-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, L/vTZPgE1uetTYUpql3GTQ9hqeXIIehiQdUzruYpJfj6n4QR+jTXjw41Pw6KjJbH 5vAHcFkn2V5qmOV4Av+YNA== 0000898822-00-000039.txt : 20000428 0000898822-00-000039.hdr.sgml : 20000428 ACCESSION NUMBER: 0000898822-00-000039 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991219 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 20000125 DATE AS OF CHANGE: 20000427 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MONSANTO CO CENTRAL INDEX KEY: 0000067686 STANDARD INDUSTRIAL CLASSIFICATION: 2800 IRS NUMBER: 430420020 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-02516 FILM NUMBER: 512255 BUSINESS ADDRESS: STREET 1: 800 N LINDBERGH BLVD CITY: ST LOUIS STATE: MO ZIP: 63167 BUSINESS PHONE: 3146941000 MAIL ADDRESS: STREET 1: 800 NORTH LINDBERGH BLVD CITY: ST LOUIS STATE: MO ZIP: 63167 FORMER COMPANY: FORMER CONFORMED NAME: MONSANTO CO DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: MONSANTO CHEMICAL CO DATE OF NAME CHANGE: 19711003 8-K 1 CURRENT REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report (Date of earliest event reported): December 19, 1999 MONSANTO COMPANY ------------------------------------ (Exact Name of Registrant as Specified in Charter) Delaware 1-2516 43-0420020 ------------------------ ----------- --------------------- (State of Incorporation) (Commission (IRS Employer File Number) Identification No.) 800 North Lindbergh Boulevard St. Louis, Missouri 63167 - - ---------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (314) 694-1000 ITEM 5. OTHER EVENTS Pro forma financial information relating to the proposed merger between Monsanto Company ("Monsanto"), a Delaware corporation, and Pharmacia & Upjohn, Inc. ("PNU"), a Delaware corporation, is attached hereto as Exhibit 99.1. PNU's audited consolidated balance sheets as of December 31, 1997 and 1998 and audited consolidated statements of income and cash flow for the years ended December 31, 1996, 1997 and 1998 are attached hereto as Exhibit 99.2. PNU's unaudited balance sheet as of September 30, 1999 and unaudited statements of income and cash flow for the nine months ended September 30, 1998 and September 30, 1999 are attached hereto as Exhibit 99.3. Monsanto has announced information relating to its 1999 earnings, a copy of which is attached hereto as Exhibit 99.4 and incorporated herein by reference. All stockholders should read the joint proxy statement/prospectus concerning the merger that will be filed with the SEC and mailed to stockholders. The joint proxy statement/prospectus will contain important information that stockholders should consider before making any decision regarding the merger. You will be able to obtain the joint proxy statement/prospectus, as well as other filings containing information about Monsanto and PNU, without charge, at the SEC's Internet site (http://www.sec.gov). Copies of the joint proxy statement/prospectus and the SEC filings that will be incorporated by reference in the joint proxy statement/prospectus will also be available, without charge, by contacting the Secretary of the appropriate company. CERTAIN INFORMATION CONCERNING PARTICIPANTS Monsanto and certain other persons named below may be deemed to be participants in the solicitation of proxies of Monsanto stockholders to approve the merger. The participants in this solicitation may include the directors of Monsanto (Robert B. Shapiro, Richard U. De Schutter, Michael Kantor, Gwendolyn S. King, Philip Leder, M.D., Jacobus F.M. Peters, John S. Reed, John E. Robson, William D. Ruckelshaus and Hendrik A. Verfaillie); the following executive officers of Monsanto: Robert B. Shapiro (Chairman of the Board and Chief Executive Officer), Hendrik A. Verfaillie (President), Richard U. De Schutter (Vice Chairman), Gary L. Crittenden (Senior Vice President and Chief Financial Officer), R. William Ide III (Senior Vice President, General Counsel and Secretary), Arnold W. Donald (Senior Vice President), Steven L. Engelberg (Senior Vice President), David L. Morley (Senior Vice President), Philip Needleman, Ph.D. (Senior Vice President), Joan H. Walker (Senior Vice President), Robert T. Fraley, Ph.D. (Co-President, Agricultural Sector), Hugh Grant (Co-President, Agricultural Sector), Nick E. Rosa (Senior Vice President), Donna A. Kindl (Senior Vice President), Bruce P. Bickner (Co-President, Global Seed Group), Martin E. Blaylock (Vice President), Ganesh M. Kishore, Ph.D. (Co-President, Nutrition and Consumer Products Sector), Alan L. Heller (Co-President, G.D. Searle & Co.) and Richard B. Clark (Vice President and Controller); and the following other members of management and employees of Monsanto: A. Nicholas Filippello, Ph.D. (Vice President, Investor Relations), Ann Gualtieri (Investor Relations), Scarlett Lee Foster (Public Affairs), Andrew J. Kuchan (Investor Relations), Jeff Bergau (Public Affairs) and Daniel F. Verakis (Public Affairs). As of the date of this communication, none of the foregoing participants individually beneficially owns in excess of 1% of Monsanto's common stock or in the aggregate in excess of 1% of Monsanto's common stock. Except as disclosed above, to the knowledge of Monsanto, none of the directors or executive officers of Monsanto or the employees or other representatives of Monsanto named above has any interest, direct or indirect, by security holdings or otherwise, in Monsanto. ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS (a) Financial statements of businesses acquired. Not applicable. (b) Pro forma financial information. Not applicable. (c) Exhibits. The following exhibits are filed as part of this report: -------- 99.1 Pro forma financial information relating to the proposed merger between Monsanto and PNU. 99.2 PNU's audited consolidated balance sheets as of December 31, 1997 and 1998 and audited consolidated statements of income and cash flow for the years ended December 31, 1996, 1997 and 1998. -2- 99.3 PNU's unaudited balance sheet as of September 30, 1999 and unaudited statements of income and cash flow for the nine months ended September 30, 1998 and September 30, 1999. 99.4 Information relating to Monsanto's 1999 earnings. 23.1 Consent of PricewaterhouseCoopers LLP. -3- SIGNATURE Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Dated: January 25, 2000 MONSANTO COMPANY By /s/ Barbara L. Blackford ------------------------------------- Name: Barbara L. Blackford Title: Chief Counsel and Assistant Secretary -4- EXHIBIT INDEX Exhibit Number Description - - ------ ----------- 99.1 Pro forma financial information relating to the proposed merger between Monsanto and PNU. 99.2 PNU's audited consolidated balance sheets as of December 31, 1997 and 1998 and audited consolidated statements of income and cash flow for the years ended December 31, 1996, 1997 and 1998. 99.3 PNU's unaudited balance sheet as of September 30, 1999 and unaudited statements of income and cash flow for the nine months ended September 30, 1998 and September 30, 1999. 99.4 Information relating to Monsanto's 1999 earnings. 23.1 Consent of PricewaterhouseCoopers LLP. -5- EX-99 2 EXHIBIT 99.1 Exhibit 99.1 UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION The following information has been provided to aid you in your analysis of the financial aspects of the merger. This information was derived from the audited consolidated financial statements of each of Monsanto and Pharmacia & Upjohn for the years 1996 through 1998 and the unaudited consolidated condensed financial statements of each of Monsanto and Pharmacia & Upjohn for the nine months ended September 30, 1999. The information is only a summary and should be read together with the historical financial statements and related notes contained in the annual reports and quarterly reports and other information that we have filed with the SEC and incorporated by reference. POOLING OF INTERESTS ACCOUNTING TREATMENT The merger is expected to be accounted for as a "pooling of interests." This means that, for accounting and financial reporting purposes, the companies will be treated as if they had always been combined. We have presented unaudited pro forma condensed combined financial information that reflects the pooling of interests method of accounting to provide a picture of what the businesses might have looked like had they always been combined. The pro forma condensed combined statements of income and pro forma condensed combined statement of financial position were prepared by combining the historical amounts of each company. The companies would have performed differently had they always been combined. You should not rely on the unaudited pro forma condensed combined financial information as being indicative of the historical results that would have occurred or the future results that will occur after the merger. PERIODS COVERED The following unaudited pro forma combined condensed statement of financial position as of September 30, 1999, is presented as if the merger had occurred on September 30, 1999. The unaudited pro forma combined condensed statements of income for the nine months ended September 30, 1999, and for the years ended December 31, 1998, 1997 and 1996, are presented as if the companies had always been merged. PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME NINE MONTHS ENDED SEPTEMBER 30, 1999 (UNAUDITED) (AMOUNTS IN MILLIONS, EXCEPT PER SHARE INFORMATION)
