approval of the Chief Executive Officer of the Company) and boards of trade
associations or charitable organizations; (ii) engaging in charitable activities
and community affairs; or (iii) managing your personal investments and affairs,
provided that such activities do not materially interfere with your duties and
responsibilities with the Company.
2. Your beginning annual base salary will be $625,000 and will be subject
to annual review for increases.
3. You will be included in the Company's Annual Incentive Plan at a level
determined by the Compensation Committee of the Board to be appropriate based on
your position, job performance and Company policy. Your 1998 incentive
compensation target award will be set at 70% of your annual base salary or
$437,500. Your incentive compensation award will be subject to adjustment
following the end of the year by the performance criteria established by the
Compensation Committee of the Board of Directors, but in no event will your 1998
<PAGE> 2
2 February 10, 1998
incentive compensation award be less than $250,000. In addition, you will
receive 25,000 shares of restricted Common Stock of the Company to compensate
you for the loss of your long-term incentive shares from your previous employer.
The restricted shares will vest on the third annual anniversary of your
Employment Commencement Date, or, if earlier, upon a Change in Control of the
Company (as defined in the Company's Long-Term Incentive Plan).
4. To provide you with new long-term equity incentive compensation and to
replace the equity awards from your current employer that you will lose as a
result of joining the Company, the Board of Directors of the Company will grant
you, as of your Employment Commencement Date, a stock option for 120,000 shares
of the Company's Common Stock, vesting ratably over a three-year period on each
of the first three annual anniversaries of your Employment Commencement Date.
The exercise price of the stock options will be the fair market value (defined
in the Company's Long-Term Incentive Plan as the average of the daily high and
low) for Pharmacia & Upjohn Common Stock on the New York Stock Exchange on your
Employment Commencement Date. All stock options will be "Incentive Stock
Options" to the maximum extent permitted, and the remainder will be
non-qualified stock options, under the U.S. Internal Revenue Code, will be
subject to the terms of said Plan and will expire no later than ten years from
the date of grant.
I will recommend to the Compensation Committee of the Board that, at their
February 15, 1998 meeting, you be granted a stock option for 50,000 shares of
the Company's Common Stock pursuant to the Company's Long-Term Incentive Plan.
Beginning in 1999, you will be granted stock options pursuant to the Company's
Long-Term Incentive Plan at the same time as other senior executives of the
Company and at a level determined by the Compensation Committee of the Board to
be appropriate based on your position, job performance, competitive practices
and Company policy, which will be in an amount not less than 100,000 shares of
the Company's Common Stock.
Stock options not yet vested will nevertheless vest immediately upon a Change in
Control of the Company (as defined in the Company's Long-Term Incentive Plan).
5. You will be eligible to receive employee benefits and perquisites in
line with the general plans applicable to our Global Officers including, without
limitation, if offered to such other senior executives, pension, profit sharing,
savings, deferred compensation, medical, dental, hospitalization, short-term and
long-term disability, life insurance, accidental death, travel accident,
vacation and any other benefit programs or plans that may be sponsored by the
Company, including any plans that supplement the above-listed plans, whether
funded or unfunded.
To the extent that there is a period of employment service required as a
condition for full benefit coverage under any employee benefit program or plan,
you shall be deemed to have met such
<PAGE> 3
3 February 10, 1998
requirement, and to the extent that you and/or your dependents will not be
eligible to participate fully in any medical/dental plan because of any
exclusion for preexisting conditions, the Company will waive any such exclusion
for pre-existing conditions.
6. In the event your employment is involuntarily terminated by the Company
other than for Cause (as defined below), which the Company reserves the right to
do at any time during or after the Term of this agreement, or you terminate your
employment for Good Reason (as defined below), during the Term of this
agreement, provided that you do not enter into Competition (as defined below)
with the Company, then, as liquidated damages and in lieu of any other damages
or compensation under this agreement, (i) you shall be entitled to receive a
lump sum severance payment, payable within 60 days after termination, equal to
twice the combined amount of your annual base salary and annual target incentive
compensation as in effect on your date of termination; (ii) you shall have your
period of employment service used to calculate retirement and other employee
benefits, including eligibility for post-retirement medical/dental coverage,
extended for two additional years following your employment termination date and
the compensation used to calculate your retirement benefits will be determined
as if you had continued to receive your then current annual base salary and
annual target incentive compensation for two additional years following your
employment termination date, which retirement benefits will be paid in a lump
sum within 30 days after termination subject to appropriate actuarial reductions
consistent with those applied under the plan to reflect your age when you
terminate employment; (iii) you will receive a pro-rata annual incentive
compensation award in March of the year following your termination equal to the
amount you would have received if you had worked for the full year as adjusted
for the performance criteria specified for your award multiplied by a fraction
where the numerator is the number of months (rounded to the next highest number
for a partial month) of the year elapsed prior to your termination and the
denominator is 12; (iv) you and your dependents shall continue to participate
(with the same level of coverage) for two additional years following your
employment termination date, in all medical/dental, accident, disability and
life insurance plans on the same terms as in effect immediately prior to your
termination, provided, however, that such benefits will cease on the date of
your receiving equivalent benefits from a new employer; (v) you shall be
entitled to outplacement services from a provider selected by you, at the
expense of the Company, subject to a maximum expense of $25,000; and (vi) you
shall receive any other amounts earned, accrued or owing to you under the plans
and programs of the Company.
In the event you enter into Competition with the Company within two years after
your employment is terminated, and you have received severance payments under
subparagraph (i) above, or additional retirement or other employee benefits
under subparagraph (ii) above, you agree to promptly repay the amount of such
severance payments and additional retirement or other employee benefits to the
Company.
<PAGE> 4
4 February 10, 1998
7. In the event that, during the Term of this agreement, you voluntarily
terminate your employment (other than for Good Reason) or you are discharged by
the Company for Cause, you will forfeit your right to receive any salary,
incentive compensation or severance pay that has not been fully earned at the
time your employment terminates, provided, however, you will be entitled to
receive any benefits or amounts accrued but not yet paid as of the date of your
termination.
8. You acknowledge that the Company may at any time relocate your place of
employment to such location as may at that time constitute the Company's
principal executive offices. While you may need to initially be present at the
Company's Management Centre in Windsor, England (your temporary living expenses
in England incurred by you will be reimbursed by the Company net of any
resulting income tax), you will primarily be based at the Company's new
headquarters in New Jersey.
9. You will be immediately eligible to participate in, and shall be
immediately vested under, the Company's Global Officer Pension Plan, which is
not qualified under the U.S. Internal Revenue Code, supplements the officer's
other sources of retirement income to provide the officer with the actuarial
value of an annual life annuity of 65% of the officer's highest three-year
average annual salary and cash bonus compensation within the ten years prior to
retirement from the Company, provided the officer retires at age 65 with at
least ten years of service under the Plan. Appropriate actuarial adjustments
consistent with those applied under the Plan will be made if you have less than
ten years of service under the Plan or retire before age 65. The benefits
payable under the Company's Global Officer Pension Plan will be offset for any
social security or other governmental retirement income and any retirement
income from any prior employers that you may be entitled to receive.
10. You are authorized to incur reasonable expenses in carrying out your
duties and responsibilities with the Company, and the Company shall promptly
reimburse you for all business expenses in accordance with Company policy.
11. During the period of your employment and thereafter, you will maintain
the confidentiality of all confidential or proprietary information relating to
the business of the Company or any of its subsidiaries or affiliates, provided,
however, you may disclose such information as (i) may be required or appropriate
in carrying out your duties at the Company or (ii) may be required for you to
disclose by applicable law, governmental regulations or judicial or regulatory
process.
12. To the fullest extent permitted by applicable law, all intellectual
property (including patents, trademarks, and copyrights) which are made,
developed or acquired by you in the course of your employment with the Company
will be and remain the absolute property of the Company, and you shall assist
the Company in perfecting and defending its rights to such intellectual
property.
<PAGE> 5
5 February 10, 1998
13. In consideration of the offer of employment and the compensation and
benefits provided hereunder, without the written consent of the Chief Executive
Officer of the Company, you agree that during the period of your employment with
the Company and for a period of two years following the termination of your
employment, you will not enter into Competition with the Company. "Competition"
as used in this agreement means that you engage in substantially the same work
as you had been engaged in while employed by the Company with another
pharmaceutical company (except companies where sales from pharmaceutical
products constitute less than 20% of total sales) as either an employee or
consultant. Anything herein to the contrary notwithstanding, your service solely
as a member of the Board of Directors of a company whose annual sales are less
than $100 million shall not be deemed to be Competition for purposes of this
agreement. For purposes of the preceding sentence, if a company is a subsidiary
of another company, the sales of both companies shall be taken into account.
14. To the fullest extent permitted by applicable law, the Company will,
during and after termination of your employment, indemnify you (including
providing advancement of expenses) for any judgments, fines, amounts paid in
settlement and reasonable expenses, including attorneys' fees, incurred by you
in connection with the defense of any lawsuit or other claim or investigation to
which you are made, or threatened to be made, a party or witness by reason of
being or having been an officer, director or employee of the Company or any of
its subsidiaries or affiliates. In addition, you will be covered under any
directors' and officers' liability insurance policy for your acts (or non-acts)
as an officer or director of the Company or any of its subsidiaries or
affiliates to the extent the Company provides such coverage for its senior
executive officers.
15. Any disputes arising under or in connection with this agreement shall,
unless other arrangements are agreed to by you and the Company, be resolved by
binding arbitration to be held in New York, New York in accordance with the
rules and procedures of the American Arbitration Association, and judgment upon
any award rendered by the arbitrator(s) may be entered in any court having
jurisdiction. Costs of the arbitration, including (but not by way of limitation)
reasonable attorney's fees of both parties, shall be borne by the party which
does not prevail in the proceedings, but in no event shall a party be liable to
pay for such costs in excess of $25,000. In the event that each party prevails
as to certain aspects of the proceedings, the arbitrator(s) shall determine an
appropriate allocation of costs between the parties.
16. In the event of termination of your employment, you will immediately,
unless otherwise requested by the Company's Board of Directors, resign from all
directorships, trusteeships, other offices and employment held at that time with
the Company or any of its subsidiaries or affiliates.
17. For purposes of this agreement, "Cause" means (i) a material breach by
you of your duties and responsibilities (other than as a result of incapacity
due to physical or mental illness) which is demonstrably willful and deliberate
on your part, which is committed in bad faith or
<PAGE> 6
6 February 10, 1998
without reasonable belief that such breach is in the best interests of the
Company, and which is not remedied in a reasonable period of time after receipt
of written notice from the Company specifying such breach; or (ii) your
conviction of a felony which is materially and demonstrably injurious to the
Company as determined in the sole discretion of the Board of Directors of the
Company.
18. For purposes of this agreement, "Good Reason" means that, without your
consent, (i) your rate of annual base salary or the cash target amount of your
annual cash incentive bonus are reduced in a manner that is not applied
proportionately to all other senior executive officers of the Company; (ii) the
Company fails to retain you as an Executive Vice President of the Company,
although the Company may at any time change your job description without
constituting "Good Reason;" (iii) there is a material diminution of your primary
job function, or the assignment to you of duties which are materially
inconsistent with your primary job function, or which materially impair your
ability to perform your primary job function with the Company; (iv) the Company
delivers to you a written notice of intended termination of this agreement
pursuant to Section 1 above at a time when the Company would not have Cause to
terminate your employment; or (v) there is a material breach of this agreement
by the Company which is not remedied in a reasonable period of time after
receipt of written notice from you specifying such breach.
19. The obligation of the Company to make any payments provided for
hereunder and otherwise to perform their obligations hereunder shall not be
affected by any set-off, counterclaim, recoupment, defense or other claim, right
or action which the Company 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.
20. In the event of any change in the outstanding shares of the Company's
Common Stock (including any increase or decrease in such shares) by reason of
any stock dividend or split, recapitalization, merger, consolidation, spin-off,
combination or exchange of shares or other similar corporate change, or any
distributions to common stockholders other than regular cash dividends, the
Compensation Committee of the Board may make such substitution or adjustment, if
any, as it deems to be equitable, as to the number or kind of shares of Common
Stock provided for in this agreement.
21. As with all prospective employees, a recent medical examination
evidencing general good health must be completed prior to employment. Your
physician should send the results of such examination to the Company's Chief
Medical Officer.
22. This agreement will be governed by and construed in accordance with the
laws of the State of New Jersey, U.S.A.
<PAGE> 7
7 February 10, 1998
23. (a) No rights or obligations of the Company under this agreement may be
assigned or transferred by the Company except that such rights or obligations
may be assigned or transferred pursuant to a merger or consolidation in which
the Company is not the continuing entity, or pursuant to the sale or transfer of
all or substantially all of the assets of the Company, provided that the
assignee or transferee is the successor to all or substantially all of the
assets of the Company.
(b) This agreement shall not be terminated by any merger, consolidation
or transfer of assets of the Company referred to above. In the event of any such
merger, consolidation or transfer of assets, the provisions of this agreement
shall be binding upon the surviving or resulting corporation or the person or
entity to which such assets are transferred.
(c) The Company agrees that concurrently with any merger, consolidation
or transfer of assets referred to above, it will cause any successor or
transferee unconditionally to assume, either contractually or as a matter of
law, all of the obligations of the Company hereunder.
(d) 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, distributes, designees and legatees. None of
your rights or obligations under this agreement may be assigned or transferred
by you other than your rights to compensation and benefits, which may be
transferred only by will or operation of law. If you should die while any
amounts or benefits have been accrued by you but not yet paid as of the date of
your death and which would be payable to you hereunder had you continued to
live, all such amounts and benefits unless otherwise provided herein shall be
paid or provided 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 such
person is so appointed, to your estate.
24. No provisions of this agreement may be waived, modified or discharged
unless such waiver, modification or discharge is agreed to in writing signed by
both you and an authorized officer of the Company. No waiver by any party hereto
at any time of any breach by any other party hereto of, or compliance with, any
condition or provision of this agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. No agreements or representations,
oral or otherwise, express or implied, with respect to the subject matter hereof
have been made by any party which are not set forth expressly in this agreement.
25. This agreement sets forth the entire agreement of the parties hereto in
respect of the subject matter contained herein and supersedes all prior
agreements, promises, covenants, arrangements, communications, representations
or warranties, whether oral or written, by any officer, employee or
representative of any party hereto in respect of the subject matter contained
herein.
<PAGE> 8
8 February 10, 1998
26. This agreement may be executed by the parties in two or more
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall constitute one and the same instrument, and all signatures
need not appear on any one counterpart. A faxed signature of a party which is a
reproduction of a genuine signature of that party shall be conclusive evidence
of execution of this agreement by that party.
Very truly yours,
FRED HASSAN
Chief Executive Officer
I accept the terms set forth in this letter and will serve in the capacity
stated:
- --------------------------------------
CHRISTOPHER J. COUGHLIN
Dated: February ____, 1998
<PAGE> 1
EXHIBIT (10)(G)
[EMPLOYMENT AGREEMENT FOR CARRIE SMITH COX]
August 26, 1997
Dear Candidate:
This letter confirms the terms of our offer for your employment as Senior Vice
President of Pharmacia & Upjohn, Inc. (the "Company") and as head of global
business management for the Company. I very much hope that you will find this
opportunity exciting and rewarding and will accept our offer. The principal
terms of your employment will be:
1. You will join the Company on August 27, 1997 (your "Employment
Commencement Date") as an employee of Pharmacia & Upjohn Management Company
Ltd., a wholly owned U.K. subsidiary of the Company that provides management
services to the Company under contract ("PUMCO"). The Company's Board of
Directors will elect you as a Senior Vice President of the Company. You will
report directly to the President and Chief Executive Officer of PUMCO and the
Company. If the Company appoints an Executive Vice President for global
pharmaceutical operations you will report to him.
The term of this agreement will be in effect from your Employment Commencement
Date until August 26, 2000 and will be automatically renewed for an indefinite
period thereafter (the "Term"), unless and until at least sixty (60) days' prior
written notice of termination is given by either party stating the date of
termination.
You will devote substantially all of your business time to your duties and
responsibilities with PUMCO and the Company. However, you will not be precluded
from (i) serving on the board of directors of other companies (subject to the
reasonable approval of the President and Chief Executive Officer of PUMCO and
the Company) and boards of trade associations or charitable organizations; (ii)
engaging in charitable activities and community affairs; or (iii) managing your
personal investments and affairs, provided that such activities do not
materially interfere with your duties and responsibilities with PUMCO and the
Company.
2. Your beginning annual base salary will be $450,000 and will be subject
to annual review for increases.
3. You will be included in the Company's Annual Incentive Plan at a level
determined by the Compensation Committee of the Board to be appropriate based on
your position, job performance
<PAGE> 2
2 August 26, 1997
and Company policy. Your 1997 incentive compensation target award will be set at
70% of your annual base salary or $315,000. Your actual award will be calculated
as if you had been employed by PUMCO for all of 1997 but will be subject to
adjustment following the end of the year by the performance criteria established
for the Company's other senior executive officers (the 1997 performance criteria
provide that 30% of targeted incentive compensation will be adjusted based on
external measures (total market return and earnings per share) compared to a
group of comparable global pharmaceutical companies, and the remaining 70% will
be adjusted based on relative growth in the Company's annual sales, earnings and
cash flow and on individual performance). However, you will be guaranteed a
minimum cash bonus equal to the pro rata amount (based on the portion of the
year elapsed prior to your joining the Company) of the bonus you would have
received from your current employer for 1997. The amount of your 1997 incentive
compensation from the Company (including the guaranteed minimum amount) will be
reduced by the amount of any annual bonus you receive from your current employer
for services rendered during 1997. Payment of your incentive compensation will
be made in March 1998 unless you elect to defer payment until after you retire.
Your ongoing annual incentive compensation target awards will be set at 70% of
your annual base salary, payable if the performance criteria determined by the
Compensation Committee are met. If the performance criteria are exceeded or not
fully met, you will receive such greater or lesser amount as the Compensation
Committee determines is appropriate.
4. To provide you with new long-term equity incentive compensation and to
replace the equity awards from your current employer that you will lose as a
result of joining the Company, the Board of Directors of the Company will grant
you, as of your Employment Commencement Date, a stock option for 150,000 shares
of the Company's Common Stock, vesting over a three year period at the rate of
50,000 shares per year and each of the first three annual anniversaries of your
Employment Commencement Date.
The exercise price of the stock options will be the fair market value (defined
in the Company's Long-Term Incentive Plan as the average of the daily high and
low) for Pharmacia & Upjohn Common Stock on the New York Stock Exchange on the
last trading day before your Employment Commencement Date. All stock options
will be "Incentive Stock Options" to the maximum extent permitted and the
remainder will be non-qualified stock options under the U.S. Internal Revenue
Code, will be subject to the terms of the Plan and will expire ten years from
the date of grant.
Beginning in 1998, you will be granted stock options pursuant to the Company's
Long-Term Incentive Plan at the same time as other senior executives of the
Company and at a level determined by the Compensation Committee of the Board to
be appropriate based on your position, job performance, competitive practices
and Company policy. If your performance is found to be satisfactory, you will be
granted stock options for at least 75,000 shares of the Company's Common Stock
in 1998 and 1999.
Stock options not yet vested will nevertheless vest immediately upon your death
or disability, a Change in Control of the Company (as defined in the Company's
Long-Term Incentive Plan), your
<PAGE> 3
3 August 26, 1997
involuntary termination of employment other than for Cause (as defined below),
or your termination of employment for Good Reason (as defined below) provided
you do not enter into Competition (as defined below) with the Company within two
years after your employment is terminated.
5. You will be eligible to receive employee benefits and perquisites at
least as favorable as those provided to any other similarly situated senior
executives of the Company, including, without limitation, if offered to such
other senior executives, pension, profit sharing, savings, deferred compensation
and other retirement plans or programs, private medical and dental,
hospitalization, short-term and long-term disability, life insurance, accidental
death, travel accident, vacation and any other benefit programs or plans that
may be sponsored by the Company, including any plans that supplement the
above-listed plans, whether funded or unfunded.
You shall be entitled to post-retirement welfare benefits, if any, as are made
available by the Company to its senior level executives, provided that for this
purpose your period of employment shall be deemed to be the period necessary to
obtain the maximum level of such benefits.
To the extent that there is a period of employment required as a condition for
full benefit coverage under any employee benefit plan, you shall be deemed to
have met such requirement, and to the extent that you and/or your dependents
will not be eligible to participate fully in any medical/dental plan because of
any exclusion for preexisting conditions, the Company will either, at its
option, waive any such exclusion for pre-existing conditions or reimburse you
for the cost of paying for the COBRA continuation coverage available under your
prior employer's medical plans.