PRO FORMA PRO FORMA HISTORICAL ADJUSTMENTS COMBINED ----------------------- ----------- ----------- PHARMACIA MONSANTO & UPJOHN -------- -------- Net Sales.................................. $ 6,804 $ 5,310 $12,114 Costs, Expenses and Other: Cost of Goods Sold....................... 2,450 1,421 3,871 Selling, General and Administrative 2,107 2,019 4,126 Expenses................................. Research and Development ................ 1,008 1,050 2,058 Amortization of Intangible Assets........ 259 68 327 Restructuring, Merger and Special Charges.................................. 10 32 42 Interest Expense......................... 287 41 328 Interest Income.......................... (30) (54) (84) Other (Income) Expense, net.............. 13 (111) (98) -------- -------- -------- Income from Continuing Operations Before Income Taxes............................. 700 844 1,544 Income Tax Expense......................... 243 255 498 -------- -------- -------- Income from Continuing Operations.......... $ 457 $ 589 $ 1,046 ======== ======== ======== Earnings from continuing operations per common share: Basic.................................... $ 0.72 $ 1.12 $ 0.83 Diluted.................................. $ 0.70 $ 1.09 $ 0.81 Weighted average shares outstanding: Basic.................................... 632.6 517.2 98.3 1,248.1 Diluted.................................. 648.6 534.5 101.6 1,284.7
See accompanying notes to unaudited pro forma condensed combined financial information. PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME (LOSS) YEAR ENDED DECEMBER 31, 1998 (UNAUDITED) (AMOUNTS IN MILLIONS, EXCEPT PER SHARE INFORMATION)
PRO FORMA PRO FORMA HISTORICAL ADJUSTMENTS COMBINED ----------------------- ----------- ----------- PHARMACIA MONSANTO & UPJOHN ----------- ---------- Net Sales.................................. $ 7,237 $ 6,758 $13,995 Costs, Expenses and Other: Cost of Goods Sold....................... 2,912 2,031 4,943 Selling, General and Administrative Expenses................................. 2,129 2,552 4,681 Research and Development................. 1,308 1,234 2,542 Acquired In-Process Research and Development.............................. 402 0 402 Amortization and Adjustment of Intangible Assets................................... 286 98 384 Restructuring, Merger and Special Charges.................................. 153 92 245 Interest Expense......................... 210 26 236 Interest Income.......................... (47) (92) (139) Other Income, net........................ (31) (160) (191) -------- -------- -------- Income (Loss) from Continuing Operations Before Income Taxes...................... (85) 977 892 Income Tax Expense......................... 46 346 392 -------- -------- -------- Income (Loss) from Continuing Operations... $ (131) $ 631 $ 500 ======== ======== ======== Earnings (loss) from continuing operations per common share: Basic.................................... $ (0.22) $ 1.20 $ 0.40 Diluted.................................. $ (0.22) $ 1.17 $ 0.39 Weighted average shares outstanding: Basic.................................... 603.5 517.5 98.4 1,219.4 Diluted.................................. 603.5 534.0 129.6 1,267.1
See accompanying notes to unaudited pro forma condensed combined financial information. PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME YEAR ENDED DECEMBER 31, 1997 (UNAUDITED) (AMOUNTS IN MILLIONS, EXCEPT PER SHARE INFORMATION)
PRO FORMA PRO FORMA HISTORICAL ADJUSTMENTS COMBINED ----------------------- ----------- ----------- PHARMACIA MONSANTO & UPJOHN ----------- ---------- Net Sales.................................. $ 6,058 $ 6,586 $12,644 Costs, Expenses and Other: Cost of Goods Sold....................... 2,382 2,047 4,429 Selling, General and Administrative Expenses................................. 1,745 2,642 4,387 Research and Development................. 1,049 1,246 2,295 Acquired In-Process Research and Development.............................. 633 0 633 Amortization of Intangible Assets........ 121 107 228 Restructuring, Merger and Special Charges.................................. 0 316 316 Interest Expense......................... 135 33 168 Interest Income.......................... (45) (113) (158) Other Income, net........................ (89) (127) (216) -------- -------- -------- Income from Continuing Operations Before Income Taxes............................. 127 435 562 Income Tax Expense (Benefit)............... (22) 177 155 -------- -------- -------- Income from Continuing Operations.......... $ 149 $ 258 $ 407 ======== ======== ======== Earnings from continuing operations per common share: Basic.................................... $ 0.26 $ 0.48 $ 0.33 Diluted.................................. $ 0.24 $ 0.48 $ 0.32 Weighted average shares outstanding: Basic.................................... 590.2 516.0 98.0 1,204.2 Diluted.................................. 610.5 529.9 105.1 1,245.5
See accompanying notes to unaudited pro forma condensed combined financial information. PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME YEAR ENDED DECEMBER 31, 1996 (UNAUDITED) (AMOUNTS IN MILLIONS, EXCEPT PER SHARE INFORMATION)
PRO FORMA PRO FORMA HISTORICAL ADJUSTMENTS COMBINED ----------------------- ----------- ----------- PHARMACIA MONSANTO & UPJOHN ----------- ---------- Net Sales.................................. $ 4,862 $ 7,176 $12,038 Costs, Expenses and Other: Cost of Goods Sold....................... 1,953 2,116 4,069 Selling, General and Administrative Expenses................................. 1,540 2,453 3,993 Research and Development............... 657 1,283 1,940 Amortization and Adjustment of Intangible Assets................................... 98 119 217 Restructuring, Merger and Special Charges.................................. 312 585 897 Interest Expense......................... 83 56 139 Interest Income.......................... (51) (161) (212) Other Income, net........................ (86) (93) $ 8(g)(2) (171) -------- -------- -------- -------- Income from Continuing Operations Before Income Taxes............................. 356 818 (8) 1,166 Income Tax Expense......................... 77 268 345 -------- -------- -------- -------- Income from Continuing Operations.......... $ 279 $ 550 $ (8) $ 821 ======== ======== ======== ======== Earnings from continuing operations per common share: Basic.................................... $ 0.48 $ 1.04 $ 0.68 Diluted.................................. $ 0.47 $ 1.03 $ 0.67 Weighted average shares outstanding: Basic.................................... 581.2 515.1 97.9 1,194.2 Diluted.................................. 598.9 530.5 100.2 1,229.6
See accompanying notes to unaudited pro forma condensed combined financial information. PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL POSITION SEPTEMBER 30, 1999 (UNAUDITED) (AMOUNTS IN MILLIONS)
PRO FORMA PRO FORMA HISTORICAL ADJUSTMENTS COMBINED ----------------------- ----------- ----------- PHARMACIA MONSANTO & UPJOHN ----------- ---------- ASSETS Current assets: Cash and cash equivalents................... $ 84 $ 1,245 $ 1,329 Short term investments...................... - 137 137 Receivables................................. 2,791 1,420 4,211 Inventories................................. 1,598 1,118 2,716 Other current assets........................ 1,174 776 1,950 -------- -------- -------- Total current assets........................ 5,647 4,696 10,343 Net property, plant and equipment........... 3,050 3,278 6,328 Intangible assets, net of accumulated amortization................................ 4,645 1,176 5,821 Other assets................................ 1,055 1,308 $ 26(d) 2,389 Net assets of discontinued operations....... 1,586 0 1,586 -------- -------- -------- -------- Total assets................................ $15,983 $10,458 $ 26 $26,467 ======== ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term debt............................. $ 915 $ 1,056 $ 1,971 Accounts payable............................ 472 333 805 Accrued liabilities......................... 2,168 1,857 $ 110(d) 4,135 -------- -------- -------- -------- Total current liabilities................... 3,555 3,246 110 6,911 Long-term debt.............................. 5,961 339 6,300 Other liabilities........................... 1,224 1,325 2,549 -------- -------- -------- -------- Total liabilities........................... 10,740 4,910 110 15,760 -------- -------- -------- -------- Shareholders' equity: Preferred stock (Monsanto).................. 0 0 273(g)(3) 273 Preferred stock (Pharmacia & Upjohn)........ 0 273 (273)(g)(3) 0 Common stock issued......................... 1,694 5 1,231(g)(l) 2,930 Additional contributed capital.............. 1,467 1,492 (1,170)(g)(l) 1,789 Treasury stock.............................. (2,449) (9) 9(g)(l) (2,449) Retained earnings........................... 5,101 5,501 (154)(d) 10,448 Reserve for ESOP debt retirement............ (91) (247) (338) Accumulated other comprehensive loss........ (479) (1,467) (1,946) -------- -------- -------- -------- Total shareholders' equity.................. 5,243 5,548 (84) 10,707 -------- -------- -------- -------- Total liabilities, and shareholders' equity. $15,983 $10,458 $ 26 $26,467 ======== ======== ======== ========
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION (a) BASIS OF PRESENTATION The unaudited pro forma condensed combined statements of income (loss) are based on the unaudited consolidated condensed financial statements of each of Monsanto and Pharmacia & Upjohn for the nine months ended September 30, 1999, and the audited consolidated financial statements of each of Monsanto and Pharmacia & Upjohn for the years ended December 31, 1998, 1997 and 1996. The unaudited pro forma condensed combined statement of financial position is based on the unaudited consolidated condensed financial statements of each of Monsanto and Pharmacia & Upjohn at September 30, 1999. In the opinion of Monsanto and Pharmacia & Upjohn management, all adjustments and/or disclosures necessary for a fair presentation of the pro forma data have been made. These unaudited pro forma combined condensed financial statements are presented for illustrative purposes only and are not necessarily indicative of the operating results or the financial position that would have been achieved had the merger been consummated as of the dates indicated or of the results that may be obtained in the future. (b) ACCOUNTING POLICIES AND FINANCIAL STATEMENT CLASSIFICATIONS The accounting policies of Monsanto and Pharmacia & Upjohn are substantially comparable, except for their accounting policies for the sale of stock by a subsidiary as described in "Other Pro Forma Adjustments". Certain revenues, costs and other deductions in the consolidated statements of earnings of Pharmacia & Upjohn have been reclassified to conform to the line item presentation in the pro forma condensed combined statements of income (loss). Certain assets and liabilities in the consolidated statements of financial position of Monsanto and Pharmacia & Upjohn have been reclassified to conform to the line item presentation in the pro forma condensed combined statement of financial position. (c) PRO FORMA EARNINGS PER SHARE The pro forma combined basic earnings per share is based on income from continuing operations less preferred stock dividends ($10 million for the nine months ended September 30, 1999, and $13 million for each of the years ended December 31, 1998, 1997 and 1996, respectively) and the weighted average number of outstanding common shares. Diluted income per share includes the dilutive effect of incentive stock options, convertible preferred stock and certain convertible debt securities. The weighted average number of outstanding common shares has been adjusted to reflect the exchange ratio of 1.19 shares of Monsanto common stock for each share of Pharmacia & Upjohn common stock. (d) MERGER-RELATED EXPENSES A one-time charge for direct incremental Merger-related transaction costs will be recorded in the quarter in which the Merger is consummated. The direct incremental Merger-related transaction costs consist principally of charges related to investment banking fees, professional services, registration and other regulatory costs (approximately $110 million) and stock compensation arrangements (approximately $70 million before tax). The charges for stock compensation arrangements consist of accounting charges related to certain Monsanto stock options which were granted with exercise prices above the fair market value of Monsanto Common Stock on the date such options were granted (the "Premium Options"). Pursuant to the terms of the Premium Options, at consummation of the Merger, the exercise price of such Premium Option will be reduced to equal the fair market value on the date of grant. (e) INTEGRATION-RELATED EXPENSES Monsanto and Pharmacia & Upjohn expect to incur pre-tax charges to operations, currently estimated to be between $500 and $800 million, to reflect costs associated with combining the operations of the two companies. These costs will be recorded subsequent to consummation of the merger. These amounts are preliminary estimates and are therefore subject to change. Additional unanticipated expenses may be incurred in the integration of the businesses of Monsanto and Pharmacia & Upjohn. Although Monsanto and Pharmacia & Upjohn expect that the elimination of duplicative expenses as well as the realization of other efficiencies related to the integration of the businesses may result in cost savings, no assurance can be given that these benefits will be achieved in the near term or at all. The unaudited pro forma condensed combined financial statements reflect neither the impact of these charges nor the benefits from the expected synergies. (f) AGRICULTURAL INITIAL PUBLIC OFFERING Monsanto and Pharmacia & Upjohn have announced an intention to reorganize the Monsanto agricultural business, as a subsidiary of the combined company and sell up to 19.9% of this subsidiary by means of an initial public offering. The agricultural business would become a separate legal entity, with a stand-alone board of directors and its own publicly traded stock upon completion of the intended initial public offering. At the time of the initial public offering for a minority interest in the agricultural business, any difference between the fair market value (expressed as the offering price) and the net book value of the minority interest at the time of the offering will be recorded as an adjustment to stockholders' equity. No price for the intended offering has been established. Subsequent to an offering, the combined company would reflect a minority interest in the equity of a consolidated subsidiary on its statement of financial position and a minority interest in the earnings of a consolidated subsidiary on its statement of income. (g) OTHER PRO FORMA ADJUSTMENTS (1) A pro forma adjustment has been made to reflect the assumed issuance of approximately 618 million shares of Monsanto common stock in exchange for all of the outstanding Pharmacia & Upjohn common stock (based on the exchange ratio of 1.19). The actual number of shares of Monsanto common stock to be issued in connection with the merger will be based on the number of shares of Pharmacia & Upjohn common stock issued and outstanding at the effective time. (2) In 1996, Pharmacia & Upjohn recorded a gain of $8 million on the issuance of new shares by one of its subsidiaries in an initial public offering. The accounting policy of Monsanto for this type of transaction requires that the resulting gain be recorded as a credit to shareowners' equity rather than as income. Therefore, the pro forma condensed combined statement of income for the year ended December 31, 1996, has been adjusted to conform accounting policies and eliminate the gain that was recorded by Pharmacia & Upjohn. (3) Under the merger agreement, each outstanding share of Pharmacia & Upjohn convertible perpetual preferred stock will be converted into the right to receive one share of Monsanto convertible perpetual preferred stock. The terms of the Monsanto convertible perpetual preferred stock are substantially identical to the terms of the Pharmacia & Upjohn convertible perpetual preferred stock. EX-99 3 EXHIBIT 99.2 Exhibit 99.2 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 2 TO 25) 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. 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. /s/ PricewaterhouseCoopers LLP Chicago, Illinois February 10, 1999, except as to Note 1 relating to the pooling of interests with SUGEN, Inc. which is as of August 31, 1999 1 Consolidated Statements of Earnings ----------------------------------------- Pharmacia & Upjohn, Inc. and subsidiaries
====================================================================================================================== FOR THE YEARS ENDED DECEMBER 31 1998 1997 1996 - - ---------------------------------------------------------------------------------------------------------------------- Dollar amounts in millions, except per-share data Net sales $6,758 $6,586 $7,176 Cost of products sold 2,031 2,047 2,116 Research and development 1,234 1,246 1,283 Selling, general and administrative 2,552 2,642 2,453 Merger and Restructuring 92 316 585 Interest Income (92) (113) (161) Interest Expense 26 33 56 All other, net (62) (20) 26 - - ---------------------------------------------------------------------------------------------------------------------- EARNINGS BEFORE INCOME TAXES 977 435 818 Provision for income taxes 346 177 268 - - ---------------------------------------------------------------------------------------------------------------------- NET EARNINGS $ 631 $ 258 $ 550 - - ---------------------------------------------------------------------------------------------------------------------- Earnings per common share: Basic $1.20 $ .48 $1.04 Diluted $1.17 $ .48 $1.03 ======================================================================================================================
Consolidated results for all periods presented have been restated retroactively for the effects of the August 1999 merger with SUGEN accounted for as a pooling of interests. See Note 1. The accompanying notes are an integral part of the consolidated financial statements. 2 Consolidated Balance Sheets ----------------------------------------- Pharmacia & Upjohn, Inc. and subsidiaries
====================================================================================================================== DECEMBER 31 1998 1997 - - ---------------------------------------------------------------------------------------------------------------------- Dollar amounts in millions CURRENT ASSETS: Cash and cash equivalents $ 881 $ 799 Short-term investments 375 591 Trade accounts receivable, less allowance of $103 (1997: $89) 1,417 1,303 Inventories 1,032 958 Deferred income taxes 378 327 Other 469 418 - - ---------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 4,552 4,396 Long-term investments 454 534 Properties, net 3,234 3,310 Goodwill and other intangible assets, net 1,238 1,287 Other noncurrent assets 865 930 - - ---------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $10,343 $10,457 ====================================================================================================================== CURRENT LIABILITIES: Short-term debt $ 332 $ 401 Accounts payable 511 427 Compensation and compensated absences 268 188 Dividends payable 141 141 Income taxes payable 389 404 Other 1,234 1,142 - - ---------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 2,875 2,703 Long-term debt 295 411 Guarantee of ESOP debt 218 240 Postretirement benefit cost 344 337 Deferred income taxes 238 362 Other noncurrent liabilities 777 826 - - ---------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 4,747 4,879 ====================================================================================================================== 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 518,797,031 shares (1997: 517,971,090 shares) 5 5 Capital in excess of par value 1,531 1,579 Retained earnings 5,334 5,265 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 5,596 5,578 - - ---------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $10,343 $10,457 ======================================================================================================================