6. In the event your employment is involuntarily terminated by the Company
other than for Cause (as defined below) or you terminate your employment for
Good Reason (as defined below), during the Term of this agreement, provided that
you do not enter into Competition (as defined below) with the Company, then, as
liquidated damages and in lieu of any other damages or compensation under this
agreement, (i) you shall be entitled to receive a lump sum severance payment,
payable within 60 days after termination, equal to twice the combined amount of
your base salary and annual target incentive compensation as in effect on your
date of termination (ii) you shall have your period of employment service used
to calculate retirement and other employee benefits, including eligibility for
post-retirement medical/dental coverage, extended until you reach age 55 and the
compensation used to calculate your retirement benefits will be determined as if
you had continued to receive your then current annual base salary and annual
target incentive compensation until you reach age 55, which retirement benefits
will be paid in a lump sum within 30 days after termination subject to
appropriate actuarial reductions consistent with those applied under the plan to
reflect your age when you terminate employment; (iii) you will receive a
pro-rata annual incentive compensation award in March of the year following your
termination equal to the amount you would have received if you had worked for
the full year multiplied by a fraction where the numerator is the number of
months (rounded to the next highest number for a partial month) of
<PAGE> 4
4 August 26, 1997
the year elapsed prior to your termination and the denominator is 12; (iv) you
will be entitled to exercise during a period of up to five years following your
termination, in accordance with their terms, any remaining stock options that
had been granted to you prior to your termination (all of which will become
vested under such circumstances); (v) you shall be entitled to payment of your
expenses in connection with the relocation of your family from the United
Kingdom to the United States on the same basis as your expenses were paid with
respect to your relocation from the United States to the United Kingdom in
connection with the commencement of your employment with PUMCO, including the
provisions of paragraph 8 relating to any loss incurred on the sale of your
principal U.S. residence shall apply to any loss incurred on the sale of your
principal U.K. residence (if any); (vi) you and your dependents shall continue
to participate (with the same level of coverage) for the period in respect to
which you receive salary and bonus payments in (i) above, in all medical/dental,
accident, disability and life insurance plans on the same terms as in effect
immediately prior to your termination, provided, however, that such benefits
will cease on the date of your receiving equivalent benefits from a new
employer, and, at your option, you may have such benefits determined as if you
had terminated employment from the Company's principal U.S. operating
subsidiary; (vii) you shall be entitled to outplacement services, at the expense
of the Company, from a provider selected by you, subject to a maximum expense of
$50,000, and (viii) you shall receive any other amounts earned, accrued or owing
to you under the plans and programs of the Company or PUMCO. In the event you
should die during the Term of this agreement, while still employed by the
Company or PUMCO, your spouse or other beneficiary shall receive a lump sum
payment equal to two years' base salary offset by any death benefits payable
under the Company's life insurance plans under which you are covered. In the
event you enter into Competition with the Company within two years after your
employment is terminated, and you have received severance payments under
subparagraph (i) above, or additional retirement or other employee benefits
under subparagraph (ii) above, you agree to promptly repay the amount of such
severance payments, additional retirement or other employee benefits and
restricted stock to the Company, and any remaining stock options will be
canceled.
7. In the event that, during the Term of this agreement, you voluntarily
terminate your employment (other than for Good Reason or due to permanent
disability) or you are discharged by the Company for Cause, you will forfeit
your right to receive any salary, incentive compensation or severance pay that
has not been fully earned at the time your employment terminates, provided,
however, you will be entitled to receive any benefits or amounts accrued but not
yet paid as of the date of your termination, and you will be able to exercise
any remaining vested stock options only during the three months following
termination of your employment.
8. You will receive the Company's customary relocation benefits. You shall
be reimbursed for any loss incurred on the sale of your principal U.S. residence
(measured by the difference between the net sales price you receive after
deducting brokerage fees and closing costs and the original purchase price you
paid plus the reasonable cost of improvements made to your residence). If this
loss cannot be fully deducted for your U.S. income taxes, the amount not
deductible will be grossed-up for any resulting taxes. In lieu of selling your
home yourself, the Company will
<PAGE> 5
5 August 26, 1997
purchase your home for an amount equal to the average appraised value of your
home as determined by at least two independent real estate appraisers mutually
satisfactory to you and the Company, which amount will be deemed your net sales
price for the purpose of determining the amount of any loss to be reimbursed by
the Company. The Company will also reimburse you, grossed-up for any resulting
taxes, for reasonable house-hunting, personal transportation, moving expenses,
temporary living expenses and other related costs associated with your move to
Pharmacia & Upjohn's management center in Windsor, England. The Company will
also pay you $25,189, grossed up for any resulting taxes, for incidental
expenses incurred in establishing a residence in England.
9. (a) In order to provide comparable pension benefits to what you would
have been entitled to receive from your current employer, when your employment
with the Company terminates (whether with or without Good Reason or Cause), the
Company will pay you the greater of (i) the amount of (A) the retirement income
you would have been entitled to receive under the retirement benefit formula now
in effect with your current employer if you had remained employed by your
current employer until your employment with the Company or PUMCO terminates and
if your current employer compensation had increased at a 5% compounded rate
annually, less (B) the amount of any qualified or non-qualified retirement
income you are actually entitled to receive from your current employer; or (ii)
the amount of retirement income you are entitled to receive under the Company's
Global Officer Pension Plan (or any other retirement plan hereafter provided by
the Company for its senior executive officers) using your actual years of
service and compensation with the Company or PUMCO, as described in paragraph
(b) below.
(b) The Company's Global Officer Pension Plan, which is not qualified
under the U.S. Internal Revenue Code, supplements the officer's other sources of
retirement income to provide the officer with the actuarial value of an annual
life annuity of 65% of the officer's highest three-year average annual salary
and cash bonus compensation within the ten years prior to retirement from the
Company, provided the officer retires at age 65 with at least ten years of
service under the Plan. Appropriate actuarial adjustments consistent with those
applied under the Plan will be made if you have less than ten years of service
under the Plan or retire before age 65. Subject to such adjustments, you may
receive your retirement benefits in a lump sum within thirty days following your
termination of employment. The benefits payable under the Company's Global
Officer Pension Plan will be offset for any social security or other
governmental retirement income and any retirement income from any prior
employers that you may be entitled to receive.
(c) If you die while employed by the Company or thereafter under
circumstances in which a spousal survivor's benefit would have been payable
under the retirement plans of your current employer had you continued employment
with your current employer, and/or you elect the pre-retirement 60% spousal
survivor's benefit under the Company's Global Officer Pension Plan, or a spousal
survivor's benefit becomes payable under any other retirement plans of the
Company under which you are covered, then the benefit payable by the Company to
your surviving spouse shall be
<PAGE> 6
6 August 26, 1997
the greater of (i) the amount which would have been payable as a spousal
survivor's benefit under the retirement plans of your current employer had you
continued employment with your current employer or (ii) the amount payable as a
spousal survivor's benefit under the Global Officer Pension Plan or any other
retirement plans of the Company under which you are covered, with each such
amount being calculated in accordance with the assumptions described in and
offsets corresponding to those provided for in subparagraph (a) above,
subparagraph (b) above, and/or subparagraph (d) below, whichever are applicable
to the circumstances of the termination of your employment with the Company.
(d) For the purpose of the foregoing calculations, alternative forms of
benefits will be made actuarially equivalent using the actuarial assumptions
then applied to all senior executive officers under the Company's Global Officer
Pension Plan (or any successor plan).
10. You are authorized to incur reasonable expenses in carrying out your
duties and responsibilities with the Company and PUMCO, and the Company shall
promptly reimburse you for all business expenses in accordance with Company
policy. The Company shall pay your reasonable expenses (up to a maximum amount
of $25,000) for legal counsel and financial advice in connection with the
negotiation and documentation of your employment arrangements with the Company
and PUMCO. You will be provided with an automobile at Company expense. You will
receive annual assistance from an independent accounting firm mutually
satisfactory to you and the Company, at Company expense, in preparing your
income tax returns. In the event tax protection or similar provisions are made
available to the President and Chief Executive Officer of the Company at any
time, the same provisions will be made available to you. You and your family
residing with you in the U.K. will be entitled to one Company-paid business
class trip to the United States each year. Your children will be entitled to
attend private school in the U.K. through high school at Company expense.
11. During the period of your employment and thereafter, you will maintain
the confidentiality of all confidential or proprietary information relating to
the business of the Company or any of its subsidiaries or affiliates provided,
however, you may disclose such information as (i) may be required or appropriate
in carrying out your duties at the Company or PUMCO or (ii) may be required for
you to disclose by applicable law, governmental regulations or judicial or
regulatory process.
12. To the fullest extent permitted by applicable law, all intellectual
property (including patents, trademarks, and copyrights) which are made,
developed or acquired by you in the course of your employment with the Company
will be and remain the absolute property of the Company.
13. Without the written consent of the Board of Directors of the Company,
you agree that during the period of your employment with the Company or PUMCO
and for a period of two years following the termination of your employment, you
will not enter into Competition with the
<PAGE> 7
7 August 26, 1997
Company. "Competition" as used in this agreement means that you commence
employment with, or provide substantial consulting services to, any
pharmaceutical company (except companies where sales from pharmaceutical
products constitute less than 20% of total sales). Anything herein to the
contrary notwithstanding, your service solely as a member of the Board of
Directors of a company whose annual sales are less than $100 million shall not
be deemed to be Competition for purposes of this agreement. For purposes of the
preceding sentence, if a company is a subsidiary of another company, the sales
of both companies shall be taken into account.
14. To the fullest extent permitted by applicable law, the Company will,
during and after termination of your employment, indemnify you (including
providing advancement of expenses) for any judgments, fines, amounts paid in
settlement and reasonable expenses, including attorneys' fees, incurred by you
in connection with the defense of any lawsuit or other claim or investigation to
which you are made, or threatened to be made, a party or witness by reason of
being or having been an officer, director or employee of the Company or any of
its subsidiaries or affiliates. In addition, you will be covered under any
directors and officers' liability insurance policy for your acts (or non-acts)
as an officer or director of the Company or any of its subsidiaries or
affiliates to the extent the Company provides such coverage for its senior
executive officers.
15. Any disputes arising under or in connection with this agreement shall,
unless other arrangements are agreed to by you and the Company, be resolved by
binding arbitration to be held in London, England, in accordance with the rules
and procedures of the London Court of International Arbitration, and judgment
upon any award rendered by the arbitrator(s) may be entered in any court having
jurisdiction. Costs of the arbitration or litigation, including (but not by way
of limitation) reasonable attorney's fees of both parties, shall be borne by the
party which does not prevail in the proceedings. In the event that each party
prevails as to certain aspects of the proceedings, the arbitrator(s) or the
court shall determine an appropriate allocation of costs between the parties.
16. In the event of termination of your employment, you will immediately,
unless otherwise requested by the Company's Board of Directors, resign from all
directorships, trusteeships, other offices and employment held at that time with
the Company or any of its subsidiaries or affiliates.
17. For purposes of this agreement, "Cause" means (i) a material breach by
you of your duties and responsibilities (other than as a result of incapacity
due to physical or mental illness) which is demonstrably willful and deliberate
on your part, which is committed in bad faith or without reasonable belief that
such breach is in the best interests of the Company, and which is not remedied
in a reasonable period of time after receipt of written notice from the Company
specifying such breach; or (ii) your conviction of a felony which is materially
and demonstrably injurious to the Company as determined in the sole discretion
of the Board of Directors of the Company.
<PAGE> 8
8 August 26, 1997
18. For purposes of this agreement, "Good Reason" means that, without your
consent, (i) your rate of annual base salary or the target amount of your annual
cash incentive bonus are reduced in a manner that is not applied proportionately
to all other senior executive officers of the Company, including the President
and Chief Executive Officer; (ii) the Company fails to retain you as Senior Vice
President of the Company; (iii) there is a material diminution in your duties,
or the assignment to you of duties which are materially inconsistent with your
duties or which materially impair your ability to perform your duties with the
Company and PUMCO, provided, however, that in the event PUMCO ceases to provide
senior management services to the Company under contract, any changes related
solely to PUMCO shall not be deemed Good Reason; (iv) there is a change in your
reporting so that you no longer report directly to an Executive Vice President
or higher ranking officer of the Company and PUMCO; provided, however, that in
the event PUMCO ceases to provide senior management services to the Company
under contract, any changes related solely to PUMCO shall not be deemed Good
Reason unless you no longer report directly to the Executive Vice President or
higher ranking officer of the Company; or (v) there is a material breach of this
agreement by the Company which is not remedied in a reasonable period of time
after receipt of written notice from you specifying such breach.
19. The obligation of the Company and PUMCO to make any payments provided
for hereunder and otherwise to perform their obligations hereunder shall not be
affected by any set-off, counterclaim, recoupment, defense or other claim, right
or action which the Company or PUMCO 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.
20. In the event of any change in the outstanding shares of the Company's
Common Stock (including any increase or decrease in such shares) by reason of
any stock dividend or split, recapitalization, merger, consolidation, spinoff,
combination or exchange of shares or other similar corporate change, or any
distributions to common stockholders other than regular cash dividends, the
Compensation Committee of the Board may make such substitution or adjustment, if
any, as it deems to be equitable, as to the number or kind of shares of Common
Stock provided for in this agreement.
21. As with all prospective employees, a recent medical examination
evidencing general good health must be completed prior to employment. Your
physician should send the results of such examination to the Company's Chief
Medical Officer at the management center in Windsor, England.
22. This agreement will be governed by and construed in accordance with the
laws of the State of Delaware, U.S.A.
<PAGE> 9
9 August 26, 1997
23. (a) No rights or obligations of the Company under this agreement may be
assigned or transferred by the Company except that such rights or obligations
may be assigned or transferred pursuant to a merger or consolidation in which
the Company is not the continuing entity, or pursuant to the sale or transfer of
all or substantially all of the assets of the Company, provided that the
assignee or transferee is the successor to all or substantially all of the
assets of the Company.
(b) This agreement shall not be terminated by any merger, consolidation
or transfer of assets of the Company referred to above. In the event of any such
merger, consolidation or transfer of assets, the provisions of this agreement
shall be binding upon the surviving or resulting corporation or the person or
entity to which such assets are transferred.
(c) The Company agrees that concurrently with any merger, consolidation
or transfer of assets referred to above, it will cause any successor or
transferee unconditionally to assume, either contractually or as a matter of
law, all of the obligations of the Company hereunder.
(d) 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, distributes, designees and legatees. None of
your rights or obligations under this agreement may be assigned or transferred
by you other than your rights to compensation and benefits, which may be
transferred only by will or operation of law. If you should die while any
amounts or benefits have been accrued by you but not yet paid as of the date of
your death and which would be payable to you hereunder had you continued to
live, all such amounts and benefits unless otherwise provided herein shall be
paid or provided 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 such
person is so appointed, to your estate.
24. No provisions of this agreement may be waived, modified or discharged
unless such waiver, modification or discharge is agreed to in writing signed by
both you and an authorized officer of the Company. No waiver by any party hereto
at any time of any breach by any other party hereto of, or compliance with, any
condition or provision of this agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. No agreements or representations,
oral or otherwise, express or implied, with respect to the subject matter hereof
have been made by any party which are not set forth expressly in this agreement.
25. This agreement sets forth the entire agreement of the parties hereto in
respect of the subject matter contained herein and supersedes all prior
agreements, promises, covenants, arrangements, communications, representations
or warranties, whether oral or written, by any officer, employee or
representative of any party hereto in respect of the subject matter contained
herein.
<PAGE> 10
10 August 26, 1997
26. This agreement may be executed by the parties in two or more
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall constitute one and the same instrument, and all signatures
need not appear on any one counterpart. A faxed signature of a party which is a
reproduction of a genuine signature of that party shall be conclusive evidence
of execution of this agreement by that party.
Very truly yours,
FRED HASSAN
President and Chief Executive Officer
I accept the terms set forth in this letter and will serve in the capacity
stated:
- --------------------------------------
Dated: August _________, 1997
<PAGE> 1
EXHIBIT (10)(H)
February 17, 1998
Mr. P. L. Matson
502 East North Avenue
Lake Bluff, IL 60044
U.S.A.
Dear Paul:
This letter confirms the terms of our offer for your employment as Senior Vice
President for Human Resources of Pharmacia & Upjohn, Inc. (the "Company")
reporting to the President and Chief Executive Officer of the Company. I very
much hope that you will find this opportunity attractive and rewarding and will
accept our offer. The principal terms of your employment will be:
1. You will join the Company as soon as possible (your "Employment
Commencement Date") as Senior Vice President for Human Resources of the Company.
The term of this agreement will be from your Employment Commencement Date until
February 28, 2001, and will be automatically renewed for an indefinite period
thereafter (the "Term"), unless and until at least sixty (60) days' prior
written notice of termination is given by either party stating the date of
termination.
You will devote substantially all of your business time to your duties and
responsibilities with the Company. However, you will not be precluded from (i)
serving on the board of directors of other companies (subject to the reasonable
approval of the Chief Executive Officer of the Company) and boards of trade
associations or charitable organizations; (ii) engaging in charitable activities
and community affairs; or (iii) managing your personal investments and affairs,
provided that such activities do not materially interfere with your duties and
responsibilities with the Company.
2. Your beginning annual base salary will be $250,000 and will be subject
to annual review for increases.
<PAGE> 2
2 February 17, 1998
3. You will be included in the Company's Annual Incentive Plan at a level
determined by the Compensation Committee of the Board to be appropriate based on
your position, job performance and Company policy. Your 1998 incentive
compensation target award will be set at 50% of your annual base salary or
$125,000. Your incentive compensation award will be subject to adjustment
following the end of the year by the performance criteria established by the
Compensation Committee of the Board of Directors, but in no event will your 1998
incentive compensation award be less than $65,000.
4. To reimburse you for any housing assistance payment received from your
current employer that you may be required to pay back to your current employer
as a result of joining the Company, you will receive a cash bonus in the amount
of $50,000, payable when it can be determined whether or not you will be
required to repay any such housing assistance payment. If your current employer
waives or forgives repayment of the remaining housing assistance payment, you
will not receive the foregoing $50,000 cash bonus.
5. To provide you with new long-term equity incentive compensation and to
replace the equity awards from your current employer that you will lose as a
result of joining the Company, the Board of Directors of the Company will grant
you, as of your Employment Commencement Date, a stock option for 50,000 shares
of the Company's Common Stock, vesting ratably over a three-year period on each
of the first three annual anniversaries of your Employment Commencement Date.
The exercise price of the stock options will be the fair market value (defined
in the Company's Long-Term Incentive Plan as the average of the daily high and
low) for Pharmacia & Upjohn Common Stock on the New York Stock Exchange on your
Employment Commencement Date. All stock options will be "Incentive Stock
Options" to the maximum extent permitted, and the remainder will be
non-qualified stock options, under the U.S. Internal Revenue Code, will be
subject to the terms of said Plan and will expire no later than ten years from
the date of grant.
Beginning in 1999, you will be granted stock options pursuant to the Company's
Long-Term Incentive Plan at the same time as other senior executives of the
Company and at a level determined by the Compensation Committee of the Board to
be appropriate based on your position, job performance, competitive practices
and Company policy, which will be in an amount not less than 50,000 shares of
the Company's Common Stock.
In addition, you will receive a grant of 5,000 shares of the Common Stock
restricted as to sale or transfer until earned. These restricted shares will be
earned ratably over a 3-year period on each of the first three annual
anniversaries of your Employment Commencement Date.
<PAGE> 3
3 February 17, 1998
Stock options and restricted shares not yet vested or earned will nevertheless
vest or be earned immediately upon a Change in Control of the Company (as
defined in the Company's Long-Term Incentive Plan).
6. You will be eligible to receive employee benefits and perquisites in
line with the general plans applicable to our Global Officers including, without
limitation, if offered to such other senior executives, pension, profit sharing,
savings, deferred compensation, medical, dental, hospitalization, short-term and
long-term disability, life insurance, accidental death, travel accident,
vacation and any other benefit programs or plans that may be sponsored by the
Company, including any plans that supplement the above-listed plans, whether
funded or unfunded.
To the extent that there is a period of employment service required as a
condition for full benefit coverage under any employee benefit program or plan,
you shall be deemed to have met such requirement, and to the extent that you
and/or your dependents will not be eligible to participate fully in any
medical/dental plan because of any exclusion for preexisting conditions, the
Company will waive any such exclusion for pre-existing conditions.
7. In the event your employment is involuntarily terminated by the Company
other than for Cause (as defined below), which the Company reserves the right to
do at any time during or after the Term of this agreement, or you terminate your
employment for Good Reason (as defined below), during the Term of this
agreement, provided that you do not enter into Competition (as defined below)
with the Company, then, as liquidated damages and in lieu of any other damages
or compensation under this agreement, (i) you shall be entitled to receive a
lump sum severance payment, payable within 60 days after termination, equal to
twice the combined amount of your annual base salary and annual target incentive
compensation as in effect on your date of termination; (ii) you shall have your
period of employment service used to calculate retirement and other employee
benefits, including eligibility for post-retirement medical/dental coverage,
extended for two additional years following your employment termination date and
the compensation used to calculate your retirement benefits will be determined
as if you had continued to receive your then current annual base salary and
annual target incentive compensation for two additional years following your
employment termination date, which retirement benefits will be paid in a lump
sum within 30 days after termination subject to appropriate actuarial reductions
consistent with those applied under the plan to reflect your age when you
terminate employment; (iii) you will receive a pro-rata annual incentive
compensation award in March of the year following your termination equal to the
amount you would have received if you had worked for the full year as adjusted
for the performance criteria specified for your award multiplied by a fraction
where the numerator is the number of months (rounded to the next highest number
for a partial month) of the year elapsed
<PAGE> 4
4 February 17, 1998
prior to your termination and the denominator is 12; (iv) you and your
dependents shall continue to participate (with the same level of coverage) for
two additional years following your employment termination date, in all
medical/dental, accident, disability and life insurance plans on the same terms
as in effect immediately prior to your termination, provided, however, that such
benefits will cease on the date of your receiving equivalent benefits from a new
employer; (v) you shall be entitled to outplacement services from a provider
selected by you, at the expense of the Company, subject to a maximum expense of
$25,000; and (vi) you shall receive any other amounts earned, accrued or owing
to you under the plans and programs of the Company.
In the event you enter into Competition with the Company within two years after
your employment is terminated, and you have received severance payments under
subparagraph (i) above, or additional retirement or other employee benefits
under subparagraph (ii) above, you agree to promptly repay the amount of such
severance payments and additional retirement or other employee benefits to the
Company.
8. In the event that, during the Term of this agreement, you voluntarily
terminate your employment (other than for Good Reason) or you are discharged by
the Company for Cause, you will forfeit your right to receive any salary,
incentive compensation or severance pay that has not been fully earned at the
time your employment terminates, provided, however, you will be entitled to
receive any benefits or amounts accrued but not yet paid as of the date of your
termination.
9. You acknowledge that the Company may at any time relocate your place of
employment to such location as may at that time constitute the Company's
principal executive offices. While you may need to initially be present at the
Company's Management Centre in Windsor, England (your temporary living expenses
in England incurred by you will be reimbursed by the Company net of any
resulting income tax), you will primarily be based at the Company's new
headquarters in New Jersey. You will receive the company's customary relocation
benefits for your move from your current home in the United States to the
Company's new headquarters in New Jersey. You shall be reimbursed for any loss
incurred on the sale of your principal U.S. residence (measured by the
difference between the net sales price you receive after deducting brokerage
fees and closing costs and the original purchase price you paid plus the
reasonable cost of improvements made to your residence) up to a maximum amount
of $100,000. In lieu of selling your home yourself, the Company will purchase
your home for an amount equal to the average appraised value of your home as
determined by at least two independent real estate appraisers mutually
satisfactory to you and the Company, which amount will be deemed your net sales
price for the purpose of determining the amount of any loss to be reimbursed by
the Company. The Company will also reimburse you, grossed-up for any resulting
taxes, for reasonable house-hunting, personal transportation, moving expenses,
temporary living expenses and other related costs associated with your move from
your
<PAGE> 5
5 February 17, 1998
current residence to the Company's new headquarters in New Jersey, which
you may incur at any time prior to August 31, 1999.
10. You will be immediately eligible to participate in, and shall be
immediately vested under, the Company's Global Officer Pension Plan, which is
not qualified under the U.S. Internal Revenue Code, supplements the officer's
other sources of retirement income to provide the officer with the actuarial
value of an annual life annuity of 65% of the officer's highest three-year
average annual salary and cash bonus compensation within the ten years prior to
retirement from the Company, provided the officer retires at age 65 with at
least ten years of service under the Plan. Appropriate actuarial adjustments
consistent with those applied under the Plan will be made if you have less than
ten years of service under the Plan or retire before age 65. The benefits
payable under the Company's Global Officer Pension Plan will be offset for any
social security or other governmental retirement income and any retirement
income from any prior employers that you may be entitled to receive.
11. You are authorized to incur reasonable expenses in carrying out your
duties and responsibilities with the Company, and the Company shall promptly
reimburse you for all business expenses in accordance with Company policy.
12. During the period of your employment and thereafter, you will maintain
the confidentiality of all confidential or proprietary information relating to
the business of the Company or any of its subsidiaries or affiliates, provided,
however, you may disclose such information as (i) may be required or appropriate
in carrying out your duties at the Company or (ii) may be required for you to
disclose by applicable law, governmental regulations or judicial or regulatory
process.
13. To the fullest extent permitted by applicable law, all intellectual
property (including patents, trademarks, and copyrights) which are made,
developed or acquired by you in the course of your employment with the Company
will be and remain the absolute property of the Company, and you shall assist
the Company in perfecting and defending its rights to such intellectual
property.
14. In consideration of the offer of employment and the compensation and
benefits provided hereunder, without the written consent of the Chief Executive
Officer of the Company, you agree that during the period of your employment with
the Company and for a period of two years following the termination of your
employment, you will not enter into Competition with the Company. "Competition"
as used in this agreement means that you engage in substantially the same work
as you had been engaged in while employed by the Company with another
pharmaceutical company (except companies where sales from pharmaceutical
products constitute less than 20% of total sales) as either an employee or
consultant. Anything herein to the contrary
<PAGE> 6
6 February 17, 1998
notwithstanding, your service solely as a member of the Board of Directors of a
company whose annual sales are less than $100 million shall not be deemed to be
Competition for purposes of this agreement. For purposes of the preceding
sentence, if a company is a subsidiary of another company, the sales of both
companies shall be taken into account.
15. To the fullest extent permitted by applicable law, the Company will,
during and after termination of your employment, indemnify you (including
providing advancement of expenses) for any judgments, fines, amounts paid in
settlement and reasonable expenses, including attorneys' fees, incurred by you
in connection with the defense of any lawsuit or other claim or investigation to
which you are made, or threatened to be made, a party or witness by reason of
being or having been an officer, director or employee of the Company or any of
its subsidiaries or affiliates. In addition, you will be covered under any
directors' and officers' liability insurance policy for your acts (or non-acts)
as an officer or director of the Company or any of its subsidiaries or
affiliates to the extent the Company provides such coverage for its senior
executive officers.
16. Any disputes arising under or in connection with this agreement shall,
unless other arrangements are agreed to by you and the Company, be resolved by
binding arbitration to be held in New York, New York in accordance with the
rules and procedures of the American Arbitration Association, and judgment upon
any award rendered by the arbitrator(s) may be entered in any court having
jurisdiction. Costs of the arbitration, including (but not by way of limitation)
reasonable attorney's fees of both parties, shall be borne by the party which
does not prevail in the proceedings, but in no event shall a party be liable to
pay for such costs in excess of $25,000. In the event that each party prevails
as to certain aspects of the proceedings, the arbitrator(s) shall determine an
appropriate allocation of costs between the parties.
17. In the event of termination of your employment, you will immediately,
unless otherwise requested by the Company's Board of Directors, resign from all
directorships, trusteeships, other offices and employment held at that time with
the Company or any of its subsidiaries or affiliates.
18. For purposes of this agreement, "Cause" means (i) a material breach by
you of your duties and responsibilities (other than as a result of incapacity
due to physical or mental illness) which is demonstrably willful and deliberate
on your part, which is committed in bad faith or without reasonable belief that
such breach is in the best interests of the Company, and which is not remedied
in a reasonable period of time after receipt of written notice from the Company
specifying such breach; or (ii) your conviction of a felony which is materially
and demonstrably injurious to the Company as determined in the sole discretion
of the Board of Directors of the Company.
<PAGE> 7
7 February 17, 1998
19. For purposes of this agreement, "Good Reason" means that, without your
consent, (i) your rate of annual base salary or the cash target amount of your
annual cash incentive bonus are reduced in a manner that is not applied
proportionately to all other senior executive officers of the Company; (ii) the
Company fails to retain you as a Senior Vice President of the Company, although
the Company may at any time change your job description or reporting
relationship without constituting "Good Reason;" (iii) there is a material
diminution of your primary job function, or the assignment to you of duties
which are materially inconsistent with your primary job function, or which
materially impair your ability to perform your primary job function with the
Company; (iv) the Company delivers to you a written notice of intended
termination of this agreement pursuant to Section 1 above at a time when the
Company would not have Cause to terminate your employment; or (v) there is a
material breach of this agreement by the Company which is not remedied in a
reasonable period of time after receipt of written notice from you specifying
such breach.
20. The obligation of the Company to make any payments provided for
hereunder and otherwise to perform their obligations hereunder shall not be
affected by any set-off, counterclaim, recoupment, defense or other claim, right
or action which the Company 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.
21. In the event of any change in the outstanding shares of the Company's
Common Stock (including any increase or decrease in such shares) by reason of
any stock dividend or split, recapitalization, merger, consolidation, spin-off,
combination or exchange of shares or other similar corporate change, or any
distributions to common stockholders other than regular cash dividends, the
Compensation Committee of the Board may make such substitution or adjustment, if
any, as it deems to be equitable, as to the number or kind of shares of Common
Stock provided for in this agreement.
22. As with all prospective employees, a recent medical examination
evidencing general good health must be completed prior to employment. Your
physician should send the results of such examination to the Company's Chief
Medical Officer.
23. This agreement will be governed by and construed in accordance with the
laws of the State of New Jersey, U.S.A.
24. (a) No rights or obligations of the Company under this agreement may be
assigned or transferred
<PAGE> 8
8 February 17, 1998
by the Company except that such rights or obligations may be assigned or
transferred pursuant to a merger or consolidation in which the Company is not
the continuing entity, or pursuant to the sale or transfer of all or
substantially all of the assets of the Company, provided that the assignee or
transferee is the successor to all or substantially all of the assets of the
Company.
(b) This agreement shall not be terminated by any merger, consolidation
or transfer of assets of the Company referred to above. In the event of any such
merger, consolidation or transfer of assets, the provisions of this agreement
shall be binding upon the surviving or resulting corporation or the person or
entity to which such assets are transferred.
(c) The Company agrees that concurrently with any merger, consolidation
or transfer of assets referred to above, it will cause any successor or
transferee unconditionally to assume, either contractually or as a matter of
law, all of the obligations of the Company hereunder.
(d) 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, distributes, designees and legatees. None of
your rights or obligations under this agreement may be assigned or transferred
by you other than your rights to compensation and benefits, which may be
transferred only by will or operation of law. If you should die while any
amounts or benefits have been accrued by you but not yet paid as of the date of
your death and which would be payable to you hereunder had you continued to
live, all such amounts and benefits unless otherwise provided herein shall be
paid or provided 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 such
person is so appointed, to your estate.
25. No provisions of this agreement may be waived, modified or discharged
unless such waiver, modification or discharge is agreed to in writing signed by
both you and an authorized officer of the Company. No waiver by any party hereto
at any time of any breach by any other party hereto of, or compliance with, any
condition or provision of this agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. No agreements or representations,
oral or otherwise, express or implied, with respect to the subject matter hereof
have been made by any party which are not set forth expressly in this agreement.
26. This agreement sets forth the entire agreement of the parties hereto in
respect of the subject matter contained herein and supersedes all prior
agreements, promises, covenants, arrangements, communications, representations
or warranties, whether oral or written, by any officer, employee or
representative of any party hereto in respect of the subject matter contained
herein.
<PAGE> 9
27. This agreement may be executed by the parties in two or more
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall constitute one and the same instrument, and all signatures
need not appear on any one counterpart. A faxed signature of a party which is a
reproduction of a genuine signature of that party shall be conclusive evidence
of execution of this agreement by that party.
Very truly yours,
FRED HASSAN
Chief Executive Officer
I accept the terms set forth in this letter and will serve in the capacity
stated:
- --------------------------------------
PAUL L. MATSON
Dated: February ____, 1998
<PAGE> 1
EXHIBIT 12
PHARMACIA & UPJOHN, INC. AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(U.S. dollar amounts in millions)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Earnings from continuing
operations before income taxes $1,016 $ 468 $ 838 $1,136 $1,271
Less: Equity in undistributed
net income (loss) of companies
owned less than 50% 58 (32) 5 7 8
------ ----- ----- ------ ------
958 500 833 1,129 1,263
Add:
Amortization of previously
capitalized interest
12 12 11 10 8
Fixed charges included in the above:
Interest and amortization of debt
expense
49 58* 82 121 139
Rental expense representative
of an interest factor 28 38 37 35 35
------ ----- ----- ------ ------
Earnings from continuing operations
before income taxes and fixed
charges $1,047 $ 608* $ 963 $1,295 $1,445
====== ===== ===== ====== ======
Interest incurred and amortization
of debt expense $ 84 $ 90 $ 115 $ 149 $ 164
Rental expense representative of an
interest factor 28 38 37 35 35
------ ----- ----- ------ ------
Total fixed charges $ 112 $ 128 $ 152 $ 184 $ 199
====== ===== ===== ====== ======
Ratio of earnings to fixed charges 9.3 4.8* 6.3 7.0 7.2
====== ===== ===== ====== ======
</TABLE>
*Revised from Form 10-K.
22
<PAGE> 1
EXHIBIT 13
Financial Review
-----------------------------------------
Pharmacia & Upjohn, Inc. and subsidiaries
OVERVIEW
1998 marked a turnaround year for Pharmacia & Upjohn (the company) with
significant improvement in operating performance compared to the previous year.
Sales growth in the U.S., restructuring of the company, and divestitures of
noncore businesses were key factors driving the 1998 turnaround.
<TABLE>
<CAPTION>
=================================================================================================
% %
CONSOLIDATED RESULTS, AS REPORTED 1998 CHANGE 1997 CHANGE 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Dollars in millions, except per-share data
Sales $6,758 3 $6,586 (8) $7,176
Operating income 938 141 390 (42) 677
Earnings before income taxes 1,016 117 468 (44) 838
Net earnings 691 114 323 (43) 562
Net earnings per common share (EPS):
--Basic $ 1.33 118 $ .61 (44) $ 1.08
--Diluted $ 1.31 115 $ .61 (43) $ 1.07
=================================================================================================
</TABLE>
The financial impact of the restructuring, divestments, and other strategic
measures described in more detail below are unusual in nature and therefore need
to be considered in the year-to-year comparison of results. In the following
discussion of consolidated results, per-share amounts are presented on a
diluted, after-tax basis.
<TABLE>
<CAPTION>
======================================================================================================
% %
CONSOLIDATED RESULTS, AS ADJUSTED 1998 CHANGE 1997 CHANGE 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Dollars in millions, except per-share data
Net earnings before unusual items $ 830 12 $ 739 (26) $ 997
EPS before unusual items:
Basic $ 1.61 13 $ 1.43 (26) $ 1.93
Diluted $ 1.58 12 $ 1.41 (26) $ 1.90
======================================================================================================
</TABLE>
Restructuring activity since the 1995 merger of The Upjohn Company and Pharmacia
AB reflects the ongoing transformation of the company from two unique operations
into one integrated global enterprise. Restructuring charges were $92 million
($.12 per share) in 1998; $316 million ($.39 per share) in 1997; and $518
million ($.62 per share) in 1996. Restructuring efforts in 1998 and 1997 were
associated with the global turnaround program. This program was undertaken to
achieve simplified infrastructure, improved efficiency, and a global focus on
the core pharmaceutical business. The 1996 restructuring was related primarily
to the merger and included the reduction of 4,350 positions, the elimination of
duplicate facilities, and other activities connected with the merger. In
addition, merger costs of $67 million ($.09 per share) were reported in 1996.
These costs consisted of certain nonrecurring organizational activities,
establishing the corporate identity for the new company, and other costs of
combining the two predecessor companies.
To concentrate resources on the faster-growing, higher-margin
pharmaceutical business, management has divested three noncore businesses since
1996. In 1998, the company sold substantially all of its nutrition business for
a loss of $52 million ($.07 per share). In 1997, the company merged Pharmacia
Biotech, its biotechnology supply business, with Amersham Life Science creating
a new company, Amersham Pharmacia Biotech Ltd., of which Pharmacia & Upjohn owns
45 percent. In connection with the merger and subsequent restructuring of
Biotech, the company recorded charges of $79 million ($.12 per share) in 1997.
In 1996, management sold 59 percent of the company's holding in Biacore
International AB through an initial public offering and recorded a gain on the
sale of Biacore stock of $55 million ($.08 per share) which was included in
nonoperating income. The ownership structure of Biotech and Biacore changed from
wholly-owned subsidiaries to equity affiliates, further affecting comparability
among years.
The company took additional strategic steps during the last three years
which affected earnings comparability. In 1998, management reached a settlement
of $103 million in a federal class-action lawsuit originally filed in 1993 on
behalf
33
<PAGE> 2
of retail pharmacies. As a consequence of the settlement, the company increased
its litigation reserves by $61 million ($0.08 per share), a charge reported in
marketing, administrative, and other (MA&O) expense in the second quarter of
1998. In 1997, the company reacquired sales and marketing rights in Japan to one
of its leading products, GENOTROPIN. The reacquisition and related inventory
repurchase resulted in a charge of $115 million ($.11 per share) recorded in
sales, cost of goods sold, and MA&O expense. Also in that year, the company
purchased exclusive worldwide commercialization rights to a research compound
for $35 million ($.04 per share) and terminated certain future product plans
resulting in a charge of $36 million ($.05 per share). Both charges were
reported in research and development (R&D) expense. Management additionally
recognized $70 million ($.09 per share) in litigation-related charges in 1997
which were recorded in MA&O expense. Significant events in 1996 included the
termination of a product development agreement with the Biopure Corporation
resulting in a charge of $106 million ($.13 per share); the sale of an equity
interest and related dissolution of a joint venture resulting in a gain of $46
million ($.06 per share); and the increase in certain environmental and legal
reserves of $73 million ($.10 per share), all reported in MA&O expense. The
company additionally recorded $26 million ($.03 per share) for a contractual
obligation relating to a co-development agreement included in R&D expense.
NET SALES
Excluding the divested Biotech business, sales rose 6 percent in 1998 to $6.7
billion. This increase represented a 7 percent volume growth, a 2 percent net
price increase, and a 3 percent unfavorable currency exchange rate effect. On
the same basis, 1997 sales of $6.3 billion were 6 percent lower than the
previous year. The change represented a 1 percent volume growth, a 1 percent net
price decrease, and a 6 percent negative exchange effect.
As a direct outcome of the company's aggressive U.S. growth strategy,
total sales in the U.S. represented an increasingly larger percentage of
worldwide sales at 37 percent in 1998, up from 33 percent in 1997 and 1996,
excluding Biotech. Despite increasing growth in the U.S. relative to non-U.S.
markets, the company's geographic composition of sales will continue to result
in significant exposure to the fluctuations of exchange rates in both
translation of financial results and the underlying transactions that comprise
the results. The estimated effect of exchange on sales by country in the
following table is based on location of customer.
<TABLE>
<CAPTION>
===================================================================================
% % CHANGE
EXCHANGE EFFECT ON CONSOLIDATED SALES 1998 CHANGE EXCL. FX* 1997
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Dollars in millions
Non-U.S.:
Japan $ 565 (9.6) (2.4) $ 624
Italy 461 0.3 2.6 460
Germany 412 1.6 3.4 405
United Kingdom 352 17.0 16.1 300
Sweden 284 (10.1) (6.3) 317
France 275 8.3 9.8 254
Spain 168 (9.0) (6.9) 185
Rest of world 1,732 0.5 6.5 1,724
United States 2,498 20.0 20.0 2,081
- -----------------------------------------------------------------------------------
Subtotal 6,747 6.3 9.1 6,350
Biotech 11 (95.0) (95.1) 236
- -----------------------------------------------------------------------------------
Total consolidated sales $6,758 2.6 5.4 $6,586
===================================================================================
</TABLE>
* Represents percent change from the prior year excluding the approximate
effects of currency exchange rate fluctuations.
Management reports its operations within two segments: pharmaceutical and
nonpharmaceutical. The pharmaceutical segment represents the company's core
business: the development, manufacture, and sale of pharmaceutical products.
Pharmaceutical products include prescription and nonprescription products for
humans and animals. The nonpharmaceutical segment includes diagnostics,
nutrition, plasma and biotechnology. Additional information regarding segments
is provided in Note 21 to the consolidated financial statements. Prior to 1998,
the company reported its operations as a single industry segment. In the fourth
quarter of 1998,
34
<PAGE> 3
the company adopted the Financial Accounting Standards Board's Statement of
Financial Accounting Standards (SFAS) No. 131 which established new standards
for defining operating segments.
<TABLE>
<CAPTION>
===================================================================================
% %
SALES BY SEGMENT 1998 CHANGE 1997 CHANGE 1996
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Dollars in millions
Pharmaceutical segment $6,127 7.6 $5,690 (5.5) $6,025
Nonpharmaceutical segment 631 (29.4) 896 (22.2) 1,151
- -----------------------------------------------------------------------------------
Total consolidated sales $6,758 2.6 $6,586 (8.2) $7,176
===================================================================================
</TABLE>
The increase in pharmaceutical segment sales in 1998 was due largely to new
prescription product growth in the U.S. and Europe. Although new product growth
was strong in 1997, sales that year were adversely affected by intense generic
competition and year-end 1996 trade inventory accumulations in the U.S. and
across major markets in Europe. In Japan, mandatory price decreases in each of
the last three years, negative exchange effects, and government restrictions in
health care reimbursements have adversely affected pharmaceutical segment sales.
The nonpharmaceutical segment accounted for approximately 9 percent of
consolidated sales in 1998, down from 14 percent in 1997 and 16 percent in 1996.
Excluding Biotech, sales of the remaining noncore businesses fell 3 percent in
1998 in local currency. As previously mentioned, sales of Biotech effective
August 1997 and Biacore effective December 1996 are no longer reported in
consolidated sales. Biotech and Biacore transactions are further discussed in
Notes 5 and 6 to the consolidated financial statements. Nutrition sales will be
significantly lower beginning in 1999 with the sale of the majority of the
nutrition business to Fresenius AG in December 1998. To comply with antitrust
regulations in Germany, operations there were not sold. As of December 31, 1998,
the sale of the operation in China was still pending.
SALES BY PRODUCT
A year-to-year consolidated net sales comparison of the company's top 20
products (including generic equivalents where applicable) is provided in the
table below.
<TABLE>
<CAPTION>
=============================================================================
% %
SALES OF TOP PRODUCTS 1998 CHANGE 1997 CHANGE 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Dollars in millions
GENOTROPIN $ 395 13.1 $ 349 (12.0) $ 397
XALATAN 332 101.6 165 452.7 30
XANAX 321 14.8 279 (20.8) 353
CLEOCIN/DALACIN 314 5.1 299 7.1 279
MEDROL 264 9.4 241 (10.3) 269
DEPO-PROVERA 227 15.8 196 (5.1) 206
NICORETTE 213 26.8 168 (18.7) 207
CAMPTOSAR 193 26.0 154 162.0 59
FRAGMIN 181 9.5 165 10.4 150
PHARMORUBICIN 177 (9.3) 196 (5.8) 208
HEALON 140 (9.3) 155 (17.7) 188
ROGAINE/REGAINE 133 3.2 129 (31.8) 189
DETROL/DETRUSITOL 125 N/A 1 N/A N/A
PROVERA 100 4.9 96 (38.9) 157
AZULFIDINE/SALAZOPYRIN 97 3.2 94 (12.2) 107
NAXCEL/EXCENEL 96 13.2 85 12.9 75
MICRONASE/GLYNASE 91 8.5 84 (50.0) 168
HALCION 88 (5.8) 93 (10.5) 104
CAVERJECT 73 (17.0) 88 26.5 70
SERMION 72 (11.1) 81 (19.1) 101
- -----------------------------------------------------------------------------
Total $3,632 16.5 $3,118 (6.0) $3,317
=============================================================================
</TABLE>
35
<PAGE> 4
Sales of new products have represented an increasing percentage of total sales
every year since the merger. In 1996 and 1997, the company's portfolio of
largely older products left it vulnerable to generic competition and consequent
price erosion. With a growing percentage of new products making up the sales
base, the impact of patent expirations on sales over the next five years will be
very limited.