Consolidated financial position for all periods presented has been restated retroactively for the effects of the August 1999 merger with SUGEN accounted for as a pooling of interests. See Note 1. The accompanying notes are an integral part of the consolidated financial statements. 3 Consolidated Statements of Shareholders' Equity ----------------------------------------- Pharmacia & Upjohn, Inc. and subsidiaries
====================================================================================================================== FOR THE YEARS ENDED DECEMBER 31 1998 1997 1996 - - ---------------------------------------------------------------------------------------------------------------------- Dollar amounts in millions 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 1,579 1,563 1,539 Stock option, incentive and dividend reinvestment plans (56) (20) 12 Offering to the public, net of issuance costs of $2 and $2, respectively -- 30 23 Debt converted to equity with conversions of senior custom convertible notes 10 -- -- Retirements, conversions and other (2) 6 (11) - - ---------------------------------------------------------------------------------------------------------------------- Balance at end of year 1,531 1,579 1,563 - - ---------------------------------------------------------------------------------------------------------------------- RETAINED EARNINGS: Balance at beginning of year 5,265 5,569 5,581 Net earnings 631 258 550 Dividends declared (549) (549) (549) Dividends on preferred stock (net of tax) (13) (13) (13) - - ---------------------------------------------------------------------------------------------------------------------- Balance at end of year 5,334 5,265 5,569 - - ---------------------------------------------------------------------------------------------------------------------- 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 $ 5,596 $ 5,578 $6,313 ====================================================================================================================== 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 631 258 550 - - ---------------------------------------------------------------------------------------------------------------------- TOTAL COMPREHENSIVE INCOME (LOSS) $ 614 $ (150) $ 410 ======================================================================================================================
Consolidated results for all periods presented have been restated retroactively for the effects of the August 1999 merger with SUGEN accounted for as a pooling of interests. See Note 1. The accompanying notes are an integral part of the consolidated financial statements. 4 Consolidated Statements of Cash Flows ----------------------------------------- Pharmacia & Upjohn, Inc. and subsidiaries
====================================================================================================================== FOR THE YEARS ENDED DECEMBER 31 1998 1997 1996 - - ---------------------------------------------------------------------------------------------------------------------- Dollar amounts in millions CASH FLOWS FROM OPERATIONS: Net earnings $ 631 $ 258 $ 550 Adjustments to net earnings: Depreciation 321 327 345 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 (153) (254) (102) Net (earnings) loss from equity investments (57) 68 (5) Other 11 17 (4) Changes in: Accounts receivable (net) (65) 196 (218) Inventories (91) (127) (69) Accounts payable 69 33 (25) Income taxes payable (16) 107 52 Other current and noncurrent assets and liabilities 108 262 (70) - - ---------------------------------------------------------------------------------------------------------------------- Net cash provided by operations 903 1,195 785 - - ---------------------------------------------------------------------------------------------------------------------- CASH FLOWS (REQUIRED) PROVIDED BY INVESTMENT ACTIVITIES: Additions of properties (650) (580) (658) Proceeds from sales of properties 37 70 50 Proceeds from sale of nutrition 332 -- -- Purchases of investments (691) (1,034) (1,578) Proceeds from sales of investments 983 1,155 2,146 Other (3) (48) (6) - - ---------------------------------------------------------------------------------------------------------------------- Net cash required by investment activities 8 (437) (46) - - ---------------------------------------------------------------------------------------------------------------------- CASH FLOWS (REQUIRED) PROVIDED BY FINANCING ACTIVITIES: Proceeds from issuance of debt 60 58 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) (95) (95) Proceeds from stock options exercises 80 18 83 Proceeds from issuance of common stock, net 4 31 27 Other 3 2 (4) - - ---------------------------------------------------------------------------------------------------------------------- Net cash required by financing activities (782) (599) (895) - - ---------------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash (47) (26) (27) - - ---------------------------------------------------------------------------------------------------------------------- Net change in cash and cash equivalents 82 133 (183) Cash and cash equivalents, beginning of year 799 666 849 - - ---------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of year $ 881 $ 799 $ 666 ====================================================================================================================== Cash paid during the year for: Interest (net of amounts capitalized) $ 22 $ 30 $ 61 Income taxes $ 398 $ 281 $ 287 Noncash investing activity: Assets disposed of in exchange for equity securities $ 54 $ -- $ -- ======================================================================================================================
Consolidated results for all periods presented have been restated retroactively for the effects of the August 1999 merger with SUGEN accounted for as a pooling of interests. See Note 1. The accompanying notes are an integral part of the consolidated financial statements. 5 Notes to Consolidated Financial Statements Dollar amounts in millions, except per-share data 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 United States. 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. On August 31, 1999, the company completed its merger with SUGEN, Inc. (Sugen) by exchanging approximately 10 million shares of its common stock for all of the common stock of Sugen. Each share of Sugen common stock was exchanged for .6091 of one share of Pharmacia & Upjohn (P&U) common stock. In addition, terms on outstanding Sugen stock options, stock warrants, convertible debt, and warrants on convertible debt were changed to convert Sugen shares to P&U shares using the same exchange ratio. The merger, a tax-free reorganization, was accounted for as a pooling of interests under APB Opinion No. 16. As a result, all prior period consolidated financial statements presented have been restated to include the combined results of operations, financial position, and cash flows of both companies as if Sugen had always been a part of P&U. There were no transactions between P&U and Sugen prior to the combination. Immaterial reclassifications were recorded to conform Sugen's financial statements to P&U's presentation. The combined net sales of the company for the years ended 1998, 1997 and 1996 totaled $6,758, $6,586 and $7,176, respectively. These amounts represent P&U's sales for the respective periods as Sugen did not have any sales for these periods. The combined net income for the same periods equaled $631, $258 and $550, respectively. These amounts represent P&U's net income of $691, $323 and $562 for the respective periods combined with Sugen's net losses of $40, $33 and $20. An adjustment was made in each year to reflect the tax benefit of Sugen's net operating loss as if the companies had been combined for all periods presented. 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 6 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. 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. The company assesses the recoverability of goodwill when events or changes in circumstances indicate that the carrying amount may be impaired. If an impairment indicator exists, an estimate of future cash flows is developed and compared to the carrying amount of the goodwill. If the expected undiscounted cash flows are less than the carrying amount of the goodwill, an impairment loss is recognized for the difference between the carrying amount of the goodwill and discounted cash flows. Rights acquired under patent are reported at acquisition cost. Amortization is calculated on a straight-line basis over the remaining legal lives of the patents. Other intangible assets are amortized over the useful lives of those assets. Product Liability The company is self-insured for product liability exposures up to reasonable risk retention levels where excess coverages have been obtained. Liability calculations take into account such factors as specific claim amounts, past experience with such claims, number of claims reported and estimates of claims incurred but not yet reported. In addition to this base level of reserves, individually significant contingent losses are accrued for in compliance with applicable guidance. Product liability accruals are not reduced for expected insurance recoveries. Income Taxes The company applies an asset and liability approach to accounting for income taxes. Deferred tax liabilities and assets are recognized for the expected future tax consequences of temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the years in which the differences are expected to reverse. The company records deferred income taxes on subsidiaries' earnings that are not considered to be permanently invested in those subsidiaries. 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 7 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. Stock Based Compensation 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 periods' 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 in comprehensive income, gains are subtracted from OCI, while losses are added.
=================================================================== TAX FOR THE YEAR ENDED BEFORE EXPENSE NET OF DECEMBER 31, 1998 TAX OR (BENEFIT) TAX - - ------------------------------------------------------------------- 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) ===================================================================
8
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) ===================================================================
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 segments and corporate administration groups, with minor restructuring of businesses included in the all other grouping (see Note 21). 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 9 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. 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:
============================================================== EMPLOYEE SEPARATION COSTS OTHER TOTAL - - -------------------------------------------------------------- Balance December 31, 1996 $ 201 $ 25 $ 226 Additions 134 20 154 Deductions (182) (25) (207) - - -------------------------------------------------------------- Balance December 31, 1997 153 20 $ 173 Additions 68 16 84 Deductions (113) (12) (125) - - -------------------------------------------------------------- Balance December 31, 1998 $ 108 $ 24 $ 132 - - --------------------------------------------------------------
4 INCOME TAXES The provision for income taxes included in the consolidated statements of earnings consisted of:
========================================================= YEARS ENDED DECEMBER 31 1998 1997 1996 - - --------------------------------------------------------- CURRENTLY PAYABLE: U.S. $ 68 $ 34 $ 171 Non-U.S. 432 429 214 - - --------------------------------------------------------- Total currently payable 500 463 385 - - --------------------------------------------------------- DEFERRED: U.S. (46) (14) (108) Non-U.S. (108) (272) (9) - - --------------------------------------------------------- Total deferred (154) (286) (117) - - --------------------------------------------------------- Provision for income taxes $ 346 $ 177 $ 268 =========================================================
10 Differences between the company's effective tax rate and the U.S. statutory tax rate were as follows:
================================================================ PERCENT OF PRETAX INCOME 1998 1997 1996 - - ---------------------------------------------------------------- Statutory tax rate 35.0% 35.0% 35.0% Lower rates in other jurisdictions, net (4.6) (11.7) (4.0) Goodwill amortization and other non-deductible expenses 3.1 7.2 4.3 Valuation allowances associated with Sugen merger 3.1 10.6 0 All other, net (1.2) (0.4) (2.5) - - ---------------------------------------------------------------- Effective tax rate 35.4 40.7 32.8 ================================================================
The lower rates in other jurisdictions are principally attributable to manufacturing operations in jurisdictions subject to more favorable tax rates. Excluding restructuring and other specifically discussed items (litigation, reacquisition of marketing rights and Biotech divestment), the annual effective tax rate was 35 percent, 38 percent and 35 percent for 1998, 1997 and 1996, respectively. Deferred income taxes are in the consolidated balance sheets as follows:
================================================================================ 1998 1998 1997 1997 DECEMBER 31 ASSETS LIABILITIES ASSETS LIABILITIES - - -------------------------------------------------------------------------------- Current $ 378 $ 49 $ 327 $ 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 307 -- 201 -- Environmental and product liabilities 59 -- 107 -- Restructuring and discontinued operations 111 -- 107 -- Tax on unremitted earnings -- 108 -- 121 All other 277 95 297 124 - - -------------------------------------------------------------------------------- Subtotal 1,120 504 1,071 644 Valuation allowances (117) -- (83) -- - - -------------------------------------------------------------------------------- Total deferred taxes $ 1,003 $504 $ 988 $644 - - -------------------------------------------------------------------------------- Net deferred tax assets $ 499 $ 344 ================================================================================
Valuation allowances have been provided for certain deferred tax assets that are not likely to be realized. The changes in the valuation allowance were increases of $34 and $13 for the years ended December 31, 1998 and 1997, respectively, and a decrease of $84 for the year ended December 31, 1996. The increases in the allowance during 1997 and 1998 were primarily due to certain tax credit carryforwards which were not likely to be realized as a result of the Sugen merger. During 1996, the valuation allowances decreased due to merger activities in various countries which improved the likelihood of realizing the benefit of the deferred tax assets. Tax loss carryforwards of $220 have various expiration dates through 2018. At December 31, 1998, undistributed earnings of subsidiaries considered permanently invested, for which deferred income taxes have not been provided, were approximately $3,000. 11 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. 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 could not be sold. As of December 31, 1998, the sale of the operations in China was still pending regulatory approval. 7 EARNINGS PER COMMON SHARE Basic earnings per share is computed by dividing net earnings available to holders of common stock by the weighted average number of shares of common stock outstanding. Diluted earnings per share is computed assuming the exercise of stock options and warrants, conversion of preferred stock and debt, and the issuance of stock as incentive compensation to certain employees. Under these assumptions, the weighted-average number of common shares outstanding is increased accordingly, and net earnings is adjusted by the after-tax interest effects of convertible debt and reduced by an incremental contribution to the Employee Stock Ownership Plan (ESOP). This contribution is the after-tax difference between (1) the income the ESOP would have received in preferred stock dividends and (2) the dividend on the common shares assumed to have been outstanding. The following table reconciles the numerators and denominators of the basic and diluted earnings per share computations:
======================================================================================================================== 1998 1998 1997 1997 1996 1996 YEARS ENDED DECEMBER 31 BASIC DILUTED BASIC DILUTED BASIC DILUTED - - ------------------------------------------------------------------------------------------------------------------------ EPS numerator: Net earnings $ 631 $ 631 $ 258 $258 $550 $ 550 Less: Preferred stock dividends, net of tax (13) -- (13) -- (13) -- Less: Interest effects on convertible instruments, -- 1 -- -- -- -- net of tax Less: ESOP contribution, net of tax -- (5) -- (5) -- (5) - - ------------------------------------------------------------------------------------------------------------------------ Income available to common shareholders $ 618 $ 627 $245 $253 $537 $ 545 - - ------------------------------------------------------------------------------------------------------------------------ EPS denominator: Average common shares outstanding 518 518 516 516 515 515 Effect of dilutive securities: Stock options and stock warrants -- 5 -- 3 -- 4 Convertible instruments and incentive compensation -- 11 -- 11 -- 11 - - ------------------------------------------------------------------------------------------------------------------------ Total shares 518 534 516 530 515 530 - - ------------------------------------------------------------------------------------------------------------------------ Earnings per share $1.20 $1.17 $ .48 $.48 $1.04 $1.03 ========================================================================================================================
12 8 ACCOUNTS RECEIVABLE AND INVENTORIES The following table displays a roll-forward of allowances for doubtful trade accounts receivable from December 31, 1995 to December 31, 1998: Balance December 31, 1995 $ 93 Additions - charged to expense 17 Deductions (15) ---- Balance December 31, 1996 95 Additions - charged to expense 11 Deductions (17) ---- Balance December 31, 1997 89 Additions - charged to expense 43 Deductions (29) ---- Balance December 31, 1998 $103 ====
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.