New product sales growth was led by XALATAN in the U.S. and Europe
during both 1998 and 1997. Introduced in 1996, XALATAN is now the leading
glaucoma treatment worldwide and is sold in 45 countries. Management expects to
launch XALATAN in Japan, the second-largest glaucoma market in the world, late
in 1999. Another successful new product for the company is DETROL (DETRUSITOL
outside the U.S.), a therapy for overactive bladder and its symptoms of urinary
urgency, frequency and urge incontinence. The product targets an underdeveloped
market which is expanding due to direct-to-consumer advertising undertaken by
Pharmacia & Upjohn. DETROL was launched in the U.S. in April 1998 and is
currently available in 22 countries in Europe, North America, and Latin America.
Sales of another promising new product, MIRAPEX, increased $29 million to $49
million in 1998. Since its U.S. launch in mid-1997, MIRAPEX has become the
leading dopamine agonist in the U.S. for the treatment of Parkinson's disease.
The strong 1998 sales performances of NICORETTE and CAMPTOSAR have
established these products as important to the company's future growth. Current
year sales of the NICORETTE line of products to treat tobacco dependency were
led by NICORETTE Gum and the NICORETTE Inhaler in the U.K. and U.S. markets. In
addition, NICORETTE Microtab was launched in Sweden. Sales levels were lower in
1997 compared to 1996 due to the initial establishment of retail inventories for
the 1996 launches of NICORETTE Gum, NICORETTE Nasal Spray, and the NICOTROL
Patch in the United States. CAMPTOSAR was granted full second-line approval by
the U.S. FDA for colorectal cancer in October 1998, two years after the product
was introduced with an accelerated approval. Sales growth of CAMPTOSAR in 1998
was positively impacted by new survival data released earlier in the year. 1997
sales levels reflected the product's initial strong market penetration in the
U.S.
FRAGMIN and GENOTROPIN also are products essential to the company's
top-line growth. New indications and improved delivery systems introduced in
selected countries over the past two years have bolstered demand for FRAGMIN, a
low molecular weight heparin for treating blood clots, deep-vein thrombosis, and
acute unstable coronary artery disease. While sales in both 1998 and 1997 fell
in Japan and France, the largest markets for FRAGMIN, the product experienced
strong growth in the U.S., Germany, and the U.K.
Pharmacia & Upjohn reacquired sales and marketing rights to GENOTROPIN
in Japan, this product's largest market, and assumed control of the product
there during 1998. The company is now able to sell the product directly to its
customers. In the last two years, sales have been adversely affected by the poor
economic climate in Japan, the weak yen, and government-imposed prescribing
restrictions and price decreases. However, continuing expansion into the U.S.
market, the introduction of the new adult indication, and the launch of
GENOTROPIN MiniQuick, a new delivery system, have resulted in strong growth in
the U.S. and Europe since 1996.
Mandatory price decreases in Japan in each of the last three years and
recent government restrictions in health care reimbursements have severely
depressed the pharmaceutical market in that country. These factors in
combination with the weak yen negatively impacted sales of several products for
which Japan is a major market. In addition to the aforementioned GENOTROPIN and
FRAGMIN, products particularly affected in both 1998 and 1997 included HEALON,
PHARMORUBICIN, SERMION, AZULFIDINE/ SALAZOPYRIN, and HALCION. HEALON is a
viscoelastic used in ophthalmic surgery. PHARMORUBICIN is an oncology product.
AZULFIDINE is a treatment for inflammatory bowel disease and rheumatoid
arthritis. SERMION is a treatment for senile dementia and HALCION is a
sleep-inducing agent.
The expansion and revitalization of the U.S. sales force benefited
certain products in 1998 for which loss of patent protection and ensuing generic
competition had led to sales declines over the past several years. These
products included XANAX, a treatment for anxiety; oral anti-diabetes agents
GLYNASE and MICRONASE; PROVERA, a progestational agent; and MEDROL steroid
products. In addition, 1997 sales levels for these products were relatively low
due to the termination of special promotions offered in the previous year and
the resulting effects of year-end 1996 trade inventory accumulations. Generic
price erosion also has affected sales of HALCION, HEALON, and PHARMORUBICIN in
Europe. Competition from generics is expected to continue to adversely affect
future sales of these products.
The U.S. market is very important to several other products including
CAVERJECT, ROGAINE, CLEOCIN, DEPO-PROVERA, and NAXCEL/EXCENEL. Since its launch
in late 1995, CAVERJECT, a treatment for erectile dysfunction, reported strong
sales growth every year until 1998 when intense U.S. competition diminished
sales there. Sales of ROGAINE, a treatment for hereditary hair loss, increased
slightly in 1998; sales levels were lower in 1997 due to the initial
establishment of retail inventories for the U.S. launch in 1996. In 1999,
ROGAINE Professional will be introduced through hair salons to improve
distribution and female use of the product. The antibiotic CLEOCIN achieved
sales growth each year since 1996 led by the U.S. market. Sales growth in 1998
of DEPO-PROVERA, the long-acting injectable contraceptive, also was led by the
U.S. market. In 1997, sales of DEPO-PROVERA fell in the U.S. due to the
termination of special promotions that were offered in the previous year and to
a temporary cutback in promotional spending. NAXCEL/ EXCENEL, an antibiotic for
animals, achieved growth across all major markets during the last three years
led by the United States.
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<PAGE> 5
OPERATING COSTS AND EXPENSES
Consolidated operating expenses, stated as a percentage of net sales, are
provided in the table below.
<TABLE>
<CAPTION>
===================================================================
1998 1997 1996
- -------------------------------------------------------------------
<S> <C> <C> <C>
Cost of products sold 30.1% 31.1% 29.5%
Research and development 17.7 18.5 17.6
Marketing, administrative
and other 39.0 40.5 36.8
Restructuring 1.4 4.8 7.2
Biotech (0.8) 1.1 --
Loss on sale of nutrition 0.8 -- --
P&U merger costs -- -- 0.9
Operating income 13.9 5.9 9.4
===================================================================
</TABLE>
A favorable comparison in product mix and production costs drove cost of
products sold lower as a percentage of sales in 1998 as compared to 1997. New
products, representing an increasing percentage of sales, contributed a higher
gross profit than older products in price competition with generics.
Improvements in production efficiencies, increased production volumes, and the
favorable effect of currency exchange on costs more than offset the negative
currency impact on sales, further reducing the percentage. From 1996 to 1997,
cost of products sold increased as a percentage of sales due to declining sales
levels and rising manufacturing expenses. The unfavorable effects of selling
price erosion, product mix, and currency exchange caused sales levels to
decline. Manufacturing expense increased due to higher production start-up
expenses for new products and project expenses incurred in 1997 to achieve
long-term production efficiencies. The increase in manufacturing expenses was
partially offset by the favorable effects of exchange.
Research and development (R&D) expense decreased as a percentage of
sales from 1997 to 1998. Excluding Biotech and the previously mentioned unusual
items recorded in 1997 (the purchase of rights to a research compound and the
cancellation of future product rights under a research agreement for a total of
$71 million), R&D spending levels increased by 7 percent in 1998. The savings
from lower infrastructure costs in 1998 due to efficiencies generated by the
1997 restructuring were reinvested into strategic licensing agreements, other
R&D collaborations to supplement the company's internal research base, and
increased clinical spending on products in development. Key activities in 1998
included the acquisition of the rights to almotriptan, an anti-migraine
compound; the in-licensing of two new compounds for the treatment of diabetes
and anxiety; and the Hepatitis C virus and pharmacogenomics collaborations.
Spending during 1998 also supported the product filings of anticancer therapies
AROMASIN (exemestane) and epirubicin as well as the development activities
related to filing a New Drug Application for EDRONAX with the U.S. FDA for
depression.
From 1996 to 1997, R&D spending grew as a percentage of sales largely
due to lower 1997 sales levels. Excluding Biotech and unusual items in both
years, R&D expense declined 6 percent in 1997. The ongoing efforts to focus R&D
resources on selected projects contributed to the decline as did the favorable
effects of exchange. In addition, 1996 spending levels were higher due to
spending for 11 significant product filings.
Marketing, administrative, and other (MA&O) expense as reported
declined as a percentage of sales from 1997 to 1998. Unusual items recorded in
1998 included the previously mentioned $61 million increase in litigation
reserves. In 1997, unusual items included $95 million for the retrieval of
marketing rights to GENOTROPIN in Japan and $70 million for litigation-related
charges. Excluding Biotech and unusual items, 1998 spending increased 8 percent.
The increase was due primarily to sales force expansions and increased product
promotion in the U.S., Europe, and Japan, particularly for the following brands:
DETROL, EDRONAX, MIRAPEX, GENOTROPIN, and XALATAN. The comparative spending
increase was somewhat mitigated by the favorable effects of exchange and a
decrease in general and administrative expense, a consequence of the 1997
restructuring.
From 1996 to 1997, MA&O expense increased as a percentage of sales on
both an as reported basis and excluding unusual items. In 1996, unusual items
included the impairment of an investment of $106 million resulting from the
termination of a product development agreement, increases in certain
environmental and legal reserves of $73 million, and a gain of $46 million on
the sale of an equity interest and related dissolution of a joint venture.
Spending levels in 1997 were higher than 1996 due to increased 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; additional marketing investments in emerging markets; and increased
information technology expenses. The greater 1997 spending was largely offset by
the favorable effects of exchange resulting in a net increase of 3 percent,
excluding unusual items and Biotech.
The company recorded $52 million in 1998 primarily for its share of
Amersham Pharmacia Biotech's pretax earnings. In 1997, the company recorded
Biotech merger costs of $36 million as well as its portion of the new company's
merger-related restructuring costs of $43 million. The merger costs included
transaction costs to effect the merger and charges associated with the write-off
of acquired R&D.
In 1997, the company announced a comprehensive restructuring and
turnaround program that would result in restructuring charges of approximately
$450 million during 1997 and 1998. The company has structured the turnaround
program in two phases reflecting management development and approval of plans.
The turnaround program was initiated in the third quarter of 1997 and has been
scheduled to be materially completed by December 31, 1999. The objectives of the
turnaround program were to significantly rationalize infrastructure, establish a
global headquarters in New Jersey, and eliminate duplicate resources in
manufacturing, administration, and R&D. The turnaround program mainly affects
37
<PAGE> 6
the company's core pharmaceutical segment and corporate administration groups,
with minor restructuring of businesses included in the nonpharmaceutical
segment. In the third and fourth quarters of 1997, the company recorded phase
one charges totaling $316 million. The second phase of the turnaround program
was finalized in the fourth quarter of 1998, resulting in an additional
restructuring charge of $92 million. Cost savings achieved from implementation
of this program will allow the company to increase investments in areas that
directly impact top-line growth.
The charge of $92 million recorded in 1998 was comprised of employee
separation costs of $68 million; write-downs of fixed assets and abandoned
manufacturing projects of $8 million; and other costs of $16 million.
The 1997 restructuring charge of $316 million for the first phase of
the turnaround program primarily related to employee separation costs of $134
million; write-downs of fixed assets and abandoned manufacturing projects of
$162 million; and other costs of $20 million.
The total restructuring charges for 1998 and 1997 included involuntary
employee separation costs for 580 and 1,320 employees worldwide, respectively.
The 1998 charge included elimination of positions in marketing and
administration of $55 million, R&D of $9 million, and manufacturing of $4
million. These amounts included an adjustment of $16 million of the phase one
accruals, mainly attributable to lower employee separation costs and, to a
lesser extent, changes in plan estimates. The 1997 charge included elimination
of positions in marketing and administration of $81 million, R&D of $22 million,
and manufacturing of $31 million. As of December 31, 1998, the company had paid
$101 million in severance costs in connection with the 1998 and 1997 charges.
The remaining balance for employee separation costs related to the turnaround
program was $101 million at December 31, 1998, comprised mainly of charges
related to the phase two charge and remaining annuity separation payments for
the phase one charge. The company expects employee reductions for the 1998 and
1997 charges to be substantially completed by December 31, 1999.
The 1998 and 1997 restructuring charges included asset write-downs for
excess manufacturing, administration, and R&D facilities totaling $8 million and
$162 million, respectively. The 1998 amount included an adjustment of $15
million of the phase one accruals, mainly attributable to changes in plan
estimates, favorable outcomes on sales of facilities, and actual facility
closure costs below the original estimates. At December 31, 1998, facilities
presently being marketed had a net book value of $47 million. Fixed asset
write-downs were based on appraisals less costs to sell.
Other costs included in the 1998 and 1997 restructuring charges of $16
million and $20 million, respectively, were primarily comprised of cancelled
contractual lease obligations and, to a lesser extent, demolition and other
costs. Offsetting 1998 charges in this grouping was an adjustment of $6 million
related to all restructuring charges prior to 1997. The company expects
substantial completion of the 1997-1998 restructuring by December 31, 1999.
In 1996, the company recorded restructuring charges of $518 million
primarily associated with the merger. The charges reflected the elimination of
approximately 3,500 positions in marketing and administration ($363 million),
R&D ($59 million), and manufacturing ($31 million); the elimination of duplicate
facilities ($43 million); and other exit costs resulting from the merger ($22
million). Implementation of the restructuring plan was completed by December 31,
1997. Remaining reserves of $7 million consist of annuity separation payments
which will be paid by the first quarter of 2000. Additional information
regarding the restructurings is provided in Note 3 to the consolidated financial
statements. Merger costs of $67 million also were recorded in 1996. As described
earlier, these charges resulted primarily from the combination of operations.
The company also incurred $41 million in restructuring-related charges
in 1998. These charges, while not included in restructuring, are one-time costs
associated with the turnaround program and include the establishment of a new
global headquarters in New Jersey and registration and validation costs
associated with the company's manufacturing rationalization program.
NONOPERATING INCOME AND EXPENSE
The decline in both interest income and interest expense in 1998 and 1997 was
largely due to lower average interest-bearing assets and liabilities in both
years and to lower interest rates in 1997, mainly in Europe. The gain on the
initial public offering of stock for Biacore of $55 million was recorded as
nonoperating income in 1996. Of the total gain, $8 million represented the gain
on the issuance of new shares. Further information is presented in Note 5 to the
consolidated financial statements.
INCOME TAXES
The annual effective tax rate was 32 percent, 31 percent and 33 percent for
1998, 1997 and 1996, respectively. Excluding nonrecurring items, the rate was 32
percent in 1998, down from 34 percent in 1997 and 35 percent in 1996. The lower
1998 and 1997 rates were the result of increased earnings in jurisdictions with
lower tax rates. Additionally, nonrecurring charges were taxed at higher rates
in 1997 than those incurred in 1996.
COMPREHENSIVE INCOME
Effective in 1998, the company adopted SFAS No. 130 which established standards
for reporting comprehensive income and its components. Comprehensive income is
defined as all nonowner changes in equity and equals net earnings plus other
comprehensive income (OCI). For Pharmacia & Upjohn, OCI consists of currency
translation adjustments, unrealized gains and losses on available-for-sale
securities, and minimum pension liability adjustments. Comprehensive income
(loss) in millions for 1998, 1997, and 1996 was $674,
38
<PAGE> 7
$(85) and $422, respectively. Comprehensive income was less than net earnings in
1998 because unrealized losses on available-for-sale securities, coupled with
the minimum pension liability adjustments, more than offset favorable currency
translation adjustments (CTA). Favorable CTA reflected the weaker U.S. dollar at
December 31, 1998, relative to its general strength at the prior year-end. In
1997 and 1996, the stronger U.S. dollar was responsible for large CTA losses
which drove comprehensive income lower than net income in these years.
Additional information regarding OCI is provided in Note 2 to the consolidated
financial statements.
FINANCIAL CONDITION, LIQUIDITY, AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
===============================================================
As of December 31, 1998 1997 1996
- ---------------------------------------------------------------
<S> <C> <C> <C>
Dollars in millions
Working capital $ 1,681 $1,639 $ 2,392
Current ratio 1.59:1 1.61:1 1.96:1
Debt to total capitalization 13.0% 15.7% 14.5%
===============================================================
</TABLE>
At year-end 1998, the company's working capital and current ratio were generally
consistent with the previous year-end. Both liquidity measures decreased from
1996 to 1997 due to declines in receivables and short-term investments. The
decrease in the percentage of debt to total capitalization from 1997 to 1998
reflects declining debt levels. Despite a modest reduction in debt in 1997, the
percentage of debt to total capitalization increased over 1996 due to a decline
in shareholders' equity. Negative currency translation adjustments recorded in
equity caused much of this decline coupled with lower 1997 earnings levels. As
indicated below, net financial assets have remained relatively constant from
1996 through 1998, increasing slightly each year.
<TABLE>
<CAPTION>
=================================================================
As of December 31, 1998 1997 1996
- -----------------------------------------------------------------
<S> <C> <C> <C>
Dollars in millions
Cash, cash equivalents and
investments $1,663 $1,848 $1,849
Short-term and long-term debt 840 1,035 1,058
- -----------------------------------------------------------------
Net financial assets $ 823 $ 813 $ 791
=================================================================
</TABLE>
Net cash provided by operations is a major source of funds to finance working
capital, shareholder dividends, and capital expenditures. Cash from operations
totaled $932 million in 1998, $1,222 million in 1997, and $805 million in 1996.
The decrease in 1998 was largely attributable to increases in receivables and
inventories. The prior year increase was due to a decrease in receivables and an
increase in liabilities. The increase in liabilities resulted from certain
significant unusual transactions previously discussed including the GENOTROPIN
rights repurchase and the litigation-related accruals. The 1996 operating cash
flows were lower due to large cash expenditures related to the merger and
restructuring and increases in receivables, inventories, and other current
assets.
In addition to net cash provided by operations, two major sources of
cash in 1998 were the proceeds on the sale of the nutrition business of $332
million and the proceeds from sales of investments net of purchases of $264
million, together accounting for a $455 million increase in sources compared to
the prior year. Cash proceeds from employee stock option exercises increased in
1998 because of higher stock market prices.
Over the three-year period from 1996 to 1998, significant uses of cash
included the company's quarterly dividend payment to shareholders and
expenditures for property, plant, and equipment (capital). Capital expenditures
in millions were $644 in 1998, $577 in 1997, and $656 in 1996. Anticipated
capital spending for 1999 of approximately $650 million includes expansion and
improvements to research and manufacturing facilities in the U.S., Belgium,
Puerto Rico, and Sweden.
In November 1998, the company announced a $1 billion stock repurchase
program. Management expects to complete the program over a two-year period. In
January 1999, the company repurchased 1.8 million shares for approximately $100
million.
The company's future cash provided by operations and borrowing capacity
are expected to cover normal operating cash flow needs, planned capital
spending, dividend payments, and stock repurchases that may be approved by the
board of directors for the foreseeable future. As of December 31, 1998, lines of
credit available for company use totaled $1,073 million, of which $500 million
are committed and $27 million were used as of year end. The company had A-1+ and
P-1 ratings for its commercial paper and AA- and A1 general bond ratings from
Standard & Poor's and Moody's, respectively, as of December 31, 1998.
The company utilizes currency exchange forward and option contracts
according to established policies to mitigate the effect of currency exchange
rate fluctuations. Because currency exchange forward and option contracts used
to hedge anticipated transaction exposures are marked to market each period, but
only some of the underlying transactions have been recorded, the timing of
recognition of the related gains and losses may 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 currency exchange forward and option contracts
related to hedges on other activities are recognized as "All Other, Net," and
are included in the investment section of the statement of cash flows. Further
information is presented in Note 14 to the consolidated financial statements and
in the market risk sensitivity analysis that follows.
MARKET RISK
Market risk represents the risk of a change in the value of a financial
instrument, derivative or nonderivative, caused by fluctuations in interest
rates, currency exchange rates, and equity prices. The company handles market
risk in
39
<PAGE> 8
accordance with established policies and thereby enters into various derivative
transactions. No such transactions are entered into for trading purposes.
Because the company's cash and investments exceed short and long-term
debt, the exposure to interest-rate risk relates primarily to the investment
portfolios. Most of the investments in the long-term portfolio are at fixed
rates. The company is actively managing the investment portfolios to increase
its return on investment, but in order to ensure liquidity, will only invest in
instruments with high credit quality where a secondary market exists. The
company holds no derivatives related to its interest-rate exposure; is in a
position to keep all investments until final maturity; and maintains long-term
debt at fixed rates.
The following sensitivity analysis presents the hypothetical change in
fair value of those financial instruments held by the company at December 31,
1998, which are sensitive to changes in interest rates. Market risk is estimated
as the potential change in fair value resulting from an immediate hypothetical
one percentage point parallel shift in the yield curve. The fair values of the
company's investments and loans are based on quoted market prices or discounted
future cash flows. As the carrying amounts on short-term loans and investments
maturing in less than 180 days approximate the fair value, these are not
included in the sensitivity analysis. The fair value of investments over 180
days is $411 million. The fair value of debt included in the analysis is $389
million and excludes Employee Stock Ownership Plan (ESOP) guaranteed debt.
Although not expected, a one percentage point change in the interest rates would
change the fair value of investments over 180 days by $6 million and debt by $3
million.
The company's management of currency exposure is primarily focused on
reducing the negative impact of currency fluctuations on consolidated cash flow
and earnings. The company uses forward contracts, cross-currency swaps, and
currency options to actively manage the net exposure in accordance with
established hedging policies. The company hedges intercompany loans and deposits
as well as a portion of both firm commitments and anticipated transactions. The
company has concentrated most of the currency exposure in facilities in Sweden,
Italy and Belgium. The largest exposures from these units are against the
Japanese yen and the U.S. dollar.
Certain derivatives entered into in order to hedge assets, liabilities,
firm commitments, and forecasted transactions are exposed to currency
fluctuations. A ten percent decrease in the Swedish krona and Italian lira would
have a negative impact on fair value of those derivatives by $23 million and $6
million, respectively; a ten percent increase in the Japanese yen would have a
negative impact of $13 million; and a ten percent decrease in the U.S. dollar
would have a negative impact of $6 million.
The company also has investments in equity securities. All such
investments are classified as long term investments. The fair market value of
these investments is $170 million, of which 60 percent are listed on a stock
exchange or quoted in an over-the-counter market. If the market price of these
securities would decrease by ten percent, the fair value of the equities would
decrease by $10 million. Further discussion of financial instruments is provided
in Notes 9 and 15 to the consolidated financial statements.
LITIGATION AND CONTINGENT LIABILITIES
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 also
is involved in several administrative and judicial proceedings relating to
environmental concerns, including actions brought by the U.S. Environmental
Protection Agency (EPA) and state environmental agencies for remedial clean-up
at approximately 50 sites.
Based on information currently available and the company's experience
with lawsuits of the nature of those currently filed or anticipated to be filed
which have resulted from business activities to date, the amounts accrued for
product and environmental liabilities are considered adequate. Although the
company cannot predict and cannot make assurances with respect to the outcome of
individual lawsuits, the ultimate liability should not have a material effect on
its consolidated financial position. Unless there is a significant deviation
from the historical pattern of resolution of such issues, the ultimate liability
should not have a material adverse effect on the company's consolidated
financial position, its results of operations, or liquidity.
The company has been 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 favor
managed care customers that were not offered to the plaintiffs. Several of the
suits are class actions. The company announced in 1998 that it has reached a
settlement with plaintiffs in the federal class action cases that had been
consolidated in federal court in Chicago, Illinois. The company believes that
any potential remaining liability above amounts accrued will not have a material
adverse effect on the company's consolidated financial position, its results of
operations, or liquidity. Further discussion of current litigation matters is
provided in Note 13 to the consolidated financial statements.
The company's estimate of the ultimate cost to be incurred in
connection with environmental situations could change due to uncertainties at
many sites with respect to potential clean-up remedies, the estimated cost of
clean-up, and the company's share of a site's cost. With regard to the company's
discontinued industrial chemical facility in North Haven, Connecticut, the
company may soon be required to submit a corrective measures study report to the
EPA. As the corrective action process progresses, it may become
40
<PAGE> 9
appropriate to reevaluate the existing reserves designated for remediation in
light of changing circumstances. It is reasonably possible that a material
increase in accrued liabilities will be required but it is not possible to
determine what, if any, exposure exists at this time or when the expenditures
might be made.
In 1997, the company adopted American Institute of Certified Public
Accountants' Statement of Position (SOP) 96-1, "Environmental Remediation
Liabilities." SOP 96-1 provides additional guidance for recognizing, measuring
and disclosing environmental remediation liabilities. The effect of initially
applying the provisions of SOP 96-1 was not material to the consolidated
financial statements. The company's estimated liability includes both direct and
indirect costs associated with remediation and is reduced to reflect the
anticipated participation of other potentially responsible parties where such
parties are considered solvent and it is probable that they will pay their
respective share of relevant costs. Such accruals are adjusted as further
information develops or circumstances change. Costs of future expenditures do
not reflect any claims for recoveries and are not discounted to their present
value.
YEAR 2000
DATE RECOGNITION PROBLEM
The company's global program to address the year 2000 (Y2K) date recognition
problem was launched in early 1997. The goal of the program is to ensure the
millennium event does not have a material adverse effect on the company's
business operations. The project, managed by a global team consisting of
technical, functional and business leaders, is led by a program director who
reports to the chief information officer (CIO) and an executive operations
group. Hundreds of employees worldwide are involved in this effort.
The program encompasses three distinct efforts: (1) assessment and
remediation of information technology (IT) systems; (2) assessment and
remediation of embedded systems; and (3) assessment of high-level business risks
and development of contingency plans to address those risks. Status reports of
the global program's progress have been regularly provided to the company's
board of directors since the inception of the program. Assessment, remediation,
and testing of both IT and embedded systems have been completed for most
business-critical systems and are expected to be finished by mid-1999 for
remaining systems. With all systems anticipated to be individually tested by
mid-1999, the latter half of the year is reserved for integration testing, a
more comprehensive exercise to ensure critical systems will work together. The
high-level business risk assessment is completed and development of the
resulting contingency plans are well underway, especially for those plans
involving steps to be taken during 1999.
Much of the Y2K effort is being supported by a reallocation of existing
resources. The company anticipates total spending of $150 million between 1997
and 2000 largely on replacement of applications that, for reasons other than Y2K
non-compliance, had been previously selected for replacement. Many of the
replacement applications, such as the new SAP financial systems, offer improved
functionality and commonality over predecessor systems and, at the same time,
resolve the Y2K problem. To date, the company estimates actual spending of $110
million of the total projected costs.
There are many factors beyond the company's control that could cause
the Y2K problem to seriously disrupt operations and the company can provide no
assurance that these factors will not cause it to experience business
disruptions. For example, a widespread failure in the utilities industry could
severely interrupt or even halt the company's operations. There are other risks,
however, for which the company may prepare and, in so doing, reduce its
exposure. These risks include a disruption in the supply of product with
particular emphasis on failures of raw material suppliers, third-party
manufacturers, and external distribution channels; internal infrastructure
failures such as utilities, communications, internal IT services and integrated
IT systems; non-U.S. government failures, especially as they impact import and
export activity; and major customer failures or interruptions. The scope of the
company's efforts regarding these risks is focused on key products, key markets,
critical suppliers, and major customers.
To reduce the impact of these failures were they to occur, the company
is developing contingency plans for the most critical business processes. These
plans represent a diversity of approaches and include maintaining higher
inventory levels, developing secondary sources for strategic product chain
links, and documenting back-up procedures and manual work-arounds. The ongoing
assessment of critical external partners also plays an important role in
contingency planning with appropriate actions mapped out at predetermined
decision points depending on the outcome. The company is in the process of
sending questionnaires to all major suppliers, third-party manufacturers, and
customers and auditing critical suppliers and third-party manufacturers in an
attempt to calculate, to the extent possible, where the company faces the
greatest risk of failure. In addition, management will implement a company-wide
program to strictly control and limit changes to major IT systems during the
latter half of 1999 to reduce potential additional exposures and to concentrate
IT resources on integration testing and other Y2K-related efforts. Neither this
program nor the previously mentioned reallocation of resources will have an
adverse effect on non-Y2K mission-critical projects. Barring critical failures
arising from factors beyond the company's direct control, management believes
that by meeting the objectives of its Y2K program, the date recognition problem
should not have a material adverse effect on the company's consolidated
financial position, its results of operations, or liquidity.
OTHER INFORMATION
Effective January 1, 1999, several European countries began operating with a new
common currency, the euro. The euro will completely replace these countries'
national currencies
41
<PAGE> 10
by January 1, 2002. The conversion to the euro will require changes in the
company's operations as systems and commercial arrangements are modified to deal
with the new currency. Management created a project team to evaluate the impact
of the euro conversion on the company's operations and to develop and execute
action plans, as necessary, to successfully effect the change. The cost of this
effort is not expected to be material. While information technology systems are
planned to be fully euro-compliant by the year 2000, a minimum of
euro-compliance for strategic locations will be achieved in 1999. The conversion
to the euro may have competitive implications on pricing and marketing
strategies; however, any such impact is not known at this time. The introduction
of the euro will not significantly change the currency exposure of the company,
but will reduce the number of transactions performed in the market. At this
point in its overall assessment, management believes the impact of the euro
conversion on the company will not be significant; however, uncertainty exists
as to the effects the euro currency will have on the marketplace. As a result,
there is no guarantee that all problems will be foreseen and corrected, or that
no material disruption of the company's business will occur.
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
requires companies to record derivatives on the balance sheet as assets and
liabilities measured at fair value. The accounting treatment of gains and losses
resulting from changes in the value of derivatives depends on the use of the
derivative and whether it qualifies for hedge accounting. The company will adopt
SFAS No.133 as required no later than January 1, 2000, and is currently
assessing the impact of adoption on its financial position, results of
operations, and liquidity.
In 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities," which requires start-up costs and organization costs to be expensed
as incurred. The SOP is effective beginning in 1999 and will be adopted by the
company at that time. Management does not anticipate its impact to be material
to the consolidated financial statements. The AICPA also issued SOP 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" in 1998 which the company adopted. The statement requires
capitalization of certain costs incurred in the development of internal-use
software, including external direct material and service costs, employee payroll
and payroll-related costs, and capitalized interest. Prior to adoption of SOP
98-1, the company expensed these costs as incurred. The effect of initially
applying the provisions of SOP 98-1 was not material to the consolidated
financial statements.
FORWARD-LOOKING INFORMATION
Many matters discussed in this annual report are forward-looking statements that
involve risks and uncertainties, including but not limited to economic,
competitive, governmental and technological factors affecting the company's
operations, markets, products, services and prices, and other factors more
specifically discussed in the company's filings with the Securities and Exchange
Commission.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
=========================================================================================================================
YEARS ENDED DECEMBER 31 1998 1997 1996 1995(a) 1994(a)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Dollar amounts in millions, except per-share data
Operating revenue $ 6,893 $ 6,710 $ 7,286 $ 7,095 $ 6,823
Earnings from continuing operations 691 323 562 739 833
Total assets 10,312 10,380 11,173 11,461 10,947
Long-term debt 290 394 567 603 678
Diluted earnings per share from continuing operations $ 1.31 $ .61 $ 1.07 $ 1.41 $ 1.60
Dividends declared per share(b) $ 1.08 $ 1.08 $ 1.08 $ .27
=========================================================================================================================
</TABLE>
(a) Pharmacia & Upjohn was formed through the 1995 merger of Pharmacia AB and
The Upjohn Company. The merger was accounted for as a pooling of interests
under U.S. generally accepted accounting principles. All data (except
dividends) prior to the November 1995 merger date have been combined as if
the companies had been merged during the prior periods.
(b) Separate dividend information for Pharmacia AB and The Upjohn Company prior
to the merger has not been presented because the information would not be
meaningful.
42
<PAGE> 11
Reports of Management and Independent Accountants
-----------------------------------------
Pharmacia & Upjohn, Inc. and subsidiaries
REPORT OF MANAGEMENT
Management is responsible for the consolidated financial statements and the
other financial information included in this Annual Report. The Board of
Directors, acting through its Audit Committee which is composed solely of
directors who are not employees of the company, oversees the financial reporting
process. The financial statements have been prepared in accordance with U.S.
generally accepted accounting principles and include amounts based on judgments
and estimates made by management. Actual results could differ from amounts
estimated.
Management has established systems of internal controls over financial
reporting designed to provide reasonable assurance that the financial records
used for preparing financial statements are reliable and that assets are
safeguarded from unauthorized use or disposition. Internal auditors review
accounting and control systems. The systems are also reviewed by the independent
accountants to the extent deemed necessary to express the opinion set forth in
their report.
Management takes corrective actions to improve reporting and control
systems in response to recommendations by the internal auditors and independent
accountants. The appointment of the independent accountants is recommended by
the Audit Committee to the Board of Directors.
Fred Hassan, President and Chief Executive Officer
Christopher J. Coughlin, Executive Vice President and Chief Financial Officer
February 10, 1999
REPORT OF INDEPENDENT ACCOUNTANTS TO THE SHAREHOLDERS AND BOARD OF DIRECTORS,
PHARMACIA & UPJOHN, INC.
In our opinion, the consolidated balance sheets and the related consolidated
statements of earnings, shareholders' equity, and cash flows (pages 44 to 60)
present fairly, in all material respects, the financial position of Pharmacia &
Upjohn, Inc. and its subsidiaries at December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of Pharmacia &
Upjohn, Inc.'s management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Chicago, Illinois
February 10, 1999
43
<PAGE> 12
Consolidated Statements of Earnings
-----------------------------------------
Pharmacia & Upjohn, Inc. and subsidiaries
<TABLE>
<CAPTION>
======================================================================================================================
FOR THE YEARS ENDED DECEMBER 31 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Dollar amounts in millions, except per-share data
OPERATING REVENUE:
Net sales $6,758 $6,586 $7,176
Other revenue 135 124 110
- ----------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING REVENUE 6,893 6,710 7,286
OPERATING COSTS AND EXPENSES:
Cost of products sold 2,031 2,049 2,116
Research and development 1,199 1,217 1,266
Marketing, administrative and other 2,633 2,665 2,642
Restructuring 92 316 518
Biotech (52) 73 --
Loss on sale of nutrition 52 -- --
Merger costs -- -- 67
- ----------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 938 390 677
Interest income 89 110 159
Interest expense (25) (33) (56)
Gain on sale of subsidiary stock -- -- 55
All other, net 14 1 3
- ----------------------------------------------------------------------------------------------------------------------
EARNINGS BEFORE INCOME TAXES 1,016 468 838
Provision for income taxes 325 145 276
- ----------------------------------------------------------------------------------------------------------------------
NET EARNINGS $ 691 $ 323 $ 562
- ----------------------------------------------------------------------------------------------------------------------
Earnings per common share:
Basic $1.33 $ .61 $1.08
Diluted $1.31 $ .61 $1.07
======================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
44
<PAGE> 13
Consolidated Balance Sheets
-----------------------------------------
Pharmacia & Upjohn, Inc. and subsidiaries
<TABLE>
<CAPTION>
======================================================================================================================
DECEMBER 31 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
Dollar amounts in millions
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 857 $ 775
Short-term investments 352 539
Trade accounts receivable, less allowance of $103 (1997: $89) 1,417 1,303
Inventories 1,032 958
Deferred income taxes 406 335
Other 468 417
- ----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 4,532 4,327
Long-term investments 454 534
Properties, net 3,226 3,306
Goodwill and other intangible assets, net 1,238 1,287
Other noncurrent assets 862 926
- ----------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $10,312 $10,380
======================================================================================================================
CURRENT LIABILITIES:
Short-term debt $ 332 $ 401
Accounts payable 506 425
Compensation and compensated absences 266 186
Dividends payable 141 141
Income taxes payable 389 404
Other 1,217 1,131
- ----------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 2,851 2,688
Long-term debt 290 394
Guarantee of ESOP debt 218 240
Postretirement benefit cost 344 337
Deferred income taxes 238 362
Other noncurrent liabilities 771 821
- ----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 4,712 4,842
======================================================================================================================
SHAREHOLDERS' EQUITY:
Preferred stock, one cent par value; authorized 100,000,000 shares,
issued Series A convertible 6,863 shares at stated value (1997: 6,996 shares) 277 282
Common stock, one cent par value; authorized 1,500,000,000 shares,
issued 508,682,707 shares (1997: 508,647,507 shares) 5 5
Capital in excess of par value 1,376 1,440
Retained earnings 5,493 5,364
ESOP-related accounts (254) (260)
Treasury stock (35) (48)
Accumulated other comprehensive income:
Currency translation adjustments (1,246) (1,298)
Unrealized investment gains, net 5 53
Minimum pension liability adjustment (21) --
- ----------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 5,600 5,538
- ----------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $10,312 $10,380
======================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
45
<PAGE> 14
Consolidated Statements of Shareholders' Equity
-----------------------------------------
Pharmacia & Upjohn, Inc. and subsidiaries
<TABLE>
<CAPTION>
======================================================================================================================
FOR THE YEARS ENDED DECEMBER 31 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
Dollar amounts in millions
<S> <C> <C> <C>
PREFERRED STOCK:
Balance at beginning of year $ 282 $ 287 $ 291
Redemptions and conversions (5) (5) (4)
- ----------------------------------------------------------------------------------------------------------------------
Balance at end of year 277 282 287
- ----------------------------------------------------------------------------------------------------------------------
COMMON STOCK:
Balance at end of year 5 5 5
- ----------------------------------------------------------------------------------------------------------------------
CAPITAL IN EXCESS OF PAR VALUE:
Balance at beginning of year 1,440 1,457 1,457
Stock option, incentive and dividend reinvestment plans (57) (22) 10
Retirements, conversions and other (7) 5 (10)
- ----------------------------------------------------------------------------------------------------------------------
Balance at end of year 1,376 1,440 1,457
- ----------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS:
Balance at beginning of year 5,364 5,603 5,603
Net earnings 691 323 562
Dividends declared (549) (549) (549)
Dividends on preferred stock (net of tax) (13) (13) (13)
- ----------------------------------------------------------------------------------------------------------------------
Balance at end of year 5,493 5,364 5,603
- ----------------------------------------------------------------------------------------------------------------------
ESOP-RELATED ACCOUNTS:
Balance at beginning of year (260) (266) (272)
Third-party debt repayment 16 11 8
ESOP expense exceeding cash contributed (2) 5 --
Additional loan (5) (7) --
Rollover of interest on ESOP note receivable (3) (3) (2)
- ----------------------------------------------------------------------------------------------------------------------
Balance at end of year (254) (260) (266)
- ----------------------------------------------------------------------------------------------------------------------
TREASURY STOCK:
Balance at beginning of year (48) (8) (18)
Stock options and incentive plans 130 54 103
Purchases of treasury stock (117) (94) (93)
- ----------------------------------------------------------------------------------------------------------------------
Balance at end of year (35) (48) (8)
- ----------------------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE INCOME:
Balance at beginning of year (1,245) (837) (697)
Other comprehensive loss (17) (408) (140)
- ----------------------------------------------------------------------------------------------------------------------
Balance at end of year (1,262) (1,245) (837)
- ----------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY $ 5,600 $ 5,538 $6,241
======================================================================================================================
COMPREHENSIVE INCOME (NET OF TAX):
Currency translation adjustments $ 52 $ (443) $ (127)
Unrealized investment gains (losses) (48) 35 (13)
Minimum pension liability adjustments (21) -- --
- ----------------------------------------------------------------------------------------------------------------------
Other comprehensive loss (17) (408) (140)
Net earnings 691 323 562
- ----------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME (LOSS) $ 674 $ (85) $ 422
======================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
46
<PAGE> 15
Consolidated Statements of Cash Flows
-----------------------------------------
Pharmacia & Upjohn, Inc. and subsidiaries
<TABLE>
<CAPTION>
======================================================================================================================
FOR THE YEARS ENDED DECEMBER 31 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
Dollar amounts in millions
<S> <C> <C> <C>
CASH FLOWS FROM OPERATIONS:
Net earnings $ 691 $ 323 $ 562
Adjustments to net earnings:
Depreciation 318 324 343
Amortization of intangibles 112 116 130
Restructuring 92 316 518
Cash expended on restructurings (140) (132) (344)
Loss on sale of nutrition 52 -- --
Net gains on sales of noncurrent assets 20 (35) (79)
Write-downs of investments, properties and intangibles 9 43 106
Deferred income taxes (173) (286) (94)
Net (earnings) loss from equity investments (57) 68 (5)
Other 10 17 2
Changes in:
Accounts receivable (net) (65) 196 (218)
Inventories (91) (127) (69)
Accounts payable 66 32 (25)
Income taxes payable (16) 107 52
Other current and noncurrent assets and liabilities 104 260 (74)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by operations 932 1,222 805
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS (REQUIRED) PROVIDED BY INVESTMENT ACTIVITIES:
Additions of properties (644) (577) (656)
Proceeds from sales of properties 37 70 50
Proceeds from sale of nutrition 332 -- --
Purchases of investments (646) (979) (1,551)
Proceeds from sales of investments 910 1,120 2,105
Other (3) (48) (6)
- ----------------------------------------------------------------------------------------------------------------------
Net cash required by investment activities (14) (414) (58)
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS (REQUIRED) PROVIDED BY FINANCING ACTIVITIES:
Proceeds from issuance of debt 60 40 38
Repayment of debt and ESOP guaranteed loan (243) (72) (410)
Net increase (decrease) in debt with initial maturity of 90 days or less (3) 26 33
Dividend payments (566) (567) (567)
Purchases of treasury stock (117) (94) (93)
Proceeds from stock options exercises 80 18 83
Other -- 1 (4)
- ----------------------------------------------------------------------------------------------------------------------
Net cash required by financing activities (789) (648) (920)
- ----------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash (47) (26) (27)
- ----------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 82 134 (200)
Cash and cash equivalents, beginning of year 775 641 841
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 857 $ 775 $ 641
======================================================================================================================
Cash paid during the year for:
Interest (net of amounts capitalized) $ 21 $ 29 $ 60
Income taxes $ 398 $ 281 $ 287
Noncash investing activity:
Assets disposed of in exchange for equity securities $ 54 $ -- $ --
======================================================================================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
47
<PAGE> 16
Notes to Consolidated Financial Statements
Dollar amounts in millions, except per-share data
-----------------------------------------
Pharmacia & Upjohn, Inc. and subsidiaries
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements are presented on the basis of accounting
principles that are generally accepted in the U.S. All professional accounting
standards that are effective as of December 31, 1998, have been taken into
consideration in preparing the financial statements. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make certain estimates and assumptions which affect the
reported earnings, financial position and various disclosures. Actual results
could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the company and
all majority-owned subsidiaries. All material intercompany transactions and
balances have been eliminated in consolidation. Investments in affiliates which
are not majority owned are reported using the equity method and are recorded in
other noncurrent assets. Gains and losses resulting from the issuance of
subsidiaries' stock are recognized in consolidated earnings.