=================================================================== DECEMBER 31 1998 1997 - - ------------------------------------------------------------------- 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 ===================================================================
9 INVESTMENTS
=================================================================== DECEMBER 31 1998 1997 - - ------------------------------------------------------------------- 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 U.S. Treasury securities and other U.S. Government obligations 6 12 Certificates of deposit 5 65 Corporate notes 15 36 Corporate commercial paper 17 31 Other 9 81 - - ------------------------------------------------------------------- Total available-for-sale 294 580 Held-to-maturity 81 11 - - ------------------------------------------------------------------- Total short-term investments $375 $591 ===================================================================
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. 13
====================================================================== UNREALIZED --------------- CARRYING LONG-TERM INVESTMENTS COST GAINS (LOSSES) VALUE - - ---------------------------------------------------------------------- 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 ======================================================================
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 $254, $942 and $1,132 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:
============================================================= 1998 1998 1997 1997 FAIR AMORTIZED FAIR AMORTIZED DECEMBER 31 VALUE COST VALUE COST - - ------------------------------------------------------------- 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 =============================================================
14 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
========================================================= DECEMBER 31 1998 1997 - - --------------------------------------------------------- Land $ 100 $ 92 Buildings and improvements 1,872 1,901 Equipment 3,078 3,044 Construction in process 730 794 Less allowance for depreciation (2,546) (2,521) - - --------------------------------------------------------- Properties, net $ 3,234 $ 3,310 =========================================================
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. Long-term debt consisted of the following:
========================================================= DECEMBER 31 1998 1997 - - --------------------------------------------------------- 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 5.0% Senior Custom Convertible Notes due 2000 5 18 Other 23 28 Current maturities (99) (173) - - --------------------------------------------------------- Total long-term debt $295 $411 =========================================================
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--$221; 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. In September 1997, Sugen completed the sale of $18 principal amount of 5% Senior Custom Convertible Notes due 2000 (the "1997 Notes"). The 1997 Notes are convertible into shares of common stock. In connection with the issuance of the 1997 Notes, Sugen issued warrants to purchase up to 202,525 equivalent shares of common stock at an exercise price of $27.48 per equivalent share. Upon the occurrence of certain events, at the election of the holders of the 1997 Notes, the company may be required to redeem in cash all or a portion of the 1997 Notes at redemption prices, which are at a premium to the face value of the 1997 Notes. 15 Information regarding interest expense and weighted average interest rates follows:
===================================================================== YEARS ENDED DECEMBER 31 1998 1997 1996 - - --------------------------------------------------------------------- Interest cost incurred $ 62 $ 64 $ 89 Less: Capitalized on construction (36) (31) (33) - - --------------------------------------------------------------------- Interest expense $ 26 $ 33 $ 56 - - --------------------------------------------------------------------- Weighted average interest rate on short-term borrowings at end of period 6.36% 7.27% 5.99% - - ---------------------------------------------------------------------
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--$82; 2000--$62; 2001--$42; 2002--$33; 2003--$33 and later years--$103. 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. It is not possible, however, to estimate a range of potential losses. Accordingly, it is not possible to determine what, if any, exposure exists at this time. 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 16 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 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. The aggregate net transaction gain /(loss) included in net income for the years ended December 31, 1998, 1997 and 1996 related to foreign currency transaction hedges was $15, $18, and $43, respectively. 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. 17 15 FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts and estimated fair values of the company's financial instruments were as follows:
================================================================== 1998 1998 1997 1997 CARRYING FAIR CARRYING FAIR DECEMBER 31 AMOUNT VALUE AMOUNT VALUE - - ------------------------------------------------------------------ FINANCIAL ASSETS: Short-term investments $375 $375 $591 $591 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 295 305 411 409 Guaranteed ESOP debt 218 241 240 280 ==================================================================
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. 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 518,119,813; 516,558,279; and 516,197,570, respectively. On a per-share basis, dividends were declared on common stock at a rate of $1.08 in 1998 and 1997. In November 1997, Sugen completed a follow-on public offering of 1,218,200 shares of common stock at a price of $26.27 per share. The net proceeds to the company were approximately $30. Common stock dividends payable were $137 at December 31, 1998 and 1997. 18 Capital in Excess of Par Value Amounts of paid-in capital that exceed the par value ($.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 and the August 1999 merger between Pharmacia & Upjohn, Inc. and Sugen, Inc., 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). Warrants Certain warrants to purchase shares of common stock were issued by Sugen in connection with the Senior Custom Convertible Notes, certain collaboration agreements, and various license, facility and equipment lease financing arrangements. Warrants to purchase 432,549 shares were outstanding at December 31, 1998 with exercise prices and expirations ranging between $6.16 and $27.48 and October 1999 and March 2003, respectively. 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, created in 1989, is a funding vehicle for the Employee Savings Plan covering essentially all active 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. Shares released during 1998, 1997 and 1996 were 391, 346 and 390, respectively. 19 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. ESOP expense represents a fringe benefit and, as such, it attaches to payroll costs that comprise a portion of all functional expense captions in the earnings statement. Key measures of the ESOP are presented in the table that follows.
=============================================================== YEARS ENDED DECEMBER 31 DOLLARS IN MILLIONS 1998 1997 1996 - - --------------------------------------------------------------- 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 ===============================================================
19 STOCK COMPENSATION Under the Pharmacia & Upjohn plans 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. Sugen's plans include incentive and nonqualified stock options, which are granted to certain employees, directors, and consultants. Vesting is graded and based on plan provisions and has expiration periods of not more than ten years. Exercise prices are specified according to the plans and may be equal to or less than the market value at the date of grant. Compensation expense is measured under the provisions of APB No. 25, where applicable. At the consummation of the merger, Sugen's plans are merged into Pharmacia & Upjohn's. 20 The number of shares authorized for grants each year is governed by the related plan documents. Information concerning option activity and balances follows:
==================================================================== WEIGHTED AVERAGE NUMBER EXERCISE PRICE OF SHARES PER SHARE (000) - - -------------------------------------------------------------------- Balance outstanding, January 1, 1996 $23.23 13,659 Granted 36.42 3,982 Exercised 23.76 (4,332) Canceled 20.67 (220) - - -------------------------------------------------------------------- Balance outstanding, December 31, 1996 27.22 13,089 Granted 35.66 4,879 Exercised 22.63 (1,681) Canceled 33.45 (236) - - -------------------------------------------------------------------- Balance outstanding, December 31, 1997 30.18 16,051 Granted 39.51 10,285 Exercised 28.44 (4,313) Canceled 38.02 (683) - - -------------------------------------------------------------------- Balance outstanding, December 31, 1998 $34.78 21,340 ====================================================================
=========================================================================== 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) - - --------------------------------------------------------------------------- $ .62--19.49 5.80 years $15.15 1,008 $19.50--29.99 5.04 years 23.90 4,545 $30.00--39.99 7.82 years 37.22 7,947 $40.00--49.99 8.67 years 40.71 7,580 $50.00--56.34 7.77 years 53.30 260 - - ---------------------------------------------------------------------------
As of December 31, 1998, 1997, and 1996, the company had exercisable options of 11,813,000, 11,392,000, and 9,232,000, respectively with weighted average exercise prices of $36.65, $28.39, and $24.08, respectively. 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 $47 or $.10 per share for 1998, $42 or $.08 per share for 1997, and $40 or $.07 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. 21 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.
==================================================================== OTHER RETIREMENT PENSION BENEFITS BENEFITS CHANGE IN BENEFIT OBLIGATION: 1998 1997 1998 1997 - - -------------------------------------------------------------------- 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 ====================================================================
==================================================================== CHANGE IN PLAN ASSETS: 1998 1997 1998 1997 - - -------------------------------------------------------------------- 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 ====================================================================
==================================================================== AT DECEMBER 31, 1998 1997 1998 1997 - - -------------------------------------------------------------------- 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) ====================================================================
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. 22
==================================================================== AT DECEMBER 31, 1998 1997 1998 1997 - - -------------------------------------------------------------------- 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) ====================================================================
==================================================================== WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31, 1998 1997 - - -------------------------------------------------------------------- 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 ====================================================================
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.
============================================================================================================= PENSION BENEFITS OTHER RETIREMENT BENEFITS COMPONENTS OF NET PERIODIC BENEFIT COST: 1998 1997 1996 1998 1997 1996 - - ------------------------------------------------------------------------------------------------------------- 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) =============================================================================================================
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. 23 21 SEGMENT INFORMATION Effective January 1, 1998, the company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which requires reporting certain financial information according to the "management approach." This approach is based on how management organizes the segments for operating decisions. The 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. This business is organized in two segments, prescription pharmaceutical and consumer health care. The prescription pharmaceutical segment includes general therapeutics, ophthalmology and hospital products including oncology, and diversified therapeutics. The consumer health care segment consists of self-medication products that are available to consumers over the counter without a prescription. This segment includes product line extensions of key prescription drugs, plus products to treat tobacco dependency. The remaining operating units include animal health, diagnostics, nutrition, plasma, pharmaceutical commercial services and biotechnology. Due to the size of these operating segments, they have been included in an "all other" grouping. Animal health produces and markets both pharmaceuticals and feed additives for livestock and pets. 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. Pharmaceutical commercial services develops, manufactures and markets certain bulk pharmaceutical chemicals and selected high-technology and specialty chemicals. 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. Segments for year ended December 31, 1998
================================================================================================================== PRESCRIPTION CONSUMER ALL RECONCILING PHARMACEUTICAL HEALTH CARE OTHER ITEMS TOTAL - - ------------------------------------------------------------------------------------------------------------------ Net sales $ 4,752 $ 683 $ 1,323 $ -- $6,758 - - ------------------------------------------------------------------------------------------------------------------ Earnings from equity affiliates $ 1 $ -- $ 56 $ -- $ 57 - - ------------------------------------------------------------------------------------------------------------------ Amortization expense $ 15 $ 6 $ 11 $ 80 $ 112 - - ------------------------------------------------------------------------------------------------------------------ Operating income (loss) before corporate $ 984 $ 111 $ 324 $ (171) $1,248 Corporate and all other (271) - - ------------------------------------------------------------------------------------------------------------------ Earnings before taxes $ 977 ==================================================================================================================
Segments for year ended December 31, 1997
================================================================================================================== PRESCRIPTION CONSUMER ALL RECONCILING PHARMACEUTICAL HEALTH CARE OTHER ITEMS TOTAL - - ------------------------------------------------------------------------------------------------------------------ Net sales $ 4,370 $ 642 $ 1,574 $ -- $6,586 - - ------------------------------------------------------------------------------------------------------------------ Earnings (loss) from equity investments $ 5 $ -- $ (73) $ -- $ (68) - - ------------------------------------------------------------------------------------------------------------------ Amortization expense $ 13 $ 5 $ 11 $ 87 $ 116 - - ------------------------------------------------------------------------------------------------------------------ Operating income (loss) before corporate $ 765 $ 119 $ 192 $ (125) $ 951 Corporate and all other (516) - - ------------------------------------------------------------------------------------------------------------------ Earnings before taxes $ 435 ==================================================================================================================
24 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 prescription pharmaceutical segment in 1996 totaled $4,586 while consumer health care sales were $710 and "all other" sales totaled $1,880. 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, corporate 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. 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.