Currency Translation
The results of operations for non-U.S. subsidiaries, other than those located in
highly inflationary countries, are translated into U.S. dollars using the
average exchange rates during the year, while assets and liabilities are
translated using period-end rates. Resulting translation adjustments are
recorded as currency translation adjustments in shareholders' equity. For
subsidiaries in highly inflationary countries, currency gains and losses
resulting from translation and transactions are determined using a combination
of current and historical rates and are reported directly in the consolidated
statements of earnings.
Cash Equivalents
The company considers all highly liquid debt instruments with an original
maturity of 91 days or less to be cash equivalents.
Investments
In addition to cash equivalents, the company has investments in debt securities
that are classified in the consolidated balance sheet as short-term (restricted
bank deposits and securities that mature in more than 91 days but not more than
one year and securities with maturities beyond one year which management intends
to sell within one year) or long-term (maturities beyond one year). The company
also has investments in equity securities, all of which are classified as
long-term investments.
Investments are further categorized as being available for sale or
expected to be held to maturity. Investments categorized as available-for-sale
are marked to market based on fluctuations in the market values of the
securities, with the resulting adjustments, net of deferred taxes, reported as a
component of other comprehensive income in shareholder's equity until realized
(see Note 2). Investments categorized as held-to-maturity are carried at
amortized cost, without recognition of gains or losses that are deemed to be
temporary, because the company has both the intent and the ability to hold these
investments until they mature.
Inventories
Inventories are valued at the lower of cost or market. Cost is determined by the
last-in, first-out (LIFO) method for substantially all U.S. inventories and the
first-in, first-out (FIFO) method for substantially all non-U.S. inventories.
Properties
Property, plant and equipment are recorded at acquisition cost. Depreciation is
computed principally on the straight-line method for financial reporting
purposes, while accelerated methods are used for income tax purposes where
permitted. Maintenance and repair costs are charged to earnings as incurred
including repair costs associated with the year 2000 date recognition problem.
Costs of renewals and improvements are capitalized. Upon retirement or other
disposition of property, any gain or loss is included in earnings.
Consistent with prior years, purchased computer software is capitalized
and amortized over the software's useful life. Effective in 1998,
internally-developed software is also capitalized and amortized over its useful
life with the adoption of the American Institute of Certified Public
Accountants' (AICPA) Statement of Position (SOP) 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use." Prior to adoption,
the company expensed these costs as incurred. The effect of initially applying
the provisions of SOP 98-1 was not material to the consolidated financial
statements.
48
<PAGE> 17
Goodwill and Other Intangibles
Goodwill represents the excess of the purchase cost over the fair value of net
assets acquired in a business or product acquisition and is presented net of
accumulated amortization. Amortization of goodwill is recorded on a
straight-line basis over periods ranging primarily from 5 to 20 years. Rights
acquired under patent are reported at acquisition cost. Amortization is
calculated on a straight-line basis over the remaining legal lives of the
patents. Other intangible assets are amortized over the useful lives of those
assets.
Income Taxes
The company applies an asset and liability approach to accounting for income
taxes. Deferred tax liabilities and assets are recognized for the expected
future tax consequences of temporary differences between the financial statement
and tax bases of assets and liabilities using enacted tax rates in effect for
the years in which the differences are expected to reverse. The company records
deferred income taxes on subsidiaries' earnings that are not considered to be
permanently invested in those subsidiaries.
Currency Exchange Contracts
Forward currency exchange contracts, cross-currency interest-rate swaps, and
currency options (hereafter referred to as contracts) are held for purposes
other than trading. Contracts held to hedge anticipated transactions are marked
to market at each balance sheet date with resulting gains and losses recognized
in earnings. Contracts that hedge recorded assets and liabilities are valued at
the month-end exchange rate with resulting exchange gains and losses recognized
in earnings, offsetting the respective losses and gains recognized on the
underlying recorded exposure. Any premium or discount is amortized over the life
of the contract. The carrying values of all contracts are generally reported
with other current assets or other current liabilities. Gains or losses from
currency transactions that are designated as hedges of currency net investments
are classified as currency translation adjustments in shareholders' equity.
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires companies to record
derivatives on the balance sheet as assets and liabilities measured at fair
value. The accounting treatment of gains and losses resulting from changes in
the value of derivatives depends on the use of the derivative and whether it
qualifies for hedge accounting. The company will adopt SFAS No. 133 as required
no later than January 1, 2000, and is currently assessing the impact of adoption
on its consolidated financial statements.
Environmental Remediation Liabilities
In 1997, the company adopted SOP 96-1, "Environmental Remediation Liabilities,"
which provides additional guidance for recognizing, measuring and disclosing
environmental remediation liabilities. The effect of initially applying the
provisions of SOP 96-1 was not material to the consolidated financial
statements. The company accrues for these losses when they are probable and
reasonably estimable based on current law and existing technologies. The
estimated liability is reduced to reflect the anticipated participation of other
potentially responsible parties where such parties are considered solvent and it
is probable that they will pay their respective share of relevant costs. The
accruals are adjusted as further information develops or circumstances change.
Costs of future expenditures do not reflect any claims for recoveries and are
not discounted to their present value. Accruals for environmental liabilities
are classified in the consolidated balance sheets primarily as other noncurrent
liabilities.
Employee Stock Options
Employee stock options are accounted for pursuant to Accounting Principles Board
Opinion (APB) No. 25, "Accounting for Stock Issued to Employees."
Reclassifications
Certain reclassifications have been made to conform prior years' data to the
current presentation.
2 OTHER COMPREHENSIVE INCOME
Effective January 1, 1998, the company adopted SFAS No. 130, "Reporting
Comprehensive Income." The statement establishes standards for reporting
comprehensive income and its components. Comprehensive income is defined as all
nonowner changes in equity and is equal to net earnings plus other comprehensive
income (OCI). OCI for the company includes three components: changes in currency
translation adjustments, unrealized gains and losses on available-for-sale
securities, and minimum pension liability adjustments. The following table shows
the changes in each OCI component. Reclassification adjustments represent items
that are included in net earnings in the current period but previously were
reported in OCI. To avoid double counting these items
49
<PAGE> 18
in comprehensive income, gains are subtracted from OCI, while losses are added.
<TABLE>
<CAPTION>
===================================================================
TAX
FOR THE YEAR ENDED BEFORE EXPENSE NET OF
DECEMBER 31, 1998 TAX OR (BENEFIT) TAX
- -------------------------------------------------------------------
<S> <C> <C> <C>
Currency translation adjustments $ 51 $ (1) $ 52
- -------------------------------------------------------------------
Unrealized investment (losses) (52) (20) (32)
Less: reclassification adjustments
for gains realized in net earnings 24 8 16
- -------------------------------------------------------------------
Net unrealized investment (losses) (76) (28) (48)
- -------------------------------------------------------------------
Minimum pension
liability adjustments (33) (12) (21)
- -------------------------------------------------------------------
Other comprehensive (loss) $ (58) $ (41) $ (17)
===================================================================
FOR THE YEAR ENDED
DECEMBER 31, 1997
- -------------------------------------------------------------------
Currency translation adjustments $(446) $ -- $(446)
Less: reclassification adjustments
for (losses) realized in net earnings
from the sales of subsidiaries (3) -- (3)
- -------------------------------------------------------------------
Net currency translation
adjustments (443) -- (443)
- -------------------------------------------------------------------
Unrealized investment gains 85 40 45
Less: reclassification adjustments
for gains realized in net earnings 23 13 10
- -------------------------------------------------------------------
Net unrealized investment gains 62 27 35
- -------------------------------------------------------------------
Other comprehensive
(loss) income $(381) $ 27 $(408)
===================================================================
FOR THE YEAR ENDED
DECEMBER 31, 1996
- -------------------------------------------------------------------
Currency translation adjustments $(128) $ (1) $(127)
- -------------------------------------------------------------------
Unrealized investment gains 31 6 25
Less: reclassification adjustments
for gains realized in net earnings 52 14 38
- -------------------------------------------------------------------
Net unrealized investment (losses) (21) (8) (13)
- -------------------------------------------------------------------
Other comprehensive (loss) $(149) $ (9) $(140)
===================================================================
</TABLE>
3 RESTRUCTURING
In 1997, the company announced a comprehensive restructuring and turnaround
program that would result in restructuring charges of approximately $450 during
1997 and 1998. The company has structured the turnaround program in two phases
reflecting management development and approval of plans. The turnaround program
was initiated in the third quarter 1997 and has been scheduled to be materially
completed by December 31, 1999. The objectives of the turnaround program were to
significantly rationalize infrastructure, establish a global headquarters in New
Jersey, and eliminate duplicate resources in manufacturing, administration, and
research and development (R&D). The turnaround program mainly affects the
company's core pharmaceutical segment and corporate administration groups, with
minor restructuring of businesses included in the nonpharmaceutical segment. In
the third and fourth quarters of 1997, the company recorded phase one charges
totaling $316. The second phase of the turnaround program was finalized in the
fourth quarter of 1998, resulting in an additional restructuring charge of $92.
The charge of $92 recorded in 1998 was comprised of employee separation
costs of $68; write-downs of fixed assets and abandoned manufacturing projects
of $8; and other costs of $16.
The 1997 restructuring charge of $316 for the first phase of the
turnaround program primarily related to employee separation costs of $134;
write-downs of fixed assets and abandoned manufacturing projects of $162; and
other costs of $20.
The total restructuring charges for 1998 and 1997 included involuntary
employee separation costs for 580 and 1,320 employees worldwide, respectively.
The 1998 charge included elimination of positions in marketing and
administration of $55, R&D of $9, and manufacturing of $4. These amounts
included an adjustment of $16 of the phase one accruals, mainly attributable to
lower employee separation costs and, to a lesser extent, changes in plan
estimates. The 1997 charge included elimination of positions in marketing and
administration of $81, R&D of $22, and manufacturing of $31. As of December 31,
1998, the company had paid $101 in severance costs in connection with the 1998
and 1997 charges. The remaining balance for employee separation costs related to
the turnaround program was $101 at December 31, 1998 comprised mainly of charges
related to the phase two charge and remaining annuity separation payments for
the phase one charge. The company expects employee reductions for the 1998 and
1997 charges to be substantially completed by December 31, 1999.
The 1998 and 1997 restructuring charges included asset write-downs for
excess manufacturing, administration, and R&D facilities totaling $8 and $162,
respectively. The 1998 amount included an adjustment of $15 of the phase one
accruals, mainly attributable to changes in plan estimates, favorable outcomes
on sales of facilities, and actual facility closure costs below the original
estimates. At December 31, 1998, facilities presently being marketed had a net
book value of $47. Fixed asset write-downs were based on appraisals less costs
to sell.
Other costs included in the 1998 and 1997 restructuring charges of $16
and $20, respectively, were primarily comprised of cancelled contractual lease
obligations and, to a lesser extent, demolition and other costs. Offsetting 1998
charges in this grouping was an adjustment of $6 related to all restructuring
charges prior to 1997. The company expects substantial completion of the
1997-1998 restructuring by December 31, 1999.
50
<PAGE> 19
In 1996, the company recorded restructuring charges of $518 primarily
associated with the merger. The charges reflected the elimination of
approximately 3,500 positions in marketing and administration ($363), R&D ($59),
and manufacturing ($31); the elimination of duplicate facilities ($43); and
other exit costs resulting from the merger ($22). Implementation of the
restructuring plan was completed by December 31, 1997. Remaining reserves of $7
consist of annuity separation payments which will be paid by the first quarter
of 2000.
The following table displays a roll-forward of the liabilities for
business restructurings from December 31, 1996 to December 31, 1998:
<TABLE>
<CAPTION>
==============================================================
EMPLOYEE
SEPARATION
COSTS OTHER TOTAL
- --------------------------------------------------------------
<S> <C> <C> <C>
Balance December 31, 1996 $ 201 $ 25 $ 226
Additions 134 20 154
Deductions (182) (25) (207)
- --------------------------------------------------------------
Balance December 31, 1997 153 20 $ 173
Additions 68 16 84
Deductions (113) (12) (125)
- --------------------------------------------------------------
Balance December 31, 1998 $ 108 $ 24 $ 132
==============================================================
</TABLE>
4 INCOME TAXES
The provision for income taxes included in the consolidated statements of
earnings consisted of:
<TABLE>
<CAPTION>
=========================================================
YEARS ENDED DECEMBER 31 1998 1997 1996
- ---------------------------------------------------------
<S> <C> <C> <C>
CURRENTLY PAYABLE:
U.S. $ 68 $ 34 $ 171
Non-U.S. 432 429 214
- ---------------------------------------------------------
Total currently payable 500 463 385
- ---------------------------------------------------------
DEFERRED:
U.S. (66) (46) (100)
Non-U.S. (109) (272) (9)
- ---------------------------------------------------------
Total deferred (175) (318) (109)
- ---------------------------------------------------------
Provision for income taxes $ 325 $ 145 $ 276
=========================================================
</TABLE>
Differences between the company's effective tax rate and the U.S. statutory tax
rate were as follows:
<TABLE>
<CAPTION>
================================================================
PERCENT OF PRETAX INCOME 1998 1997 1996
- ----------------------------------------------------------------
<S> <C> <C> <C>
Statutory tax rate 35.0% 35.0% 35.0%
Lower rates in other
jurisdictions, net (4.4) (10.9) (3.9)
Goodwill amortization and other
non-deductible expenses 3.0 6.7 4.2
All other, net (1.6) .2 (2.3)
- ----------------------------------------------------------------
Effective tax rate 32.0 31.0 33.0
================================================================
</TABLE>
The lower rates in other jurisdictions are principally attributable to
manufacturing operations in jurisdictions subject to more favorable tax rates.
Excluding nonrecurring items, the annual effective tax rate was 32 percent, 34
percent and 35 percent for 1998, 1997 and 1996, respectively.
Deferred income taxes are in the consolidated balance sheets as
follows:
<TABLE>
<CAPTION>
================================================================================
1998 1998 1997 1997
DECEMBER 31 ASSETS LIABILITIES ASSETS LIABILITIES
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current $ 406 $ 49 $ 335 $ 3
Noncurrent $ 408 $238 $ 382 $362
- --------------------------------------------------------------------------------
Components of deferred taxes were:
Property, plant and
equipment $ -- $210 $ -- $277
Inventory 172 -- 185 --
Compensation and
benefit plans 194 60 174 60
Swedish tax deferrals -- 31 -- 62
Tax loss and tax credit
carryforwards 265 -- 167 --
Environmental and product
liabilities 59 -- 107 --
Restructuring and
discontinued operations 111 -- 107 --
Tax on unremitted earnings -- 108 -- 121
All other 271 95 293 124
- --------------------------------------------------------------------------------
Subtotal 1,072 504 1,033 644
Valuation allowances (41) -- (37) --
- --------------------------------------------------------------------------------
Total deferred taxes $ 1,031 $504 $ 996 $644
- --------------------------------------------------------------------------------
Net deferred tax assets $ 527 $ 352
================================================================================
</TABLE>
Valuation allowances have been provided for certain deferred tax assets that are
not likely to be realized. Tax loss carryforwards of $94 have various expiration
dates through 2011. At December 31, 1998, undistributed earnings of subsidiaries
considered permanently invested, for which deferred income taxes have not been
provided, were approximately $3,000.
5 GAIN ON SALE OF MAJORITY INTEREST IN SUBSIDIARY
In December 1996, the company completed the sale of a portion of its holdings in
its wholly-owned subsidiary, Biacore International AB, through an initial public
offering, reducing the company's ownership to 41 percent. The investment in
Biacore, previously consolidated, is now accounted for using the equity method.
Biacore develops, manufactures, and markets advanced scientific instruments
employing affinity-based biosensor technology.
51
<PAGE> 20
The global offering included 5.75 million total shares (or American
Depository Shares) at $16 per share. Of the total shares, 1.5 million were newly
issued and 4.25 million were sold by the company. The sale generated net
proceeds to the company of $57 and a gain of $55 recorded in 1996. The gain is
composed of an $8 gain on the issuance of new shares and a $47 gain on the sale
of existing shares.
6 BIOTECH AND NUTRITION DIVESTITURES
In August 1997, the company merged its biotechnology supply business, Pharmacia
Biotech, with Amersham Life Science, a division of Amersham International plc,
in a noncash transaction that did not result in the recognition of a gain or
loss. The merger created a new company, Amersham Pharmacia Biotech Ltd., of
which Pharmacia & Upjohn owns 45 percent and accounts for using the equity
method. In 1998, Pharmacia & Upjohn recorded a credit of $52 primarily
representing the company's share of Amersham Pharmacia Biotech's pretax
earnings. In 1997, the company recorded $79 in charges related to the Biotech
merger and subsequent restructuring of the new company. Of this total, $36
consisted of transaction costs to effect the merger and a write-off of certain
acquired research and development costs. The Biotech line item on the
consolidated statement of earnings includes these charges as well as the
company's share of Amersham Pharmacia Biotech's pretax earnings.
In December 1998, the company sold substantially all of its nutrition
business to Fresenius AG for a loss of $52. To comply with antitrust regulations
in Germany, operations there were not sold. As of December 31, 1998, the sale of
the operations in China was still pending.
7 EARNINGS PER COMMON SHARE
Basic earnings per share is computed by dividing net earnings available to
common stockholders by the weighted average number of shares of common stock
outstanding. Diluted earnings per share is computed assuming all stock options
that are profitable to the recipients are exercised, all preferred stock is
converted, and all incentive stock compensation is issued. Under these
assumptions, the weighted average number of common shares outstanding is
increased accordingly, and net earnings is reduced by an incremental
contribution to the Employee Stock Ownership Plan (ESOP). This contribution is
the after-tax difference between the income the ESOP would have received from
the preferred stock and the assumed dividend yield to be earned on the common
shares. The following table reconciles the numerators and denominators of the
basic and diluted earnings per share (EPS) computations:
<TABLE>
<CAPTION>
========================================================================================================================
1998 1998 1997 1997 1996 1996
YEARS ENDED DECEMBER 31 BASIC DILUTED BASIC DILUTED BASIC DILUTED
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EPS numerator:
Net earnings $ 691 $ 691 $ 323 $323 $ 562 $ 562
Less: Preferred stock dividends, net of tax (13) (13) -- (13) --
Less: ESOP contribution, net of tax -- (5) -- (5) -- (5)
- ------------------------------------------------------------------------------------------------------------------------
Income available to common shareholders $ 678 $ 686 $310 $318 $ 549 $ 557
- ------------------------------------------------------------------------------------------------------------------------
EPS denominator:
Average common shares outstanding 508 508 508 508 508 508
Effect of dilutive securities:
Stock options -- 4 -- 2 -- 4
Convertible preferred stock and incentive compensation -- 10 -- 11 -- 11
- ------------------------------------------------------------------------------------------------------------------------
Total shares 508 522 508 521 508 523
- ------------------------------------------------------------------------------------------------------------------------
Earnings per share $1.33 $1.31 $ .61 $.61 $1.08 $1.07
========================================================================================================================
</TABLE>
8 INVENTORIES
<TABLE>
<CAPTION>
===================================================================
DECEMBER 31 1998 1997
- -------------------------------------------------------------------
<S> <C> <C>
Estimated replacement cost (FIFO basis):
Pharmaceutical and other finished products $ 558 $ 500
Raw materials, supplies and work in process 628 618
- -------------------------------------------------------------------
Inventories (FIFO basis) 1,186 1,118
Less reduction to LIFO cost (154) (160)
- -------------------------------------------------------------------
Inventories $1,032 $ 958
===================================================================
</TABLE>
Inventories valued on the LIFO method had an estimated replacement cost (FIFO
basis) of $521 at December 31, 1998, and $416 at December 31, 1997.
52
<PAGE> 21
9 INVESTMENTS
<TABLE>
<CAPTION>
===================================================================
DECEMBER 31 1998 1997
- -------------------------------------------------------------------
<S> <C> <C>
SHORT-TERM INVESTMENTS:
Available-for-sale:
Kingdom of Sweden debt instruments $242 $267
Government of Italy debt instruments -- 30
Government of Belgium debt instruments -- 10
Government of Norway debt instruments -- 48
Mortgage certificates of deposit 5 61
Corporate commercial paper 15 31
Other 9 81
- -------------------------------------------------------------------
Total available-for-sale 271 528
Held-to-maturity 81 11
- -------------------------------------------------------------------
Total short-term investments $352 $539
===================================================================
</TABLE>
Amortized cost of short-term investments classified as available-for-sale
approximates fair market value. Short-term investments classified as
held-to-maturity consist primarily of bank certificates of deposit with
amortized cost approximating fair market value.
<TABLE>
<CAPTION>
======================================================================
UNREALIZED
--------------- CARRYING
LONG-TERM INVESTMENTS COST GAINS (LOSSES) VALUE
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998:
Available-for-sale:
Equity securities $164 $ 29 $(23) $170
Mortgage-backed securities--
guaranteed by the
U.S. Government 144 4 -- 148
- ----------------------------------------------------------------------
Total available-for-sale $308 $ 33 $(23) 318
Held-to-maturity 136
- ----------------------------------------------------------------------
Total long-term investments $454
- ----------------------------------------------------------------------
December 31, 1997:
Available-for-sale:
Equity securities $ 55 $77 $ -- $132
Mortgage-backed securities--
guaranteed by the
U.S. Government 179 4 -- 183
- ----------------------------------------------------------------------
Total available-for-sale $234 $81 $ -- 315
Held-to-maturity 219
- ----------------------------------------------------------------------
Total long-term investments $534
======================================================================
</TABLE>
The total of unrealized gains (net of deferred taxes) included in shareholders'
equity amounted to $5 at December 31, 1998, compared to $53 and $18 at December
31, 1997 and 1996, respectively.
During 1997 and 1996 the company sold debt securities in the
held-to-maturity category for the amortized cost of $25 and $70, respectively.
Because these sales were initiated through the call option of the issuer, which
effectively accelerates the maturity date of the security, no gain or loss was
realized. No sales of held-to-maturity securities occurred in 1998.
The proceeds realized from the sale of available-for-sale debt
securities were $229, $939 and $1,128 for 1998, 1997 and 1996, respectively.
Profits realized on these sales are recorded as interest income. During 1998,
1997 and 1996, the proceeds realized from the sale of available-for-sale equity
securities amounted to $53, $4 and $123. Profits realized on these sales are
recorded in other nonoperating income. Based on original cost, gains of $24, $23
and $52 were realized on all sales of available-for-sale securities in 1998,
1997 and 1996, respectively.
Long-term investments held to maturity are summarized as follows:
<TABLE>
<CAPTION>
=============================================================
1998 1998 1997 1997
FAIR AMORTIZED FAIR AMORTIZED
DECEMBER 31 VALUE COST VALUE COST
- -------------------------------------------------------------
<S> <C> <C> <C> <C>
Guaranteed by the
U.S. Government $ 71 $ 71 $ 92 $ 83
Commonwealth of
Puerto Rico debt
instruments 35 35 73 71
Bank obligations:
Certificates of
deposit 10 10 15 15
Other 20 20 51 50
- -------------------------------------------------------------
Long-term
investments held
to maturity $136 $136 $231 $219
=============================================================
</TABLE>
At December 31, 1998, long-term mortgage-backed securities available for sale
had scheduled maturities ranging from 2001 to 2024. Scheduled maturities of
long-term securities to be held to maturity were from 2000 to 2022.
10 PROPERTIES, NET
<TABLE>
<CAPTION>
=========================================================
DECEMBER 31 1998 1997
- ---------------------------------------------------------
<S> <C> <C>
Land $ 100 $ 92
Buildings and improvements 1,868 1,897
Equipment 3,068 3,037
Construction in process 730 794
Less allowance for depreciation (2,540) (2,514)
- ---------------------------------------------------------
Properties, net $ 3,226 $ 3,306
=========================================================
</TABLE>
11 LINES OF CREDIT AND LONG-TERM DEBT
The company has a borrowing facility amounting to $500 which was unused as of
December 31, 1998. The facility is available through 2004 largely to support
commercial paper borrowings in the U.S. and Europe. While the facility does not
require compensating balances, it is subject to various fees. The company also
has uncommitted lines of credit amounting to $573 available with various
international banks, of which $546 were unused at December 31, 1998.
53
<PAGE> 22
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
=========================================================
DECEMBER 31 1998 1997
- ---------------------------------------------------------
<C> <C> <C>
5.875% Notes due 2000 $200 $200
6.182-6.843% Medium-Term Notes due 1999 80 238
0.818-11.85% Italian Government Loans
due 1999-2004 46 54
7.5% Industrial Revenue Bonds due 2023 40 40
3.78% Industrial Revenue Bonds due 2008 -- 6
Other 23 28
Current maturities (99) (172)
- ---------------------------------------------------------
Total long-term debt $290 $394
=========================================================
</TABLE>
Current maturities of long-term debt are included with short-term debt in the
consolidated balance sheets. Annual aggregate maturities of long-term debt
during the next five years are: 2000--$216; 2001--$11; 2002--$7; 2003--$5 and
2004--$51. The company has guaranteed $275 original principal amount of ESOP
9.79% notes due in 2004. At December 31, 1998, the balance of the guarantee was
$240 of which $22 was classified as current. Principal payments that began in
1995 cause the recognition of compensation expense (see Note 18). Annual
aggregate maturities of guaranteed debt during the five years subsequent to 1999
are: 2000--$28; 2001--$35; 2002--$44; 2003--$53 and 2004--$59.
Information regarding interest expense and weighted average interest
rates follows:
<TABLE>
<CAPTION>
=====================================================================
YEARS ENDED DECEMBER 31 1998 1997 1996
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Interest cost incurred $ 61 $ 64 $ 89
Less: Capitalized on construction (36) (31) (33)
- ---------------------------------------------------------------------
Interest expense $ 25 $ 33 $ 56
- ---------------------------------------------------------------------
Weighted average interest rate on
short-term borrowings at end
of period 6.36% 7.27% 5.99%
=====================================================================
</TABLE>
12 COMMITMENTS AND OTHER CONTINGENT LIABILITIES
Future minimum payments under noncancellable operating leases at December 31,
1998, approximately 80 percent real estate and 20 percent equipment, are as
follows: 1999--$79; 2000--$59; 2001--$38; 2002--$29; 2003--$29 and later
years--$99.
Capital asset spending committed for construction and equipment but
unexpended at December 31, 1998, was approximately $480.
The consolidated balance sheets include accruals for estimated product
litigation and environmental liabilities. The latter includes exposures related
to discontinued operations, including the industrial chemical facility and
several sites which, under the Comprehensive Environmental Response,
Compensation, and Liability Act, are commonly known as Superfund sites (see Note
13). The company's ultimate liability in connection with Superfund sites depends
on many factors, including the number of other responsible parties, their
financial viability, and the remediation methods and technology to be used.
Actual costs incurred may vary from the estimates given the inherent
uncertainties in evaluating environmental exposures.
With regard to its discontinued industrial chemical facility in North
Haven, Connecticut, the company may soon be required to submit a corrective
measures study report to the U.S. Environmental Protection Agency (EPA). As the
corrective action process progresses, it may become appropriate to reevaluate
the existing reserves designated for remediation in light of changing
circumstances. It is reasonably possible that a material increase in accrued
liabilities will be required but it is not possible to determine what, if any,
exposure exists at this time.
13 LITIGATION
The company is involved in a number of legal and environmental proceedings.
These include a substantial number of product liability suits claiming damages
as a result of the use of the company's products and administrative and judicial
proceedings at approximately 50 "Superfund" sites.
While it is not possible to predict or determine the outcome of legal
actions brought against the company, or the ultimate cost of environmental
matters, the company continues to believe that any potentially unaccrued costs
and liabilities associated with such matters will not have a material adverse
effect on the company's consolidated financial position. Unless there is a
significant deviation from the historical pattern of resolution of these issues,
there should not be a material adverse effect on the company's consolidated
financial position, its results of operations or liquidity.
The company has been a party along with a number of other defendants
(both manufacturers and wholesalers) in several federal civil antitrust
lawsuits, some of which were consolidated and transferred to the Federal
District Court for the Northern District of Illinois. These suits, brought by
independent pharmacies and chains, generally allege unlawful conspiracy, price
discrimination and price fixing and, in some cases, unfair competition, and
specifically allege that the company and the other named defendants violated the
following: (1) the Robinson-Patman Act by giving substantial discounts to
hospitals, nursing homes, mail-order pharmacies and health maintenance
organizations ("HMOs") without offering the same discounts to retail drugstores,
and (2) Section I of the Sherman Antitrust Act by entering into illegal vertical
combination with other manufacturers and wholesalers to restrict certain
discounts and rebates so they benefited only favored customers. The Federal
District Court for the Northern District of Illinois certified a national class
of retail pharmacies in November 1994. Similar actions by proposed retailer
classes have been filed in the state courts of Alabama, California, Minnesota,
Mississippi, and Wisconsin. Eighteen class action lawsuits seeking damages based
on the same alleged conduct have been filed in 14 states and the District of
Columbia. The plaintiffs claim to represent consumers who purchased prescription
drugs in those
54
<PAGE> 23
jurisdictions and four other states. Two of the lawsuits have been dismissed.
The company announced in 1998 that it reached a settlement with the plaintiffs
in the federal class action cases for $103. The company believes that any
potential remaining liability above amounts accrued will not have a material
adverse effect on the company's consolidated financial position, its results of
operations, or liquidity.
14 CURRENCY RISK MANAGEMENT
The company is exposed to currency exchange rate fluctuations related to certain
intercompany and third-party transactions, primarily intercompany sales from
Sweden and Italy to other European countries, the U.S. and Japan. The exposures
and related hedging program are managed centrally using forward currency
contracts, cross-currency swaps and currency options to hedge a portion of both
net recorded currency transaction exposures on the balance sheet as well as net
anticipated currency transactions. The company also has hedged part of its net
investment in Japan. Financial instruments for trading purposes are neither held
nor issued by the company.
The company's program to hedge net anticipated currency transaction
exposures is designed to protect cash flows from potentially adverse effects of
exchange rate fluctuations. At December 31, 1998, the contract amount of the
company's outstanding contracts used to hedge net transaction exposure was $690.
Of these contracts, 20 percent were denominated in Japanese yen, 11 percent were
denominated in U.S. dollars, 8 percent were denominated in German marks, and 17
percent were denominated in mainly other European currencies all against Swedish
kronor; 10 percent were denominated in various currencies, mainly Japanese yen
and U.S. dollars, against Italian lira; and 34 percent in various currencies,
mainly European currencies and Japanese yen, against U.S. dollars.
Gains and losses on hedges of intercompany loans and deposits offset
the currency exchange gains and losses of the underlying loans and deposits. At
December 31, 1998, the contract amount of forward exchange contracts held for
balance sheet financial exposure hedging program was $756. Of these contracts,
59 percent were denominated in U.S. dollars against European currencies; 17
percent were denominated in U.S. dollars against Japanese yen; 4 percent were
denominated in Swedish kronor against various European currencies; and 20
percent were denominated in various other currencies mainly against the Swedish
krona and the U.S. dollar.
Because the contract amounts are stated as notional amounts, the amount
of contracts disclosed above is not a direct measure of the exposure of the
company through its use of derivatives. These contracts generally have
maturities that do not exceed twelve months and require the company to exchange
currencies at agreed-upon rates at maturity. The counterparties to the contracts
consist of a limited number of major international financial institutions. The
company does not expect any losses from credit exposure.
15 FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of the company's financial
instruments were as follows:
<TABLE>
<CAPTION>
==================================================================
1998 1998 1997 1997
CARRYING FAIR CARRYING FAIR
DECEMBER 31 AMOUNT VALUE AMOUNT VALUE
- ------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Short-term investments $352 $352 $539 $539
Long-term investments 454 454 534 546
Forward currency
exchange contracts
Hedges of loans and deposits (7) (7) (14) (14)
Hedges of anticipated
transactions (13) (13) (10) (10)
FINANCIAL LIABILITIES:
Short-term debt 332 332 401 401
Long-term debt 290 299 394 394
Guaranteed ESOP debt 218 241 240 280
==================================================================
</TABLE>
Because maturities are short-term, fair value approximates carrying amount for
cash and cash equivalents, short-term investments, accounts receivable,
short-term debt, and accounts payable. Fair values of forward currency exchange
contracts, long-term investments, long-term debt, and guaranteed ESOP debt were
estimated based on quoted market prices for the same or similar instruments or
on discounted cash flows.
16 CONCENTRATIONS OF CREDIT RISK
The company invests excess cash in deposits with major banks throughout the
world and in high quality short-term liquid debt instruments. Such investments
are made only in instruments issued or enhanced by high quality institutions.
Financial instruments which potentially subject the company to concentrations of
credit risk consist principally of short-term investments in instruments issued
by the Kingdom of Sweden; otherwise, amounts invested in a single institution
are limited to minimize risk. The company has not incurred losses related to
these investments.
The company sells a broad range of pharmaceutical products to a diverse
group of customers operating throughout the world. In the U.S. and Japan, the
company makes substantial sales to relatively few large wholesale customers.
Credit limits, ongoing credit evaluation, and account monitoring procedures are
utilized to minimize the risk of loss. Collateral is generally not required.
55
<PAGE> 24
17 SHAREHOLDERS' EQUITY
Preferred Stock
The Series A Convertible Perpetual Preferred Stock is held by the Employee Stock
Ownership Trust (ESOP Trust). The per-share stated value is $40,300.00 and the
preferred stock ranks senior to the company's common stock as to dividends and
liquidation rights. Each share is convertible, at the holder's option, into
1,450 shares of the company's common stock and has voting rights equal to 1,450
shares of common stock. The company may redeem the preferred stock at any time
after July 20, 1999, or upon termination of the ESOP at a minimum price of
$40,300.00 per share. Dividends, at the rate of 6.25 percent, are cumulative,
paid quarterly, and charged against retained earnings.
Common Stock
The number of common shares outstanding at December 31, 1998, 1997 and 1996 was
508,000,489; 507,234,696; and 508,283,260, respectively. On a per-share basis,
dividends were declared on common stock at a rate of $1.08 in 1998 and 1997.
Common stock dividends payable were $137 at December 31, 1998 and 1997.
Capital in Excess of Par Value
Amounts of paid-in capital that exceed the par value ($.01 per share) of the
company's common stock are recorded in this account. This method was also
followed for all prior periods, including those preceding the November 1995
merger of Pharmacia AB and The Upjohn Company, because the common stock was
assumed to have been outstanding for all years. The tax benefit related to the
exercise of certain stock options reduces income taxes payable and is reflected
as capital in excess of par. Offsetting this is the difference between the cost
of treasury shares and cash received for them, if any, when used to satisfy
stock option exercises and other employee stock awards.
ESOP-related Accounts
The company holds a note receivable from the ESOP Trust that matures on February
1, 2005; bears interest at 6.25 percent; and may be added to or repaid, in whole
or in part, at any time. Accrued interest at the end of any calendar year is
added to the note principal. At December 31, 1998, the note principal balance
was $56. Also, upon recognition of the company's guarantee of the debt of the
ESOP Trust, an offsetting amount was recorded in shareholders' equity. As
guaranteed debt is repaid, this amount diminishes correspondingly (see Notes 11
and 18). Also, to the extent the company recognizes expense more rapidly than
the corresponding cash contributions are made to the Trust, this account is
reduced. The balance in this account at December 31, 1998, was $198.
Treasury Stock
The balance at December 31, 1998, and 1997 was $35 and $48, respectively,
carried at cost. The number of treasury shares used in 1998 for stock options
and employee benefit plans, net of shares acquired, was 730,593.
Accumulated Other Comprehensive Income
Accumulated other comprehensive income reflects the cumulative balance of (1)
currency translation adjustments, the adjustments of translating the financial
statements of non-U.S. subsidiaries from local currencies into U.S. dollars (see
Note 1); (2) unrealized gains and losses on investments categorized as
available-for-sale, net of deferred taxes and reclassifications (see Note 2);
and (3) minimum pension liability adjustments, net of deferred tax (see Notes 2
and 20).
Shareholder Protection Rights Plan
In February 1997, the board of directors approved a shareholder protection
rights plan, declaring a dividend of one right for each share of the company's
common stock outstanding on or after March 7, 1997. Exercisable 10 days after
any person or group acquires 15 percent or more or commences a tender offer for
15 percent or more of the company's common stock, the rights entitle holders to
effectively purchase a specified amount of the company's common stock at an
exercise price equal to half of its market value. The rights are redeemable for
$.01 per right and have a life of 10 years, unless redeemed earlier by the
company. In lieu of cash payment, the company has the option to exchange stock
for rights unless the acquiring person acquires more than 50 percent of the
company's common stock.
18 EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)
The ESOP is a funding vehicle for the Employee Savings Plan covering certain
U.S. employees. As the ESOP Trust makes debt principal and interest payments, a
proportionate amount of preferred stock is released for allocation to plan
participants. The preferred shares are allocated to participants' accounts based
upon their respective savings plan contributions and the dividends earned on
their previously allocated preferred shares. As of December 31, 1998, 1,878
preferred shares had been released and allocated; 352 shares were released but
unallocated; and 4,633 shares remained unreleased, of which 37 shares are
committed to be released.
56
<PAGE> 25
Under the agreement whereby the company guaranteed third-party debt of
the ESOP Trust, the company is obligated to provide sufficient cash annually to
the Trust to enable it to make required principal and interest payments. The
company satisfies this annual cash flow requirement through payment of dividends
on all preferred shares outstanding, loans and cash contributions. The company
has fully and unconditionally guaranteed the ESOP Trust's payment obligations
whether at maturity, upon redemption, upon declaration of acceleration, or
otherwise. The holders of the debt securities have no recourse against the
assets of the ESOP Trust except in the event that the Trust defaults on payments
due and the company also fails to make such payments. In that event, the holders
may have recourse against unallocated funds held by the Trust. At December 31,
1998, assets of the ESOP trust consisted primarily of $277 of Pharmacia &
Upjohn, Inc., Series A Convertible Perpetual Preferred Stock.
ESOP expense is determined by a formula that apportions debt service to
each year of the plan based on shares allocated to participants and deducts
dividends paid on all preferred stock held by the trust.
Key measures of the ESOP are presented in the table that follows.
<TABLE>
<CAPTION>
===============================================================
YEARS ENDED DECEMBER 31
DOLLARS IN MILLIONS 1998 1997 1996
- ---------------------------------------------------------------
<S> <C> <C> <C>
Interest expense of ESOP Trust $27 $28 $28
Dividend income of ESOP Trust 17 18 18
Company contribution to
ESOP Trust 18 12 16
Company ESOP expense (net) 13 14 14
===============================================================
</TABLE>
19 STOCK COMPENSATION
Incentive and nonqualified stock options are granted to certain employees.
Options granted in 1998 have a ten-year term and vest at the end of three years
or vest pro rata over three years. All options have an exercise price equal to
the market value of the underlying stock at date of grant. Since the company has
elected the disclosure-only alternative under SFAS No. 123 and continues to
account for stock options per the terms of APB No. 25, no compensation expense
is recognized in earnings.
Upon a stock-for-stock exercise of an option, an active employee will
receive a new, nonqualified "reloaded" option at the then-current market price
for the number of shares surrendered to exercise the option. The "reloaded"
option will have an exercise term equal to the remaining term of the original
exercised option.
The number of shares authorized for grants each year is equal to 1.25
percent of outstanding common shares and is cumulative. Information concerning
option activity and balances follows:
<TABLE>
<CAPTION>
=============================================================
WEIGHTED
AVERAGE NUMBER
EXERCISE PRICE OF SHARES
PER SHARE (000)
- -------------------------------------------------------------
<S> <C> <C>
Balance outstanding, January 1, 1996 $24.32 12,571
Granted 38.26 3,585
Exercised 24.49 (4,146)
Canceled 35.17 (77)
- -------------------------------------------------------------
Balance outstanding, December 31, 1996 28.50 11,933
Granted 37.04 4,444
Exercised 24.07 (1,526)
Canceled 38.27 (179)
- -------------------------------------------------------------
Balance outstanding, December 31, 1997 31.43 14,672
Granted 40.40 9,777
Exercised 28.68 (4,246)
Canceled 39.65 (623)
- -------------------------------------------------------------
Balance outstanding, December 31, 1998 $36.25 19,580
=============================================================
</TABLE>
<TABLE>
<CAPTION>
===========================================================================
COMPOSITION OF THE WEIGHTED WEIGHTED
DECEMBER 31, 1998 BALANCE: AVERAGE AVERAGE NUMBER
OPTIONS HAVING A REMAINING EXERCISE PRICE OF SHARES
PER-SHARE EXERCISE PRICE OF: LIFE PER SHARE (000)
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
$19.44--19.99 3.74 years $19.63 620
$20.00--29.99 3.89 years 24.99 3,178
$30.00--39.99 7.82 years 37.23 7,942
$40.00--49.99 8.67 years 40.71 7,580
$50.00--56.34 7.77 years 53.30 260
- ---------------------------------------------------------------------------
19,580
Less non-exercisable options 9.18 years 39.90 8,699
- ---------------------------------------------------------------------------
Exercisable options $38.42 10,881
===========================================================================
</TABLE>
Had the company elected to measure stock compensation using the fair value of
the awards at grant date under the provisions of SFAS No. 123, the company's net
income and earnings per share would have been reduced by approximately $20 or
$.04 per share for 1998, $24 or $.05 per share for 1997, and $25 or $.05 per
share for 1996. The fair value of each option grant was estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions for 1998, 1997 and 1996, respectively: dividend yield of 2.7, 2.83,
and 2.8 percent; volatility of 24, 21, and 21 percent; risk-free interest rate
of 4.72, 5.45, and 5.4 percent; and an expected life of 5.1, 5.3, and 5.5 years.
57
<PAGE> 26
20 RETIREMENT BENEFITS
The company has various pension plans covering substantially all employees.
Benefits provided under the defined benefit pension plans are primarily based on
years of service and the employee's compensation. The company also provides
nonpension benefits to eligible retirees and their dependents, primarily in the
form of medical and dental benefits. The following tables summarize the changes
in benefit obligations and plan assets during 1997 and 1998.