==================================================================== GEOGRAPHIC SALES FOR YEARS ENDED DECEMBER 31 1998 1997 - - -------------------------------------------------------------------- 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 ====================================================================
Long-lived assets include property, plant and equipment, goodwill and other intangibles, all net of depreciation or amortization.
==================================================================== Long-lived assets, December 31 1998 1997 - - -------------------------------------------------------------------- United States $1,840 $1,805 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 $4,472 $4,597 ====================================================================
25 EX-99 4 EXHIBIT 99.3 Exhibit 99.3 PHARMACIA & UPJOHN, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS ($s in millions, except per-share data) Unaudited ----------------------------------------------- For Three Months For Nine Months Ended September 30, Ended September 30, ----------------------- ------------------- 1999 1998 1999 1998 ---------- --------- -------- -------- Net sales $ 1,776 $ 1,669 $ 5,310 $ 4,909 Cost of products sold 481 516 1,421 1,495 Research and development 373 279 1,050 869 Selling, general and administrative 667 599 2,019 1,869 Merger and restructuring 32 - 32 - Interest income, net (7) (15) (13) (50) All other, net (37) (22) (43) (59) ---------- --------- -------- -------- Earnings before income taxes 267 312 844 785 Provision for income taxes 82 108 255 276 ---------- --------- -------- -------- Net earnings $ 185 $ 204 $ 589 $ 509 ========== ========= ======== ======== Net earnings per common share: Basic $.35 $.39 $1.12 $.97 ==== ==== ==== ==== Diluted $.34 $.38 $1.09 $.95 ==== ==== ==== ==== See accompanying notes. PHARMACIA & UPJOHN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ($s in millions) For the nine months ended September 30 Unaudited -------------------- 1999 1998 -------- -------- Net cash provided by operations $ 405 $ 617 -------- -------- Cash flows provided (required) by investment activities: Proceeds from sale of subsidiaries 122 - Additions of properties (383) (378) Proceeds from sale of properties 24 20 Purchases of intangibles (123) (7) Proceeds from sales of investments 414 853 Purchases of investments (126) (448) -------- -------- Net cash (required) provided by investment activities (72) 40 -------- -------- Cash flows provided (required) by financing activities: Issuance of debt 63 19 Repayment of debt (83) (153) Payments of ESOP debt (22) (16) Net increase in debt with initial maturity of 90 days or less 579 155 Dividend payments (422) (425) Purchases of treasury stock (170) (57) Proceeds from sale of treasury stock and exercise of stock options 100 58 -------- -------- Net cash provided (required) by financing activities 45 (419) -------- -------- Effect of exchange rate changes on cash (14) (17) -------- -------- Net change in cash and cash equivalents 364 221 Cash and cash equivalents, beginning of year 881 799 -------- -------- Cash and cash equivalents, end of period $ 1,245 $ 1,020 ======== ======== See accompanying notes. PHARMACIA & UPJOHN, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS ($s in millions) Unaudited --------------------------- September 30, December 31, 1999 1998 ASSETS ------------- ----------- Current assets: Cash and cash equivalents $ 1,245 $ 881 Short-term investments 137 375 Trade accounts receivable, less allowance of $101 (1998: $103) 1,420 1,417 Inventories 1,118 1,032 Other current assets 776 847 ----------- ----------- Total current assets 4,696 4,552 Long-term investments 384 454 Properties, net 3,278 3,234 Goodwill and other intangible assets, net 1,176 1,238 Other noncurrent assets 924 865 ----------- ----------- Total assets $ 10,458 $ 10,343 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term debt, including current maturities of long-term debt $ 1,056 $ 332 Other current liabilities 2,190 2,543 ----------- ----------- Total current liabilities 3,246 2,875 Long-term debt and guarantee of ESOP debt 339 513 Other noncurrent liabilities 1,325 1,359 ----------- ----------- Shareholders' equity: Preferred stock, one cent par value; at stated value; authorized 100,000,000 shares; issued 6,758 shares (1998: 6,863 shares) 273 277 Common stock, one cent par value; authorized 1,500,000,000 shares; issued 519,182,527 shares (1998: 518,797,031 shares) 5 5 Capital in excess of par value 1,492 1,531 Retained earnings 5,501 5,334 ESOP-related accounts and other (247) (254) Treasury stock (9) (35) Accumulated other comprehensive income (1,467) (1,262) ----------- ----------- Total shareholders' equity 5,548 5,596 ----------- ----------- Total liabilities and shareholders' equity $ 10,458 $ 10,343 =========== =========== See accompanying notes. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED ($S IN MILLIONS, EXCEPT PER-SHARE DATA) A - INTERIM CONSOLIDATED FINANCIAL STATEMENTS The consolidated financial information presented herein is unaudited. The interim financial statements and notes thereto do not include all disclosures required by generally accepted accounting principles and should be read in conjunction with the financial statements and notes thereto included in the company's latest annual report on Form 10-K. In the opinion of management, all adjustments necessary for a fair presentation are reflected in the interim period financial statements presented. The current period's results of operations are not necessarily indicative of results that ultimately may be achieved for the year. The company is presenting its consolidated statement of earnings in a "single-step" format and, accordingly, reclassifications of prior year amounts have been made to conform to this presentation. 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 expects to adopt SFAS No. 133 no earlier than January 1, 2000, and is currently assessing the impact of adoption on its financial position, results of operations, and liquidity. B - INVENTORIES September 30, December 31, 1999 1998 ------------ ------------ Estimated replacement cost (FIFO basis): Pharmaceutical and other finished products $ 453 $ 558 Raw materials, supplies and work-in-process 811 628 ---------- ---------- 1,264 1,186 Less reduction to LIFO cost (146) (154) ---------- ---------- $ 1,118 $1,032 ========== ========== Inventories valued on the LIFO method had an estimated replacement cost (FIFO basis) of $665 at September 30, 1999, and $521 at December 31, 1998. C - CONTINGENT LIABILITIES 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 referred to below and several sites which, under the Comprehensive Environmental Response, Compensation, and Liability Act, are commonly known as Superfund sites (see Note D). The company's ultimate liability in connection with Superfund sites depends on many factors, including the number of other responsible parties and their financial viability and the remediation methods and technology to be used. Actual costs to be incurred may vary from the estimates given the inherent uncertainties in evaluating environmental exposures. With regard to 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, nor is it possible to estimate the range of potential costs. D - 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 as well as 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 should not have a material adverse effect on the company's consolidated financial position, and unless there is a significant deviation from the historical pattern of resolution of these issues, there should not be a material adverse effect on the company's results of operations or liquidity. The company 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 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 which was paid during the first quarter of 1999. 