<TABLE>
<CAPTION>
====================================================================
OTHER RETIREMENT
PENSION BENEFITS BENEFITS
CHANGE IN BENEFIT OBLIGATION: 1998 1997 1998 1997
- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
Benefit obligation at
beginning of year $1,394 $1,266 $ 393 $ 366
Service cost 56 52 10 9
Interest cost 91 90 27 26
Benefits paid (133) (105) (19) (18)
Actuarial (gain) loss 53 114 (10) 7
Plan amendment and other
adjustments (14) 27 5 3
Currency exchange effects 8 (50) -- --
- --------------------------------------------------------------------
Benefit obligation at
end of year $1,455 $1,394 $ 406 $ 393
====================================================================
<CAPTION>
====================================================================
CHANGE IN PLAN ASSETS: 1998 1997 1998 1997
- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fair value of plan assets
at beginning of year $1,387 $1,247 $ 170 $ 144
Actual return on plan assets 184 215 40 27
Employer contribution 38 26 18 16
Benefits paid (133) (105) (19) (18)
Other adjustments (5) 21 2 1
Currency exchange effects 6 (17) -- --
- --------------------------------------------------------------------
Fair value of plan assets at
end of year $1,477 $1,387 $ 211 $ 170
====================================================================
<CAPTION>
====================================================================
AT DECEMBER 31, 1998 1997 1998 1997
- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
Funded status $ 22 $ (7) $(195) $(223)
Unrecognized net actuarial
(gains) losses (11) (4) (115) (74)
Amortized net transition asset (45) (56) -- --
Unrecognized prior service cost 41 33 (34) (40)
- --------------------------------------------------------------------
Prepaid (accrued) benefit cost $ 7 $ (34) $(344) $(337)
====================================================================
</TABLE>
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for the pension plans with accumulated benefit obligations in
excess of plan assets were $346, $291, and $90 as of December 31, 1998, and
$361, $302, and $78 as of December 31, 1997, respectively. The benefit
obligation and fair value of plan assets for benefit plans with obligations in
excess of plan assets were $752 and $301, as of December 31, 1998, and $810 and
$290 as of December 31, 1997, respectively.
<TABLE>
<CAPTION>
====================================================================
AT DECEMBER 31, 1998 1997 1998 1997
- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total accrual balances $(221) $(221) $(344) $(337)
Total prepaid balances 190 187 -- --
Minimum pension liability
offsets:
Intangible assets 5 -- -- --
Shareholders' equity
(pretax) 33 -- -- --
- --------------------------------------------------------------------
Prepaid (accrued) benefit cost $ 7 $ (34) $(344) $(337)
====================================================================
<CAPTION>
====================================================================
WEIGHTED-AVERAGE ASSUMPTIONS
AS OF DECEMBER 31, 1998 1997
- --------------------------------------------------------------------
<S> <C> <C>
Discount rate 6.66% 6.95%
Salary growth rate 3.68 4.20
Return on plan assets 9.21 9.27
Health care cost rate--initially 5.83 6.33
trending down to 5.00 5.00
====================================================================
</TABLE>
The consolidated net expense amounts in the following table are exclusive of
curtailments, settlements, and termination benefit costs associated with
restructurings. Net amounts of $4, $5 and $25 before tax were recorded in 1998,
1997 and 1996, respectively, within restructuring charges. During 1996, the
company recognized administrative credits of $24 related to curtailments of its
postretirement life insurance plans. The curtailments resulted principally from
elimination of the company's obligation to provide future postretirement life
insurance benefits for those retirees electing to switch to the new plan.
58
<PAGE> 27
<TABLE>
<CAPTION>
=============================================================================================================
PENSION BENEFITS OTHER RETIREMENT BENEFITS
COMPONENTS OF NET PERIODIC BENEFIT COST: 1998 1997 1996 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 56 $ 52 $ 55 $ 10 $ 9 $ 10
Interest cost 91 90 88 27 26 26
Expected return on plan assets (109) (102) (100) (15) (12) (10)
Amortization of transition amount (9) (9) (9) -- -- --
Amortization of prior service cost 5 4 4 (3) (4) (4)
Recognized actuarial loss (gain) 3 4 3 (2) (1) (1)
- -------------------------------------------------------------------------------------------------------------
Net periodic benefit cost 37 39 41 17 18 21
Curtailment gain (3) -- -- -- -- (24)
- -------------------------------------------------------------------------------------------------------------
Net benefit cost $ 34 $ 39 $ 41 $ 17 $ 18 $ (3)
=============================================================================================================
</TABLE>
The assumption concerning health care cost trend rate has a significant effect
on the amounts reported. Increasing the rate by one percentage point in each
year would increase the postretirement benefit obligation as of December 31,
1998, by $52 and the total of service and interest cost components of net
postretirement benefit cost for the year by $6. Conversely, decreasing the rate
by one percentage point in each year would decrease the postretirement benefit
obligation as of December 31, 1998, by $46 and the total of service and interest
cost components of net postretirement benefit cost for the year by $5.
The company recorded an additional minimum liability of $38 for
underfunded plans at December 31, 1998. This liability represents the amount by
which the accumulated benefit obligation exceeds the sum of the fair market
value of plan assets and accrued amounts previously recorded. The additional
liability is offset by an intangible asset ($5) to the extent of previously
unrecognized prior service cost. The remaining amount ($33) is recorded, net of
tax benefits, as a reduction to shareholders' equity within accumulated other
comprehensive income.
21 SEGMENT INFORMATION
Effective January 1, 1998, the company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This statement requires
enterprises to report certain information about segments including information
about products, geographic areas, and major customers.
The company's core business is the development, manufacture and sale of
pharmaceutical products. Based on commonalities, the pharmaceutical segment
includes prescription and nonprescription products for humans and animals. The
prescription products include general therapeutics, ophthalmology and hospital
products including oncology, and diversified therapeutics. Nonprescription
products include product line extensions of key prescription drugs, plus
products to treat tobacco dependency. Animal health products derive largely from
human pharmaceutical research and also include feed additives, growth
promotants, and reproduction facilitators for livestock and pets.
The nonpharmaceutical segment includes diagnostics, nutrition, plasma
and biotechnology. Diagnostics provides services to identify specific allergies
in people. Nutrition sells food replacement products, primarily to hospitals.
Plasma is a therapeutic area that prepares and markets products derived from
blood plasma. Biotechnology primarily represents minority equity positions in
biotechnology joint ventures that manufacture and market reagents, chemicals,
and systems for biotechnology companies and academic research laboratories.
The following table shows revenues and expenses for the company's
operating segments and reconciling items necessary to total to amounts reported
in the consolidated financial statements. Information about segment assets,
interest income and expense, and income taxes is not provided on a segment level
as the segments are reviewed based on operating income. Corporate support
functions and restructuring charges also are not allocated to segments. There
are no inter-segment revenues. Depreciation is not available on a segmental
basis.
59
<PAGE> 28
Segments for year ended December 31, 1998
<TABLE>
<CAPTION>
==================================================================================================================
PHARMACEUTICAL NONPHARMACEUTICAL RECONCILING ITEMS TOTAL
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 6,127 $ 631 $ -- $6,758
- ------------------------------------------------------------------------------------------------------------------
Earnings from equity affiliates $ 1 $ 56 $ -- $ 57
- ------------------------------------------------------------------------------------------------------------------
Amortization expense $ 22 $ 9 $ 81 $ 112
- ------------------------------------------------------------------------------------------------------------------
Operating income (loss) before corporate $ 1,329 $ 149 $ (137) $1,341
Corporate and all other (325)
- ------------------------------------------------------------------------------------------------------------------
Earnings before taxes $1,016
==================================================================================================================
</TABLE>
Segments for year ended December 31, 1997
<TABLE>
<CAPTION>
==================================================================================================================
PHARMACEUTICAL NONPHARMACEUTICAL RECONCILING ITEMS TOTAL
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 5,690 $ 896 $ -- $6,586
- ------------------------------------------------------------------------------------------------------------------
Earnings (loss) from equity investments $ 5 $ (73) $ -- $ (68)
- ------------------------------------------------------------------------------------------------------------------
Amortization expense $ 20 $ 9 $ 87 $ 116
- ------------------------------------------------------------------------------------------------------------------
Operating income (loss) before corporate $ 1,086 $ 25 $(126) $ 985
Corporate and all other (517)
- ------------------------------------------------------------------------------------------------------------------
Earnings before taxes $ 468
==================================================================================================================
</TABLE>
As part of the global turnaround program, the structure of the company has
changed significantly from 1996 to 1998. It is therefore not practicable to
display segmental earnings information for the year ended December 31, 1996, on
a basis comparable to that presented above. Net sales of the pharmaceutical
segment in 1996 totaled $6,025 while nonpharmaceutical sales were $1,151. The
reconciling item for amortization expense represents goodwill amortization
resulting from acquisitions by Pharmacia AB prior to the 1995 merger with The
Upjohn Company. In addition to amortization, unallocated noncorporate general
and administrative expenses are included in the other reconciling item.
Corporate and all other amounts represent general and administrative expenses of
corporate support functions, unusual items such as restructuring charges and
litigation accruals, and net nonoperating income.
The company's products are sold throughout the world to a wide range of
customers including pharmacies, hospitals, chain warehouses, governments,
physicians, wholesalers, and other distributors. No single customer accounts for
10 percent or more of the company's consolidated sales.
The top selling 20 products in 1998 represent approximately 54 percent
of total sales with no one product constituting more than 6 percent of total
sales. A more comprehensive analysis of product sales performance is provided in
the Financial Review on pages 35-36. The following table shows the company's
sales geographically. U.S. exports to third-party customers are less than 10
percent of U.S. sales.
<TABLE>
<CAPTION>
====================================================================
GEOGRAPHIC SALES FOR YEARS ENDED DECEMBER 31 1998 1997
- --------------------------------------------------------------------
<S> <C> <C>
Sales to customers in:
United States $2,498 $2,081
Japan 565 624
Italy 461 460
Germany 412 405
United Kingdom 352 300
Sweden 284 317
France 275 254
Spain 168 185
Rest of the world 1,743 1,960
- --------------------------------------------------------------------
Total sales $6,758 $6,586
====================================================================
</TABLE>
Long-lived assets include property, plant and equipment, goodwill and
other intangibles, all net of depreciation or amortization.
<TABLE>
<CAPTION>
====================================================================
Long-lived assets, December 31 1998 1997
- --------------------------------------------------------------------
<S> <C> <C>
United States $1,832 $1,801
Sweden 995 1,322
Italy 443 416
Japan 186 188
United Kingdom 133 147
Ireland 123 81
Rest of the world 752 638
- --------------------------------------------------------------------
Total long-lived assets $4,464 $4,593
====================================================================
</TABLE>
60
<PAGE> 29
Eight-Year Summary of Operations
-----------------------------------------
Pharmacia & Upjohn, Inc. and subsidiaries
<TABLE>
<CAPTION>
======================================================================================================================
Years ended December 31 1998 1997 1996 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------
Dollar amounts in millions, except per-share data
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS
Net sales $ 6,758 $ 6,586 $ 7,176 $ 6,949 $ 6,704 $6,507 $ 5,910 $ 5,292
Other revenue 135 124 110 146 119 54 28 22
- ----------------------------------------------------------------------------------------------------------------------
Operating revenue 6,893 6,710 7,286 7,095 6,823 6,561 5,938 5,314
- ----------------------------------------------------------------------------------------------------------------------
Cost of products sold 2,031 2,049 2,116 1,967 1,877 1,822 1,623 1,415
Research and development 1,199 1,217 1,266 1,254 1,163 1,144 940 785
Marketing, administrative and other 2,633 2,665 2,642 2,617 2,583 2,596 2,393 2,183
Biotech (52) 73 -- -- -- -- -- --
Restructuring 92 316 518 104 20 269 46 58
Loss on nutrition sale 52 -- -- -- -- -- -- --
Merger costs -- -- 67 138 -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Operating costs and expenses 5,955 6,320 6,609 6,080 5,643 5,831 5,002 4,441
- ----------------------------------------------------------------------------------------------------------------------
Operating income 938 390 677 1,015 1,180 730 936 873
Interest income 89 110 159 216 157 227 248 166
Interest expense (25) (33) (56) (94) (112) (183) (136) (119)
Gain on sale of subsidiary stock -- -- 55 -- -- -- -- --
All other, net 14 1 3 (1) 46 4 (101) (10)
- ----------------------------------------------------------------------------------------------------------------------
Earnings from continuing
operations before income taxes 1,016 468 838 1,136 1,271 778 947 910
Provision for income taxes 325 145 276 397 438 217 243 307
- ----------------------------------------------------------------------------------------------------------------------
Earnings from continuing operations 691 323 562 739 833 561 704 603
Discontinued operations, net -- -- -- -- 2 46 (129) 164
Cumulative effect of accounting
changes (net of tax) -- -- -- -- -- (19) (224) --
- ----------------------------------------------------------------------------------------------------------------------
Net earnings 691 323 562 739 835 588 351 767
- ----------------------------------------------------------------------------------------------------------------------
Dividends on preferred stock
(net of tax) 13 13 13 13 12 12 12 12
- ----------------------------------------------------------------------------------------------------------------------
Net earnings on common stock $ 678 $ 310 $ 549 $ 726 $ 823 $ 576 $ 339 $ 755
- ----------------------------------------------------------------------------------------------------------------------
Net earnings per common share:
Diluted $ 1.31 $ .61 $ 1.07 $ 1.41 $ 1.60 $ 1.13 $ .67 $ 1.46
======================================================================================================================
FINANCIAL POSITION
Cash and cash equivalents $ 857 $ 775 $ 641 $ 841 $ 652 $ 393 $ 373 $ 544
Short-term investments 352 539 696 974 1,134 447 1,176 670
Trade accounts receivable, net 1,417 1,303 1,705 1,535 1,480 1,416 1,272 1,109
Inventories 1,032 958 1,012 976 887 833 728 735
Other current assets 874 752 841 648 652 559 436 480
- ----------------------------------------------------------------------------------------------------------------------
Current assets 4,532 4,327 4,895 4,974 4,805 3,648 3,985 3,538
Net assets of discontinued operations -- -- -- -- -- 278 1,989 2,644
Properties 3,226 3,306 3,602 3,393 3,074 2,906 2,517 2,495
Goodwill and other intangibles, net 1,238 1,287 1,522 1,722 1,795 1,843 1,556 1,813
Other noncurrent assets 1,316 1,460 1,154 1,372 1,273 1,220 826 855
- ----------------------------------------------------------------------------------------------------------------------
Total assets $10,312 $10,380 $11,173 $11,461 $10,947 $9,895 $10,873 $11,345
- ----------------------------------------------------------------------------------------------------------------------
Short-term debt, including current
maturities of long-term debt $ 332 $ 401 $ 235 $ 524 $ 766 $ 769 $ 500 $ 216
Other current liabilities 2,519 2,287 2,268 2,116 2,110 2,001 2,077 1,572
Long-term debt and ESOP debt 508 634 823 870 953 950 739 919
Other noncurrent liabilities 1,353 1,520 1,606 1,564 1,508 1,411 1,158 949
Shareholders' equity 5,600 5,538 6,241 6,387 5,610 4,764 6,399 7,689
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $10,312 $10,380 $11,173 $11,461 $10,947 $9,895 $10,873 $11,345
======================================================================================================================
</TABLE>
61
<PAGE> 30
Quarterly Data
-----------------------------------------
Pharmacia & Upjohn, Inc. and subsidiaries
<TABLE>
<CAPTION>
======================================================================================================================
1998 (UNAUDITED) FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
- ----------------------------------------------------------------------------------------------------------------------
Dollar amounts in millions, except per-share data
<S> <C> <C> <C> <C>
Net sales $ 1,586 $ 1,654 $ 1,669 $ 1,849
Other revenue 26 37 38 34
- ----------------------------------------------------------------------------------------------------------------------
Operating revenue 1,612 1,691 1,707 1,883
Cost of products sold 485 493 515 538
Research and development 274 292 272 361
Marketing, administrative and other 601 717 634 681
Biotech (9) (9) (15) (19)
Restructuring -- -- -- 92
Loss on sale of nutrition -- -- -- 52
- ----------------------------------------------------------------------------------------------------------------------
Operating income 261 198 301 178
Interest income 24 21 20 24
Interest expense (6) (5) (6) (8)
All other, net (2) 2 7 7
- ----------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 277 216 322 201
Provision for income taxes 88 70 103 64
- ----------------------------------------------------------------------------------------------------------------------
Net earnings $ 189 $ 146 $ 219 $ 137
======================================================================================================================
Net earnings per common share:
Basic $ .37 $ .28 $ .42 $ .26
Diluted $ .36 $ .28 $ .41 $ .26
- ----------------------------------------------------------------------------------------------------------------------
Dividends declared per share $ .27 $ .27 $ .27 $ .27
- ----------------------------------------------------------------------------------------------------------------------
Market Price:
High $45.875 $46.688 $51.688 $57.250
Low $33.750 $38.250 $40.438 $44.875
======================================================================================================================
<CAPTION>
======================================================================================================================
1997 (UNAUDITED) FIRST QUARTER SECOND QUARTER THIRD QUARTER FOURTH QUARTER
Dollar amounts in millions, except per-share data
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 1,635 $ 1,703 $ 1,551 $ 1,697
Other revenue 27 35 36 26
- ----------------------------------------------------------------------------------------------------------------------
Operating revenue 1,662 1,738 1,587 1,723
Cost of products sold 503 550 476 520
Research and development 283 281 268 385
Marketing, administrative and other 602 652 585 826
Biotech merger and restructuring costs -- -- 31 42
Restructuring charges -- -- 125 191
- ----------------------------------------------------------------------------------------------------------------------
Operating income (loss) 274 255 102 (241)
Interest income 29 25 26 30
Interest expense (7) (11) (6) (9)
All other, net (2) 1 (2) 4
- ----------------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes 294 270 120 (216)
Provision for income taxes 100 92 41 (88)
- ----------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 194 $ 178 $ 79 $ (128)
======================================================================================================================
Net earnings (loss) per common share:
Basic $ .38 $ .34 $ .15 $ (.26)
Diluted $ .37 $ .34 $ .15 $ (.26)
======================================================================================================================
</TABLE>
62
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Jurisdiction in which
Corporate Name Incorporated
---------------------------
PHARMACIA & UPJOHN, INC. Delaware (Parent)
Subsidiaries (excluding those which when considered
in the aggregate as a single subsidiary did not constitute
a significant subsidiary as of December 31, 1998):
<S> <C>
Pharmacia & Upjohn (Perth) Pty Ltd Australia
Pharmacia & Upjohn Pty Ltd Australia
Pharmacia & Upjohn N.V./S.A. Belgium
Pharmacia & Upjohn Coordination Center N.V. Belgium
Pharmacia & Upjohn Inc. Canada
Sino-Swed Pharmaceutical Co Ltd China
Upjohn Suzhou Pharmaceutical Co Ltd China
Pharmacia & Upjohn GmbH Germany
Pharmacia & Upjohn S.A. Spain
Pharmacia & Upjohn S.A. France
Pharmacia & Upjohn Limited United Kingdom
Pharmacia UK Ltd United Kingdom
Pharmacia & Upjohn Cork Ltd Ireland
Prosec (Ireland) Ltd Ireland
Pharmacia & Upjohn S.p.A. Italy
Pharmacia & Upjohn Ltd Japan
Pro Re (Luxembourg) S.A. Luxembourg
Pharmacia & Upjohn S.A. Luxembourg
Pharmacia & Upjohn S.A. de C.V. Mexico
Pharmacia & Upjohn Holdings BV Netherlands
Pharmacia & Upjohn International N.V. Netherlands
Pharmacia & Upjohn Financial Services B.V. Netherlands
Pharmacia & Upjohn AS Norway
Pharmacia & Upjohn Caribe Inc. Puerto Rico
Pharmacia & Upjohn AB Sweden
Pharmacia Biosystems AB Sweden
Pharmacia & Upjohn Treasury Services AB Sweden
Kabi Pharmacia Peptide Hormones AB Sweden
Sopaco S.A. Switzerland
P&UFSC Inc. (Foreign Sales Corporation) Virgin Islands
Pharmacia & Upjohn ABBV LLC Delaware
Pharmacia & Upjohn Company Delaware
Upjohn International Inc. Michigan
Pharmacia & Upjohn Inter-American Corporation Michigan
Pharmacia & Upjohn Trading Company Michigan
Pharmacia & Upjohn Holding Company Delaware
The Upjohn Manufacturing Company Delaware
The Upjohn Holding Company M Delaware
Greenstone Ltd. Delaware
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to incorporation by reference in the registration Statements on
Form S-8 (No. 333-74783 and No. 333-74785) of our report dated February 10,
1999, on our audits of the consolidated financial statements of Pharmacia &
Upjohn, Inc. and its subsidiaries as of December 31, 1998 and 1997 and for each
of the three years in the period ended December 31, 1998, included in this Form
10-K for the fiscal year ended December 31, 1998 of Pharmacia & Upjohn, Inc.
PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
March 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 857
<SECURITIES> 0
<RECEIVABLES> 1520
<ALLOWANCES> 103
<INVENTORY> 1032
<CURRENT-ASSETS> 4532
<PP&E> 5766
<DEPRECIATION> 2540
<TOTAL-ASSETS> 10312
<CURRENT-LIABILITIES> 2851
<BONDS> 290<F1>
0
277
<COMMON> 5
<OTHER-SE> 5318
<TOTAL-LIABILITY-AND-EQUITY> 10312
<SALES> 6758
<TOTAL-REVENUES> 6893
<CGS> 2031
<TOTAL-COSTS> 2031
<OTHER-EXPENSES> 1199<F2>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25
<INCOME-PRETAX> 1016
<INCOME-TAX> 325
<INCOME-CONTINUING> 691
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 691
<EPS-PRIMARY> 1.33
<EPS-DILUTED> 1.31
<FN>
<F1>Does not include guarantee of ESOP debt of $218.
<F2>Only includes R&D expense.
</FN>
</TABLE>