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. E - COMPREHENSIVE INCOME Total comprehensive income for the three months ended September 30, 1999 and 1998 was $372 and $309, respectively. Total comprehensive income for the nine months ended September 30, 1999 and 1998, was $474 and $412, respectively. F - EARNINGS PER SHARE Basic earnings per share is computed by dividing net earnings available to holders of common stock by the weighted average number of shares of common stock outstanding. Diluted earnings per share is computed assuming the exercise of stock options and warrants, conversion of preferred stock and debt, and the issuance of stock as incentive compensation to certain employees. Under these assumptions, the weighted-average number of common shares outstanding is increased accordingly, and net earnings is adjusted by the after-tax interest effects of convertible debt and reduced by an incremental contribution to the Employee Stock Ownership Plan (ESOP). This contribution is the after-tax difference between (1) the income the ESOP would have received in preferred stock dividends and (2) the dividend on the common shares assumed to have been outstanding. The following table reconciles the numerators and denominators of the basic and diluted earnings per share computations: For the three months ended September 30, 1999 1999 1998 1998 Basic Diluted Basic Diluted ------- ------- ------- ------- EPS numerator: Net earnings $ 185 $ 185 $ 204 $ 204 Less: Preferred stock dividends, net of tax (3) - (3) - Less: ESOP contribution, net of tax - (1) - (1) Less: Interest effects on convertible instruments, net of tax - (1) - - Rounding adjustment (1) - (1) - ------- ------- ------- ------- Income available to common shareholders $ 181 $ 183 $ 200 $ 203 ======= ======= ======= ======= For the three months ended September 30, 1999 1999 1998 1998 Basic Diluted Basic Diluted ------- ------- ------- ------- EPS denominator: Average common shares outstanding 518 518 518 518 Effect of dilutive securities: Stock options and stock warrants - 6 - 6 Convertible instruments and incentive compensation - 10 - 11 ------- ------- ------- ------- Total shares 518 534 518 535 ======= ======= ======= ======= Earnings per share $.35 $.34 $.39 $.38 ======= ======= ======= ======= For the nine months ended September 30, 1999 1999 1998 1998 Basic Diluted Basic Diluted EPS numerator: ------- ------- ------- ------- Net earnings $ 589 $ 589 $ 509 $ 509 Less: Preferred stock dividends, net of tax (10) - (10) - Less: ESOP contribution, net of tax - (4) - (4) Add: Interest effects on convertible instruments, net of tax - - - 1 ------- ------- ------- ------- Income available to common shareholders $ 579 $ 585 $ 499 $ 506 ======= ======= ======= ======= 1999 1999 1998 1998 Basic Diluted Basic Diluted EPS denominator: ------- ------- ------- ------- Average common shares outstanding 517 517 517 517 Effect of dilutive securities: Stock options and stock warrants - 7 - 5 Convertible instruments and incentive compensation - 11 - 11 ------- ------- ------- ------- Total shares 517 535 517 533 ======= ======= ======= ======= Earnings per share $1.12 $1.09 $.97 $.95 ======= ======= ======= ======= G - SEGMENT INFORMATION The company's core business is the development, manufacture and sale of pharmaceutical products. This business is organized into two segments, prescription pharmaceutical and consumer health care. The remaining operating units are included in the "all other" grouping. These operating units include animal health, diagnostics, plasma, pharmaceutical commercial services, nutrition, and biotechnology products. As of the end of 1998, the company had divested substantially all of its biotechnology and nutrition lines. The following table shows revenues and expenses for the company's operating segments and reconciling items necessary to total to amounts in the consolidated financial statements. Information about segment interest income and expense, income taxes, corporate support functions, and depreciation are not available on a segment basis. There are no intersegment revenues. For the three months ended September 30, Sales Profit ------------------- -------------------- 1999 1998 1999 1998 --------- --------- --------- --------- Prescription pharmaceutical $ 1,360 $ 1,193 $ 244 $ 291 Consumer health care 165 158 43 28 All other 251 318 79 73 --------- --------- --------- --------- $ 1,776 $ 1,669 366 392 ========= ========= Unallocated corporate and other (99) (80) --------- --------- Earnings before income taxes $ 267 $ 312 ========= ========= For the nine months ended September 30, Sales Profit ------------------- -------------------- 1999 1998 1999 1998 --------- --------- --------- --------- Prescription pharmaceutical $ 4,010 $ 3,439 $ 790 $ 757 Consumer health care 508 485 97 59 All other 792 985 230 222 --------- --------- --------- --------- $ 5,310 $ 4,909 1,117 1,038 ========= ========= Unallocated corporate and other (273) (253) --------- --------- Earnings before income taxes $ 844 $ 785 ========= ========= H - 1999 MERGER AND RESTRUCTURING On August 31, 1999, the company completed its merger with SUGEN, Inc. (Sugen) by exchanging approximately 10 million shares of its common stock for all of the common stock of Sugen. Each share of Sugen common stock was exchanged for .6091 of one share of Pharmacia & Upjohn (P&U) common stock. In addition, terms on outstanding Sugen stock options, stock warrants, convertible debt, and warrants on convertible debt were changed to convert Sugen shares to P&U shares using the same exchange ratio. The merger, a tax-free reorganization, was accounted for as a pooling of interests under APB Opinion No. 16. As a result, all prior period consolidated financial statements presented have been restated to include the combined results of operations, financial position, and cash flows of both companies as if Sugen had always been a part of P&U. There were no transactions between P&U and Sugen prior to the combination. Immaterial reclassifications were recorded to conform Sugen's financial statements to P&U's presentation. The results of operations for the separate companies and the combined amounts presented in the consolidated financial statements follow. The adjustment represents the tax benefit of Sugen's net operating loss which had been fully reserved for by Sugen. Six months ended June 30, 1999 Net sales: ---------------- Pharmacia & Upjohn $ 3,534 SUGEN - ---------- Combined $ 3,534 ========== Net income: Pharmacia & Upjohn $ 437 SUGEN (47) Adjustment 14 ---------- Combined $ 404 ========== In connection with the merger, the company recorded $32 in merger and restructuring expenses in the third quarter of 1999. The charge consisted of merger transaction costs such as fees for investment bankers, attorneys, accountants, and other costs to effect the merger. The charge also included costs pertaining to reorganizations which will result in the termination of certain R&D projects as well as the elimination of 91 employee positions in R&D and sales. Termination benefits approximate $12. Cash expenditures related to the restructuring costs are expected in the first half of 2000. I - TURNAROUND RESTRUCTURING The company announced a global turnaround program in 1997 to rationalize infrastructure, establish a global headquarters, and eliminate duplicate resources in manufacturing, administration, and research and development. The program was implemented in two phases throughout 1998. At September 30, 1999, the remaining accrual balance was $70 and related principally to the fourth-quarter 1998 phase of the turnaround program. Cash spending caused the decrease in the accrual. EX-99 5 EXHIBIT 99.4 Exhibit 99.4 Monsanto Pre-Announces Fourth Quarter and Full-Year 1999 Earnings Monsanto Company has announced that the company will delay releasing its fourth quarter and full-year earnings until Feb. 10, to coincide with the release of Pharmacia & Upjohn's earnings. The company also announced that earnings for the fourth quarter and full-year were better than most analysts had forecast. Both the agricultural and pharmaceutical businesses had earnings before interest expense and taxes (EBIT) in the fourth quarter well in excess of EBIT for the comparable period last year after adjusting for non-recurring factors. For the full year, after adjusting for non-recurring factors, Monsanto earned approximately $1 per share. Both the pharmaceutical and agricultural businesses performed at or above expectations. Celebrex arthritis treatment ended up with sales of $1.5 billion, even though the product was not launched until late January 1999. Volumes for Roundup herbicide remained strong and reached the product's historical 20 percent growth trend line for the entire year. Monsanto also highlighted the progress it made on its balance sheet in 1999. The company reduced debt as a result of better than expected management of capital expenditures. Also, working capital as a percentage of sales declined in 1999 when compared with working capital as a percentage of sales in 1998. Monsanto Company and Pharmacia & Upjohn announced on December 19, 1999 that they have entered into a definitive agreement to merge the two companies. Monsanto stated that the merger process is proceeding on schedule. EX-23 6 EXHIBIT 23.1 Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in Monsanto Company's Registration Statements on Form S-8 (Nos. 2-36636, 2-76696, 2-90152, 33-13197, 33-21030, 33-39704, 33-39705, 33-39706, 33-39707, 33-49717, 33-53363, 33-53365, 33-53367, 333-02783, 333-02961, 333-02963, 333-33531, 333-38599, 333-45341 and 333-76653) and Registration Statement on Form S-4 (No. 333-66175) of our report dated February 10, 1999, except as to Note 1 relating to the pooling of interests with SUGEN, Inc. which is as of August 31, 1999, which appears in Exhibit 99.2 to this Current Report on Form 8-K of Monsanto Company. /s/ PricewaterhouseCoopers LLP Chicago, Illinois January 24, 2000 -----END PRIVACY-ENHANCED MESSAGE-----